Continuing Connected Transactions - Design and Management Agreement

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旭 日 企 業 有 限 公 司

(Incorporated in Bermuda with limited liability)

(Stock Code: 393)

On 24 April 2017, Jeanswest International (a wholly-owned subsidiary of the Company) and Glory Star entered into the Design and Management Agreement in respect of the outsourcing by Jeanswest International of its product design, development and certain management functions to Glory Star for a term of no more than three years commencing from 24 April 2017 and expiring on 31 December 2019.

As Glory Star is owned as to 51% and as to 34% by Dr. Charles Yeung and by Mr. Yeung Chun Fan (both being Directors and substantial shareholders of the Company), respectively, Glory Star is a connected person of the Company. Accordingly, the transactions under the Design and Management Agreement constitute continuing connected transactions for the Company under the Listing Rules.

Since the aggregate annual cap for each of the years ending 31 December 2017, 2018 and 2019 is more than 0.1% but less than 5% of each of the applicable percentage ratios as defined in the Listing Rules, the continuing connected transactions under the Design and Management Agreement are exempt from the circular and independent shareholders' approval requirements but are subject to the reporting, announcement and annual review requirements under Chapter 14A of the Listing Rules.

The principal terms of the Design and Management Agreement are summarised as follows: Date : 24 April 2017

Parties : (i) Jeanswest International, a wholly-owned subsidiary of the Company

(ii) Glory Star

Subject matter : Pursuant to the Design and Management Agreement,

Jeanswest International agreed to outsource its product design, development and certain management functions in relation to Jeanswest International's apparel products under the brand name "Jeanswest" in the PRC. Glory Star will be responsible for design and product development of apparel products suitable for the retail market in the PRC, in particular those provinces along the seacoast in the PRC, as well as providing management services in the areas of in-depth retail market study and research, brand re-positioning and brand image enhancement, design, production and quality control, inventory management and logistic supervision, store display and renovation supervision, recruitment and training, administrative services, and those management supporting functions for retail operations. As part of the services, Glory Star has agreed, upon request from Jeanswest International, to hire as employees of Glory Star the current employees of Jeanswest International, who are performing the abovementioned functions.

Fee and Payment terms : The fee to be charged by Glory Star for such outsourcing

has been determined after arm's length negotiations between relevant parties and shall be a percentage (i.e. 3%) of the net sales of the relevant products under the Jeanswest brand in the PRC during the term of the Design and Management Agreement, provided that the total fee payable shall not exceed RMB10 million for the period commencing from 24 April 2017 and ending on 31 December 2017, RMB15 million for the year ended 31 December 2018 and RMB18 million for the year ended 31 December 2019, and such fees shall be no less favourable to the Group than similar services offered from other suppliers which are independent third parties.

Term : A term of no more than three years commencing from 24 April 2017 and ending on 31 December 2019.

The Board has considered and proposed that the following caps be set for the annual transaction amounts under the Design and Management Agreement for no more than three years commencing from 24 April 2017 to 31 December 2019:

RMB RMB RMB

Annual caps 10 million (approximately

HK$11.24 million)

15 million (approximately

HK$16.85 million)

18 million (approximately

HK$20.22 million)

The above annual caps for the three years ending 31 December 2019 are determined taking reference to the historical and estimated net sales of Jeanswest International's apparel products in the relevant PRC market.

Jeanswest International is a wholly-owned subsidiary of the Company and is now engaging in design and development of retail apparel products as well as retailing and wholesale business of apparel products under the brand name "Jeanswest" in the PRC, mainly in provinces along the seacoast of the PRC.

The Company considers that it is an appropriate timing to re-position the brand and products of Jeanswest in order to enhance its competitiveness and bargaining power in the market. Given the broad spectrum of consumer needs and preferences within the retail market in the PRC, the Company intends to test run new concepts of Jeanswest branding, design and development in the provinces along the seacoast in the PRC. The Company will then review effectiveness of the initiative and consider to expand it to other regions as appropriate.

The Directors (including the independent non-executive Directors) considered that in order to better control the cost associated with the above initiative of design, development and certain management functions of apparel products by Jeanswest International, outsourcing opportunities should be explored.

In considering whether to outsource the design, development and certain management functions of "Jeanswest" apparel products to Glory Star, the Group has considered the following factors: (a) the apparent cost savings by outsourcing these functions outside the Group, whereby the estimated relevant staff cost and overheads for design and management supporting functions to be incurred by Jeanswest International based on its 2017 budget assuming no outsourcing of such functions would amount to approximately RMB27.9 million; (b) the credentials of the management of Glory Star in handling such outsourcing arrangement taking into account that the management and owners of Glory Star have more than 40 years of experiences in the garment industry, and (c) cost from suppliers which are independent third parties offering the same or comparable services.

Having considered the service fees to be charged and the services to be provided by Glory Star, the Directors (including the independent non-executive Directors), save for those Directors who have been absent or have abstained from voting as mentioned below, are of the view the terms of the Design and Management Agreement have been negotiated on arm's length basis and the transactions contemplated thereunder are on normal commercial terms and in the ordinary and usual course of business of the Group, and that the terms of the Design and Management Agreement, the transactions contemplated thereunder and the annual caps thereof are fair and reasonable and are in the interests of the Company and its shareholders as a whole.

Dr. Charles Yeung, Mr. Yeung Chun Fan, Ms. Cheung Wai Yee, an executive Director and the spouse of Mr. Yeung Chun Fan, who have a material interest in the Design and Management Agreement, have abstained from attending the Board meeting for approving the Design and Management Agreement. Ms. Yeung Yin Chi, Jennifer, an executive Director, a niece of Dr. Charles Yeung and Mr. Yeung Chun Fan, has abstained from voting on the relevant resolutions at the Board meeting for approving the Design and Management Agreement. Dr. Chung Shui Ming, Timpson has been absent from the Board meeting due to his other commitments outside Hong Kong.

The Company has established various internal control measures in order to ensure that the transactions under the Design and Management Agreement are in accordance with the pricing terms thereof and are on normal commercial terms or on terms no less favorable than those terms offered to/by the Group from/to independent third parties for similar products and services in its ordinary and usual course of business. Such internal control measures mainly include the following:

1. The Directors overseeing the transactions under the Design and Management Agreement will regularly review the terms of such transactions to ensure that the fees charged for such transactions will reflect the pricing terms of the transactions under the Design and Management Agreement.

2. The finance department of the Company will also review annually the pricing terms of the transactions under the Design and Management Agreement to ensure that the transactions are charged on the same basis and the same rates for similar services rendered from/to independent third parties.