pegasus entertainment holdings limited 天馬影視文化控股有限公司

If you are in any doubt as to any aspect of this circular or as to the action to be taken, you should consult yourstockbroker or other registered dealer in securities, bank manager, solicitor, professional accountant or otherprofessional adviser.

If you have sold or transferred all your shares in Pegasus Entertainment Holdings Limited, you should at once handthis circular and the accompanying form of proxy to the purchaser or transferee or to the bank, stockbroker or otheragent through whom the sale or the transfer was effected for onward transmission to the purchaser or the transferee.

This circular is for information purposes only and does not constitute an invitation or offer to acquire, purchase orsubscribe for any securities nor is it calculated to invite any such offer.

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

Pegasus Entertainment Holdings Limited天馬影視文化控股有限公司

(Incorporated in the Cayman Islands with limited liability)

(Stock Code: 1326)

(1) DISCLOSEABLE AND CONNECTED TRANSACTION;AND

(2) NOTICE OF EXTRAORDINARY GENERAL MEETING

Independent Financial Adviserto the Independent Board Committee and the Independent Shareholders

Capitalised terms used in this cover page shall have the same meanings as those defined in the section headed‘‘Definitions’’ of this circular.

A letter from the Board is set out on pages 5 to 23 of this circular. A letter of advice from the Independent BoardCommittee is set out on pages 24 to 25 of this circular. A letter of advice of Akron Corporate Finance Limited, theIndependent Financial Adviser, containing its opinion and advice to the Independent Board Committee and theIndependent Shareholders is set out on pages 26 to 55 of this circular.

A notice convening the EGM of the Company to be held at Rooms 1801–02, Westlands Centre, 20 Westlands Road,Quarry Bay, Hong Kong, on Friday, 29 May 2015 at 4:00 p.m. is set out on pages 88 to 89 of this circular.

A form of proxy for the EGM is enclosed. Whether or not you are able to attend the EGM, you are advised to read thenotice and to complete and return the enclosed form of proxy, in accordance with the instructions printed thereon, tothe Hong Kong branch share registrar and transfer office of the Company, Tricor Investor Services Limited at Level 22,Hopewell Centre, 183 Queen’s Road East, Hong Kong as soon as possible but in any event not less than 48 hoursbefore the time appointed for the holding of the EGM or any adjourned meeting. Completion and delivery of the formof proxy will not preclude you from attending and voting in person at the EGM if you so wish.

THIS CIRCULAR IS IMPORTANT AND REQUIRES YOUR IMMEDIATE ATTENTION

13 May 2015

Page

DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

LETTER FROM THE BOARD . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

LETTER FROM THE INDEPENDENT BOARD COMMITTEE . . . . . . . . . . . . . . . . . . . . 24

LETTER FROM THE INDEPENDENT FINANCIAL ADVISER . . . . . . . . . . . . . . . . . . . 26

APPENDIX I — VALUATION REPORT OF THE TARGET GROUP . . . . . . . . . . . . 56

APPENDIX II — LETTER FROM THE REPORTING ACCOUNTANTIN RELATION TO THE FORECASTUNDERLYING THE VALUATION . . . . . . . . . . . . . . . . . . . . . . . . . . . 81

APPENDIX III — GENERAL INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83

NOTICE OF EXTRAORDINARY GENERAL MEETING . . . . . . . . . . . . . . . . . . . . . . . . . . 88

CONTENTS

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In this circular, unless the context otherwise requires, the following expressions shallhave the following meanings when used herein:

‘‘Acquisition’’ the sale and purchase of the Sale Shares contemplated underthe Agreement

‘‘Agreement’’ a sale and purchase agreement dated 6 March 2015 (asamended by a supplemental agreement dated 30 April 2015)entered into between the Purchaser as purchaser, theCompany as the Purchaser’s holding company, the Vendoras vendor for the acquisition of the Sale Shares by thePurchaser at a total consideration of HK$68,000,000 whichwill be satisfied partly by cash and partly by the Company’sissue of the Consideration Shares to the Vendor

‘‘Board’’ board of Directors

‘‘Business Day(s)’’ a day (other than Saturdays or Sunday) on which banks areopen for business in Hong Kong

‘‘BVI’’ British Virgin Islands

‘‘Chili Platinum’’ Chili Platinum Advertising and Magazine PublishingLimited (智理白金雜誌廣告出版有限公司), a companyincorporated under the laws of Hong Kong and a wholly-owned subsidiary of Favorable On

‘‘Company’’ Pegasus Entertainment Holdings Limited, a companyincorporated under the laws of the Cayman Islands withlimited liability and the shares of which are listed on theStock Exchange (Stock Code: 1326)

‘‘Completion’’ actual completion of the sale and purchase of the SaleShares in accordance with the Agreement

‘‘Connected Person(s)’’ has the meaning given to that term in the Listing Rules

‘‘Consideration Shares’’ being 46,000,000 new Shares to be issued and allotted atthe issue price of HK$1.26 per Share, credited as fully paid,by the Company to partly satisfy the consideration for theAcquisition under the Agreement

‘‘Controlling Shareholder’’ has the meaning ascribed to it under the Listing Rules andunless the context requires otherwise, refer to Mr. Wong,Mr. Edmond Wong and Ms. Alvina Wong

‘‘Director(s)’’ director(s) of the Company

DEFINITIONS

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‘‘EGM’’ extraordinary general meeting of the Company to beconvened to approve, inter alia, the Agreement and thetransactions contemplated thereunder and the issue of theConsideration Shares

‘‘Favorable On’’ Favorable On Global Investment Limited (嘉安環球投資有

限公司), a company incorporated under the laws of the BVIand is owned as to 70% and 30% by Powerful Target andan Independent Third Party, respectively

‘‘Guangzhou Platinum’’ 廣州純鉑金廣告有限公司 (in English, for identificationpurpose only, Guangzhou Platinum Advertising Limited), acompany established under the laws of the PRC withlimited liability and an Independent Third Party

‘‘Group’’ the Company and its subsidiaries

‘‘HK$’’ Hong Kong dollar(s), the lawful currency of Hong Kong

‘‘Hong Kong’’ Hong Kong Special Administrative Region of the PRC

‘‘Independent BoardCommittee’’

an independent committee of the Board which comprisesMr. Lam Kam Tong, Mr. Lo Eric Tien-cheuk and Mr. TangKai Kui Terrence, all independent non-executive Directors

‘‘Independent FinancialAdviser’’ or ‘‘Akron’’

Akron Corporate Finance Limited, a licensed corporation tocarry out Type 6 (advising on corporate finance) regulatedactivity under the SFO and the independent financialadviser to the Independent Board Committee and theIndependent Shareholders in respect of the Acquisition

‘‘Independent Shareholders’’ Shareholders other than the Vendor, Mr. Wong, Mr.Edmond Wong and Ms. Alvina Wong, who are required bythe Listing Rules to abstain from voting on the Boardresolutions proposed to be passed at the EGM for approvingthe Agreement and the transactions contemplated thereunder

‘‘Independent Third Party’’ a person or persons or a company or companies which, tothe best of Directors’ knowledge, information and belief,having made all reasonable enquires, is not or are not ourconnected person(s) within the meaning ascribed under theListing Rules

‘‘Last Trading Day’’ 6 March 2015, being the last trading day of the Shares onthe Stock Exchange immediately prior to the signing of theAgreement

DEFINITIONS

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‘‘Latest Practicable Date’’ 11 May 2015, being the latest practicable date prior to theprinting of this circular for ascertaining certain informationcontained herein

‘‘Listing Rules’’ the Rules Governing the Listing of Securities on the StockExchange

‘‘Mr. Edmond Wong’’ Mr. Wong Chi Woon, Edmond, an executive Director and aControlling Shareholder. He is the son of Mr. Wong and thenephew of the Vendor

‘‘Mr. Wong’’ Mr. Wong Pak Ming, the brother of the Vendor, the fatherof Mr. Edmond Wong and Ms. Alvina Wong, the chairmanof the Company, an executive Director and a ControllingShareholder

‘‘Ms. Alvina Wong’’ Ms. Wong Yee Kwan, Alvina, an executive Director and aControlling Shareholder. She is the daughter of Mr. Wongand the niece of the Vendor

‘‘Platinum Club CooperationAgreement’’

a cooperation agreement dated 23 April 2014 entered intobetween Favorable On and Guangzhou Platinum in relationto the operation of a club to be established between theparties

‘‘Powerful Target’’ Powerful Target Investment Group Limited (中威投資集團

有限公司), a company incorporated under the laws of theBVI and a wholly-owned subsidiary of the Target Company

‘‘Powerful Target Group’’ Powerful Target and its subsidiaries

‘‘Publication CooperationAgreement’’

a cooperation agreement dated 23 April 2014 entered intobetween Favorable On and Guangzhou Platinum in relationto the publication of ‘‘Platinum of UnionPay’’ (銀聯白金)

‘‘Purchaser’’ Green Riches Holdings Limited, a company incorporatedunder the laws of the BVI and a wholly-owned subsidiaryof the Company

‘‘PRC’’ People’s Republic of China

‘‘Sale Shares’’ such number of shares of HK$1.00 each in the capital ofthe Target Company representing the entire issued sharecapital of the Target Company immediately beforecompletion of the Acquisition, which are legally andbeneficially owned by the Vendor

DEFINITIONS

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‘‘SFO’’ Securities and Futures Ordinance (Chapter 571 of the lawsof Hong Kong)

‘‘Share(s)’’ ordinary share(s) of HK$0.01 each in the share capital ofthe Company

‘‘Shareholder(s)’’ holder(s) of the Share(s)

‘‘Stock Exchange’’ The Stock Exchange of Hong Kong Limited

‘‘Target Company’’ Chili Advertising & Promotions Limited, a companyincorporated under the laws of Hong Kong and the entireissued share capital of which is held by the Vendor as at thedate of the Agreement

‘‘Target Group’’ the Target Company, Powerful Target, Favorable On andChili Platinum

‘‘Valuation’’ valuation of the market value of the entire equity interest inthe Target Group as at 31 December 2014 as assessed bythe Valuer

‘‘Valuer’’ Roma Appraisals Limited, a qualified independent valuerregistered in Hong Kong and is an Independent Third Party

‘‘Vendor’’ Ms. Wong Kit Fong, owner of the entire issued sharecapital of the Target Company, the sister of Mr. Wong andthe aunt of Mr. Edmond Wong and Ms. Alvina Wong; and

‘‘%’’ per cent.

DEFINITIONS

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(Stock Code: 1326)

Executive Directors:Mr. Wong Pak Ming (Chairman)Ms. Wong Yee Kwan AlvinaMr. Wong Chi Woon Edmond

Independent non-executive Directors:Mr. Lam Kam TongMr. Lo Eric Tien-cheukMr. Tang Kai Kui Terence

Registered office:Cricket SquareHutchins DriveP.O. Box 2681Grand Cayman KY1-1111Cayman Islands

Principal place of businessin Hong Kong:

Rooms 1801–2Westlands Centre20 Westlands RoadQuarry BayHong Kong

13 May 2015

To the Shareholders

Dear Sir or Madam,

(1) DISCLOSEABLE AND CONNECTED TRANSACTION;AND

(2) NOTICE OF EXTRAORDINARY GENERAL MEETING

INTRODUCTION

Reference is made to the announcement of the Company dated 6 March 2015 in relationto the Acquisition.

The Board is pleased to announce that, on 6 March 2015 (after trading hours), thePurchaser, a wholly-owned subsidiary of the Company, the Vendor and the Company enteredinto the Agreement pursuant to which the Vendor agrees to sell and the Purchaser agrees topurchase the Sales Shares, representing the entire issued share capital of the Target Company,at a total consideration of HK$68,000,000 to be paid to the Vendor partly by cash and partlyby the Company’s issue of the Consideration Shares.

LETTER FROM THE BOARD

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The purpose of this circular is to provide you with, among other things, (i) the letter fromthe Board containing details on the Acquisition and the transactions contemplated thereunder;(ii) the recommendation from the Independent Board Committee in respect of the Acquisition;(iii) the advice from Independent Financial Adviser to the Independent Board Committee andthe Independent Shareholders regarding the Acquisition; and (iv) the valuation report on thebusiness of the Target Group.

THE AGREEMENT

Major terms of the Agreement are set out below.

Date: 6 March 2015

Parties: (1) the Purchaser, a wholly-owned subsidiary of the Company;

(2) the Company; and

(3) the Vendor.

As the entire issued share capital of the Target Company is legally and beneficially ownedby the Vendor, the sister of Mr. Wong, an executive Director, the Vendor is therefore aconnected person of the Company as defined under the Listing Rules.

Assets to be acquired

Pursuant to the Agreement, the Sale Shares will comprise all those issued shares of theTarget Company held by the Vendor and represent the entire issued share capital of the TargetCompany.

Upon completion of the Acquisition, the Target Company will become an indirect wholly-owned subsidiary of the Company. The Target Company is engaged in organising filmadvertising and promotion services. As at the Latest Practicable Date, it is interested in 70% ofChili Platinum, which is engaged in the business of magazine publication.

The shareholding structure of the Target Group will be illustrated in the subsequentsection of this circular.

Consideration

The total consideration for the Sale Shares is HK$68,000,000 which will be satisfied uponCompletion in the following manner:

(a) as to HK$10,040,000, will be paid in cash; and

(b) as to HK$57,960,000, by the Company’s issue of the Consideration Shares to theVendor.


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The cash portion of the consideration will be funded by internal resources of the Group.The consideration for the Acquisition was based on normal commercial terms after arm’s lengthnegotiations between the parties with reference to, among other things, (a) the Valuation inrelation to the entire equity interest in the Target Group performed by the Valuer ofHK$82,600,000; (b) the expected costs and expenses for the Acquisition; and (c) other factorsset out in the paragraph headed ‘‘Reasons for entering into the Agreement’’ below. The TargetCompany was founded by Ms. Alvina Wong and an Independent Third Party. The entire sharecapital of the Target Company was then acquired by an Independent Third Party andsubsequently acquired by Mr. Lam Sze Ho, Owen in March 2009 at a consideration ofHK$500,000. In April 2013, Mr. Lam Sze Ho, Owen, the spouse of Ms. Alvina Wong, decidedto focus on other business opportunities and transferred the entire share capital of the TargetCompany to the Vendor at a consideration of HK$1.00, provided that the Vendor will assumeand perform the on-going contractual obligations of the Target Company such that theadvertising and promotion contracts entered into between the Target Company and variousIndependent Third Parties can be performed in accordance with their agreed terms. In April2013, the Vendor acquired entire share capital of the Target Company at a consideration ofHK$1.00.

In mid-2014, Mr. Lee Yiu Hee (李耀熙), an Independent Third Party and the soleshareholder of Powerful Target, which in turn owned 70% of the entire issued share capital ofFavorable On, had expressed his intention to the Vendor in selling his entire interest inPowerful Target. According to the Vendor, by then Favorable On had already entered into thePublication Cooperation Agreement and Platinum Club Cooperation Agreement withGuangzhou Platinum and Mr. Lee Yiu Hee, after reassessing his business investments, wasthwarted by the high initial set up cost required to enter into the publication business and thecosts and expenses for maintaining the business. On the other hand, the Vendor considered thatan expansion of the Target Company’s business to include printed and digital mediapublication could provide an additional solid marketing channel to facilitate the marketingactivities of the Target Company in the PRC market and hence, would be highly beneficial inaligning the business of the Target Company in accordance with its operation needs in the longrun. In September 2014, after arm’s length negotiations, the Target Company acquired theentire issued share capital of Powerful Target from Mr. Lee Yiu Hee at a consideration ofHK$1.00 which was determined with reference to the obligations of Favorable On under thePublication Cooperation Agreement, including the payment obligations of Favorable On duringthe whole term of the Publication Cooperation Agreement, to be assumed by the TargetCompany. After the acquisition of the Powerful Target Group, the business of the TargetCompany has extended beyond the provision of advertising and marketing services to includeprinted and digital media publication.

The Board has considered the benefits of the Acquisition to the Group as set out in thesection headed ‘‘Reason for entering into the Agreement’’ below. In particular, the Groupbelieves that the abovementioned expansion of the business of the Target Company willenhance its competitiveness and operational efficiency, and the Acquisition will also benefitthe Group by providing more flexibility to formulate its advertising and promotion strategies aswell as its competitiveness in the PRC media and cultural industry.


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The Valuation was based on discounted cash flow methodology under the income-basedapproach. As such, the Valuation constitutes a profit forecast under Rule 14.61 of the ListingRules and the requirements under Rule 14.62 of the Listing Rules are applicable accordingly.

The principal assumptions upon which the profit forecast for the Target Group was madeare set out in ‘‘Appendix I — Valuation Report of the Target Group’’ to this circular. Theunderlying assumptions (such as financial projections and the business plans of the TargetGroup) provided by the Board to the Valuer under the Valuation are based on historicalfigures, and the major revenues and cost forecast are supported by the underlying contracts andagreements. Accordingly the Board considered that the underlying assumptions under theValuation provided to the Valuer are fair and reasonable.

In accordance with Rule 14.62 of the Listing Rules, the Company has engaged its auditor,Deloitte Touche Tohmatsu, as the reporting accountant who have reported to the Directors asset out in ‘‘Appendix II — Letter from the reporting accountant in relation to the forecastunderlying the Valuation’’ to this circular. Also in accordance with Rule 14.62(3) of theListing Rules, the Directors have confirmed that the forecast underlying the Valuation wasmade after due and careful enquiry.

The Board (including the independent non-executive Directors, after taking intoconsideration the advice and recommendation of the Independent Financial Adviser set on thepages 26 to 55 in this circular) considers that (i) the consideration of HK$68,000,000 is fairand reasonable; and (ii) the Agreement is on normal commercial terms and such terms are fairand reasonable, and the entering into the Agreement is in the interests of the Company andsuch terms the Shareholders as a whole.

Conditions precedent

Completion of the Agreement is subject to the fulfillment of, inter alia, the followingconditions precedent:

(a) the Purchaser and its advisers having completed and satisfied in its absolutediscretion with the results of the legal, financial, business and other due diligenceinvestigation in respect of the assets, liabilities, business, prospects and other affairsof the Target Group as the Purchaser may in its sole and absolute discretion considernecessary or desirable;

(b) the Purchaser and its advisers having received and satisfied in its absolute discretion(in substance and form) a legal opinion issued by a firm of lawyers qualified topractise in Hong Kong covering such aspect of the laws of Hong Kong as thePurchaser may consider appropriate or relevant to the transactions contemplated bythe Agreement;

(c) the approval by the Independent Shareholders at the EGM of the Agreement and thetransactions contemplated thereunder (including without limitation the allotment andissue of the Consideration Shares) and all other consents and acts required under theListing Rules having been obtained and completed;


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(d) the Listing Committee of the Stock Exchange having granted or having agreed togrant the listing of, and permission to deal in the Consideration Shares;

(e) if required, all approvals, consents, authorisations and licences (so far as arenecessary) in relation to the transactions contemplated under the Agreement havingbeen obtained from the relevant governmental authorities;

(f) the Purchaser being satisfied in its absolute discretion, from the date of theAgreement and at any time before Completion, that the warranties set out in theAgreement remain true and accurate in all material respects, not misleading or inbreach in any material respect and that no events have suggested that there were anybreach in any material respect of any Warranties or other provisions of theAgreement by the Vendor; and

(g) the Purchaser being satisfied in its absolute discretion, from the date of theAgreement to Completion, there has not been any material adverse change in respectof any member of the Group.

The Purchaser may at its absolute discretion at any time waive in writing any of theconditions precedent (save and except conditions (c) and (d)) and such waiver may be madesubject to such terms and conditions as determined by the Purchaser. If all the conditionsprecedent have not been satisfied or waived by 5:00 p.m. on 30 June 2015, the Agreement willlapse and have no further effect and the parties will be released from all obligations under it.

COMPLETION

Completion shall take place on a date which is the fifth (5th) Business Day after the dateon which the conditions precedent are satisfied or waived or such other date as the Vendor andthe Purchaser may agree in writing.

THE CONSIDERATION SHARES

HK$57,960,000 of the total consideration under the Agreement will be satisfied by theissued of the Consideration Shares by the Company to the Vendor upon Completion. The issueprice of the Consideration Shares of HK$1.26 per Consideration Share was determined afterarm’s length negotiations between the parties with reference to the prevailing market price ofthe Share as at 6 March 2015 of HK$1.31 and represents: (i) a discount of approximately 3.8%to the closing price of HK$1.31 per Share as quoted on the Stock Exchange on the LastTrading Day; (ii) a discount of approximately 6.7% to the average closing price of HK$1.35per Share as quoted on the Stock Exchange on the last five trading days immediately prior tothe Last Trading Day; and (iii) a discount of approximately 62.6% to the closing price ofHK$3.37 per Share as quoted on the Stock Exchange on 11 May 2015, being the LatestPracticable Date. The Board considers the issue price of HK$1.26 of the Consideration Sharesis fair and reasonable and in the interests of the Company and the Shareholders as a whole.The Consideration Shares represented approximately 8.4% of the issued share capital of theCompany as at the Latest Practicable Date and approximately 7.8% of the issued share capitalof the Company as enlarged by the issue of the Consideration Shares. The ConsiderationShares will be entitled to dividends, interim dividends or other distribution from the


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Completion Date. The Consideration Shares will be allotted and issued under the specificmandate to be sought from the Independent Shareholders at the forthcoming EGM, and whenissued, will rank equally in all respects with the Shares in issue on the date of allotment andissuance, and free and clear of any pledges, liens, encumbrances and restrictions on transfer.An application will be made to the Stock Exchange for the listing of and permission to deal inthe Consideration Shares.

Details of the shareholding structure of the Company as at the Latest Practicable Date andimmediately after Completion, assuming that there is no other change in the share capital ofthe Company are set out below:

ShareholdersAs at

the Latest Practicable Date

Immediately afterCompletion and

allotment and issuance ofthe Consideration Shares

No. of SharesApproximately

% No of SharesApproximately

%

Honour GraceLimited (Note) 300,000,000 54.95 300,000,000 50.68

Mr. Wong 4,180,000 0.76 4,180,000 0.70Vendor 7,292,000 1.34 53,292,000 9.00Public Shareholders 234,528,000 42.95 234,528,000 39.62

Total 546,000,000 100.00 592,000,000 100.00

Note: Honour Grace Limited is owned as to 60% by Mr. Wong, 20% by Mr. Edmond Wong and 20% by Ms.Alvina Wong.

INFORMATION OF THE TARGET GROUP

The Target Company

The Target Company is a limited liability company incorporated in Hong Kong on 28August 2000. The Target Company is a full service marketing agency principally engaged inthe provision of advertising and marketing services since its incorporation, including, withoutlimitation, event management, product advertisements, product branding as well as organisingfilm advertising and promotion services.

The Target Company has been providing film advertising and promotion services to theGroup since 2009. Details of the transactions between the Target Company and the Group hadbeen disclosed in the paragraph headed ‘‘Continuing Connected Transactions — (3) Provisionof film advertising and promotion services by Chili’’ of the Company’s prospectus dated 9October 2012. In September 2014, the Target Company acquired three subsidiaries, namely,Powerful Target, Favorable On and Chili Platinum with a view to expand the business of theTarget Group to include printed and digital media publication and the operation of a privatemembers’ club.


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The Powerful Target Group

The Powerful Target Group is principally engaged in the printed and digital mediapublication business and the operation of a private members’ club.

Powerful Target

Powerful Target is an investment holding company incorporated under the laws of theBVI on 5 March 2014 and is wholly owned by the Target Company. Based on the informationprovided by the Vendor, Powerful Target does not have any asset other than its investment inFavorable On.

Favorable On

Favorable On is an investment holding company incorporated under the laws of the BVIon 16 January 2014 and is owned as to 70% by Powerful Target and as to 30% by anIndependent Third Party. Based on the information provided by the Vendor, Favorable On doesnot have any asset other than its investment in Chili Platinum.

Chili Platinum

Chili Platinum is a limited liability company incorporated in Hong Kong on 7 February2014. Chili Platinum is principally engaged in the publication of a monthly issued luxurylifestyle magazine, namely ‘‘Platinum of UnionPay’’ (銀聯白金), which features a wide rangeof the most updated news on luxurious lifestyle related products and services ranging fromfashion, jewellery, entertainment, food and restaurants, leisure, to art and culture. Themagazine is targeted to the high-end consumer market of Hong Kong, Macau and the PRC.Currently, the magazine is distributed to various high-end private clubs, golf clubs and hotelswhilst selected content is also available online in a number of digital media in order to broadenthe scope of potential audiences. It is expected that the magazine will be provided on acomplementary basis to selected premium level cardholders of UnionPay in its target markets.As the magazine is and will only be distributed on a complementary basis, revenue from themagazine distribution business will be primarily derived from printed media and digital mediaadvertisements placed by local or international luxury brands in the magazine.

‘‘Platinum of UnionPay’’ (銀聯白金) had been published by Guangzhou Platinum, anIndependent Third Party, for over 10 years. According to the public information available,Guangzhou Platinum is wholly owned by 廣州銀聯網路支付有限公司 (in English, foridentification purpose only, Guangzhou UnionPay Internet Payment Limited), which is in turnwholly owned by 銀聯商務有限公司 (in English, for identification purpose only, UnionPayMerchant Services Company Limited) (‘‘UnionPay Merchant’’), a subsidiary of a companyestablished in the PRC which is primarily responsible for the promotion of its credit cards andthe provision of payment and settlement services. Also according to the public informationavailable, the parent company of UnionPay Merchant has approximately 4.6 billion bank cardsissued globally with about 400 associate members worldwide, with its cards accepted in 150countries and regions outside the PRC. During the years from 2012 to 2014, the issued bankcards was significantly increased from approximately 2.7 billion at the end of 2011 toapproximately 4.6 billion in 2014, representing a compounded annual growth rate of


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approximately 19.4%. According to its transactions data available, the domestic transactions ofits bank cards represented 47.7% of the total domestic consumption value in the PRC in 2014and the global network processed transactions with a total volume of RMB41.0 trillion in 2014,representing a year-on-year increase of 27.3%. Under the prevailing laws and regulations in thePRC, enterprises with foreign ownership are prohibited from engaging in the publication ofbooks, newspapers and periodicals. In view of the restrictions, the provisions of the PublicationCooperation Agreement entered into between the Powerful Target Group and GuangzhouPlatinum have provided that Guangzhou Platinum will continue to act as the channel ofpublication of the magazine in the PRC; while the Powerful Target Group will be responsiblefor the publication and distribution of the magazine in Hong Kong and Macau. Sincepublication activities in the PRC, including contents approval and distribution activities, arecarried out by Guangzhou Platinum, the Powerful Target Group is not required to obtain anylicense or permit in relation to its publication business. The magazine has been issued monthlysince January 2003 and a total of 132 issues have been published so far. Based on theinformation provided by Guangzhou Platinum, approximately 3,000 copies of the magazine hadbeen issued on average per month since March 2013.

In September 2014, the Target Company acquired the Powerful Target Group and itsbusiness. Soon after completion of the acquisition, a working team responsible for thepublication and distribution of the magazine has been set up by the Target Company. Given thescale of the magazine and to ensure a smooth transition, it took the working team three monthsto prepare and select suitable contents for approval by Guangzhou Platinum, and the firstpublication in which the Target Group was involved was published and distributed in January2015. As at the Latest Practicable Date, the Target Group had been involved in the latest fivepublications since January 2015. To the best knowledge information and belief of theDirectors, having made all reasonable enquiries, Guangzhou Platinum and its ultimatebeneficial owners are all Independent Third Parties.

Please refer to the paragraph headed ‘‘Major terms of the cooperation agreements’’ belowfor further details of the Publication Cooperation Agreement and the Platinum ClubCooperation Agreement.

Major terms of the cooperation agreements

1. Publication Cooperation Agreement:

Set out below are the major terms of the Publication Cooperation Agreement:

Date : 23 April 2014

Parties involved : 1. Guangzhou Platinum

2. Favorable On


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Major terms : Pursuant to the Publication Cooperation Agreement, GuangzhouPlatinum and Favorable On had agreed to cooperate in thepublication of ‘‘Platinum of Unionpay’’ (銀聯白金) and indeveloping and procuring potential advertising clients.Favorable On will take overall responsibility for the contents ofthe magazine, negotiating the terms of sponsorship andadvertisements with potential customers, promoting andmarketing the magazine, as well as the printing and publicationof the magazine under the direction of Guangzhou Platinum.

Guangzhou Platinum will be responsible for approving themagazine’s contents and compliance with the relevant PRC laws,regulations and policies prior to its publication as well as thedistribution activities in the PRC, whereas Favorable On will beresponsible for the publication and distribution activities inother designated distribution areas.

Term : Subject to the termination clause as described below, thePublication Cooperation Agreement will be valid from the dateof execution for a term of 4 years, and will be renewedautomatically upon expiry unless being objected by the partiesgiving 30 Business Days’ notice prior to the expiry of any one4-year period.

Monthly flat feesand profit sharing

: As Favorable On will be responsible for the overall operation ofthe printed and digital media publication business, it will also beresponsible for the payment of all the relevant expenses,including an agreed monthly flat fee of RMB50,000 payable toGuangzhou Platinum for approving the magazine’s contents andthe distribution activities conducted in the PRC. If the profitafter tax derived from the business exceeds the aggregate annualflat fee payable to Guangzhou Platinum, Favorable On will beentitled to 80% of such profit and Guangzhou Platinum will beentitled to the remaining 20% in excess of the aggregate annualflat fee. In contrast, if the profit after tax derived from thebusiness is less than the aggregate annual flat fee payable toGuangzhou Platinum, Favourable On will be entitled to theentire profit after tax derived from the business.

Termination : The Publication Cooperation Agreement may be terminated byeither party giving 30 Business Days’ notice prior to the expiryof any one 4-year period. If the financial information providedby Favorable On is inaccurate or misleading, GuangzhouPlatinum is entitled to terminate the Publication CooperationAgreement and claim damages arising therefrom if the profitdistributable to Guangzhou Platinum is understated.


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Other terms : Guangzhou Platinum will be entitled to all copyrights andintellectual property of the magazine, including the name‘‘Platinum of Unionpay’’ (銀聯白金) and approval rights to themagazine’s contents proposed by Favorable On.

2. Platinum Club Cooperation Agreement:

Set out below are the major terms of the Platinum Club Cooperation Agreement:

Date : 23 April 2014

Parties involved : 1. Guangzhou Platinum

2. Favorable On

Major terms : Pursuant to the Platinum Club Cooperation Agreement,Guangzhou Platinum and Favorable On have agreed tocooperate in establishing a club that organises functions andevents tailored to the interest of the target audiences of‘‘Platinum of Unionpay’’ (銀聯白金). Favorable On will takethe overall responsibility in managing and operating the club aswell as organising, promoting and marketing the activities andfunctions carried out by the club. Guangzhou Platinum will beresponsible for approving the club activities proposed byFavorable On and compliance with the relevant PRC laws,regulations and policies as well as determining the overallstrategic direction of the club.

Term : Subject to the termination clause as described below, thePlatinum Club Cooperation Agreement will be valid from thedate of execution for a term of 4 years, and will be renewedautomatically upon expiry unless being objected by the partiesgiving 30 Business Days’ notice prior to the expiry of any one4-year period.

Profit sharing : As Favorable On will be responsible for the overall operation ofthe club, it will also be responsible for the payment of all therelevant expenses. In return, Favorable On and GuangzhouPlatinum will be entitled to 80% and 20% of the profit after taxderived from operation of the club respectively. Save asdisclosed above, Favorable On does not have othercommitments under the Platinum Club Cooperation Agreement.


– 14 –

Termination : The Platinum Club Cooperation Agreement may be terminatedby either party giving 30 Business Days’ notice prior to theexpiry of any one 4-year period. If the financial informationprovided by Favorable On is inaccurate or misleading,Guangzhou Platinum is entitled to terminate the Platinum ClubCooperation Agreement and claim damages arising therefrom ifthe profit distributable to Guangzhou Platinum is understated.

Other terms : Guangzhou Platinum will be entitled to the ownership of theclub and all intellectual property rights associated with the clubas well as approval rights to the club activities proposed byFavorable On. If Favorable On conduct club activities withoutthe prior approval of Guangzhou Platinum resulting in economicloss to the club or to Guangzhou Platinum, Guangzhou Platinumis entitled to claim full damages arising therefrom.

Recent business development

1. Publication Cooperation Agreement:

Based on the development plans agreed between Favorable On and Guangzhou Platinum,the average number of magazine distributed per month had been increased from approximately3,000 copies in the past to approximately 10,000 copies since January 2015, which is the firstpublication in which the Target Group was involved in under the Publication CooperationAgreement.

Given that the magazine is targeted to the high-end consumer market in Hong Kong,Macau, and the PRC and is currently distributed to various high-end private clubs, golf clubsand hotels, the increase in the number of issued copies will allow the Target Group to furtherexpand the number of the magazine’s recipients which will be highly beneficial in extendingthe reach of the Target Group to new audiences in its target markets. In addition, the Grouphas invested resources and manpower to explore and develop various multimedia contents andsocial media platform to provide easier and quicker access to the magazine’s contentsirrespective of geographical constrains. Not only selected contents of the magazine is availableonline on its official webpage and selected social media platform, in view of the ever growingpopularity of mobile devices, the Target Group had also developed mobile applications forsmartphones and tablets to further expand the magazine’s readership base with an aim to extendits geographical reach and reaching out to the younger generations. Further, it is expected thatthe magazine will be provided on a complementary basis to selected premium level cardholdersof UnionPay in its target markets through the digital media platform by providing selecteddigital contents of the magazine as well as messages on the multimedia platform from whichthe recipients can hyperlink directly to their subscripted contents. Based on the currentdevelopment plan, as ‘‘Platinum of Unionpay’’ (銀聯白金) is a luxury lifestyle magazineoriented to the high-end consumer markets, such qualified cardholders will mainly consist ofhigh net worth individuals having investable assets of US$1 million or above in Hong Kong,


– 15 –

Macau and the PRC. According to a market research conducted by RBC Wealth Management,as of 2014, there were approximately 758,000 and 124,000 high net worth individuals in thePRC and Hong Kong respectively.

With the establishment of the digital media platform, the Directors believe that thecombined digital and print readership base will secure stable advertising revenue and keep theTarget Group’s publication business gear towards a more competitive edge.

2. Platinum Club Cooperation Agreement

Based on the development plans agreed between Favorable On and Guangzhou Platinum,members of the club will primarily consist of the target audience of the magazine. As theTarget Group has only been involved in five publications since January 2015, it is envisagedthat the club will be established pursuant to the Platinum Club Cooperation Agreement oncethe publication business advance to a more stable stage when more market information andfeedbacks are gathered from the target audience such that the operations of the club can betailored to the needs of the high-end consumer market. Further, the Platinum Club CooperationAgreement is a framework agreement which sets out only the basic terms of cooperation andresponsibilities of the parties, and without prescribing a definite timeframe in establishing theclub. In the circumstances, the Directors consider that it is in the best interest of the Group tofocus on the publication of ‘‘Platinum of Unionpay’’ (銀聯白金) at the current stage andproceed with the development of the business as contemplated under the Platinum ClubCooperation Agreement when the Group has established a stronger client base and distributionnetwork.

As at the Latest Practicable Date, the development of the club is at a preliminary stage. Itis expected that a comprehensive and detailed development plan for the club which willinclude, among others, its mode of operation, capital commitment, revenue model or annualbudget will be devised when the publication business is at a more mature stage. The definitedevelopment plan of the club will be subject to the negotiations between the Target Group andGuangzhou Platinum and further announcement will be made by the Company to update theShareholders on the progress of the development of the club as and when appropriate inaccordance with the Listing Rules.


– 16 –

Shareholding structure of the Target Group

Set out below is the shareholding structure of the Target Group as at the LatestPracticable Date:

100%

100%

100%

70% 30%

(BVI)Favorable On

Chili Platinum

(Hong Kong)

Vendor

Target Company

(Hong Kong)

Independent Third

Party(BVI)Powerful Target

Financial information of the Target Group

The consolidated financial information of the Target Group for the two years ended 31December 2013 and 31 December 2014 respectively and for the two months ended 28 February2015, which has been prepared in accordance with the Hong Kong Financial ReportingStandards, are summarised as follows:

For the year ended31 December

For thetwo months

ended28 February

2013 2014 2015HK$’000 HK$’000 HK$’000(audited) (unaudited) (unaudited)

Revenue 9,075 8,616 3,635Profit/(Loss) before taxation 1,005 (509) (525)Profit/(Loss) after taxation 854 (655) (647)Profit/(Loss) after taxation andnon-controlling interest 854 (237) (264)


– 17 –

For the two years ended 31 December 2013 and 31 December 2014 respectively and forthe two months ended 28 February 2015, approximately HK$1,207,000, HK$1,159,000 andHK$278,000 represented by 13.3%, 13.5% and 7.6% of the revenue of the Target Group wascontributed by the Group.

For the year ended 31 December 2014, the Target Group recorded a loss after taxation ofHK$655,000 compared to a profit after taxation of HK$854,000 for the corresponding periodin 2013. Since the operating expenses, mainly consist of the initial set up cost and other one-off expenses incurred prior to the Target Group’s first publication of the magazine during theyear ended 31 December 2014 was immediately recognised, while the advertising income willonly be recognised since January 2015 when the first issue of the magazine was publishedunder the Publication Cooperation Agreement, the Target Group’s result for the year ended 31December 2014 was adversely affected.

Generally, demand for advertisements and promotional campaigns tend to move in tandemwith seasonal shopping and spending patterns. Hence, revenue generated from such activitiestends to fluctuate and will not be evenly distributed over the financial year. Moreover, asrevenue will only be recognised upon the relevant services have been provided by the TargetGroup, the results for the two months ended 28 February 2015 may not be indicative of theresults of the full financial year.

As at 31 December 2014, the unaudited net asset value of the Target Group isHK$2,227,000.

Financial information of the Powerful Target Group

For theyear ended

31 December2014

For thetwo months

ended28 February

2015HK$’000 HK$’000

(unaudited) (unaudited)

Revenue — 575Loss before taxation 1,393 1,276Loss after taxation 1,393 1,276Loss after taxation and non-controlling interest 975 893

Based on the unaudited consolidated financial information of the Powerful Target Group,the unaudited consolidated net loss (both before and after taxation) for the year ended 31December 2014 amounted to approximately HK$1,393,000. The unaudited net liabilities of thePowerful Target Group as at 31 December 2014 (including the non-controlling interest)amounted to approximately HK$1,393,000.


– 18 –

Since the Powerful Target Group was established in 2014, financial information for theyear ended 31 December 2013 is not available. Please refer to the section headed ‘‘Informationof the Target Group’’ above for further corporate information on members of the PowerfulTarget Group.

As at the Latest Practicable Date, there had not been any transaction between the PowerfulTarget Group and the Target Company, and between the Powerful Target Group and the Group.Regarding the transactions between the Group and the Target Company, please refer to theparagraph below headed ‘‘Continuing Connected Transactions’’ for further details.

REASON FOR ENTERING INTO THE AGREEMENT

The Group is principally engaged in films and television series production, distribution,licensing of film rights, film exhibition and post-production.

Given the nature of the Group’s business and that the Group does not have an in-housefilm advertising team, the Group has been outsourcing the marketing activities of its film andtelevision series productions to experienced professional parties. With a view to facilitate theGroup’s development in film production and distribution business, the Directors believe thatthe acquisition of the Target Company, which has over 14 years of experience in the provisionof film advertising and promotion services, will allow the Group to develop a professional in-house advertising and promotion team, which will benefit the Group in terms of providingmore flexibility to formulate and fine-tune its advertising and promotion strategies as well asimproved cost effectiveness. Further, the Target Company has been providing such services tothe Group since 2009 and throughout their history of cooperation, the Directors are satisfiedwith the quality of professional services rendered by the Target Company. Having established along term relationship with the Target Company in numerous film and television seriesmarketing campaigns, the Directors consider it is more cost-efficient to establish an in-housemarketing team by acquiring the Target Company, which has extensive hands-on experience inorganising film advertising and promotion services, as compared to establishing an in-housemarketing team by hiring new staff which could entail substantial ongoing training and time tofamiliarise with the tailored marketing approach offered by the Target Company. Further, it isalso difficult to establish an in-house marketing team that possesses that same level ofexperience and public media connections as the Target Company. Having considered theabove, the Directors consider that acquiring the Target Company will offer enhancedoperational efficiency and cost efficiency to the Group. The Group is optimistic that theexpertise of the Target Company in film advertising and promotion will further strengthen itsexisting core business of film production and distribution by providing a more tailoredapproach in marketing the Group’s film productions to capture the opportunities offered by thegolden development phrase of the PRC cultural industry.

Moreover, the Directors are optimistic about the future development of printed and digitalmedia advertisement in the PRC market given the rapid economic growth in the PRC and theincreasing number of high net worth consumers pursuing luxurious lifestyle related product andservices. As such, the Directors consider that it is the right opportune to develop printed anddigital media business by acquiring the Target Group, which is also engaged in the publicationof a luxury lifestyle magazine, namely ‘‘Platinum of UnionPay’’ (銀聯白金), which covers a


– 19 –

wide range of the most updated news on luxurious lifestyle related products and servicesranging from fashion, jewellery, entertainment, food and restaurants, leisure, to art and culture,that targets the high-end consumer market of Hong Kong, Macau and the PRC. In view of thegrowing consumption of luxury products and services in the PRC, more international luxurybrands are seizing the PRC market by strengthening their foothold in the PRC henceencouraging the advertising market for luxury products and services in the PRC. Given theprincipal target audiences of Chili Platinum’s publication are high net worth individuals andother elite groups of the PRC, being the selected premium level cardholders of UnionPay aswell as members of various high-end private clubs, golf clubs and hotels that have highdisposable income with desire of quality living standards, the Group considers that it hasestablished considerable number of targeted readership base and has a strong competitiveadvantage within the industry. The Directors further consider that the printed and digital mediaplatform will create synergy to the Group’s existing core business of film production anddistribution by providing an additional solid marketing channel of the Group’s film andtelevision series productions in the PRC market that will also give the Group a high degree ofcontrol on the marketing campaigns of its productions and to further expand its potential targetaudiences to the high-end consumer market of the PRC. The Group believes that the magazinepublication business is an important step towards its expansion into a diversified culturalbusiness.

The terms of the Agreement were determined after arm’s length negotiations between theparties. The Directors (including the independent non-executive Directors) consider that theterms of the Agreement are normal commercial terms and are fair and reasonable and theAcquisition is in the interests of the Company and Shareholders as a whole.

LISTING RULES IMPLICATIONS

The Target Company is wholly owned by the Vendor, the sister of Mr. Wong. TheVendor is therefore a connected person of the Company under Chapter 14A of the ListingRules. As one of the applicable percentage ratios (as defined in the Listing Rules) in respect ofthe Acquisition is greater than 5% but less than 25% and the consideration exceedsHK$10,000,000, the Acquisition constitutes a discloseable and connected transaction for theCompany under Chapter 14 and Chapter 14A of the Listing Rules and is subject to reporting,announcement and the Independent Shareholders’ approval requirements under the ListingRules.

Since the Acquisition constitutes a connected transaction for the Company due to theconnection between the Vendor, each of (1) Mr. Wong; (2) Mr. Edmond Wong, being the sonof Mr. Wong and the nephew of the Vendor; and (3) Ms. Alvina Wong, the daughter of Mr.Wong and the niece of the Vendor, had abstained from voting on the relevant Board resolutionin this aspect.


– 20 –

Continuing Connected Transactions

Existing continuing connected transactions

Subsequent to Completion of the Acquisition, the Target Company will become anindirect wholly-owned subsidiary of the Company and will therefore cease to be a connectedperson of the Company. As such, the transactions between the Company and the Target Groupas detailed in the paragraph headed ‘‘Continuing Connected Transactions — (3) Provision offilm advertising and promotion services by Chili’’ of the Company’s prospectus dated 9October 2012 after Completion will cease to be continuing connected transactions of theCompany.

Details of the continuing connected transactions, being the expenses paid or payable tothe Target Company for the provision of film advertising and promotion services during therelevant period since 2009 are as follows:

For the year ended 30 June2010 2011 2012 2013 2014

HK$’000 HK$’000 HK$’000 HK$’000 HK$’000

Transaction amountduring the relevantperiod 300 500 800 1,304 1,205

Annual cap for therelevant period — — — 2,500 3,500

New continuing connected transactions

Pure Project Limited is a company owned as to 99.99% by Mr. Wong and as to 0.01% bythe Vendor, and is therefore a connected person of the Company under the Listing Rules. PureProject Limited entered into a lease agreement with the Group on 1 October 2011 (assupplemented by an agreement dated 5 October 2012) in respect of a property located inQuarry Bay, Hong Kong which the Group uses as its Hong Kong office for a term commencedon 1 October 2011 and will expire on 30 June 2015 at a monthly rental of HK$40,000. Inaddition, Pure Project Limited also entered into a lease agreement (the ‘‘Chili LeaseAgreement’’) with the Target Company on 30 September 2013 in respect of a propertyadjacent to the property leased to the Group which the Target Company uses as its Hong Kongoffice for a term commenced on 1 October 2013 and will expire on 30 September 2015 at amonthly rental of HK$17,000. Upon Completion, the Chili Lease Agreement between theTarget Company and Pure Project Limited will become a continuing connected transaction ofthe Company. In view of the Chili Lease Agreement, the annual cap for the year ending on 30June 2015 in respect of the rental payable by the Group to Pure Project Limited will need to beincreased from the original annual cap of HK$500,000 to HK$517,000. The revised annual capdetermine based on the monthly rental under the Chili Lease Agreement payable by the Group


– 21 –

to Pure Project Limited after Completion. The Company will comply with all connectedtransaction requirements under Chapter 14A of the Listing Rules upon any variation or renewalof any of the lease agreements referred above.

EGM

The EGM will be convened and held for the Shareholders to consider and, if thought fit,to approve the Agreement and the transactions contemplated thereunder. Set out on pages 88and 89 is a notice convening the EGM to be held at Rooms 1801–02, Westlands Centre, 20Westlands Road, Quarry Bay, Hong Kong on Friday, 29 May 2015 at 4:00 p.m. at which therelevant resolution(s) will be proposed to the Independent Shareholders to consider and, ifthought fit, approve the Acquisition and the transactions contemplated thereunder.

A form of proxy for use at the EGM is enclosed with this circular. Whether or not you areable to attend the EGM, you are requested to complete the accompanying form of proxy inaccordance with the instructions printed thereon and return the same to the Company’s shareRegistrar, Tricor Investor Services Limited at Level 22, Hopewell Centre, 183 Queen’s RoadEast, Hong Kong as soon as possible but in any event not less than 48 hours before the timeappointed for the holding of the EGM or any adjourned meeting. Completion and delivery ofthe form of proxy will not preclude you form attending and voting in person at the EGM orany adjourned meeting (as the case may be) if you so wish.

Any shareholder with a material interest in the Agreement and the transactionscontemplated thereunder will not vote at the EGM. To the best of the Directors’ knowledge,information and belief having made all reasonable enquiries, the Vendor holds 7,292,000Shares, representing 1.34% of the issued share capital of the Company as at the LatestPracticable Date and is considered to be materially interested in the Acquisition. Further, Mr.Wong, Mr. Edmond Wong and Ms. Alvina Wong are also considered to be interested in theAcquisition by virtue of their relationship with the Vendor. As a result, the Vendor, Mr. Wong,Mr. Edmond Wong and Ms. Alvina Wong and their respective associates will abstain fromvoting on the relevant resolutions to be proposed at the EGM.

Save as the Shareholders as disclosed above, to the best of the Directors’ knowledge,there is no Shareholder who has material interest in the Acquisition that shall abstain fromvoting at the EGM.

INDEPENDENT BOARD COMMITTEE

The EGM will be convened and held for the Shareholders to consider and, if thought fit,to approve the Agreement and the transactions contemplated thereunder. The IndependentBoard Committee comprising all independent non-executive Directors has been established tomake recommendations to the Independent Shareholders regarding the Agreement and thetransactions contemplated thereunder. Akron has been appointed by the Company as theIndependent Financial Adviser to advise the Independent Board Committee and theIndependent Shareholders in the same regard.


– 22 –

The text of the letter from the Independent Board Committee is set out on pages 24 to 25of this circular, the text of the letter from Independent Financial Adviser containing its adviseis set out on pages 26 to 55 of this circular.

RECOMMENDATION

Your attention is drawn to the letter from the Independent Board Committee set out onpages 24 to 25 of this circular. The Independent Board Committee, having taken into accountthe advice of the Independent Financial Adviser, the text of which is set out on pages 26 to 55of this circular, considers that the Agreement is entered into upon normal commercial termsfollowing arm’s length negotiations between the parties thereto and that the terms of theAgreement is fair and reasonable so far as the Independent Shareholders are concerned and theAcquisition is in the interests of the Company and the Shareholders as a whole. Accordingly,the Independent Board Committee recommends the Independent Shareholders to vote in favorof the resolution to be proposed at the EGM to approve the Agreement and the transactionscontemplated thereunder.

ADDITIONAL INFORMATION

Your attention is also drawn to the additional information set out in the appendices to thiscircular.

Yours faithfully,On behalf of the Board

Pegasus Entertainment Holdings LimitedWong Pak Ming

Chairman


– 23 –



(Stock Code: 1326)

13 May 2015

To the Independent Shareholders

Dear Sir or Madam,

DISCLOSEABLE AND CONNECTED TRANSACTION

We refer to the circular dated 13 May 2015 issued by the Company (the ‘‘Circular’’), ofwhich this letter forms part. Terms used in this letter shall bear the same meanings as given tothem in the Circular unless the context otherwise requires.

We have been appointed by the Board as members to form the Independent BoardCommittee to consider the Agreement and the transactions contemplated thereunder and toadvise the Independent Shareholders as to whether the Agreement and the transactionscontemplated thereunder are fair and reasonable so far as the Independent Shareholders areconcerned and are in the interests of the Company and the Shareholders as a whole, and torecommend how the Independent Shareholders should vote at the EGM. Akron CorporateFinance Limited (‘‘Akron’’) has been appointed to advise the Independent Board Committeeand the Independent Shareholders in this regard. Details of Akron’s advice, together with theprincipal factors taken into consideration in arriving at such advice, is set out on pages 26 to55 of the Circular. Your attention is also drawn to the letter from the Board set out on pages 5to 23 to the Circular and the additional information set out in the appendices of the Circular.

Having taken into account of the advice of Akron, we consider that the Agreement wasentered into upon normal commercial terms following arm’s length negotiations between theparties thereto, and that the terms of the Agreement are fair and reasonable so far as theIndependent Shareholders are concerned, and the Agreement and the transactions contemplatedthereunder are in the interests of the Company and the Shareholders as a whole. Accordingly,

LETTER FROM THE INDEPENDENT BOARD COMMITTEE

– 24 –

we recommend the Independent Shareholders to vote in favour of the resolution to be proposedat the EGM to approve the Agreement and the transactions contemplated thereunder.

Yours faithfully,the Independent Board Committee

Lam Kam Tong Lo Eric Tien-Cheuk Tang Kai Kui TerenceIndependent

non-executive DirectorIndependent

non-executive DirectorIndependent

non-executive Director

LETTER FROM THE INDEPENDENT BOARD COMMITTEE

– 25 –

The following is the text of a letter from Akron Corporate Finance Limited, theindependent financial adviser to the Independent Board Committee and the IndependentShareholders in respect of the Acquisition, for the purpose of inclusion in this circular.

3808 China Resources Building26 Harbour Road

Wanchai, Hong Kong

13 May 2015

To: The Independent Board Committee and the Independent Shareholders

Dear Sirs,

DISCLOSEABLE AND CONNECTED TRANSACTION

INTRODUCTION

We refer to our engagement as the independent financial adviser to the Independent BoardCommittee and the Independent Shareholders on the Acquisition, details of which are containedin the Letter from the Board (the ‘‘Letter from the Board’’) contained in the circular (the‘‘Circular’’) of the Company to the Shareholders dated 13 May 2015, of which this letterforms part. Terms used in this letter have the same meanings as defined in the Circular unlessthe context otherwise requires.

On 6 March 2015, (after trading hours), the Purchaser, a wholly-owned subsidiary of theCompany, the Vendor and the Company entered into the Agreement pursuant to which theVendor agrees to sell and the Purchaser agrees to purchase the Sales Shares, representing theentire issued share capital of the Target Company, at a total consideration of HK$68 million tobe paid to the Vendor partly by cash and partly by the Company’s issue of the ConsiderationShares.

The Target Company is wholly owned by the Vendor, the sister of Mr. Wong. TheVendor is therefore a connected person of the Company under Chapter 14A of the ListingRules. As one of the applicable percentage ratios (as defined in the Listing Rules) in respect ofthe Acquisition is greater than 5% but less than 25% and the consideration exceeds HK$10million, the Acquisition constitution a discloseable and connected transaction for the Companyunder Chapter 14 and Chapter 14A of the Listing Rules and is subject to reporting,announcement and the independent shareholders’ approval requirements under the ListingRules. To the best of the Directors’ knowledge, information and belief having made allreasonable enquiries, the Vendor holds 7,292,000 Shares, representing 1.34% of the issuedshare capital of the Company as at the Latest Practicable Date and is considered to be

LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

– 26 –

materially interested in the Acquisition. Further, Mr. Wong, Mr. Edmond Wong and Ms.Alvina Wong are also considered to be interested in the Acquisition by virtue of theirrelationship with the Vendor. As a result, the Vendor, Mr. Wong, Mr. Edmond Wong and Ms.Alvina Wong and their respective associates will abstain from voting on the relevantresolutions to be proposed at the EGM.

The Independent Board Committee comprising Mr. Lam Kam Tong, Mr. Lo Eric Tien-cheuk and Mr. Tang Kai Kui Terence, all being independent non-executive Directors, has beenformed to advise the Independent Shareholders on whether (i) the terms of the Agreement arefair and reasonable so far as the Independent Shareholders are concerned; and (ii) theAcquisition is in the interest of the Company and the Shareholders as a whole. We have beenappointed as the independent financial adviser to advise the Independent Board Committee andthe Independent Shareholders in this regard.

BASIS OF OUR ADVICE

In formulating our advice and recommendation to the Independent Board Committee andthe Independent Shareholders, we have relied on the statements, information, opinions andrepresentations contained or referred to in the Circular and the information and representationsas provided to us by the Directors. We have assumed that all information and representationsthat have been provided by the Directors, for which they are solely and wholly responsible, aretrue, complete and accurate in all material respects at the time when they were made andcontinue to be so as at the date of the despatch of the Circular. We have also assumed that allstatements of belief, opinion, expectation and intention made by the Directors in the Circularwere reasonably made after due enquiries and careful considerations.

We have no reason to suspect that any material facts or information have been withheld orto doubt the truth, accuracy and completeness of the information and facts contained in theCircular, or the reasonableness of the opinions expressed by the Company, its advisers and/orthe Directors, which have been provided to us.

We consider that we have taken sufficient and necessary steps to form a reasonable basisand an informed view for our recommendation in compliance with Rule 13.80 of the ListingRules. The Directors have collectively and individually accepted full responsibility for theaccuracy of the information contained in the Circular and have confirmed, having made allreasonable enquiries, that to the best of their knowledge and belief, there are no other facts theomission of which would make any statement in the Circular misleading. We consider that wehave been provided with sufficient information to reach an informed view and to provide areasonable basis for our recommendation. We have not, however, conducted any independentin-depth investigation into the business and affairs of the Company nor have we considered thetaxation implication on the Group or the Shareholders as a result of the transactions herein.

In addition, we have no obligation to update this opinion to take into account eventsoccurring after the issue of this letter. Nothing contained in this letter should be construed as arecommendation to hold, sell or buy any Shares or any other securities of the Company.


– 27 –

PRINCIPAL FACTORS CONSIDERED

The principal factors and reasons that we have taken into consideration in assessing theterms of the Acquisition and arriving at our opinion are set out as follows:

1. Business and financial information of the Group

The Group is principally engaged in films and television (‘‘TV’’) series production,distribution and licensing of film rights in Hong Kong, the PRC and South East Asiathrough its established distribution channels. During the six months ended 31 December2014, the Group further expanded its business portfolio and began to participate in filmexhibition and post-production. The Group has been producing films and TV series inChinese language with the PRC as its major market.

(a) Financial performance for the six months ended 31 December 2014

According to the interim report of the Group for the six months ended 31December 2014 (the ‘‘2014 Interim Report’’), the Group’s financial performance forthe six months ended 31 December 2014 can be briefly summarised as follows.

Revenue and gross profit of the Group were approximately HK$40.2 millionand HK$17.6 million respectively for the six months ended 31 December 2014,representing increases of approximately HK$7.3 million or 22.0% and HK$5.4million or 43.9% respectively compared to the same period in 2013. According to the2014 Interim Report, such increases was mainly due to the revenue arising from thefilm exhibition in the Cinema City Langham Place, the Group’s flagship cinema inHong Kong which located in the prime area of Mongkok (a popular shopping andentertainment in Hong Kong). Gross profit margin for the six months ended 31December 2014 was approximately 43.7%, which showed an increase from that ofapproximately 37.0% for the corresponding period of the previous financial year.This was mainly due to the revenue contributed by general-scale films during the sixmonths ended 31 December 2014 as opposed to a large-scale film for correspondingperiod of 2013. Due to the relatively large cost involved, large scale productioninherently has a lower gross profit margin. In addition, the gross profit margin forthe film exhibition was approximately 50.0% whilst no such operation in the sameperiod of 2013.

The Group’s loss and total comprehensive expense attributable to owners of theCompany for the six months ended 31 December 2014 amounted to approximatelyHK$29.0 million as compared with profit and total comprehensive incomeattributable to owners of the Company amounted to approximately HK$4.5 millionfor the corresponding period of 2013. The loss for the period in 2014 compared tothe profit in the same period of 2013 was primarily a result of the significantincrease in selling and distribution expenses by approximately HK$34.3 million fromapproximately HK$1.8 million in 2013 to approximately HK$36.1 million in 2014.The surge in selling distribution expenses was mainly attributable to (i) cinemacircuit distribution expenses of the film ‘‘Z Storm’’ (Z 風暴) of approximatelyHK$2.8 million and (ii) the rental expenses and management fee of the cinema for


– 28 –

the film exhibition business commenced on 23 July 2014 of approximately HK$27.4million whilst no such expenses were recorded for the same period of the previousfinancial period.

(b) Financial performance for the year ended 30 June 2014

According to the annual report of the Group for the year ended 30 June 2014(the ‘‘2014 Annual Report’’), the Group’s financial performance for the year ended30 June 2014 can be briefly summarised as follows.

Revenue and gross profit of the Group were approximately HK$134.8 millionand HK$59.7 million respectively for the year ended 30 June 2014, representingdecreases of approximately HK$57.8 million or 30.0% and HK$5.6 million or 8.5%respectively compared to those of the corresponding period in 2013. According to the2014 Annual Report, the decrease in revenue was mainly to the fact that all the filmsreleased during the year 2014 were of general-scale, whilst during the correspondingperiod in 2013, the Group had released a large-scale film, which accounted forapproximately 64.2% of the total revenue for year 2013.

The Group’s profit and total comprehensive income attributable to owners of theCompany for the year ended 30 June 2014 amounted to approximately HK$26.4million as compared with approximately HK$19.1 million for the correspondingperiod of 2013. The increase of profit for the year ended 30 June 2014 was primarilyattributable to (i) an increase in other income and gain of approximately HK$2.6million, (ii) share of results of an associate of approximately HK$4.7 million, (iii)decrease in selling and distribution and other expenses of approximately HK$10.6million outweighed (iv) the decrease in gross profit of approximately HK$5.6 millionand (v) increase in administrative expenses of approximately HK$5.1 million.

2. Business and financial information of the Target Group

As disclosed in the Letter from the Board, the Target Group comprises the TargetCompany, Powerful Target, Favorable On and Chili Platinum.

Target Company and Chili Platinum are the two operating arms of the Target Group.Upon development of the Target Group, based on projections made by the Target Group,Chili Platinum will eventually become the leading business segment of the Target Groupin terms of revenue contribution.

The Target Company is a full service marketing agency principally engaged in theprovision of advertising and marketing services since its incorporation, including, withoutlimitation, event management, product advertisements, product branding as well asorganising film advertising and promotion activities. The Target Company has beenproviding film advertising and promotion services to the Group since 2009. Details of thetransactions between the Target Company and the Group had been disclosed in theparagraph headed ‘‘Continuing Connected Transactions — (3) Provision of filmadvertising and promotion services by Chili’’ of the Company’s prospectus dated 9October 2012. In September 2014, the Target Company acquired three subsidiaries,


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namely, Powerful Target, Favorable On and Chili Platinum with a view to expand thebusiness of the Target Group to include printed and digital media publication and theoperation of a private members’ club. The Target Company is indirectly interested in 70%equity interest of Chili Platinum.

Powerful Target is an investment holding company and is wholly owned by theTarget Company. Powerful Target does not have any asset other than its investment in the70% equity interest of Favorable On.

Favorable On is an investment holding company and is owned as to 70% byPowerful Target and as to 30% by an independent third party. Favorable On does not haveany asset other than its investment in the entire equity interest of Chili Platinum.

Chili Platinum is a limited liability company incorporated in Hong Kong on 7February 2014. Chili Platinum is principally engaged in the publication of a monthlyissued luxury lifestyle magazine (the ‘‘Magazine’’), namely ‘‘Platinum of UnionPay’’ (銀聯白金), which features a wide range of the most updated news on luxurious lifestylerelated products and services ranging from fashion, jewellery, entertainment, food andrestaurants, leisure, to art and culture.

Currently, the Magazine is distributed to various high-end private clubs, golf clubsand hotels whilst selected content is also available online in a number of digital media inorder to broaden the scope of potential audiences. The Magazine will be provided on acomplementary basis to selected premium level cardholders of UnionPay in its targetmarkets. The Magazine targets high-end consumer market of Hong Kong, Macau and thePRC. The principal target audiences of the Magazine are high net worth individuals andother elite groups of the PRC which have high disposable income with desire of qualityliving standards. The Magazine has been issued monthly since January 2003 and 132issues have been published. As at the Latest Practicable Date, the Target Group has beeninvolved in the latest five publications of the Magazine under the Publication CooperationAgreement since January 2015.

As the Magazine is and will only be distributed on a complementary basis, revenuefrom the magazine distribution business will be primarily derived from printed media anddigital media advertisements placed by local or international luxury brands in theMagazine.

Under the prevailing laws and regulations in the PRC, enterprises with foreignownership are prohibited from engaging in the publication of books, newspapers andperiodicals. Under the Publication Cooperation Agreement, Guangzhou Platinum, anIndependent Third Party, which has been publishing the Magazine for over ten years, willcontinue to act as the channel of distribution of the Magazine and publication activities ofthe Magazine in the PRC, while the Target Group will be responsible for publication anddistribution of the Magazine in Hong Kong and Macau, contents of the Magazine,negotiating the terms of sponsorship and advertisements with potential customers,promoting and marketing the Magazine, as well as the printing and publication of theMagazine under direction of Guangzhou Platinum. Since publication activities in the PRC,including contents approval and distribution activities are carried out by Guangzhou


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Platinum, the Target Group is not required to obtain any license or permit in relation to itspublication business. The Publication Cooperation Agreement will continue for a term offour years and renewed automatically unless and until being terminated by either partyprior to the expiry of any one 4-year period.

According to the Publication Cooperation Agreement, Guangzhou Platinum will beentitled to receive a monthly flat fee (the ‘‘Flat Fee’’) of RMB50,000 from the TargetGroup for approving the Magazine’s contents and the distribution activities conducted inthe PRC. In addition to the Flat Fee, if the profit after tax derived from the Magazineexceeds the aggregate annual Flat Fee (the ‘‘Excess Amount’’), Guangzhou Platinum willbe entitle to receive 20% of the Excess Amount. Therefore, the income generated toGuangzhou Platinum under the Publication Cooperation Agreement will correlate with theprofit after tax derived from the Magazine.

We consider that there is no foreseeable obstacle in renewing the PublicationCooperation Agreement upon expiration after taking into account (i) substantial time andeffort will be dedicated by the Target Group for on-going cooperation with GuangzhouPlatinum and hence the Target Group will be familiar with the mode of cooperation,arrangements on division of responsibilities, selection of suitable magazine contents underthe Publication Cooperation Agreement upon expiration of the Publication CooperationAgreement; (ii) the Target Group will have developed the expertise and established a longterm cooperation relationship with Guangzhou Platinum upon expiration of the PublicationCooperation Agreement. Therefore, the Target Group will be in an advantageous positionas compared to other parties in managing the publication of the Magazine; and (iii) theTarget Group’s development of the digital media platform to complement issue of theMagazine will further expand the target audiences of the Magazine in high-end consumermarket irrespective of geographical constraints. In view of the digital media platform, theMagazine will become a more comprehensive advertising channels for advertisers. Thus, itwill increase the attractiveness of the Magazine to advertisers. In addition, it will furthercontribute to the revenue and profits of the publication business of the Magazine and willbe beneficial to Guangzhou Platinum in view of the profit sharing arrangement under thePublication Cooperation Agreement. Based on the foregoing, we consider that there existsa strong incentive for both parties to renew the Publication Cooperation Agreement.Hence, it is justifiable to assume that the Publication Cooperation Agreement will berenewed and the Target Group will continue as a going concern.

Given that Guangzhou Platinum is the key business partner of the Target Group, wehave discussed with management of the Company and obtained background information ofGuangzhou Platinum including but not limited to its shareholding structure, businessoperation and financial strength. We are given to understand that the holding company ofGuangzhou Platinum is one of the well-known enterprise established in the PRC which isprimarily responsible for the promotion of its credit cards and the provision of paymentand settlement services (the ‘‘Card Company’’). According to public informationavailable, the Card Company has issued 4.6 billion bank cards globally with about 400associate members worldwide and with its cards accepted in 150 countries and regionsoutside the PRC. During the years from 2012 to 2014, the issued bank cards wassignificantly increased from approximately 2.7 billion at the end of 2011 to approximately


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4.6 billion in 2014, representing a compounded annual growth rate of approximately19.4%. According to its transactions data available, the domestic transactions of its bankcards represented approximately 47.7% of the total domestic consumption value in thePRC in 2014 and the global network processed transactions with a total volume ofapproximately RMB41.0 trillion in 2014, representing a year-on-year increase ofapproximately 27.3%.

In view of (i) Guangzhou Platinum’s relation with the Card Company; (ii) extensiveexperience of Guangzhou Platinum in the publication of the Magazine and its establishednetwork in distribution of the Magazine; and (iii) readership base of the Magazine beinghigh net worth individuals with high disposable income will be attractive to advertiser,thus facilitating advertising income generation to the Target Group under the PublicationCooperation Agreement.

As mentioned in the Letter from the Board, based on the unaudited financialinformation of the Target Group, the Target Group recorded an unaudited consolidatedprofit after tax of approximately HK$854,000 and a loss after tax of approximatelyHK$655,000 for the two years ended 31 December 2013 and 31 December 2014,respectively. The net loss of the Target Group recorded for year ended 31 December 2014as compared with net profit in the corresponding period in 2013 was attributable topreliminary expenses amounting to approximately HK$1.39 million incurred in thecommencement of business of the Chili Platinum. The unaudited consolidated net assetsof the Target Group as at 31 December 2014 was approximately HK$2,227,000.

3. Reasons for and benefits of entering into the Acquisition

(a) Overview of the advertising and luxury market in the PRC

According to a report published in December 2014 by Zenith Optimedia GroupLimited (‘‘ZenithOptimedia’’), an independent reputable global media researchhouse with extensive experience in its profession, China was the world’s secondlargest advertising market in 2014. The estimated net advertising expenditures inChina reached approximately US$45.5 billion in 2014, being the largest advertisingmarket in Asia. ZenithOptimedia further forecasted that the total net advertisingexpenditures in China will reach approximately US$62.1 billion by 2017,representing a compound annual growth rate (‘‘CAGR’’) of approximately 10.9%from 2014 to 2017 compared to a forecasted decrease in net advertising expendituresin many other developed countries during the same period. It is forecasted that Chinawill remain the second largest world’s advertising market in 2017, just behind thetraditional global advertising leader, the United States.


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The table below shows the top ten advertising markets based on advertisingexpenditures in 2014 and 2017.

Top Ten Advertising Markets Based on Advertising Expenditures in 2014 and2017

2014 2017(US$ million) (US$ million)

United States 176,006 United States 197,536China 45,491 China 62,076Japan 44,520 Japan 47,842Germany 24,597 United Kingdom 26,475United Kingdom 22,525 Germany 25,540Brazil 16,686 Brazil 20,015France 13,086 South Korea 14,918Australia 12,317 Australia 13,060South Korea 11,670 France 12,985Canada 11,159 Argentina 12,545

Source: ZenithOptimedia

According to the 2013 China Luxury Report (‘‘Luxury Report’’) published byFortune Character Institute, an organization specializing in lifestyle studies of therich in China, Chinese is the largest consumer of the global luxury market,accounting for approximately 47% of the global luxury sales.

As the world’s largest group of luxury consumption, China has become the keytarget market for international luxury brands. The lucrative China market has alsopresented abundant opportunities for global luxury players to further establish theirpresence across the country. Therefore, many well-known international luxury brandsare attracted to set up business in China. Some brands have already gained access tothe market while others are struggling for an inroad, the competition between theseinternational luxury brands is getting intense.

Due to the more intense competition, luxury goods players used a variety ofways to promote their brands, including customised services, direct local operationand more advertising, in order to maintain and consolidate their competitive positionin China. To survive in the intense competition, luxury brands are apt to deployadvertising and marketing activities to increase market penetration as well asdeepening their brand image when promoting in China. Luxury brands also seek toattract new customers by educating them about their brand’s heritage and culture.Advertising in magazine is one of the important media platforms for the internationalluxury brands to enhance the visibility of their brands and deepen the brand image.

Luxury brands are niche brands and their advertisements are tailored towards aspecific consumer market. Advertisement of luxury brands are mostly featured infashion magazines, business publications, airline in-flight magazines and other high-


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end publications. This is because these publications are the most widely read by thetarget audience. Therefore, it indicated the importance of the print media in theadvertisement and its influence on the luxury consumer market.

In view of the growth potential of advertising expenditure in China and risingneeds for luxury brands to strengthen its brand consciousness in China in order tosecure a stronger foothold in the luxury market in China, the prospect of the China’sadvertising industry which targets at luxury advertisers will be promising.

(b) Reasons for the Acquisition

The Ministry of Culture has issued the Doubling Plan for Cultural Industries ofthe 12th Five Year Plan that requires a doubled increase in production value ofcultural industries at the end of 2015 comparing to that of in 2010. As set out in the2014 Interim Report, in 2014, the film industry in the PRC has seen a very rapidpace of development with (i) total box office receipts exceeding RMB29.0 billion,representing a year-on-year rise of approximately 36.2%; and (ii) total number ofcinema admissions increasing by approximately 34.5% to 830 million, whichindicates that the PRC film market has entered a golden phase of development.

As stated in the 2014 Annual Report, at the end of May 2014, centralgovernment ministries and departments including the Ministry of Finance and StateAdministration of Taxation, in conjunction with the State Administration of Press,Publication, Radio, Film and Television issued the Notice on Certain EconomicPolicies for the Support of the Development of the Film Industry, which mainlyprovides for preferential tax policy as well as financing supports and subsidies forthe film industry. This demonstrates the increasing support from the state towards thecultural industry after the announcement of the related policies stated in the 12thFive Year Plan by the PRC Government.

Given the continuing growth of the PRC cultural industry as well as theencouragement of the PRC Government as discussed above, the Group is confidentin the PRC cultural industry’s outlook which is encouraging for industry participants.

We also note from the 2014 Interim Report that the Group took two major stepstowards its expansion into a diversified cultural business. The Group has expandedits core business of film and TV series production and distribution and licensing offilm rights to include (i) film exhibition (the ‘‘Film Exhibition Development’’); and(ii) post-production (the ‘‘Post-Production Development’’). In mid-November 2014,the Group’s flagship cinema had been opened for trial operation and officiallycommenced operation in January 2015. In September 2014, the Group established itsin-house post-production arm through cooperating with a post-production house inHong Kong with over twenty years of experience in the post-production industry toparticipate in digital media post-production operation with a view to forming anintegrated film production chain so as to achieve economies of scale and synergies.Given that post-production is integral to the production process, the establishment ofthe in-house post-production arm will enable the Group to undertake post-productionof its films which had previously been outsourced to external service providers.


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As indicated in the 2014 Interim Report, in order to capture the opportunitiesoffered by the rapid development of the PRC cultural market, the Group willcontinue to expand its production capacities.

Taking into account the Group’s business strategy in seeking businessopportunities to expand its cultural business and the Film Exhibition Developmentand the Post-Production Development taken by the Group, we consider that theAcquisition is in line with the business strategy of the Group.

As set out in the Letter from the Board, given the nature of the Group’sbusiness, the Group does not have an in-house film advertising team. The Group hasbeen outsourcing the marketing activities of its film and TV series productions.Taking into account that the Target Company possesses over 14 years of experiencein film advertising and promotion services and has been providing such services tothe Group since 2009 it is anticipated that the Acquisition will allow the Group todevelop a professional in-house advertising and promotion team, which will benefitthe Group in terms of providing more flexibility to formulate and fine-tune itsadvertising and promotion strategies as well as improved cost effectiveness byproviding a more tailored approach in marketing the Group’s film productions.Furthermore, the Acquisition will also enable the Group to participate in filmadvertising and promotion business to external customers for generating positivereturn to the Group under the golden development phrase of the PRC culturalindustry as discussed above.

As discussed in the paragraph headed ‘‘Overview of the advertising and luxurymarket in the PRC’’, in view of (i) the anticipated growth in advertising expenditurein the PRC; (ii) the PRC is the largest consumer of the global luxury market; and(iii) competition among luxury brands for strengthening their foothold in the PRC,the Directors are optimistic about that the development of printed and digital mediaadvertisement in the PRC, in particular, targeting the luxury advertisers.

As such, we concur with the Directors that it is the right time to develop printedand digital business by acquiring the Target Group, which is also engaged in thepublication of the Magazine, a luxury lifestyle magazine with the view of earningadvertising income from luxury advertisers under promising prospect of the PRCadvertising market for luxury sector.

We note that the Magazine has established considerable number of targetedreadership base, being selected premium level cardholders of UnionPay as well asmembers of various high-end private clubs, golf clubs and hotels that have highdisposable income with desire of quality living standard. Capitalizing on the uniquereadership base of the Magazine, being the targeted consumers of luxury brands, weconsider that the Magazine has a strong competitive advantage within the advertisingmarket for luxury products and services.

Moreover, with unique readership base of the Magazine, it will create synergyto the Group’s existing core business of film production and distribution byproviding an additional solid marketing channel of the Group’s film and TV series


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productions in the PRC market that will in turn give the Group a high degree ofcontrol on the marketing campaigns of its productions and to further expand itspotential target audiences to the high-end consumer market of the PRC. The Groupbelieves that the magazine publication business is an important step towards itsexpansion into a diversified cultural business.

Apart from the Publication Cooperation Agreement, the Platinum ClubCooperation Agreement is another major agreement of the Target Group. Althoughbusiness development under the Platinum Club Cooperation Agreement is still at apreliminary stage, once the publication business of the Target Group advanced to amore stable stage, it is considered that the Platinum Club Cooperation Agreementwill allow the Target Group to capture potential business opportunities associatedwith operation of the club. In this regards, the Platinum Club Cooperation Agreementrepresents an additional potential income stream of the Target Group.

Based on the foregoing, we are of the view that the Acquisition is not in theordinary and usual course of business of the Group. Having considered (i) theupcoming development opportunities associated with advertising market for luxuryproducts and services in the PRC as discussed under the paragraph headed‘‘Overview of the advertising and luxury market in the PRC’’ above from thepublication of a luxury lifestyle magazine; (ii) the support of the PRC Government inthe cultural industry; (iii) the synergy effect of the Magazine to the Group’s existingbusiness; and (iv) the Acquisition is in line with the business strategy of the Group,we concur with the Directors that the Acquisition is in the interest of the Group andits Shareholders as a whole.

4. Principal terms of the Agreement

Pursuant to the Agreement, total consideration for the Sale Shares is HK$68,000,000(the ‘‘Consideration’’) which will be satisfied upon Completion in the following manner:

(i) as to HK$10,040,000, will be paid in cash; and

(ii) as to HK$57,960,000, by the Company’s issue of 46,000,000 ConsiderationShares at the issue price of HK$1.26 per Consideration Share (the ‘‘IssuePrice’’) to the Vendor.

We note that according to the 2014 Interim Report, the Group recorded cash andbank balances of approximately HK$27.7 million as at 31 December 2014 and recorded anet loss of approximately HK$29.0 million for the six months ended 31 December 2014.In addition, as stated in the 2014 Annual Report, the Group recorded net cash used inoperating activities of approximately HK$25.1 million for the year ended 30 June 2014. Inthis connection, we consider that settlement of part of the Consideration by issuing theConsideration Shares to the Vendor instead of making cash payment will (i) minimizeimmediate cash outflow of the Group; and (ii) enable the Group to retain more cash forgeneral working capital in the course of its business operations and business development,therefore, it will be in the interests of the Company and the Shareholders as a whole.


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(a) Evaluation of the Consideration

As set out in the Letter from the Board, the Consideration of HK$68,000,000was based on normal commercial terms after arm’s length negotiations between theparties with reference to, among other things, (i) the preliminary valuation in relationto the entire equity interest in the Target Group performed by the Valuer ofHK$82,600,000; (ii) the expected costs and expenses for the Acquisition; and (iii)other factors set out in the paragraph headed ‘‘Reasons for entering into theAgreement’’ as set out in the Letter from the Board.

We note that it is common market practice in Hong Kong to employ twomethods to assess the fairness and reasonableness of the consideration for anacquisition of equity interest in a target company similar to the Acquisition, namely,(i) comparable company analysis; and (ii) comparison between consideration andvaluation. For the reasons as stated below, we have chosen the second method overthe first method for our evaluation of the Consideration.

(i) Comparable company analysis

Under this method, a number of companies are selected for comparisonbased on certain criteria such as: (i) the comparable companies are listed on theStock Exchange; and (ii) the principal business activities of the comparablecompanies are similar to those of the target company.

After compiling an exhaustive list of comparable companies on a best-effort basis, the price-to-earnings ratio (the ‘‘P/E ratio’’) and price-to-book ratio(the ‘‘P/B ratio’’) of each of the comparable companies will be calculated andtabulated into two separate ranges. If the target company’s P/E ratio and P/Bratio as implied by the consideration falls within the respective range, theconsideration is likely to be regarded as fair and reasonable.

Even if the target company is not listed on the Stock Exchange,comparable analysis can still be performed by deriving implied P/E ratio andimplied P/B ratio for the target company. An implied P/E ratio is calculatedbased on the amount of the consideration divided by the target company’s netprofit after taxation for the financial year as discounted by the equity interest tobe acquired in the target company. The method to derive the implied P/B ratio,on the other hand, is almost the same as that of the implied P/E ratio except thatthe target company’s net profit after taxation is substituted by its net assetvalue.

However, the efficacy of the implied P/E ratio and the implied P/B ratiofor comparable company analysis is premised on the fact that the targetcompany has been engaged in similar business activities as those of thecomparable companies; if not, no meaningful comparison can be made. We aregiven to understand that at present, the Target Group has two principaloperating arms, namely the Target Company and Chili Platinum, which areresponsible for film advertising and promotion business and magazine


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publication business respectively. We also note that in pursuing businessdevelopment of the Target Group, Chili Platinum will gradually become the keyoperating subsidiary of the Target Group despite the fact that Chili Platinum hasjust commenced its business operation of magazine publication in January 2015.In view of the above, we have decided not to use comparable company analysisto assess the fairness and reasonableness of the Consideration as it may not beable to reflect the development prospect of the Target Group.

(ii) Comparison between the Consideration and the Valuation

The Company has engaged the Valuer, a qualified independent valuer, toconduct a business valuation of the Target Group. According to the valuationreport prepared by the Valuer (the ‘‘Valuation Report’’), in preparing theValuation, the Valuer adopted the discounted cash flow method using income-based approach with reference to the projected future cash flows of the TargetGroup.

Details of the principal assumptions upon which the Valuation was basedare set out in Appendix I to the Circular under the section headed ‘‘9. CashFlow Projections’’ and ‘‘10. Major Assumptions’’.

In relation to the Valuer and its work as regards the Valuation as stated inthe Valuation Report, we have taken all reasonable steps pursuant to note 1(d)to Rule 13.80 of the Listing Rules as follows:

(i) interviewing the Valuer including as to its expertise and any currentor prior relationships with the Group, the Vendor and connectedpersons of either the Group or the Vendor;

(ii) reviewing the terms of engagement (having particular regard to thescope of work, whether the scope of work is appropriate to theopinion required to be given and any limitations on the scope of workwhich might adversely impact on the degree of assurance given by theValuation Report, opinion or statement); and

(iii) assessing whether the representations made by the Group to theValuer are in accordance with our knowledge.

As to the second method, we have compared the Consideration ofHK$68,000,000 to the Valuation of HK$82,600,000 as at 31 December 2014,where the Consideration represents a discount of approximately 18% to themarket value of the entire equity interest in Target Group.

We have reviewed the Valuation Report and discussed with the Valuer themethodology adopted and the basis and assumptions used in arriving at theValuation. We understand that the Valuer has considered three classicalappraisal approach to determine the Valuation, namely the asset-based approach(also known as the cost-based approach), the market-based approach and the


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income-based approach. We have enquired into and the Valuer explained thatthe income-based approach was adopted as (i) the asset-based approach has thedisadvantage that it will understate the market value of a company as it does nottake into consideration the future earning potential of the Target Group ; and(ii) most of the important assumptions of the comparable market transactions,such as discount or premium on the transaction prices or considerations, werehidden under the market-based approach.

Based on the result of our discussion and the reasons given by the Valueras stated above, we concur with the Valuer and are of the view that the income-based approached is an appropriate measure to evaluate the market value of theTarget Group.

We understand that income-based approach focuses on the economicbenefits due to the income producing capability of the Target Group. In thisconnection, the income-based approach estimates the future economic benefitsof the Target Group and discounts them to their present values using a discountrate appropriate for the risks associated with realising those benefits.

Under the income-based approach, we understand that the Valuer hadadopted the discounted cash flow method (‘‘DCF’’) to derive the futureeconomic benefits of the Target Group into a present market value. We considerthat DCF is suitable for the valuation of the Target Group since DCF eliminatesthe discrepancy in time value of money by using a discount rate that reflects allrisks including intrinsic and extrinsic uncertainties in relation to the business.

Furthermore, we also note that in determining the Valuation, the Valuerhad taken into consideration and relied on the projections of future cash flowsof the Target Company (advertising and promotion service business only) andChili Platinum (magazine business only) from 2015 to 2021 (the ‘‘Cash FlowProjections’’) prepared by the appointed personnel and management of theCompany and the Target Group. The Valuer understood the assumptionsadopted by the appointed personnel and management of the Company and theTarget Group reflect their judgment of the ability of the Target Group togenerate revenue from the market with due regard to published research data,current industry conditions, nature and prospect of the Target Group. Details ofthe Cash Flow Projections are set out in the valuation report of the TargetGroup (the ‘‘Valuation Report’’) as set out in Appendix I to the Circular underthe section headed ‘‘9. Cash Flow Projections’’.

In arriving at the Cash Flow Projections, cash flow projections of theTarget Company and Chili Platinum from 2015 to 2019 has been prepared.Thereafter, cash flows for subsequent years were then projected based on aterminal value as at 2020 by applying a terminal growth rate of 3%.

We understand that in estimating the cash flow projections for ChiliPlatinum, it did not include operation of club pursuant to the Platinum ClubCooperation Agreement (the ‘‘Club’’). Having considered that (i) the


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development of the Club is only at a preliminary stage; (ii) there is no definitetimeframe in establishing the Club; and (iii) a more concrete development planfor the Club regarding, among others, its mode of operation, capitalcommitment, revenue model or annual budget will only be devised when thepublication business is at a more mature stage, we consider that it will be moreappropriate to take a more conservative approach for purpose of determining theValuation by not including financial estimation of the Club in cash flowprojection projections for Chili Platinum.

Furthermore, as set out in the Letter from the Board, it is envisaged thatthe Club will be established once the publication business of the Target Groupadvanced to a more stable stage when more market information and feedbacksare gathered from the target audience such that the operations of the Club canbe tailored to the needs of the high-end consumer markets. Apart from profitsharing arrangement between the Target Group and Guangzhou Platinum underthe Platinum Club Cooperation Agreement, no fixed fees have to be paid by theTarget Group and the Target Group does not have any other commitment underthe Platinum Club Cooperation Agreement. We are also given to understand thatthe Company will conduct further research on the earning potential and growthprospect of operation of the Club prior establishment of the Club. The Companywill proceed with development of business of operation of the Club only whensuch development is considered to be beneficial to the Group with the view ofallowing the Group to capture potential business opportunities and bringing inadditional potential income stream to the Group associated with Club’soperation. The Company will not proceed to develop the business of operationof the Club in the event that such business will result in projected net cashoutflow to the Target Group. Therefore, it is a conservative approach forpurpose of determining the Valuation by not including financial estimation ofthe Club in the cash flow projections for the Target Group because thedevelopment of the Club will be subject to the Company’s research result of theearning potential and growth prospect of operation of the Club.

Upon our review of the Cash Flow Projections as set out in the ValuationReport, a major assumption for arriving at the Valuation, we further note that inassessing the fairness and reasonableness of the Cash Flow Projections, theValuer has (i) reviewed historical financial statements and operating data of theTarget Group, the terms and conditions of the Cooperation Agreements and thecurrent rate card for the Magazine; (ii) discussed with the management of theCompany and the Target Group about the bases of assumptions underlying theCash Flow Projections and the business plan of the Target Group; and (iii)made reference to other public information, including but not limited to thenumber and type of advertisers and distribution channels of the Magazine, thehistorical revenue growth and profit margins of comparable companies, and ratecards of other magazines.


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In assessing the fairness and reasonableness of the key parameters andassumptions used to derive the Cash Flow Projections, our review work and keyfindings are summarized as follows:

(a) Revenue

The Target Company

Upon our review of the Cash Flow Projections, we note thatadvertising income of the Target Company is forecasted with reference toits audited revenue for the year ended 31 December 2014 with a CAGR of5% for the period from 2014 to 2019. We note that according to theresearch report of ZenithOptimedia published in December 2014, theCAGR of advertising expenditure from 2014 to 2017 in China and inadvanced Asia region (including Australia, Hong Kong, New Zealand,Singapore and South Korea) are approximately 10.9% and 5.1%respectively. Based on the foregoing, revenue growth of the TargetCompany is in line with market growth and are not excessive.

Chili Platinum

As stated in the Letter from the Board, the Magazine will bedistributed on a complementary basis, therefore, revenue of Chili Platinumwill be principally derived from advertisement placement in the Magazine(the ‘‘Advertising Income’’) which accounts for around 97% of revenue.As such, we consider that determination of Advertising Income withreference to number of advertising pages, occupancy rate of the advertisingpages (the ‘‘Occupancy Rate’’), prices charged per page and the salesdiscount rate (the ‘‘Sales Discount’’) to be fair and reasonable.

We note that growth in Advertising Income is mainly driven by theexpected increase in Occupancy Rate and the expected decrease in SalesDiscounts. The Occupancy Rate is assumed to be 100% from 2016 andonwards and Sales Discounts is expected to decrease by 5% to 10% perannum. Having considered (i) principal target audiences of the Magazinecomprises of high net worth individuals and the premium level cardholdersof UnionPay (the ‘‘Premium Target Audience’’) which are targetedconsumers of luxury brands; (ii) with Premium Target Audience being thereadership base of the Magazine, it offers competitive advantage of theMagazine for gaining popularity as one of the leading luxury lifestylemagazines, this will facilitate the increase in the Occupancy Rate; (iii)growth potential of the premium level cardholders of UnionPay asillustrated from CAGR of global bank cards issued by UnionPay ofapproximately 19.4% from 2011 to 2014, this will facilitate the building upof readership base of the Magazine; and (iv) promising prospect of theChina’s advertising industry which targets at luxury advertisers asdiscussed above, we consider that the basis and assumptions of arrivingthe Occupancy Rate and the Sales Discounts to be justifiable.


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In deriving the estimated Advertising Income, the management of theTarget Group has also estimated the prices to be charged by Chili Platinumto the customers. We have reviewed the rate card of the Magazines andnoted that the prices under the rate card are comparable to those offered byother luxury magazines.

To further assess the fairness and reasonableness of the expectedprices to be charged by Chili Platinum, we have conducted the desktopresearch on the average market price of the advertising expenditure peradvertising page by targeted sectors of advertisers of the Magazine (the‘‘Average Market Price’’) for year ended 31 December 2013 andcompared the Average Market Price with the estimated average price peradvertising page to be charged by Chili Platinum (‘‘Estimated AveragePrice’’). The Average Market Price is arrived at with reference to theresearch report prepared by admanGo, an online platform providingcompetitive advertising monitoring in May 2014. We note that theEstimated Average Price demonstrates an upward trend during theprojection period from 2015 to 2019. The Estimated Average Price in2015 and 2019 increases from approximately 8.3% to 30.3% of theAverage Market Price respectively and does not exceed the AverageMarket Price. Taking into account that the Magazine is new to theadvertisers, thus offering high Sales Discounts can be an initiative toattract more potential customers to place advertisements in the Magazine.In view of growth momentum driven by the potential increase in premiumlevel cardholders of UnionPay as discussed above for building up thereadership base of the Magazine, we consider it is justifiable for a higherprice to be charged by Chili Platinum.

Based on the foregoing, we are of the view that the bases andassumptions in arriving at the forecasted Advertising Income to be fair andreasonable.

(b) Cost of sales

Target Company

The forecast on cost of sales of the Target Company is madereference to its historical cost of sales, expected gross margins and generalinflation. In estimating the costs sales of the Target Company, we note thataround 5% annual growth is adopted. Such growth (i) is in line with therevenue growth of the Target Company; and (ii) exceeds the expectedlong-term inflation rate of Hong Kong of around 3.5% as forecasted byInternational Monetary Fund (the ‘‘IMF’’). Therefore, we consider thebases and assumptions used for the forecast on the cost of sales of theTarget Company are fair and reasonable.


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Chili Platinum

The forecast on cost of sales of Chili Platinum mainly consists of theprinting cost of the Magazine, annual flat approval fees and profit sharingpayable to Guangzhou Platinum for approving the Magazine’s contents andthe distribution activities conducted in the PRC. We have reviewed theprinting invoices quoted from Independent Third Party for the Magazine’sprinting cost and note the basis of estimating the printing cost iscomparable to the those invoices quoted from Independent Third Party.We have also reviewed the terms of the Publication CooperationAgreement and note that the basis of estimating the calculation of theapproval fees and profit sharing payable to Guangzhou Platinum is made inaccordance with the terms thereunder. Based on the review work performedby us, we are of the view that the bases and assumptions adopted inarriving at the forecast on cost of sales of Chili Platinum are fair andreasonable.

(c) Operating Expenses

Target Company

The forecast on operating expenses of the Target Company isdetermined with reference to its historical operating expenses and generalinflation. An annual growth of 5% is adopted for operating expensesprojection, which exceeds the expected long-term inflation rate of HongKong of around 3.5% as forecasted by IMF. Therefore, we consider thebases and assumptions used for the forecast on the operating expenses ofthe Target Company are fair and reasonable.

Chili Platinum

The operating expenses of Chili Platinum mainly consists of salaryand allowances and the rent and rates for operating the Magazine. We aregiven to understand that the salary and allowances were estimated based onthe labor force required for the operations of the Chili Platinum asdetermined with reference to its business plan. The rent and rates wereestimated with reference to the tenancy agreement with the landlord andthe actual amount paid in January 2015. We have also (i) reviewed thebreakdown of actual salary and allowances as at January 2015; and (ii)reviewed the actual rent and rates paid in January 2015. During the courseof our review, nothing comes to our attention that the bases and theassumptions used for estimating operating expenses of the Chili Platinumto be unreasonable.

Based on the foregoing, we are of the view that bases and assumptions adoptedfor the Cash Flow Projections are reasonably established.


– 43 –

Moreover, to discount the future cash flows of the Target Group, the Valuer hasused the weighted average cost of capital (‘‘WACC’’) as the discount rate in theValuation Report. WACC recognizes the weighted average cost of debt-fundedcapital and equity capital, which is the minimum required return that that a companymust earn to satisfy its various capital providers including shareholders and debtholders.

We note that in the Valuation Report that in assessing the cost of equity,Capital Asset Pricing Model (‘‘CAPM’’) was employed, of which the cost of equityis calculated by reference to (i) risk free rate, being the yield of Hong Kong 10-yeargovernment bond; (ii) equity market risk premium in Hong Kong, being thedifference between the expected market return in the stock market in Hong Kong andthe risk free rate; (iii) average adjusted beta coefficient of five comparable listedcompanies on the Stock Exchange with business copes and operations similar tothose of the Target Group (the ‘‘Business Comparables’’) as selected by the Valuer;and (iv) firm specific risk premium and size premium of the Target Group.

Having considered (i) cost of equity was derived using CAPM in the manner asdiscussed above; (ii) cost of debt, being the after-tax interest expense of the TargetGroup with reference made to Hong Kong prime rate plus spread and corporate taxrate in Hong Kong; (iii) weight of equity, being average of the debt-to-equity ratio ofthe five Business Comparables; and (iv) weight of debt, being one minus weight ofequity, we are of the view that the bases in determining the WACC as the discountrate to be reasonable.

Apart from the Cash Flow Projections, we have also reviewed and noted thatother major assumptions used in arriving at the Valuation as set out under the sectionheaded ‘‘10. Major Assumptions’’ in the Valuation Report, including but not limitedto (i) there is no major change in the taxation laws, political, legal, economic orfinancial conditions in Hong Kong and the PRC; (ii) the continuity of the TargetGroup; (iii) the Target Group will be operated in accordance with its scheduleddevelopment plan; and (iv) there is no major change in the prevailing interest ratesand exchanges rates in Hong Kong and the PRC, are common assumptions which areconsistent with normal market practice.

Shareholders should be aware of that Cash Flow Projections cannot be madewith complete accuracy and are dependent on the assumptions made. Based on (i)our review of the Valuation Report, (ii) our discussion with the Valuer and workperformed by the Valuer in its assessment of fairness and reasonableness of the CashFlow Projections, upon which the Valuation is determined; (iii) our review of theCash Flow Projections and our assessment in the fairness and reasonableness of thekey parameters and assumptions used for deriving the Cash Flow Projections; and(iv) and other major assumptions used in arriving at the Valuation are in line withnormal market practice, we have not identified any major factors which cause us todoubt the fairness and reasonableness of the methodologies adopted and the bases


– 44 –

and assumptions used in arriving at the Valuation. Having considered all of theabove, we are of the opinion that the Valuation may provide a valid benchmark toassess the fairness and reasonableness of the Consideration.

As an additional analysis, to the best of our knowledge and as far as we areaware of, we have identified 11 acquisitions of equity interests as announced byother listed companies in Hong Kong during the period from 7 September 2014 up tothe date of the Agreement, being a 6-month period prior to the date of Agreement,based on the following selection criteria: (i) business valuation was used as a basisfor determining the consideration of acquisitions; and (ii) income-based approachusing discounted cash flow method was employed in preparation of relevant businessvaluation (the ‘‘Consideration Comparables’’). Shareholders should note that thebusinesses, operations and prospects of the Group and the Target Group are not thesame as the Consideration Comparables and the subject companies being acquiredand we have not conducted any independent verification with regard to thebusinesses and operations of the Consideration Comparables and the subjectcompanies being acquired. Taking into account that (i) the ConsiderationComparables were transacted at time close to the signing of the Agreement,therefore, the terms of the Consideration Comparables are determined under similarmarket conditions and sentiments as the Agreement. Therefore, we consider that theConsideration Comparables could provide information on the general reference forthe common market practice by listed companies in Hong Kong in determination ofconsideration of acquisitions with reference to business valuation; and (ii) there arereasonable number of Consideration Comparables for comparison purposes duringthe period, we consider the selection of six-month period prior to the date of theAgreement is appropriate for our analysis and the Consideration Comparables are fairand representative samples for our analysis.

Details of the Consideration Comparables are set out below:

Date ofannouncement Company name

Principal business(Note) Stock code

Discount ofconsideration to

respectiveattributable

businessvaluation

3 March 2015 China HouseholdHoldings Limited

Trading of wooden productsand provision of interiordesign services, the salesof fabrics and garmentsand other relatedaccessories, iron andtitanium exploration,development and mining inthe PRC.

692 0.0%


– 45 –





businessvaluation

16 February 2015 Enterprise DevelopmentHoldings Limited

Provision of integratedbusiness software solutionsand trading of listedsecurities.

1808 10.3%

21 January 2015 China EnvironmentalEnergy InvestmentLimited

Recycling of waste paper,scrap metal andconsumable wastes.

986 0.0%

30 December 2014 Sinopec KantonsHoldings Limited

Trading of crude oil and oilproducts, the operation ofcrude oil and oil productsterminals and theirancillary facilities,provision of logisticsservices including storage,logistics, transportationand terminal services andthe distribution of oil andoil products andinternational logisticsagency services on globalbasis.

934 0.0%

29 December 2014 Beijing Jingneng CleanEnergy Co., Limited

Provision of gas-fired powerand operation of windpower, with a diversifiedclean energy portfolioincluding gas-fired powerand heat energy, windpower, small to mediumhydropower and otherclean energy projects.

579 0.0%


– 46 –





businessvaluation

17 December 2014 Yuexiu TransportInfrastructure Limited

Investment, operation andmanagement of tollexpressways and bridges inGuangdong Province andother highgrowth provincesin the PRC.

1052 3.5%

3 November 2014 Sinoref HoldingsLimited

Manufacture and sale ofadvanced steel flowcontrol products includingsubentry nozzle, stopper,tundish nozzle and ladleshroud.

1020 2.2%

16 October 2014 China PropertiesInvestment HoldingsLimited

Properties investmentbusiness and theexploitation of a minelocated in the InnerMongolia, the PRC.

736 24.4%

14 October 2014 Amax InternationalHoldings Limited

Investments in gaming andentertainment relatedbusiness.

959 14.0%

26 September 2014 SynertoneCommunicationCorporation

Design, research &development, manufacture& sales of specializedcommunication systems,equipment & systemstechnologies; providingtotal solution ofcommunication system;provision of satellitebandwidth capacity &communication serviceapplication.

1613 18.2%


– 47 –





businessvaluation

8 September 2014 China EnvironmentalEnergy InvestmentLimited

Recycling of waste paper,scrap metal andconsumable wastes.

986 11.2%

Maximum 24.4%Minimum 0.0%Average 7.6%

6 March 2015 The Company 1326 17.7%

Source: Website of the Stock Exchange (www.hkex.com.hk)

Note: The principal business of the Consideration Comparables are based on their respectivelatest published annual report or interim report.

As shown in the table above, we note that the discounts of consideration of theConsideration Comparables to the business valuation range from no discount to adiscount of approximately 24.4% (the ‘‘Consideration Discount Range’’) withaverage discount of approximately 7.6%. The Consideration with a discount ofapproximately 17.7% to the Valuation falls within the Consideration Discount Rangeand is lower than the average discount of the Consideration Comparables. As such,we are of the opinion that the Consideration is fair and reasonable so far as theIndependent Shareholders are concerned and the Acquisition are on normalcommercial terms.

In view of the above analysis, we consider that the Consideration is fair andreasonable so far as the Group and the Independent Shareholders are concerned.

(b) Consideration Shares analysis

As stated in the Letter from the Board, part of the Consideration, in the amountof HK$57,960,000 will be satisfied by issue of 46,000,000 Consideration Shares atthe Issue Price of HK$1.26 per Consideration Share upon Completion. The IssuePrice represents:

(i) a discount of approximately 3.8% to the closing price of HK$1.31 perShare as quoted on the Stock Exchange on the Last Trading Day;

(ii) a discount of approximately 6.7% to the average closing price ofapproximately HK$1.35 per Share as quoted on the Stock Exchange on thelast five trading days immediately prior to the Last Trading Day;


– 48 –

(iii) a discount of approximately 6.0% to the average closing price ofapproximately HK$1.34 per Share as quoted on the Stock Exchange forthe last five trading days up to and including the Last Trading Day;

(iv) a discount of approximately 62.6% to the closing price of HK$3.37 perShare as quoted on the Stock Exchange on the Latest Practicable Date;

To assess the fairness and reasonableness of the Issue Price, we set out belowthe following analyses:

(i) Historical Share price analysis

We have reviewed the closing price level of the Shares during the periodfrom 7 March 2014 (being the 12 months period prior to the Last Trading Day)to the Last Trading Day (the ‘‘Review Period’’). We consider that that reviewof Share price performance for a 12-month period is in line with normal marketpractice and will be able to reflect the trend of the Share price for recent period,we consider the Review Period to be a reasonable period of time in assessingthe Share price performance of the Company. The chart below illustrates theclosing price level of the Shares during the Review Period:

1.800

1.600

1.400

1.200

1.000

0.800

0.600

0.400

0.200

0.000

7/3/

2014

7/4/

2014

7/5/

2014

7/6/

2014

7/7/

2014

7/8/

2014

7/9/

2014

7/10

/201

4

7/11

/201

4

7/12

/201

4

7/1/

2015

7/2/

2015

Issue Price: HK$1.26

Source: The Stock Exchange

As shown in the chart above, during the Review Period, the closing priceof the Shares ranged from the lowest of HK$0.80 per Share (recorded on 26May 2014) to the highest of HK$1.64 per Share (recorded on 7 and 8 January2015) (the ‘‘Historical Price Range’’), with average closing price ofapproximately HK$1.19 per Share. The Issue Price is within the HistoricalPrice Range, which represents a premium of approximately 57.5% to the lowestclosing price, discount of approximately 23.2% to the highest closing price anda premium of approximately 5.5% to the average closing price of the Sharesduring the Review Period.


– 49 –

As depicted in the chart above, after attaining a peak on 7 and 8 January2015, the price of the Shares demonstrated a downward trend and closed at alevel of HK$1.31 per Share on the Last Trading Day, representing a drop ofapproximately 20.1% from the peak in around two months.

(ii) Comparison with other issue of consideration shares

As part of our analyses, we have also searched for acquisitions fromconnected persons which involves issue of consideration shares (excluding issueof H shares) to satisfy all or part of the consideration conducted by listedcompanies in Hong Kong which were announced from 7 September 2014 up tothe date of the Agreement, being a 6-month period prior to the date ofAgreement (the ‘‘Comparables’’). To the best of our knowledge and as far aswe are aware of, we have identified 11 transactions which met the said criteria.Shareholders should note that the businesses, operations and prospects of theCompany are not the same as the Comparables and we have not conducted anyindependent verification with regard to the businesses and operations of theComparables. Taking into account that (i) the Comparables were transacted attime close to the signing of the Agreement, therefore, the terms of theComparables are determined under similar market conditions and sentiments asthe Consideration Shares. Therefore, we consider that the Comparables couldprovide information on the general recent market practice which involves issueof consideration shares to connected persons by listed companies in HongKong; and (ii) there are reasonable number of Comparables for comparisonpurposes during the period, we consider the selection of six-month period priorto the date of the Agreement is appropriate for our analysis and theComparables are fair and representative samples.

Set out below is the information of the Comparables.

Date ofannouncement Company name Stock code

Issue pricepremium over/

(discount to) theclosing price on

the date ofagreement/the

last trading dayprior to the date

of agreement


(discount to) theaverage closing

price for the lastfive trading days

prior to andincluding the

date ofagreement

(Approximate %) (Approximate %)

23/1/2015 United Photovoltaics GroupLimited

686 1.98 2.79

22/1/2015 Perfect Optronics Limited 8311 0.00 1.24


– 50 –

Date ofannouncement Company name Stock code


(discount to) theclosing price on

the date ofagreement/the

last trading dayprior to the date

of agreement


(discount to) theaverage closing

price for the lastfive trading days

prior to andincluding the

date ofagreement

(Approximate %) (Approximate %)

22/1/2015 China Public ProcurementLimited

1094 2.24 0.00

8/12/2014 China Resources Land Limited 1109 (8.58) (7.62)

13/11/2014 Zhuguang Holdings GroupCompany Limited

1176 1.75 1.99

3/11/2014 Longfor Properties Co. Ltd. 960 (3.34)(Note 1)

0.00

28/10/2014 China State ConstructionInternational Holdings Limited

3311 2.85 1.82

16/10/2014 Newtree Group Holdings Limited 1323 (9.77) (9.70)

10/10/2014 Changfeng Axle (China)Company Limited

1039 (29.03) (23.26)

10/10/2014 U Banquet Group HoldingLimited

8107 (11.39) (13.37)

16/9/2014 Peking University Resources(Holdings) Company Limited

618 (40.40)(Note 1)

(40.90)(Note 1)

Maximum 2.85 2.79Minimum (40.40) (40.90)Average (8.52) (7.91)

6 March 2015 The Company 1326 (3.82) (5.97)

Source: Website of the Stock Exchange (www.hkex.com.hk)


– 51 –

Note 1: Information was not disclosed in the corresponding announcements. Figures werecomputed based on the issue prices as disclosed in the correspondingannouncements and the closing share prices of the respective companies as on thewebsite of the Stock Exchange (www.hkex.com.hk).

As shown by the above table, the issue prices of the Comparablesrepresented (i) a discount of approximately 40.40% to a premium ofapproximately 2.85% to/over the respective closing price of their shares on thelast trading day prior to the relevant announcement/on the date of the relevantagreement (the ‘‘LTD Range’’) with an average discount of approximately8.52%; and (ii) a discount of approximately 40.90% to a premium ofapproximately 2.79% to/over the respective closing price of their shares on theaverage closing price for the last five trading days prior to and including thedate of relevant agreement (the ‘‘5-Day Market Range’’) with an averagediscount of approximately 7.91%. The Issue Price (i) represents a discount ofapproximately 3.82% to the closing price of the Shares on the date ofAgreement is within the LTD Range and is lower than the average discount ofthe Comparables of approximately 8.52%; and (ii) represents a discount ofapproximately 5.97% to the closing price of the Shares for the last five tradingdays up to and including the Last Trading Day is within the 5-Days MarketRange and is lower than the average discount of the Comparables ofapproximately 7.91%.


– 52 –

In light of (i) the fact that the Issue Price was determined with reference tothe prevailing market prices of the Shares and was within the Historical PriceRange and represented a premium to the average closing price of the Sharesduring the Review Period; and (ii) the results of the above comparison wherethe Issue Price falls within the LTD Range and the 5-Days Market Range of theComparables, we consider that the Issue Price is fair and reasonable so far asthe Independent Shareholders are concerned.

(a) Possible dilution effect on the shareholding interests of the existingpublic Shareholders

The table below demonstrates the shareholding structure of theCompany as at the Latest Practicable Date and immediately afterCompletion and allotment and issuance of the Consideration Shares,assuming that there is no change in the shareholding structure of theCompany from the Latest Practicable Date:

ShareholdersAs at

the Latest Practicable Date

Immediately after Completionand allotment and issuance of

the Consideration Shares

No. of SharesApproximately

% No. of SharesApproximately

%

Honour Grace Limited(Note) 300,000,000 54.95 300,000,000 50.68

Mr. Wong 4,180,000 0.76 4,180,000 0.70Vendor 7,292,000 1.34 53,292,000 9.00Public Shareholders 234,528,000 42.95 234,528,000 39.62

Total 546,000,000 100.00 592,000,000 100.00

Note: Honour Grace Limited is owned as to 60% by Mr. Wong, 20% by Mr.Edmond Wong and 20% by Ms. Alvina Wong.

As demonstrated by the above table, the shareholding interests of thepublic Shareholders will be decreased from approximately 42.95% to39.62% immediately after the Completion, representing a dilution ofapproximately 7.75%. In this regard, taking into account (i) the reasons forand benefits of the Acquisition as mentioned previously; (ii) the terms ofthe Agreement being fair and reasonable; and (iii) the issue of theConsideration Shares to partly settle the consideration of the Acquisitioninvolves no cash outlay and would enable the Group to preserve itsinternal resources for general working capital and/or future businessexpansion, we are of the view that the said level of dilution to theshareholding interests of the public Shareholders as a result of the issue ofthe Consideration Shares is acceptable.


– 53 –

(b) Financial effect of the Acquisition on the Group

Upon Completion, the Target Company will be accounted for as awholly-owned subsidiary of the Group. Therefore, results of the TargetGroup will be consolidated into the financial statements of the Group.

(i) Earnings

Upon Completion, the Target Company will become an indirectwholly-owned subsidiary of the Company. The future earnings of theGroup will be affected by profitability of the Target Group. Takinginto consideration the expected positive future business prospect ofthe Target Group in view of the optimistic prospect of the PRCcultural industries and magazine publishing business in capturingbusiness opportunities in the PRC advertising market for luxury sectoras discussed earlier, the Acquisition would likely to have a positiveimpact on the future earnings potential of the Group.

(ii) Net assets value

The unaudited net asset value of the Group as at 31 December2014 was approximately HK$325.0 million.

As mentioned in Letter from the Board, the Target Grouprecorded unaudited net assets value of approximately HK$2.2 millionas at 31 December 2014. Upon Completion, financial results of theTarget Group will be consolidated into the Group’s financialstatements. In addition, with the issue of the Consideration Shares,total equity of the Company will also be increased. As such, theAcquisition will improve the net asset value of the Group.

(iii) Cashflow

Cash and bank balance of the Group as at 31 December 2014was approximately HK$27.7 million. Taking into account cashpayment of approximately HK$10.0 million will be required forsettling part of the Consideration, the Acquisition will have negativeimpact to the Group’s cash position. However, having considered (i)decrease in cash is an exchange for an investment in the Target Groupfor bringing in future income stream; (ii) the Acquisition representsan opportunity for the Group to diversify into film advertising andpromotion industry and advertising industry for luxury sector throughmagazine publication which have optimistic prospect; and (iii) thepotential synergy effects of the Acquisition with the Group’s existingcore business of film production and distribution and licensing of filmrights, we consider that the decrease in cash is acceptable.


– 54 –

(iv) Gearing

The gearing ratio was computed by dividing total borrowings bytotal equity of the Group. The Group did not record any borrowing asat 31 December 2014, as such gearing ratio of the Group as at 31December 2014 is zero. According to the unaudited consolidatedmanagement accounts of the Target Group as at 31 December 2014,the Target Group did not have any borrowing as at 31 December2014. Moreover, given the increase in net assets upon Completion, itis expected that there will not be material change to the gearing levelof the Group.

It should be noted that the above analyses are for illustrative purposes only and doesnot purport to represent how the actual financial position of the Group will be on the dateof Completion.

RECOMMENDATION

Having taken into account the principal factors and reasons referred to the above, we areof the opinion that (i) the nature of the Acquisition is not in the ordinary and usual course ofbusiness of the Group but is in line with the strategic development of the Group; (ii) the termsof the Agreement and the transactions contemplated thereby are on normal commercial termsand are fair and reasonable so far as the Independent Shareholders are concerned; and (iii) theentering into of the Agreement and the transactions contemplated thereby is in the interests ofthe Company and the Shareholders as a whole. Accordingly, we recommend the IndependenceShareholders, as well as the Independent Board Committee to recommend the IndependentShareholders, to vote in favour of the ordinary resolution in respect of approving theAcquisition.

Yours faithfully,For and on behalf of

Akron Corporate Finance LimitedRoss Cheung

Managing Director


– 55 –

The following is the text of a report prepared for the purpose of incorporation in thiscircular from Roma Appraisals Limited, an independent valuer, in connection with theValuation as at 31 December 2014 of the market value of 100% equity interest in the TargetGroup.

Unit 3806, 38/F, China Resources Building,

26 Harbour Road, Wan Chai, Hong Kong

Tel (852) 2529 6878 Fax (852) 2529 6806

E-mail [email protected]

http://www.romagroup.com

13 May 2015

Pegasus Entertainment Holdings LimitedRooms 1801–02,Westlands Centre,20 Westlands Road,Quarry Bay, Hong Kong

Case Ref: KY/BV2279/OCT14

Dear Sir/Madam,

Re: Business Valuation of 100% Equity Interest in Chili Advertising & PromotionsLimited and Its Subsidiaries

In accordance with the instructions from Pegasus Entertainment Holdings Limited(hereinafter referred to as the ‘‘Company’’) to us to conduct a business valuation on 100%equity interest in Chili Advertising & Promotions Limited (hereinafter referred to as the‘‘Business Enterprise’’) and its subsidiaries (together with the Business Enterprise referred toas the ‘‘Target Group’’), we are pleased to report that we have made relevant enquiries andobtained other information which we considered relevant for the purpose of providing you withour opinion of the market value of 100% equity interest in the Target Group as at 31 December2014 (hereinafter referred to as the ‘‘Date of Valuation’’).

This report states the purpose of valuation, scope of work, economic and industryoverviews, an overview of the Target Group, basis of valuation, investigation and analysis,valuation methodology, major assumptions, limiting conditions, remarks and opinion of value.

1. PURPOSE OF VALUATION

This report is prepared solely for the use of the directors and management of theCompany. In addition, Roma Appraisals Limited (hereinafter referred to as ‘‘RomaAppraisals’’) acknowledges that this report may be made available to the Company for publicdocumentation purpose only.

Roma Appraisals assumes no responsibility whatsoever to any person other than theCompany in respect of, or arising out of, the contents of this report. If others choose to rely inany way on the contents of this report they do so entirely at their own risk.

APPENDIX I VALUATION REPORT OF THE TARGET GROUP

– 56 –

2. SCOPE OF WORK

Our valuation conclusion is based on the assumptions stated herein and the informationprovided by the management of the Company and/or its representative(s) (together referred toas the ‘‘Management’’).

In preparing this report, we have had discussions with the Management in relation to thedevelopment and prospect of the Target Group and the advertising and promotion servicesindustry. As part of our analysis, we have reviewed such financial information and otherpertinent data concerning the Target Group and the advertising and promotion services industryprovided to us by the Management and have considered such information and data as attainableand reasonable.

We have no reason to believe that any material facts have been withheld from us.However, we do not warrant that our investigations have revealed all of the matters which anaudit or more extensive examination might disclose.

We do not express an opinion as to whether the actual results of the business operation ofthe Target Group will approximate those projected because assumptions regarding future eventsby their nature are not capable of independent substantiation.

In applying these projections to the valuation of the Target Group, we are making norepresentation that the business expansion will be successful, or that market growth andpenetration will be realized.

3. ECONOMIC OVERVIEW

3.1 Overview of the Economy in China

According to the National Bureau of Statistics of China, the nominal gross domesticproduct (‘‘GDP’’) of China in 2014 was RMB63,646.3 billion, an increase of 8.2% overlast year. China was the third largest economy in the world, ranked after the EuropeanUnion and the United States, in terms of nominal GDP measured by the InternationalMonetary Fund (‘‘IMF’’) in 2014. Despite the global financial crisis in late 2008, theChinese economy continued to be supported by the Chinese government through spendingin infrastructure and real estates.

Throughout 2009, the global economic downturn reduced foreign demand forChinese exports for the first time in many years. The government vowed to continuereforming the economy and emphasized the need to increase domestic consumption inorder to make China less dependent on foreign exports. China’s economy reboundedquickly in 2010, outperforming all other major economies with robust GDP growth andthe economy remained in strong growth since 2011. The Chinese government targeted togrow its GDP by around 7% for the period from 2011 to 2015. Figure 1 further illustratesthe nominal GDP of China from 2010 to 2014.


– 57 –

Figure 1 — China’s Nominal GDP from 2010 to 2014

2010 2011 2012 2013 2014

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

billion RMB

Source: National Bureau of Statistics of China

Tackling inflation problem has long been the top priority of the Chinese governmentas high prices are considered as one of the causes of social unrest. For such a fast-growing economy, the middle-class’ demand for food and commodities has been risingcontinuously. Inflation in China has been driven mainly by food prices, which have beenstayed high in 2011. According to the National Bureau of Statistics of China, theconsumer price index demonstrated an uptrend in the first half of 2011. Thanks to thegovernment’s policies in suppressing commodity prices, the inflation slowed in the secondhalf of 2011 and first half of 2012 and maintained at around 2% to 3% during 2013.During 2014, the inflation dropped and reached 1.5% in December 2014. Figure 2 showsthe year-over-year change in consumer price index of China from January 2013 toDecember 2014.


– 58 –

Figure 2 — Year-over-year Change in China’s Consumer Price Indexfrom January 2013 to December 2014

1.0

1.5

2.0

2.5

3.0

3.5

4.0

%

Jan

2013

Apr Jul Oct Jan

2014

Apr Jul Oct

Source: Bloomberg

China’s inflation rate was volatile during the past decade. According to the IMF, theinflation rate in China increased from 2.8% in 2006 to 6.5% in 2007, and then dropped to1.2% and 1.9% in 2008 and 2009 respectively. The inflation rate increased to 4.6% in2010 and maintained at 4.1% in 2011. The inflation dropped again to 2.5% in 2012 and2013, and further to 2.3% in 2014. According to IMF’s forecast, the long-term inflationrate of China is expected to be around 3.0%. Figure 3 shows the historical trend ofChina’s inflation rate from 2005 to 2014.


– 59 –

Figure 3 — China’s Inflation Rate from 2005 to 2014

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

%

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Source: IMF

3.2 Overview of the Economy in Hong Kong

Hong Kong has long been a free market economy highly dependent on internationaltrade and finance. For this reason, it was heavily exposed to the global economic turmoilthat began in 2008 which resulted in a sharp drop of the nominal GDP of Hong Kong inthe first quarter of 2009. Since then, the economy of Hong Kong has been recovering.According to Bloomberg, the nominal GDP of Hong Kong in 2014 was approximatelyHK$2,246 billion, a 5.3% increase over 2013. Figure 4 and figure 5 illustrate the trend ofHong Kong’s nominal GDP over the past few quarters.


– 60 –

Figure 4 — Hong Kong’s Quarterly Nominal GDP fromthe First Quarter of 2012 to the Fourth Quarter of 2014

300,000

350,000

400,000

450,000

500,000

550,000

600,000

650,000

Q1

2012

Q2 Q3 Q4 Q1

2013

Q2 Q3 Q4 Q1

2014

Q2 Q3 Q4

HK$ million

Source: Bloomberg

Figure 5 — Year Over Year Percentage Change of Hong Kong’s QuarterlyNominal GDP from the First Quarter of 2012 to the Fourth Quarter of 2014

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

%

Q1

2012

Q2 Q3 Q4 Q1

2013

Q2 Q3 Q4 Q1

2014

Q2 Q3 Q4

Source: Bloomberg


– 61 –

According to IMF, the inflation rate in 2014 was 3.9%, while the long-term inflationrate is expected to be around 3.5%. Figure 6 shows the historical trend of Hong Kong’sinflation rate from 2005 to 2014.

Figure 6 — Hong Kong’s Inflation Rate from 2005 to 2014

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

%

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Source: IMF

4. INDUSTRY OVERVIEW

4.1 Overview of Advertising and Promotion Services Industry

Over the past few years, companies around the world are spending increasing amountof money on creating eyeball catching and innovative advertisements. While bringinginsightful ideas in contents of advertisement, companies are also creative in the choice ofadvertising and promotion channels. Advertising can be accessed from traditional printedmedia to digital technology such as online platforms and mobile phone applications.According to ZenithOptimedia, a world leading global media services network, globaladvertising spending (‘‘adspend’’) growth in 2014 was estimated to be 5.1% over the lastyear, reaching US$48.8 billion, and the growth is predicted to be 4.9% in 2015. Figure 7shows the share of global adspend by medium in 2014.


– 62 –

Figure 7 — Share of Global Adspend by Medium in 2014

39.6%

18.8%

15.2%

7.3%

6.8%

6.8%

5.0%

0.5%

Television

Desktop Internet

Newspapers

Magazines

Outdoor

Mobile Internet

Cinema

Radio


Television is the most popular advertising channel, taking up almost 40% of globaladspend in 2014. Internet advertising has been on the rise and catching up quickly.Adspend from printed media (newspapers and magazines) showed mild growth in recentyears. Figure 8 shows the historical adspend by medium from 2012 to 2014.

Figure 8 — Historical Adspend by Medium from 2012 to 2014

0

5,000

10,000

15,000

20,000

25,000

2012 2013 2014

Television

Internet

Printed Media

US$ million



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According to ZenithOptimedia, the United States will lead the global market inadspend between 2014 and 2017. China has surpassed Japan and became the world’ssecond largest advertising market with estimated adspend of US$45 billion in 2014.Figure 9 showed the top ten advertising markets in 2014.

Figure 9 — Top Ten Advertising Markets in 2014

0

20,000

40,000

60,000

80,000

100,000

120,000

140,000

160,000

180,000

200,000

Uni

ted

State

s

Chi

na

Japa

n

Ger

man

y

Uni

ted

Kin

gdom

Bra

zil

Franc

e

Aus

tralia

South

Kor

ea

Can

ada

US$ million


5. OVERVIEW OF THE TARGET GROUP

The Business Enterprise is principally engaged in provision of advertising and promotionservices. The Business Enterprise has three subsidiaries, namely Powerful Target InvestmentGroup Limited (hereinafter referred to as ‘‘Powerful Target’’), Favorable On GlobalInvestment Limited (hereinafter referred to as ‘‘Favorable On’’) and Chili PlatinumAdvertising and Magazine Publishing Limited (hereinafter referred to as ‘‘Chili Platinum’’).

Powerful Target is a wholly owned subsidiary of the Business Enterprise and is aninvestment holding company. Favorable On is owned as to 70% by Power Target and holds theentire equity interest in Chili Platinum. Chili Platinum is principally engaged in the publicationof a monthly issued luxury lifestyle magazine, namely ‘‘Platinum of UnionPay’’ (銀聯白金),which features a wide range of updated news on luxurious lifestyle related products andservices, ranging from fashion, jewelry, entertainment, food and restaurants, leisure, to art andculture. The magazine is targeted to the high-end consumer markets of Hong Kong, Macau andthe People’s Republic of China (‘‘PRC’’). Currently, the magazine is being provided to varioushigh-end private clubs, golf clubs and hotels. Selected contents are also available in a numberof digital media.


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In April 2014, Favorable On entered into a publication cooperation agreement(‘‘Publication Cooperation Agreement’’) and platinum club cooperation agreement(hereinafter collectively referred to as the ‘‘Cooperation Agreements’’) with 廣州純鉑金廣告

有限公司 (Guangzhou Platinum Advertising Limited (‘‘Guangzhou Platinum’’)). Pursuant tothe Cooperation Agreements, Favorable On was granted the rights to operate and organize thebusinesses of the magazine ‘‘Platinum of UnionPay’’ (銀聯白金) and the platinum club ofUnionPay, for a term of 4 years with automatic renewal terms.

6. BASIS OF VALUATION

Our valuation is based on a market value basis. According to the International ValuationStandards established by the International Valuation Standards Council in 2011, market valueis defined as ‘‘the estimated amount for which an asset should exchange on the valuation datebetween a willing buyer and a willing seller in an arm’s length transaction, after propermarketing and where the parties had each acted knowledgeably, prudently and withoutcompulsion’’.

7. INVESTIGATION AND ANALYSIS

Our investigation included discussions with members of the Management in relation to thedevelopment, operations and other relevant information of the Target Group. In addition, wehave made relevant inquiries and obtained further information and statistical figures regardingthe economy and industry as we considered necessary for the purpose of the valuation.

As part of our analysis, we have reviewed such financial information and other pertinentdata concerning the Target Group provided to us by the Management and have considered suchinformation and data as attainable and reasonable. We have also consulted other sources offinancial and business information.

The valuation of the Target Group requires consideration of all pertinent factors, whichmay or may not affect the operation of the business and its ability to generate futureinvestment returns. The factors considered in our valuation include, but are not necessarilylimited to, the following:

. The nature and prospect of the Target Group;

. Financial information of the Target Group, including historical financial statementsand operating data, which were the major bases for the cash flow projections;

. The valuation was prepared based on the business plan and financial projections ofthe Target Group as provided by the Management;

. The economic outlook in general and the specific economic environment and marketelements affecting the business, industry and market;

. Terms and conditions of relevant business licenses and agreements held by theTarget Group, including the Cooperation Agreements, have been considered in thecash flow projections;


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. The business risks of the Target Group such as the ability in maintaining competenttechnical and professional personnel; and

. Investment returns and market transactions of entities engaged in similar lines ofbusiness.

8. VALUATION METHODOLOGY

There are generally three accepted approaches to obtain the market value of the TargetGroup, namely the Market-Based Approach, Income-Based Approach and Asset-BasedApproach. Each of these approaches is appropriate in one or more circumstances, andsometimes, two or more approaches may be used together. Whether to adopt a particularapproach will be determined by the most commonly adopted practice in valuing businessentities that are similar in nature.

8.1 Market-Based Approach

The Market-Based Approach values a business entity by comparing prices at whichother business entities in a similar nature changed hands in arm’s length transactions. Theunderlying theory of this approach is that one would not pay more than one would have tofor an equally desirable alternative. By adopting this approach, the valuer will first lookfor valuation indication of prices of other similar business entities that have been soldrecently.

The right transactions employed in analyzing indications of value need to be sold atan arm’s length basis, assuming that the buyers and sellers are well informed and have nospecial motivations or compulsions to buy or to sell.

8.2 Income-Based Approach

The Income-Based Approach focuses on the economic benefits due to the incomeproducing capability of the business entity. The underlying theory of this approach is thatthe value of the business entity can be measured by the present worth of the economicbenefits to be received over the useful life of the business entity. Based on this valuationprinciple, the Income-Based Approach estimates the future economic benefits anddiscounts them to their present value using a discount rate appropriate for the risksassociated with realizing those benefits.

Alternatively, this present value can be calculated by capitalizing the economicbenefits to be received in the next period at an appropriate capitalization rate. This issubject to the assumption that the business entity will continue to maintain stableeconomic benefits and growth rate.

8.3 Asset-Based Approach

The Asset-Based Approach is based on the general concept that the earning power ofa business entity is derived primarily from its existing assets. The assumption of thisapproach is that when each of the elements of working capital, tangible and intangible


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assets is individually valued, their sum represents the value of a business entity andequals to the value of its invested capital (‘‘equity and long term debt’’). In other words,the value of the business entity is represented by the money that has been made availableto purchase the business assets needed.

This money comes from investors who buy stocks of the business entity (‘‘equity’’)and investors who lend money to the business entity (‘‘debt’’). After collecting the totalamounts of money from equity and debt, and converted into various types of assets of thebusiness entity for its operation, their sum equals the value of the business entity.

8.4 Business Valuation

In the process of valuing the Target Group, we have taken into account of theoperation and the nature of the advertising and promotion services industry in which theTarget Group is participating.

The Market-Based Approach was not adopted because most of the importantassumptions of the comparable transactions, such as discount or premium on thetransaction prices or considerations, were hidden. The Asset-Based Approach was also notadopted because it could not capture the future earning potential and thus market value ofthe Target Group. We have therefore considered the adoption of the Income-BasedApproach in arriving at the market value of the Target Group.

8.4.1 Discounted Cash Flow

Under the Income-Based Approach, we have adopted the discounted cash flow(‘‘DCF’’) method, which is based on a simple reversal calculation to restate all futurecash flows in present terms. The expected free cash flow for each year wasdetermined as follows:

Expected Free Cash Flow = Net Profit + Depreciation – Change in NetWorking Capital – Capital Expenditure

The present value of the expected free cash flows was calculated as follows:

PVCF = CF1/(1+r)1 + CF2/(1+r)

2 + ⋯ + CFn/(1+r)n

In whichPVCF = Present value of the expected free cash flows;CF = Expected free cash flow;r = Discount rate; andn = Number of years.


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We estimated the weighted average cost of capital (‘‘WACC’’) of the TargetGroup as a basic discount rate. WACC is the minimum required return that an entitymust earn to satisfy its various capital providers including shareholders and debtholders. WACC calculation takes into account the relative weights of debt andequity. It is computed using the formula below:

WACC = We x Re + Wd x Rd x (1 – Tc)

In whichRe = Cost of equity;Rd = Cost of debt;We = Weight of equity value to enterprise value;Wd = Weight of debt value to enterprise value; andTc = Corporate tax rate.

8.4.2 Cost of Debt

The cost of debt was estimated by the expected borrowing rate of the TargetGroup. Since the interest expenses paid on debts are tax-deductible for the TargetGroup, the cost of the Target Group to get debt funds is less than the required rate ofreturn of the suppliers of the debt capital. The after-tax cost of debt was calculatedby multiplying one minus the corporate tax rate by the cost of debt.

8.4.3 Cost of Equity

The cost of equity was estimated using the Capital Asset Pricing Model(‘‘CAPM’’), which describes the relationship between the risk of the Target Groupand expected return to investors. It is calculated by the following formula:

Re = Rf + ß x Market Risk Premium + Other Risk Premium

In whichRe = Cost of equity;Rf = Risk-free rate; andß = Beta coefficient.

8.4.4 Discount Rate

In the process of estimating the WACC, we adopted several listed companieswith business scopes and operations similar to those of the Target Group ascomparable companies. The comparable companies were selected mainly withreference to the following selection criteria:

. The companies were principally engaged in provision of printed mediaadvertising, event organizing and related services;

. The companies are operating mainly in Hong Kong and China;

. The companies were sufficient listing and operating histories; and

. The financial information of the companies is available to the public.


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Details of the comparable companies adopted were listed as follows:

CompanyName Stock Code

ListingLocation Business Description

Modern MediaHoldings

72.HK Hong Kong The company operates as a publishingholding company. The company,through its subsidiaries, publishes anddistributes magazines throughout thePRC and Hong Kong. The companyalso provides publishing consultingservices.

SEEC MediaGroupLimited

205.HK Hong Kong T h e c o m p a n y , t h r o u g h i t ssubsidiaries, provides advertisingagency services.

Shifang HoldingLimited

1831.HK Hong Kong The company provides a wide rangeof integrated print media and digitalmedia services to advertisers. Thecompany’s services include design,layout, content planning, and eventorganizing.

China 33 MediaGroupLimited

8087.HK Hong Kong The company produces print mediaand audio programs for the Chineserailway network. The materials aredistributed and used on the trains.T h e c ompa ny a l s o own s t h eadvertising rights to traffic controltowers at Chinese airports.

Branding ChinaGroupLimited

8219.HK Hong Kong The company i s a ma r k e t i n gcommunications services providerwith a focus on well-known brands inthe high value consumer goodssectors in the PRC which currentlycomprise mainly automobile andhome fashion brands. The companyprovides one-stop branding servicesincluding advertising, PR and eventm a r k e t i n g t o d o m e s t i c a n dinternational brands.

Source: Bloomberg


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During the process of comparable company selection, we did not aware of anylisted companies closely comparable to the Target Group which publishes luxurystyle magazine, operates event clubs and provides advertising and promotionservices. Thus, we searched for listed companies which were principally engaged inthe provision of printed media advertising (resembling the magazine business), andevent organizing and related services (resembling the club operation business andadvertising and promotion service business). We considered the adopted comparablecompanies are comparable to the Target Group in the following ways:

. Main revenue streams of the comparable companies and the Target Groupare advertising incomes, which are subject to similar demand and riskfactors;

. The comparable companies and the Target Group have similar coststructure, mainly printing and distribution costs, and personnel costs; and

. The target market of both the comparable companies and the Target Groupis the Greater China region.

In the build-up of the discount rate, we have applied size premium and firmspecific risk premium to account for the effect of smaller size and shorter operatinghistory of the Target Group as compared with the comparable companies.

Below is the summary of the key parameters of the WACC of the Target Groupadopted as at the Date of Valuation:

Key ParametersAs at

31 December 2014

(a) Risk-free Rate 1.86%(b) Market Risk Premium 10.24%(c) Beta Coefficient 0.53(d) Size Premium 3.87%(e) Other Risk Premium 3.00%(f) Cost of Equity 14.13%(g) Cost of Debt 10.00%(h) Weight of Equity Value to Enterprise Value 93.95%(i) Weight of Debt Value to Enterprise Value 6.05%(j) Corporate Tax Rate 16.50%

WACC (Rounded) 14.00%

Notes:

(a) The risk-free rate adopted was the yield rate of Hong Kong 10-year government bond as atthe Date of Valuation as extracted from Bloomberg.

(b) The market risk premium adopted was the equity market risk premium in Hong Kong as atthe Date of Valuation as extracted from Bloomberg.


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(c) The beta coefficient adopted was the average adjusted beta of the comparable companies asat the Date of Valuation as extracted from Bloomberg.

(d) The size premium adopted was the size premium for micro-cap companies with reference tothe size premium study published in 2014 Valuation Handbook by Duff & Phelps, LLC.

(e) The other risk premium adopted was to reflect the business risks of the Target Group.

(f) The cost of equity was estimated based on Capital Asset Pricing Model (‘‘CAPM’’).

(g) The cost of debt adopted was with reference to Hong Kong prime rate plus spread as at theDate of Valuation.

(h) The weight of equity value to enterprise value adopted was derived from the average debt-to-equity ratio of the comparable companies as at the Date of Valuation as extracted fromBloomberg.

(i) The weight of debt value to enterprise value adopted was derived from the average debt-to-equity ratio of the comparable companies as at the Date of Valuation as extracted fromBloomberg.

(j) The corporate tax rate adopted was the corporate tax rate in Hong Kong.

Hence, we adopted the WACC of 14.00% as the discount rate for the TargetGroup as at the Date of Valuation.

8.4.5 Marketability Discount

Compared to similar interest in public companies, ownership interest is notreadily marketable for closely held companies. Therefore, the value of a share ofstock in a privately held company is usually less than an otherwise comparable sharein a publicly held company. We have made reference to the result of the restrictedstock study published in ‘‘A Companion Guide to the FMV Restricted Stock Study2014 Edition’’ by FMV Opinions, Inc. According to the study, 714 private placementtransactions of unregistered common stock issued by publicly traded companies fromJuly 1980 through September 2013 were examined. The marketability discount wasthe percentage difference between the private placement price per share and themarket trading price per share. The average discount for the 714 transactions(excluding premiums) was 21.10%, which was adopted as the marketability discountfor the valuation of the Target Group.


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8.4.6 Sensitivity Analysis

To determine how the different values of an independent variable would impacta particular dependent variable under a given set of assumptions, we carried out asensitivity analysis on the market value of the Target Group in respect of deviationin the discount rate from the status quo. The result of the sensitivity analysis was asfollows:

Absolute Changein Discount Rate

AppliedDiscount Rate

Market Value ofthe Target Group

HK$

+2% 16.00% 69,200,000+1% 15.00% 75,400,0000% 14.00% 82,600,000

–1% 13.00% 91,300,000–2% 12.00% 101,900,000

9. CASH FLOW PROJECTIONS

The valuation was based on the cash flow projection of the Business Enterprise (theadvertising and promotion service business) and that of Chili Platinum (publication of‘‘Platinum of UnionPay’’ (銀聯白金) business).

Since the Business Enterprise held 70% equity interest in Chili Platinum, separate cashflow projection for Chili Platinum (magazine business only) was adopted to arrive at themarket value of the 70% equity interest in Chili Platinum (magazine business only), which wasthen added to the market value of the 100% equity interest in the Business Enterprise(advertising and promotion service business only) to arrive at the market value of the 100%equity interest in the Target Group. The setting up of the platinum club of UnionPay is in thepreliminary stage and more concrete business plan will be available in accordance with thedevelopment progress of the publication of ‘‘Platinum of Unionpay’’ (銀聯白金). Withoutprescribing a definite timeframe in establishing the club, the Management considered therewould be more appropriate not to include the valuation of the club at this stage to achieve amore conservative valuation of the Target Group as at the Date of Valuation. Hence, the cashflow projection for Chili Platinum did not include the operation of the platinum club ofUnionPay.


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The Management has prepared cash flow projections from 2015 to 2019. Cash flows forsubsequent years were projected based on a terminal value as at 2020 by applying a terminalgrowth rate of 3.00%. The cash flow projections adopted in the valuation are as follows:

Cash Flow Projection for the Business Enterprise (Advertising and PromotionService Business Only):

Year Ended 31 December 2015 2016 2017 2018 2019 2020 2021HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000

(a) Revenue 8,354 9,499 9,974 10,473 10,996 11,326 11,666(b) Cost of Revenue (5,732) (6,565) (6,894) (7,238) (7,600) (7,828) (8,063)Gross Profit 2,622 2,933 3,080 3,234 3,396 3,498 3,603Gross Profit Margin 31% 31% 31% 31% 31% 31% 31%(c) Operating Expenses (1,790) (1,914) (2,006) (2,108) (2,216) (2,275) (2,343)Profit Before Tax 832 1,020 1,074 1,126 1,179 1,223 1,259(d) Income Tax Expense (137) (168) (177) (186) (195) (202) (208)Net Profit 695 852 897 940 985 1,021 1,052(e) Add: Depreciation Expense 11 13 15 18 21 14 15(f) Less: Capital Expenditure (10) (11) (13) (15) (18) (14) (15)(g) Less: Change in Working Capital 226 (334) 58 32 34 28 22Free Cash Flow 922 519 958 975 1,022 1,050 1,074

(h) Terminal Value as at Year 2020 9,764

Present Value of Free Cash Flow 863 427 690 616 567 511Present Value of Terminal Value 4,749

Cash Flow Projection for Chili Platinum (Magazine Business Only):

Year Ended 31 December 2015 2016 2017 2018 2019 2020 2021HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000

(a) Revenue 12,322 32,649 43,524 44,829 46,174 47,559 48,986(b) Cost of Revenue (7,819) (12,702) (15,761) (16,302) (16,862) (17,368) (17,889)Gross Profit 4,503 19,946 27,763 28,528 29,312 30,191 31,097Gross Profit Margin 37% 61% 64% 64% 63% 63% 63%(c) Operating Expenses (6,355) (6,850) (7,255) (7,702) (8,186) (8,197) (8,365)

Profit Before Tax (1,852) 13,097 20,509 20,826 21,125 21,994 22,732

(d) Income Tax Expense — (2,161) (3,384) (3,436) (3,486) (3,629) (3,751)

Net Profit (1,852) 10,936 17,125 17,390 17,640 18,365 18,981

(e) Add: Depreciation Expense 349 534 622 738 874 665 608(f) Less: Capital Expenditure (1,500) (349) (534) (622) (738) (665) (608)(g) Less: Change in Working Capital 462 241 (295) (66) 17 11 4

Free Cash Flow (2,541) 11,362 16,918 17,439 17,793 18,376 18,985

(h) Terminal Value as at Year 2020 172,589

Present Value of Free Cash Flow (2,379) 9,334 12,189 11,021 9,864 8,939Present Value of Terminal Value 83,955


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Notes:

(a) For the Business Enterprise advertising and promotion service business, future revenues were estimatedby the Management based on historical operating data, existing customer contracts and expected growthin fees charged for advertising services. For Chili Platinum magazine business, future revenues weremainly estimated based on the expected prices charged and the occupancy rates for advertising ofprinted publication in ‘‘Platinum of UnionPay’’ (銀聯白金) and the number of anticipated advertisingcontents published in the digital media platform. We understood from the Management that they havemade reference to the historical operating data in estimating the future revenues. Revenue of the printedpublication was estimated based on the number of pages available for advertising, occupancy rate of theadvertising pages, the price charged per page and the sales discount rate. Revenue of the publication inthe digital media platform was estimated based on the assumptions that: (i) 20% of the advertisingcustomers of the printed publication will place advertisements in the digital media platform; and (ii) theadvertising expenses of such customers on the digital media platform will amount to 20% of their netadvertising spending on printed publications. Based on the above assumptions, advertising revenue inthe digital media platform is estimated to be approximately 3% of the total advertising revenue eachyear during the forecasted period. Breakdown of the major revenue components for the revenue ofprinted publication during the forecasted period between 2015 and 2019 (forecasted revenue for 2020and onwards were estimated based on a terminal growth rate as described in note (h) below) is asfollows:

Year Ended 31 December 2015 2016 2017 2018 2019

Average pages availablefor advertising 1,458 1,560 1,560 1,560 1,560

Occupancy rate 10%–100% 100% 100% 100% 100%Advertising revenue

per page (HK$)12,800–815,850

12,800–815,850

12,800–815,850

12,800–815,850

12,800–815,850

Sales discount rate 68%–94% 53%–79% 46%–72% 44%–71% 42%–70%

The number of occupied advertising pages was estimated based on the expected total number ofavailable advertising pages in the magazine and the expected occupancy rate. The average advertisingrevenue per page, including the hard advertising contents such as advertisements directly published inthe front and back covers and inside pages, and soft advertising contents such as advertisements inpictorial and editorial formats, was estimated based on the current rate card of ‘‘Platinum of UnionPay’’(銀聯白金) and the expected sales discount rate in accordance with the available market information asmentioned in point (v) of this note below.

As advised by the Management, revenue growth would be mainly driven by the expected increase inoccupancy rate of the advertising pages and the expected decrease in sales discount rate. For 2015, theManagement estimated high sales discount rates for cover and inside pages ranged from about 68% to94% to attract new advertisers. For later years, the sales discount rate was expected to decrease by 5%to 10% per annum to a stable level of about 42% to 70% in 2019. The occupancy rate of the advertisingpages was assumed to be 100% from 2016 and onwards, as a result of the high sales discount rate andon the grounds that ‘‘Platinum of UnionPay’’ (銀聯白金) has been gaining higher popularity and wouldbecome one of the leading luxury lifestyle magazines.

For estimating the sales discount rate and the price charged per page, the Management has (i)considered the anticipated penetration of the magazine to the principal target audiences in high networth individuals and the premium level cardholders of UnionPay through the cooperation party whichprovided a platform of considerable number of targeted readership base and a strong competitiveadvantage within the industry; (ii) considered a rapid growth potential of the premium level cardholdersof UnionPay in accordance with the overall bank cards issuance growth rate in the past three yearswhich could lead to the increase of the popularity and target audience of the magazine; (iii) taken intoaccount of the expansion of the circulation from the average of approximately 3,000 copies in the pastto approximately 10,000 copies in 2015. From 2016 onwards, the estimated circulation of printed copieswill remain at the same level as 2015 as future circulation to selected premium level cardholders ofUnionPay in its targeted markets, which mainly consist of high net worth individuals having investableassets of US$1 million or above in Hong Kong, Macau and the PRC, will be enhanced by utilizing the


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digital media platform. The Management estimated that the number of average monthly page view ofthe digital media platform will range from approximately 10,000 to 40,000 during the forecasted periodbetween 2015 and 2019. According to a market research conducted by RBC Wealth Management in2014, there were approximately 758,000 and 124,000 high net worth individuals in the PRC and HongKong respectively. Considering the market penetration of UnionPay bank cards and assuming suchindividuals are holders of UnionPay bank cards, it is expected that the digital media platform willprovide a means to further extend the reach of the magazine; (iv) considered the continuing growth inbuilding up the membership of the magazine itself; and (v) made reference to researches on theadvertising expenditure per advertising page by industry. According to the research report prepared byadmanGo, an online platform providing competitive advertising monitoring, in May 2014 as sourcedfrom the prospectus of Winto Group (Holdings) Limited dated 30 January 2015, the advertisingexpenditure per advertising page by sectors of cosmetics and skincare, jewelry, watches and clock, andbeauty, slimming and fitness in Hong Kong was approximately HK$97,200 to HK$108,100 for the yearended 31 December 2013.

The Management’s estimates also took into account the anticipated uptrend of China’s magazineadvertising market. According to the research report prepared by Frost & Sullivan, a global consultingcompany, in December 2014 as sourced from the prospectus of Asiaray Media Group Limited dated 31December 2014, the magazine advertising market in China was forecast to expand at annual growthrates ranged from 6.3% to 8.2% from 2014 to 2018.

In estimating the readership base of the digital media publication, the Management had also consideredthe readership statistics of similar digital media platforms providing online lifestyle contents, such asShangLiuTatler, LifeStyle Magazine and Robb Report. According to Alexa.cn, an online portalproviding website traffic statistics estimates, the monthly average daily page view of the aforementionedplatforms ranged from 120 to 3,000, depending on the popularity of such online platform and thepopularity of the contents offered.

(b) The cost of revenue was estimated by the Management with reference to the historical operating data.The Management also took into account other factors such as general inflation and expected grossmargins. For the Business Enterprise advertising and promotion service business, the gross profitmargin was expected to maintain at about 31%, which was based on the historical gross profit margin ofthe Business Enterprise. For Chili Platinum magazine business, the gross profit margin was expected tobe about 37% in 2015 and over 60% thereafter. The expected increase in gross profit margin was due tothe expected increase in occupancy rate of the advertising pages and the expected decrease in salesdiscount rate, which would drive up the revenue. As the majority of the direct costs would be fixedproduction costs, which were assumed to grow at 5% per annum, the increase in revenue wouldtherefore result in increase in gross profit margin.

(c) Operating expenses referred to general administrative and salary expenses, which were estimated by theManagement based on the historical operating data. The Management also took into account generalinflation factor in projecting the expenses. For Chili Platinum magazine business, the operatingexpenses also included the license fees payable to Guangzhou Platinum as stipulated in the CooperationAgreements.

(d) Income tax expenses were estimated based on Hong Kong corporate tax rate of 16.5%.

(e) Depreciation expenses were estimated based on straight-line depreciation of the existing fixed assets andthe projected capital expenditure over the assumed useful life of 5 years.

(f) Capital expenditure referred to the maintenance capital expenditure for the refreshment of general officeequipment and fixtures. For Chili Platinum, the Management estimated a start-up capital expenditure ofHK$1,500,000 for the purpose of the development of digital media platform, based on the letter ofintent entered into between the Target Group and a digital media platform developer.

(g) Working capital referred to current assets and liabilities of the Target Group, which were mainlyreceivables and payables. The changes in working capital for the Business Enterprise and Chili Platinumwere projected based on the historical working capital ratios of the Business Enterprise.


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(h) The cash flows for years 2020 and 2021 were estimated based on a terminal growth rate of 3.00%,which was estimated with reference to the long-term forecast inflation rates in Hong Kong and China,which were 3.5% and 3.0% respectively according to the IMF. The terminal value as at year 2020 wasestimated based on the formula: Free Cash Flow for Year 2021/(Discount Rate – Terminal GrowthRate).

As advised by the Management, the Target Group plans to make use of the digital mediaplatform to reach more selected premium level cardholders of UnionPay, and traditional printedmedia format will be retained in the targeted distribution location such as high-end privateclubs, golf clubs and hotels, therefore the Target Group is currently developing a digital mediaplatform complementing the issue of magazine. The Target Group has entered into a letter ofintent with a digital media platform developer for the development of websites and mobileapplications. The estimated investment cost of the digital media platform has been included inthe capital expenditure of the Target Group for 2015. The digital media platform is expected tocommence operation in 2015. With the digital media platform, ‘‘Platinum of UnionPay’’ (銀聯

白金) will become a more comprehensive advertising channel for advertisers. As UnionPaycards have been gaining worldwide popularity, the large potential cardholder base would be ahuge advantage of ‘‘Platinum of UnionPay’’ (銀聯白金) to attract advertisers.

To assess the reasonableness of the cash flow projections, we have reviewed informationprovided by the Management, including but not limited to historical financial statements andoperating data of the Target Group, the terms and conditions of the Cooperation Agreementsand the current rate card for ‘‘Platinum of UnionPay’’ (銀聯白金). We have also discussed withthe Management about the bases of assumptions underlying the cash flow projections and thebusiness plan of the Target Group. We have also made reference to other public information,including but not limited to the number and type of advertisers and distribution channels of‘‘Platinum of UnionPay’’ (銀聯白金), the historical revenue growth and profit margins of thecomparable companies, and rate cards of other magazines.


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The market value of the 100% equity interest in the Target Group was derived as follows:

HK$’000The Business Enterprise (Advertising and Promotion ServiceBusiness Only)

Total Present Value of Free Cash Flows for the Period from 2015to 2020 and the Terminal Value as at 2020 8,423

Adjustments forCash and Debt 4,598Amounts Due to/from Other Parties 1,070Non-Recurring Items (Temporary Accounts) (649)

100% Equity Value (Marketable Basis) 13,443

100% Equity Value (Non-Marketable Basis) (Rounded) 10,600

Chili Platinum (Magazine Business Only)Total Present Value of Free Cash Flows for the Period from 2015to 2020 and the Terminal Value as at 2020 132,923

Adjustments forCash and Debt 424Amounts Due to/from Other Parties (3,052)

100% Equity Value (Marketable Basis) 130,296

100% Equity Value (Non-Marketable Basis) 102,803

70% Equity Value (Non-Marketable Basis) (Rounded)* 72,000

Market Value of the 100% Equity Interest in the Target Group 82,600

Note: Numbers may not add up due to rounding.

* The remaining 30% equity interest was held by a non-controlling shareholder

10. MAJOR ASSUMPTIONS

We have adopted certain specific assumptions in our valuation and the major ones are asfollows:

. The Target Group would be operated and developed as planned by the Managementand the development would be in line with the financial projections adopted in thisvaluation (as stated in section 9 of this report);


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. The valuation was mainly based on the projections of the future cash flows asprovided by the Management. The projections outlined in the financial informationprovided was assumed to be capable of reflecting future market conditions andeconomic fundamentals, and was assumed to be materialized;

. According to the terms of the Cooperation Agreements, the Cooperation Agreementswill be automatically renewed for a period of 4 years upon expiration, unless beingobjected by either party. The Management considered that there is no foreseeableobstacle in renewing the Cooperation Agreements upon their expiration. In particular,based on the existing cooperation with Guangzhou Platinum, the working team of theTarget Group dedicated to the publication of the magazine has spent substantial timeand effort to familiarise with the mode of cooperation, arrangements on division ofresponsibilities, selection of suitable magazine contents and development of themultimedia platform including the mobile applications through various discussionsand on-going implementation of business plans with Guangzhou Platinum. By thetime of the expiration of the Cooperation Agreements, the Management believes thatthe contribution of the Target Group will become more significant as the digitalmedia platform it developed will further contribute to the revenue and profits of thepublication business as well as expanding the target audiences of the magazine in thehigh-end consumer market irrespective of geographical constrains. Further, havingestablished a long term cooperation relationship upon the expiration of thePublication Cooperation Agreement, the Target Group will be in an advantageousposition as compared to other perspective parties in managing the publication of themagazine considering the on-going cooperation between the Target Group andGuangzhou Platinum and the substantial time and expertise required to familiarisewith the mode of cooperation under the Publication Cooperation Agreement. Basedon the above considerations, the Management is optimistic that there exists a strongincentive for both parties to renew the Publication Cooperation Agreement. Hence,the valuation was conducted based on a going concern assumption;

. The Cooperation Agreements would be renewed without material changes in themajor terms. As discussed with the Management, the terms of the CooperationAgreements were determined based on arm’s length negotiation between FavorableOn and Guangzhou Platinum. The current terms were considered fair and reasonableto both parties and there have not been any indications of and requests for changes tothe terms of the Cooperation Agreements from both parties as at the Date ofValuation. It was considered reasonable to assume no material changes in majorterms of the Cooperation Agreements upon renewal;

. Terminal growth rate of 3.00% was adopted with reference to the general inflation inHong Kong and China;

. All relevant legal approvals and business certificates or licenses to operate thebusiness in the localities in which the Target Group operates or intends to operatewere assumed to be successfully obtained and renewable upon expiry with minimalcosts;


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. There will be sufficient supply of technical staff in the industry in which the TargetGroup operates, and the Target Group will retain competent management, keypersonnel and technical staff to support its ongoing operations and developments;

. There will be no major change in the current taxation laws in the localities in whichthe Target Group operates or intends to operate and that the rates of tax payable shallremain unchanged and that all applicable laws and regulations will be complied with;

. There will be no major change in the political, legal, economic or financialconditions in the localities in which the Target Group operates or intends to operate,which would adversely affect the revenues attributable to and profitability of theTarget Group; and

. Interest rates and exchange rates in the localities for the operation of the TargetGroup will not differ materially from those presently prevailing. The exchange rateadopted in the valuation was HK$1:RMB1.2497, which was the prevailing exchangerate as at the Date of Valuation as extracted from Bloomberg.

11. LIMITING CONDITIONS

The valuation reflects facts and conditions existing at the Date of Valuation. Subsequentevents or circumstances have not been considered and we are not required to update our reportfor such events and conditions.

We would particularly point out that our valuation was based on the information such asthe company background and business nature of the Target Group provided to us.

To the best of our knowledge, all data set forth in this report are reasonable andaccurately determined. The data, opinions, or estimates identified as being furnished by othersthat have been used in formulating this analysis are gathered from reliable sources; yet, noguarantee is made nor liability assumed for their accuracy.

We have relied on the historical and/or prospective information provided by theManagement and other third parties to a considerable extent in arriving at our opinion ofvalue. The information has not been audited or compiled by us. We are not in the position toverify the accuracy of all information provided to us. However, we have had no reason todoubt the truth and accuracy of the information provided to us and to doubt that any materialfacts have been omitted from the information provided. No responsibilities for the operationand financial information that have not been provided to us are accepted.

We assumed that the Management is competent and perform duties under the companyregulation. Also, ownership of the Target Group was in responsible hands, unless otherwisestated in this report. The quality of the Management may have direct impact on the viability ofthe business as well as the market value of the Target Group.

We have not investigated the title to or any legal liabilities of the Target Group and haveassumed no responsibility for the title to the Target Group appraised.


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Our conclusion was derived from generally accepted valuation procedures and practicesthat rely substantially on the use of various assumptions and the consideration of manyuncertainties, not all of which can be easily quantified or ascertained. The conclusion andvarious estimates may not be separated into parts, and/or used out of the context presentedherein, and/or used together with any other valuation or study.

We assume no responsibility whatsoever to any person other than the directors and theManagement in respect of, or arising out of, the content of this report. If others choose to relyin any way on the contents of this report, they do so entirely at their own risk.

The working papers and models for this valuation are being kept in our files and would beavailable for further references. We would be available to support our valuation if required.The title of this report shall not pass to the Company until all professional fee has been paid infull.

12. REMARKS

Unless otherwise stated, all monetary amounts stated in this valuation report are in HongKong Dollars (HK$).

We hereby confirm that we have neither present nor prospective interests in the Company,the Target Group and their associated companies, or the values reported herein.

13. OPINION OF VALUE

Based on the investigation and analysis stated above and on the valuation methodemployed, the market value of 100% equity interest in the Target Group as at the Date ofValuation, in our opinion, was reasonably stated as HK$82,600,000 (HONG KONGDOLLARS EIGHTY TWO MILLION AND SIX HUNDRED THOUSAND ONLY).

Yours faithfully,For and on behalf of

Roma Appraisals Limited


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ACCOUNTANT’S REPORT ON CALCULATIONS OF DISCOUNTED FUTUREESTIMATED CASH FLOWS IN CONNECTION WITH THE VALUATION OF EQUITYINTEREST IN CHILI ADVERTISING & PROMOTIONS LIMITED AND ITSSUBSIDIARIES

TO THE DIRECTORS OF PEGASUS ENTERTAINMENT HOLDINGS LIMITED

We have examined the calculations of the discounted future estimated cash flows onwhich the valuation prepared by Roma Appraisals Limited dated 13 May 2015, of 100% equityinterest in Chili Advertising & Promotions Limited and its subsidiaries as at 31 December 2014(the ‘‘Valuation’’) is based. The Valuation based on the discounted future estimated cash flowsis regarded as a profit forecast under Rule 14.61 of the Rules Governing the Listing ofSecurities on The Stock Exchange of Hong Kong Limited (the ‘‘Listing Rules’’) and referenceto the Valuation will be included in a circular dated 13 May 2015 to be issued by PegasusEntertainment Holdings Limited (the ‘‘Company’’) in connection with the acquisition of 100%equity interest in Chili Advertising & Promotions Limited (the ‘‘Circular’’).

Directors’ responsibility for the discounted future estimated cash flows

The directors of the Company are responsible for the preparation of the discounted futureestimated cash flows in accordance with the bases and assumptions determined by the directorsand set out in Appendix I to the Circular (the ‘‘Assumptions’’). This responsibility includescarrying out appropriate procedures relevant to the preparation of the discounted futureestimated cash flows for the Valuation and applying an appropriate basis of preparation; andmaking estimates that are reasonable in the circumstances.

Reporting accountant’s responsibility

It is our responsibility to form an opinion on the arithmetical accuracy of the calculationsof the discounted future estimated cash flows on which the Valuation is based and to reportsolely to you, as a body, as required by Rule 14.62(2) of the Listing Rules, and for no otherpurpose. We do not assume responsibility towards or accept liability to any other person forthe contents of this report.

Our engagement was conducted in accordance with Hong Kong Standard on AssuranceEngagements 3000 ‘‘Assurance Engagements Other Than Audits or Reviews of HistoricalFinancial Information’’ issued by the Hong Kong Institute of Certified Public Accountants.This standard requires that we comply with ethical requirements and plan and perform theassurance engagement to obtain reasonable assurance on whether the discounted future

APPENDIX II LETTER FROM THE REPORTING ACCOUNTANT IN RELATIONTO THE FORECAST UNDERLYING THE VALUATION

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estimated cash flows, so far as the calculations are concerned, have been properly compiled inaccordance with the Assumptions. Our work does not constitute any valuation of ChiliAdvertising & Promotions Limited.

Because the Valuation relates to discounted future estimated cash flows, no accountingpolicies of the Company have been adopted in its preparation. The Assumptions includehypothetical assumptions about future events and management actions which cannot beconfirmed and verified in the same way as past results and these may or may not occur. Evenif the events and actions anticipated do occur, actual results are still likely to be different fromthe Valuation and the variation may be material. Accordingly, we have not reviewed,considered or conducted any work on the reasonableness and the validity of the Assumptionsand do not express any opinion whatsoever thereon.

Opinion

Based on the foregoing, in our opinion, the discounted future estimated cash flows, so faras the calculations are concerned, have been properly compiled, in all material respects, inaccordance with the Assumptions.

Deloitte Touche TohmatsuCertified Public AccountantsHong Kong13 May 2015

APPENDIX II LETTER FROM THE REPORTING ACCOUNTANT IN RELATIONTO THE FORECAST UNDERLYING THE VALUATION

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1. RESPONSIBILITY STATEMENT

This circular, for which the Directors collectively and individually accept fullresponsibility, includes particulars given in compliance with the Listing Rules for the purposeof giving information with regard to the Company. The Directors, having made all reasonableenquiries, confirm that to the best of their knowledge and belief, the information contained inthis circular 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 thiscircular misleading.

2. DISCLOSURE OF INTERESTS BY DIRECTORS AND CHIEF EXECUTIVE

Interests in the Shares, underlying Shares, of the Directors and chief executive

Save as disclosed below, as at the Latest Practicable Date, none of the Directors orchief executive of the Company had any interests or short positions in any shares,underlying shares and debentures of the Company or any of its associated corporations (asdefined in Part XV of the SFO) which are required to be notified to the Company and theStock Exchange pursuant to Divisions 7 and 8 of Part XV of the SFO (including interestsand short positions which they were taken or deemed to have under such provisions of theSFO), or are required to be entered in the register maintained in accordance with Section352 of the SFO, or are required to be notified to the Company and the Stock Exchangepursuant to the Model Code for Securities Transactions by Directors of Listed Issuers setout in Appendix 10 to the Listing Rules.

Name ofdirector

Company/name ofassociatedcompany

Nature of interest(Long position)

Number ofShares held

Approximatelypercentage orattributable

percentage ofshareholding tothe Company/

associatedcompany

Mr. Wong Company Interest in acontrolledcorporation

300,000,000(Note)

54.95%

Company Beneficial owner 4,180,000 0.76%

304,180,000 55.71%

Honour GraceLimited

Beneficial owner 9 shares ofUS$1.00 each

60.00%

Note: These shares are registered in the name of Honour Grace Limited, the entire issued share capitalof which is legally and beneficially owned as to 60% by Mr. Wong, 20% by Mr. Edmond Wongand 20% by Ms. Alvina Wong. Under the SFO, Mr. Wong is deemed to be interest in all theshares registered in the name of Honour Grace Limited.

APPENDIX III GENERAL INFORMATION

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3. DISCLOSURE OF INTERESTS BY SUBSTANTIAL SHAREHOLDERS

Save as disclosed below, as at the Latest Practicable Date, the Directors were not aware ofany person (other than the Directors or Chief Executives of the Company) who had any interestor short position in the shares or underlying Shares which would fall to be disclosed to theCompany under the provisions of Divisions 2 and 3 of Part XV of the SFO.

Name of shareholderNature of interest(Long position)

Number ofShares held

Approximatelypercentage orattributable

percentage ofshareholding to

the Company

Honour Grace Limited Beneficial owner 300,000,000 54.95%

Mr. Wong Interest in acontrolledcorporation

300,000,000(Note 1)

54.95%

Beneficial owner 4,180,000 0.76%

304,180,000 55.71%

Ms. Zee Ven Chu Lydia(Note 2)

Deemed interest 304,180,000 55.71%

Yue Xiu Investment Fund SeriesSegregated Portfolio Company

Beneficial owner 43,680,000 8.00%

Yue Xiu Asset ManagementLimited

Investment manager 43,680,000 8.00%

Notes:

1. These shares are registered in the name of Honour Grace Limited, the entire issued share capital ofwhich is legally and beneficially owned as to 60% by Mr. Wong, 20% by Mr. Edmond Wong and 20%by Ms. Alvina Wong. Under the SFO, Mr. Wong is deemed to be interest in all the shares registered inthe name of Honour Grace Limited.

2. Ms. Zee Ven Chu Lydia, spouse of Mr. Wong, is deemed under the SFO to be interested in all theShares in which Mr. Wong is deemed to be interested.

4. DIRECTORS’ SERVICE CONTRACTS

As at the Latest Practicable Date, none of the Directors had any existing or proposedservice contract with any member of the Group (excluding contracts expiring or determinableby the employer within one year without payments of compensation (other than statutorycompensation)).


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5. DIRECTORS’ INTEREST IN COMPETING BUSINESSES

As at the Latest Practicable Date, none of the Directors or their respective associates wasinterested in any business which competes or is likely to compete, either directly or indirectly,with the business of the Group as required to be disclosed pursuant to the Listing Rules.

6. MATERIAL INTERESTS AND CONTRACTS

As at the Latest Practicable Date, none of the Directors was materially interested in anysubsisting contract or arrangement which is significant in relation to the business of the Group,and none of the Directors had any assets which have, since 30 June 2014 (being the date towhich the latest published audited consolidated accounts of the Group were made up), beenacquired or disposed of by or leased to any member of the Group, or are proposed to beacquired or disposed of or leased to any member of the Group.

7. MATERIAL ADVERSE CHANGE

As disclosed in the announcement dated 23 September 2014, according to the leaseagreement entered into between the Group and the landlord of the cinema located in LanghamPlace, a rent-free period of four months commencing from 23 July 2014 was offered by thelandlord as compensation for the renovation period during which the cinema is not inoperation. In light of the accounting principles, practices and policies adopted by the Groupunder the applicable accounting standards, such incentive provided by the landlord will betreated as a uniform reduction of rental expenses (that is, on a straight-line basis over the leaseterm). With the lease term having commenced on 23 July 2014, rental expenses will beimmediately recognised under the abovementioned accounting treatment. However, revenue hasonly been generated after the cinema commences operation in the fourth quarter of 2014. Assuch, the Group’s results for the six months ended 31 December 2014 was adversely affected.

Save for the above, the Directors are not aware of any material adverse change in thefinancial or trading position of the Group since 30 June 2014, being the date to which thelatest audited financial statements of the Company were made up as at the Latest PracticableDate.

8. LITIGATION

No member of the Group is engaged in any litigation, arbitration or claim of materialimportance and no litigation, arbitration or claim of material importance is known to theDirectors to be pending or threatened against any member of the Group as at the LatestPracticable Date.


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9. QUALIFICATIONS AND CONSENTS OF EXPERTS

The following are qualifications of the expert who have given their opinions and advicewhich are included in this circular:

Name Qualification

Akron Corporate FinanceLimited

A licensed corporation to carry out type 6 (advising oncorporate finance) regulated activity under the SFO

Roma Appraisals Limited Independent valuer

Deloitte Touche Tohmatsu Certified Public Accountant

Each of the above experts has given and has not withdrawn its written consent to the issueof this circular with the inclusion of its letters, reports and/or opinion, as the case may be, andreferences to its name in the form and context in which they respectively appear.

As at the Latest Practicable Date, each of the above experts did not have any shareholdingin any member of the Group or the right (whether legally enforceable or not) to subscribe foror to nominate persons to subscribe for securities in any member of the Group.

As at the Latest Practicable Date, each of the above experts did not have, directly orindirectly, any interest in any assets which had since 30 June 2014 (being the date to which thelatest published audited consolidated accounts of the Group were made up) been acquired ordisposed of by or leased to any member of the Group, or are proposed to be acquired ordisposed of by or leased to any member of the Group.

10. GENERAL

The English text of this circular shall prevail over the Chinese text in the event ofinconsistency.

11. DOCUMENTS AVAILABLE FOR INSPECTION

Copies of the following documents are available for inspection at the head office andprincipal place of business of the Company in Hong Kong at Rooms 1801–2, WestlandsCentre, 20 Westlands Road, Quarry Bay, Hong Kong during normal business hours on anybusiness day from the date of this circular up to and including the date of the EGM:

(a) the Agreement;

(b) the letter of recommendation from the Independent Board Committee to theIndependent Shareholders, the text of which is set out on pages 24 to 25 of thiscircular;


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(c) the letter of advice from the Independent Financial Adviser to the Independent BoardCommittee and the Independent Shareholders, the text of which is set out from pages26 to 55 of this circular;

(d) the valuation report prepared by Roma Appraisals Limited, the text of which is setout in Appendix I to this circular;

(e) the letter from Deloitte Touche Tohmatsu, the text of which is set out in Appendix IIto this circular;

(f) the consent letter from Akron Corporate Finance Limited referred to in the paragraphheaded ‘‘Qualifications and consents of experts’’ in this appendix;

(g) the consent letter from Roma Appraisals Limited referred to in the paragraph headed‘‘Qualifications and consents of experts’’ in this appendix;

(h) the consent letter from Deloitte Touche Tohmatsu referred to in the paragraph headed‘‘Qualifications and consents of experts’’ in this appendix; and

(i) this circular.


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(Stock Code: 1326)

NOTICE IS HEREBY GIVEN that an extraordinary general meeting (‘‘EGM’’) ofPegasus Entertainment Holdings Limited (the ‘‘Company’’) will be held at Rooms 1801–02,Westlands Centre, 20 Westlands Road, Quarry Bay, Hong Kong at 4:00 p.m. on Friday, 29May 2015 for the purposes of considering and, if thought fit, passing the following resolutionas ordinary resolution:

ORDINARY RESOLUTION

(1) ‘‘THAT:

(a) the agreement dated 6 March 2015 (as amended by a supplemental agreementdated 30 April 2015) (the ‘‘Agreement’’) entered into between the Green RichesHoldings Limited, which is a direct wholly-owned subsidiary of the Company,as purchaser (the ‘‘Purchaser’’), the Company and Ms. Wong Kit Fong (the‘‘Vendor’’) as vendor in relation to the acquisition of the entire issued sharecapital of Chili Advertising & Promotions Limited by the Purchaser, a copy ofthe which has been produced to this meeting marked ‘‘A’’ and signed by theChairman of the meeting for the purpose of identification, and the transactionscontemplated thereunder be and are hereby approved, confirmed and ratified;

(b) the allotment and issue of 46,000,000 new ordinary shares of HK$0.01 each(the ‘‘Consideration Shares’’) in the share capital of the Company to theVendor credited as fully paid at an issue price of HK$1.26 per ConsiderationShare pursuant to terms and conditions of the Agreement be and are herebyapproved; and

(c) any one or more of the directors of the Company be and is/are herebyauthorised to implement and take all steps and do all acts and things andexecute all such documents (including under seal) which he/she/they considernecessary or expedient to give effect to the Agreement and the transactionscontemplated thereunder including but not limited to the allotment and issue ofthe Consideration Shares.’’

By order of the BoardPegasus Entertainment Holdings Limited

Wong Pak MingChairman

Hong Kong, 13 May 2015

NOTICE OF EXTRAORDINARY GENERAL MEETING

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Registered office:Cricket SquareHutchins DriveP.O. Box 2681Grand Cayman KY1-1111Cayman Islands

Principal place of business in Hong Kong:Rooms 1801–2Westlands Centre20 Westlands RoadQuarry BayHong Kong

Notes:

1. A member entitled to attend and vote at the meeting convened by the above notice is entitled to appoint oneor more proxy to attend and, subject to the provisions of the articles of association of the Company, vote inhis stead. A proxy need not be a member of the Company. If more than one proxy is so appointed, theappointment shall specify the number and class of shares in respect of which each such proxy is so appointed.

2. In order to be valid, the form of proxy must be deposited together with a power of attorney or other authority,if any, under which it is signed or a notarially certified copy of that power or authority, at the office of theCompany’s branch registrar and transfer office in Hong Kong, Tricor Investor Services Limited, at Level 22,Hopewell Centre, 183 Queen’s Road East, Hong Kong not less than 48 hours before the time appointed forholding the meeting or adjourned meeting. Completion and return a form of proxy will not preclude a memberfrom attending in person and voting at the above meeting or any adjournment thereof, should you so wish.

3. In the case of joint holders of shares, any one such holders may vote at the meeting, either personally or byproxy, in respect of such shares as if he was solely entitled thereto, but if more than one of such joint holdersare present at the meeting personally or by proxy, that one of the said persons so present whose name standsfirst in the register of members of the Company in respect of such shares shall alone be entitled to vote inrespect thereof.

4. The voting on the resolutions at the EGM will be conducted by way of a poll.

NOTICE OF EXTRAORDINARY GENERAL MEETING

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pegasus entertainment holdings limited 天馬影視文化控股有限公司

Documents