Connected transactions - disposal of 70% equity interests and increase of registered capital of inner mongolia yiyingmei dairy co., ltd

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

CHINA SHENGMU ORGANIC MILK LIMITED

中 國 聖 牧 有 機 奶 業 有 限 公 司

(Incorporated in the Cayman Islands with limited liability)

(Stock Code: 1432)

CONNECTED TRANSACTIONS

DISPOSAL OF 70% EQUITY INTERESTS AND INCREASE OF REGISTERED CAPITAL OF INNER MONGOLIA YIYINGMEI DAIRY CO., LTD.

EQUITY TRANSFER AND CAPITAL INCREASE AGREEMENT

The Board is pleased to announce that on 11 September 2020 (after trading hours), Shengmu High-tech, a wholly-owned subsidiary of the Company, Dabeinong Group and the Target Company entered into the Equity Transfer and Capital Increase Agreement pursuant to which (i) Shengmu High-tech agreed to sell, and Dabeinong Group agreed to purchase 70% equity interests in the Target Company (before taking into account the Capital Increase) held by Shengmu High-tech; and

1. the registered capital of the Target Company will be increased by RMB50 million, all of which will be contributed by Dabeinong Group.

The Consideration for the Equity Transfer under the Equity Transfer and Capital Increase Agreement is RMB57,822,865.25 (equivalent to approximately HK$65,529,086), among which the First Instalment in the amount of RMB45,000,000 shall be paid by Dabeinong Group within five Business Days after the effective date of the Equity Transfer and Capital Increase Agreement. Subject to the confirmation that there are no other liabilities save for those provided in the Latest Managment Accounts, and no other contingent liabilities or other matters that are detrimental to the interests of the Target Company and Dabeinong Group, the Second Instalment in the amount of RMB12,822,865.25 shall be paid within 15 Business Days from the Registration Date. The contribution of RMB50 million for the Capital Increase shall be paid by Dabeinong Group within five Business Days from the date of submission of materials by the Target Company to the relevant market regulation authority for Registration.

− 1 −

LISTING RULES IMPLICATIONS

Mr. Shao Genhuo, a non-executive Director, holds more than 30% equity interests in Dabeinong Group. Mr. Shao also holds the entire equity interests of Beijing Zhi Nong, which in turn holds the entire equity interests of Nong You, a substantial shareholder of the Company. Mr. Shao is therefore a connected person of the Company and Dabeinong Group is an associate of Mr. Shao and therefore also a connected person of the Company as defined under the Listing Rules. Accordingly, the Equity Transfer contemplated under the Equity Transfer and Capital Increase Agreement constitutes a connected transaction of the Company under Chapter 14A of the Listing Rules. The Capital Increase contemplated under the Equity Transfer and Capital Increase Agreement constitutes a deemed disposal of the Company's equity interest in the Target Company under Rule 14.29 of the Listing Rules and a connected transaction of the Company under Chapter 14A of the Listing Rules.

As at the date of this announcement, the Target Company is a wholly-owned subsidiary of Shengmu High-tech with a registered capital of RMB100 million. Upon completion of the Transactions, the Target Company will have a registered capital of RMB150 million and will be held as to 80% and 20% by Dabeinong Group and Shengmu High-tech, respectively. Pursuant to Rule 14A.81 of the Listing Rules, the Transactions contemplated under the Equity Transfer and Capital Increase Agreement shall be aggregated. As the highest applicable percentage ratio for the Transactions when aggregated exceeds 0.1% but is lower than 5%, the Transactions shall comply with the reporting and announcement requirements but are exempted from the independent Shareholders' approval requirement under Chapter 14A of the Listing Rules.

INTRODUCTION

The Board is pleased to announce that on 11 September 2020 (after trading hours), Shengmu High-tech, a wholly-owned subsidiary of the Company, Dabeinong Group and the Target Company entered into the Equity Transfer and Capital Increase Agreement pursuant to which (i) Shengmu High-tech agreed to sell, and Dabeinong Group agreed to purchase 70% equity interests in the Target Company (before taking into account the Capital Increase) held by Shengmu High-tech; and (ii) the registered capital of the Target Company will be increased by RMB50 million, all of which will be contributed by Dabeinong Group.

− 2 −

EQUITY TRANSFER AND CAPITAL INCREASE AGREEMENT

The principal terms of the Equity Transfer and Capital Increase Agreement are summarised as follows:

Date:

11 September 2020

Parties:

1. Dabeinong Group (as transferee);
2. Shengmu High-tech (as transferor); and
3. Target Company (as target).

Subject Matter

Subject to the terms and conditions of the Equity Transfer and Capital Increase Agreement:

1. Shengmu High-tech agreed to sell and Dabeinong Group agreed to purchase 70% equity interests in the Target Company (before taking into account the Capital Increase) held by Shengmu High-tech; and
2. the registered capital of the Target Company will be increased by RMB50 million, all of which will be contributed by Dabeinong Group.

The percentage of equity interests in the Target Company owned by Shengmu High-tech and Dabeinong Group, respectively, (i) before completion of the Transactions; and (ii) upon completion of the Transactions, are set out below:

− 3 −

Consideration of the Equity Transfer

The Consideration for the Equity Transfer under the Equity Transfer and Capital Increase Agreement is RMB57,822,865.25 (equivalent to approximately HK$65,529,086). The Consideration was determined after arm's length negotiations among Shengmu High-tech and Dabeinong Group after taking into consideration (i) the net asset value of the Target Company of RMB85,078,100 as at the Valuation Base Date based on the Assets Valuation Report prepared by the Valuer, an independent valuer engaged by the Company, using the asset-based valuation approach; and (ii) the profit/loss incurred from the Valuation Base Date to the signing date of the Equity Transfer and Capital Increase Agreement.

The Consideration shall be settled in two instalments by Dabeinong Group to Shengmu High-tech. The First Instalment in the amount of RMB45,000,000 shall be paid by Dabeinong Group within five Business Days after the effective date of the Equity Transfer and Capital Increase Agreement. Subject to the confirmation that there are no other liabilities save for those provided in the Latest Management Accounts, and no other contingent liabilities or matters that are detrimental to the interests of the Target Company and Dabeinong Group, the Second Instalment in the amount of RMB12,822,865.25 shall be paid within 15 Business Days from the Registration Date.

If the net asset value of the Target Company as shown in the Latest Management Accounts is lower than the net asset value as shown in the Asset Valuation Report, Dabeinong shall be entitled to deduct such difference from the Second Instalment. If the liabilities of the Target Company as shown in the Latest Management Accounts are higher than the liabilities as shown in the Asset Valuation Report, Dabeinong shall be entitled to deduct the excess amount from the Second Instalment.

Capital Increase

Pursuant to the Equity Transfer and Capital Increase Agreement, Daibeinong Group also agreed to contribute RMB50 million for the Capital Increase of the Target Company. Dabeinong Group shall pay the contribution of RMB50 million within five Business Days from the date of submission of materials by the Target Company to the relevant market regulation authority for Registration.

Board Composition of the Target Company

The board of directors of the Target Company shall consist of three directors, two of which shall be recommended by Dabeinong Group and one director shall be recommended by Shengmu High-tech. The legal representative of the Target Company shall be a director recommended by Dabeinong Group.

− 4 −

Conditions Precedent

Completion of the Equity Transfer is conditional upon the fulfilment or waiver of the following conditions in writing:

Conditions for Shengmu High-tech

1. the representations and warranties made by Dabeinong Group under the Equity Transfer and Capital Increase Agreement are true, complete and accurate as of the Registration Date; and
2. compliance by the Company of the applicable requirements under the Listing Rules in relation to the Equity Transfer and Capital Increase Agreement.

Conditions for Dabeinong Group

1. the representations and warranties made by Shengmu High-tech under the Equity Transfer and Capital Increase Agreement are true, complete and accurate and there is no breach of undertaking by Shengmu High-tech under the Equity Transfer and Capital Increase Agreement as of the Registration Date;
2. Shengmu High-tech should have provided Dabeinong Group with full support and assistance in accordance with the reasonable requirements of Dabeinong Group when conducting due diligence on the Target Company. The results of the due diligence should be to the satisfaction of Dabeinong Group;
3. Dabeinong Group having received the effective board resolution or shareholders' resolution of Shengmu High-tech, approving the Equity Transfer;
4. Dabeinong Group having received the written resignation of the current directors, general manager and supervisor of the Target Company to be effective on the Registration Date;
5. Dabeinong Group having received the written resignation of the current legal representative of the Target Company to be effective on the Registration Date;
6. there is no incident or possible occurrence of any incident that Dabeinong Group reasonably considers having a material adverse effect on the Target Company as of the Registration Date;
7. save as disclosed in writing to Dabeinong Group and having obtained the consent from Dabeinong Group, there has been no material change to the business of the Target Company as of the Registration Date in the opinion of Dabeinong Group; and

− 5 −

1. Shengmu High-tech having completed the handover of certain materials and assets specified in the Equity Transfer and Capital Increase Agreement to the satisfaction of Dabeinong Group.

Closing

Closing of the Transactions shall have taken place upon the completion of all the following events:

1. the Registration, whose materials will be submitted to the relevant authority of market regulation within 10 days of the payment of the First Instalment; and
2. the handover of all the documents and assets as listed in the appendix of the Equity Transfer and Capital Increase Agreement.

REASONS FOR AND BENEFITS OF THE EQUITY TRANSFER AND CAPITAL

INCREASE AGREEMENT

The Target Company launched a 12,000-ton organic infant milk powder manufacturing plant project (the "Project") in August 2015 but the Project has not been completed as at the date of this announcement. The budget of construction of the production plant for the Project was RMB280 million and the Group has invested RMB125 million with an outstanding amount of RMB155 million. In addition, considering the cost of building the infant milk powder brand and sales channels in future, the Directors believe that substantial further investment will be required before the Project can achieve commercial operation. The Equity Transfer will enable the Group to recover approximately RMB57.8 million of equity investment and RMB46 million of intra-group receivables owed by the Target Company to Shengmu High-tech.

Further, the Group does not have sufficient human resources to support the completion of the Project and the Equity Transfer will enable the Group to focus on its dairy farming business. The Directors also believe that the Transactions will accelerate the completion of the Project.

− 6 −

FINANCIAL INFORMATION OF THE TARGET COMPANY

The net loss (both before and after taxation) for the two financial years ended 31 December 2018 and 2019 of the Target Company based on the audited financial statements of the Target Company prepared in accordance with the International Financial Reporting Standards are as follows:

Year ended 31 December

2018 2019

(unaudited) (unaudited) (RMB'000)

The book value and valuation of the total assets of the Target Company as at the Valuation Base Date based on the Assets Valuation Report prepared by the Valuer amounted to approximately RMB159,474,500 and RMB160,600,900, respectively.

FINANCIAL EFFECTS OF THE TRANSACTIONS

Upon completion of the Transactions, the Target Company will cease to be recognised as a subsidiary of Shengmu High-tech and the Company. The Target Company will be recognised as an investment in the consolidated financial statements of the Company.

The Company is expected to record a net gain (after deducting the relevant taxes and expenses) from the Equity Transfer of approximately RMB600,000 (equivalent to approximately HK$679,964) in its consolidated statement of profit or loss for the year ending 31 December 2020 calculated based on, among other factors, (i) the net asset value of the Target Company as at the Valuation Base Date; and (ii) the profit/loss incurred from the Valuation Base Date to the signing date of the Equity Transfer and Capital Increase Agreement.

The Company intends to use the sale proceeds from the Equity Transfer for general working capital and repayment of debts.

LISTING RULES IMPLICATION

Mr. Shao Genhuo, a non-executive Director, holds more than 30% equity interests in Dabeinong Group. Mr. Shao also holds the entire equity interests of Beijing Zhi Nong, which in turn holds the entire equity interests of Nong You, a substantial shareholder of the Company. Mr. Shao is therefore a connected person of the Company and Dabeinong Group is an associate of Mr. Shao and therefore also a

− 7 −

connected person of the Company as defined under the Listing Rules. Accordingly, the Equity Transfer contemplated under the Equity Transfer and Capital Increase Agreement constitutes a connected transaction of the Company under Chapter 14A of the Listing Rules. The Capital Increase contemplated under the Equity Transfer and Capital Increase Agreement constitutes a deemed disposal of the Company's equity interest in the Target Company under Rule 14.29 of the Listing Rules and a connected transaction of the Company under Chapter 14A of the Listing Rules.

As at the date of this announcement, the Target Company is a wholly-owned subsidiary of Shengmu High-tech with a registered capital of RMB100 million. Upon completion of the Transactions, the Target Company will have a registered capital of RMB150 million and will be held as to 80% and 20% by Dabeinong Group and Shengmu High-tech, respectively.

Pursuant to Rule 14A.81 of the Listing Rules, the Transactions contemplated under the Equity Transfer and Capital Increase Agreement shall be aggregated. As the highest applicable percentage ratio for the Transactions when aggregated exceeds 0.1% but is lower than 5%, the Transactions shall comply with the reporting and announcement requirements but are exempted from the independent Shareholders' approval requirement under Chapter 14A of the Listing Rules.

Taking into account the above, the Directors (excluding Mr. Shao Genhuo, Mr. Fu Wenge, Mr. Wang Liyan and Mr. Li Xuan) consider that the terms of the Equity Transfer and Capital Increase Agreement are on normal commercial terms, fair and reasonable and in the interests of the Company and its Shareholders as a whole. Mr. Shao Genhuo has abstained from voting at the relevant Board meeting for the approval of the Equity Transfer and Capital Increase Agreement and the transactions contemplated thereunder due to his relationship with Dabeinong Group. Mr. Fu Wenge, Mr. Wang Liyan and Mr. Li Xuan, being the independent non-executive Directors, are also independent directors of Dabeinong Group and have abstained from voting at the relevant Board meeting for the approval of the Equity Transfer and Capital Increase Agreement and the transactions contemplated thereunder to avoid any potential conflicts of interest. Save as disclosed above, none of the other Directors has a material interest in the Transactions or is required to abstain from voting on the relevant resolution of the Board.

INFORMATION ON THE PARTIES

The Company is an investment holding company. The Group is principally engaged in dairy farming business.

Shengmu High-tech is a wholly-owned subsidiary of the Company and is principally engaged in dairy farming and the sale of raw milk.

− 8 −

Dabeinong Group is a company whose shares are listed on the Shenzhen Stock Exchange and is principally engaged in the manufacturing and sale of animal feed products.

The Target Company is principally engaged in the manufacturing and sale of dairy products, including organic infant and other formula milk powder and cheese.

DEFINITIONS

In this announcement, unless the context requires otherwise, the following expressions have the meanings as set out below:

• Assets Valuation Report" the assets valuation report of the Target Company dated 17 August 2020 and issued by the Valuer
• Beijing Zhi Nong"Beijing Zhi Nong Investment Co., Ltd（. 北京智農 投資有限責任公司）, a company incorporated in the PRC

• Capital Increase"the increase of registered capital of the Target Company in the amount of RMB50 million to be contributed by Dabeinong Group pursuant to the Equity Transfer and Capital Increase Agreement

− 9 −

• First Instalment"RMB45,000,000, being the first instalment of the Consideration payable by Dabeinong Group to Shengmu High-tech in relation to the Equity Transfer

"Latest Management the latest management accounts of the Target

Accounts"Company available before the Handover Date

"Listing Rules"The Rules Governing the Listing of Securities on the Stock Exchange

− 10 −

− 11 −

For the purposes of this announcement, the exchange rate of HK$1.00 to RMB0.8824 has been used, where appropriate, for the purposes of illustration only and does not constitute a representation that any amount has been, could have been or may be exchanged at the above rate or at any other rates or at all.

By order of the Board

China Shengmu Organic Milk Limited

Shao Genhuo

Chairman

Hong Kong, 11 September 2020

As at the date of this announcement, the executive directors of the Company are Mr. Yao Tongshan and Mr. Zhang Jiawang; the non-executive directors of the Company are Mr. Shao Genhuo, Mr. Zhao Jiejun, Mr. Sun Qian and Mr. Zhang Ping; and the independent non-executive directors of the Company are Mr. Fu Wenge, Mr. Wang Liyan and Mr. Li Xuan.

* For identification purpose only

− 12 −