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IMPORTANT

If you are in any doubt about any of the contents of this prospectus, you should obtain independent professional advice and consult your stockbroker, bank manager, solicitor, professional accountant or other professional advisor.

A8 Digital Music Holdings Limited A8 (Incorporated in the Cayman Islands with limited liability)

LISTING ON THE MAIN BOARD OF THE STOCK EXCHANGE OF HONG KONG LIMITED BY WAY OF PLACING AND PUBLIC OFFER Number of Offer Shares

:

Number of Placing Shares

:

Number of Public Offer Shares Offer Price

: :

Nominal value Stock code

: :

91,000,000 Shares comprising 80,000,000 New Shares and 11,000,000 Sale Shares (subject to the Over-allotment Option) 81,900,000 Shares comprising 70,900,000 New Shares and 11,000,000 Sale Shares (subject to re-allocation and the Over-allotment Option) 9,100,000 New Shares (subject to re-allocation) Not more than HK$2.38 per Offer Share and expected to be not less than HK$1.66 per Offer Share (payable in full on application in Hong Kong dollars, subject to refund, plus brokerage of 1%, SFC transaction levy of 0.004% and Stock Exchange trading fee of 0.005%) HK$0.01 each 00800 Sponsor

SBI E2-CAPITAL (HK) LIMITED Sole Bookrunner and Lead Manager

SBI E2-CAPITAL SECURITIES LIMITED Capitalized terms used in this cover page shall have the same meanings as those defined in the section headed “Definitions” in this prospectus unless the context otherwise requires. The Stock Exchange and HKSCC take no responsibility for the contents of this prospectus, make no representation as to its accuracy or completeness and expressly disclaim any liability whatsoever for any loss howsoever arising from or in reliance upon the whole or any part of the contents of this prospectus. A copy of this prospectus, having attached thereto the documents specified in the paragraph headed “Documents delivered to the Registrar of Companies in Hong Kong” in Appendix VI to this prospectus, has been registered by the Registrar of Companies in Hong Kong as required by Section 342C of the Companies Ordinance. The SFC and the Registrar of Companies in Hong Kong take no responsibility for the contents of this prospectus or any of the other documents referred to above. The Offer Price is expected to be fixed by an agreement between the Company (acting for itself and on behalf of the Selling Shareholder) and the Lead Manager (on behalf of the Underwriters) on or before the Price Determination Date, which is expected to be on or before Wednesday, 4 June 2008 or such other date or time as may be agreed between the Company (acting for itself and on behalf of the Selling Shareholder) and the Lead Manager (on behalf of the Underwriters) but in any event, not later than 12:00 noon on Thursday, 5 June 2008. The Offer Price will be not more than HK$2.38 per Offer Share and is expected to be not less than HK$1.66 per Offer Share. Applicants for the Offer Shares are required to pay, on application, the maximum Offer Price of HK$2.38 for each Offer Share together with brokerage of 1%, SFC transaction levy of 0.004% and Stock Exchange trading fee of 0.005%, subject to refund if the Offer Price should be lower than HK$2.38 (the maximum Offer Price). The Lead Manager, with the consent of the Company (acting for itself and on behalf of the Selling Shareholder), may reduce the indicative Offer Price range as stated in this prospectus (which is HK$1.66 to HK$2.38) at any time prior to the morning of the last day for lodging applications under the Public Offer. In such event, the Company will, as soon as practicable following the decision to make such reduction, and in any event not later than the morning of the last day for lodging applications under the Public Offer, cause to be published in South China Morning Post (in English) and Hong Kong Economic Times (in Chinese) an announcement of such change. If applications for the Public Offer Shares have been submitted, then even if the indicative Offer Price range is so reduced, such applications cannot be subsequently withdrawn. If, for whatsoever reason, the Company (acting for itself and on behalf of the Selling Shareholder) and the Lead Manager (on behalf of the Underwriters) are unable to reach an agreement on the Offer Price on or before the Price Determination Date or such other date or time as may be agreed between the Company (acting for itself and on behalf of the Selling Shareholder) and the Lead Manager (on behalf of the Underwriters) but in any event, not later than 12:00 noon on Thursday, 5 June 2008, the Share Offer will not become unconditional and will lapse immediately. In such event, the Company will issue an announcement to be published in South China Morning Post (in English) and Hong Kong Economic Times (in Chinese). Prospective investors of the Share Offer should note that the Share Offer will not proceed if the Lead Manager terminates the obligations of the Underwriters under the Underwriting Agreement if any of the events set out in the paragraph headed “Grounds for termination” in the section headed “Underwriting” in this prospectus occurs prior to 8:00 a.m. on the Listing Date. It is important that you refer to the section headed “Underwriting” in this prospectus for further details. Prior to making an investment decision, prospective investors should carefully consider all of the information set out in this prospectus, including, without limitation, the risk factors set out in the section headed “Risk factors” in this prospectus.

28 May 2008


EXPECTED TIMETABLE If there is any change in the following expected timetable of the Share Offer, the Company will issue an announcement in Hong Kong to be published in South China Morning Post (in English) and in Hong Kong Economic Times (in Chinese). 2008 (Note 6) Application lists of the Public Offer open (Note 1) . . . . . . . 11:45 a.m. on Monday, 2 June Latest time for lodging WHITE and YELLOW Application Forms . . . . . . . . . . . . . . . . . . . . . 12:00 noon on Monday, 2 June Latest time to complete electronic applications under White Form eIPO service through the designated website www.eipo.com.hk (Note 2) . . . . . . . . . . . . . . . . . .11.30 a.m. on Monday, 2 June Latest time to complete payment of White Form eIPO applications by effecting internet banking transfer(s) or PPS payment transfer(s) . . . . . . . . . . . . . . . . . . . . . . . .12:00 noon on Monday, 2 June Latest time to give electronic application instructions to HKSCC (Note 3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .12:00 noon on Monday, 2 June Application lists of the Public Offer close . . . . . . . . . . . . . .12:00 noon on Monday, 2 June Price Determination Date (Note 4) . . . . . . . . . . . . . . . . . . .on or before Wednesday, 4 June Announcement of the Offer Price, the level of indication of interest in the Placing, the results of the Public Offer and the basis of allotment of the Public Offer Shares to be published in South China Morning Post (in English) and Hong Kong Economic Times (in Chinese) on or before . . . . . . . . . . . . .Tuesday, 10 June Results of allocations in the Public Offer (with successful applicants’ identification document numbers, where appropriate) to be available through a variety of channels (see paragraph headed “Publication of results” in the section headed “How to Apply for the Public Offer Shares”) from . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Tuesday, 10 June A full announcement of the Public Offer containing the announcement and results of allocations in the above two paragraphs will be published on the website of the Stock Exchange at www.hkex.com.hk from . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Tuesday, 10 June Despatch of share certificates to wholly or partially successful applications on or before (Note 5) . . . . . . . . . . . . . . . . . . . . .Tuesday, 10 June Despatch of refund cheques in respect of wholly or partially unsuccessful applications under the Public Offer on or before (Note 5) . . . . . . . . . . . . . . . . . . . . . . . . . .Tuesday, 10 June Dealings in the Shares on the Main Board of the Stock Exchange expected to commence on . . . . . . . . . . . . . . . . . . .Thursday, 12 June –i–


EXPECTED TIMETABLE Notes: 1

If there is a “black” rainstorm warning or a tropical cyclone warning signal number 8 or above in force in Hong Kong at any time between 9:00 a.m. and 12:00 noon on Monday, 2 June 2008 , the application lists will not open and close on that day. Please refer to the paragraph headed “Effect of bad weather on the opening of the application lists” in the section headed “How to apply for the Public Offer Shares” in this prospectus.

2.

You will not be permitted to submit your application through the designated website at www.eipo.com.hk after 11:30 a.m. on the last day for submitting applications. If you have already submitted your application and obtained an application reference number from the designated website prior to 11:30 a.m. on the last day for submitting applications, you will be permitted to continue the application process (by completing payment of application monies) until 12:00 noon on the last day for submitting applications, when the application lists close.

3.

Applicants who apply by giving electronic application instructions to HKSCC should refer to the paragraph headed “How to apply by giving electronic application instructions to HKSCC” under the section headed “How to apply for the Public Offer Shares” in this prospectus.

4.

If, for whatsoever reason, the Company (acting for itself and on behalf of the Selling Shareholder) and the Lead Manager (acting on behalf of the Underwriters) are unable to reach an agreement on the Offer Price on or before Wednesday, 4 June 2008 or such other date or time as may be agreed between the Company (acting for itself and on behalf of the Selling Shareholder) and the Lead Manager (acting on behalf of the Underwriters) but in any event, not later than 12:00 noon on Thursday, 5 June 2008, the Share Offer will not become unconditional and will lapse immediately. In such event, the Company will issue an announcement to be published in South China Morning Post (in English) and Hong Kong Economic Times (in Chinese). Notwithstanding that the Offer Price may be fixed at below the maximum offer price of HK$2.38 per Offer Share, applicants who apply for Public Offer Shares must pay on application the maximum Offer Price of HK$2.38 per Offer Share plus brokerage of 1%, SFC transaction levy of 0.004% and Stock Exchange trading fee of 0.005% but the Company will refund the surplus application monies as provided in the section headed “How to apply for the Public Offer Shares” in this prospectus.

5.

Applicants who have applied on WHITE Application Forms for 1,000,000 Public Offer Shares or more and have indicated in their WHITE Application Forms that they wish to collect their share certificates and/or refund cheques (if any) in person may collect them in person from the Company’s Hong Kong branch share registrar and transfer office, Computershare Hong Kong Investor Services Limited, at Shops 1712-1716, 17th Floor, Hopewell Centre,183 Queen’s Road East, Wanchai, Hong Kong, between 9:00 a.m. and 1:00 p.m. on the date notified by the Company in South China Morning Post (in English) and Hong Kong Economic Times (in Chinese), which is expected to be on Tuesday, 10 June 2008. For details, please refer to the paragraph headed “Collection/posting of share certificates/refund cheques and deposit of share certificates into CCASS” in the section headed “How to apply for the Public Offer Shares” in this prospectus. Applicants who have applied on YELLOW Application Forms for 1,000,000 Public Offer Shares or more may elect to collect their refund cheques (if any) in person but may not elect to collect their share certificates, which will be deposited into CCASS for credit to their designated CCASS participants’ stock accounts or CCASS Investor Participant stock accounts (as appropriate). The procedures for the collection of refund cheques for YELLOW Application Form applicants are the same as those for WHITE Application Form applicants. Uncollected share certificates and refund cheques will be despatched by ordinary post at the applicants’ own risk to the addresses specified on the relevant Application Forms. For further information, please refer to the paragraph headed “Collection/posting of share certificates/refund cheques and deposit of share certificates into CCASS” under the section headed “How to apply for the Public Offer Shares” in this prospectus.

6.

In this prospectus, unless otherwise stated, all times and dates refer to Hong Kong local times and dates.

For details of the structure of the Share Offer, including the conditions thereto, please see the section headed “Structure and conditions of the Share Offer” in this prospectus. Share certificates will only become valid certificates of title at 8:00 a.m. on the Listing Date provided that (i) the Share Offer has become unconditional in all respects; and (ii) the Underwriting Agreement has not been terminated in accordance with its terms. No dealings should take place in the Offer Shares prior to the commencement of dealings in the Shares on the Stock Exchange. Investors who trade the Offer Shares on the basis of publicly available allocation details prior to the receipt of share certificates or prior to the share certificates becoming valid certificates of title do so entirely at their own risk. – ii –


CONTENTS

You should rely only on the information contained in this prospectus and the related Application Forms to make your investment decision. The Company has not authorized anyone to provide you with information that is different from what is contained in this prospectus and the related Application Forms. Any information or representation not contained or made in this prospectus and the related Application Forms must not be relied on by you as having been authorized by the Company, the Sponsor, the Sole Bookrunner and Lead Manager, the Underwriters, any of their respective directors or any other person or party involved in the Share Offer.

Page Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1

Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

16

Glossary of technical terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

26

Risk factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

28

Waivers from strict compliance with the Listing Rules . . . . . . . . . . . . . . . . . . . .

47

Information about this prospectus and the Share Offer . . . . . . . . . . . . . . . . . . . .

49

Directors and parties involved in the Share Offer . . . . . . . . . . . . . . . . . . . . . . . . .

54

Corporate information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

59

Industry overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

61

History and development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

72

Business Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

110

Competitive strengths . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

111

Strategies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

114

Business model . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

116

Music content collection platform . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

117

Distribution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

121

Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

127

Technology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

130

Research and development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

131

Suppliers. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

132

Customers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

135

Credit policy. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

139

– iii –


CONTENTS Page Quality control . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

140

Awards and achievements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

141

Competition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

142

Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

145

Property interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

145

Intellectual property rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

146

Employees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

147

Legal proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

147

Health, labor and safety issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

148

Regulatory overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

149

Connected transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

162

Directors, senior management and staff . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

166

Relationship with Controlling Shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

173

Substantial Shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

181

Share capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

183

Financial information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

186

Future plans and use of proceeds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

223

Underwriting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

227

Structure and conditions of the Share Offer . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

234

How to apply for the Public Offer Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

243

Appendix I

Accountants’ report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

I-1

Appendix II

Unaudited pro forma financial information . . . . . . . . . . . . .

II-1

Appendix III

Property valuation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

III-1

Appendix IV

Summary of memorandum and articles of association and Cayman Islands company law . . . . . . . . . . . . . . . . . . .

IV-1

Appendix V

Statutory and general information . . . . . . . . . . . . . . . . . . . . .

V-1

Appendix VI

Documents delivered to the Registrar of Companies and documents available for inspection . . . . . . . . . . . . . . .

VI-1

– iv –


SUMMARY

This summary aims to give you an overview of the information contained in this prospectus. As this is a summary, it does not contain all the information that may be important to you. You should read the whole document before you decide to invest in the Offer Shares. There are risks associated with any investment. Some of the particular risks in investing in the Offer Shares are set out in the section headed “Risk factors” in this prospectus. You should read this section carefully before you decide to invest in the Offer Shares.

OVERVIEW The Group is an integrated digital music company. It sources its music content from its own interactive Internet UGC platform, www.a8.com, as well as from other international and domestic record labels. The Group promotes such music content through the wireless network of mobile operators and on the Internet. It sells the music content in form of ringtones, RBTs and IVR Music to mobile phone subscribers in the PRC. The music content distributed by the Group can be put into two broad categories namely, the original independently produced music content and other music content. The original independently produced music content is uploaded by artists to the Group’s own interactive Internet UGC platform, www.a8.com, while other music content is licensed from international and domestic record labels. The Group distributes its services through the wireless network of mobile operators such as China Mobile Group and China Unicom Group. In addition, the Group sells non-music content which include games, wall-papers, entertainment news and jokes. The Group’s major customers are China Mobile Group and China Unicom Group. The Group commenced its business cooperation with China Mobile Group since the Group’s establishment in 2000 and with China Unicom Group in 2001. For the year ended 31 December 2007, the Group derived approximately 86.3% of its revenue from its collaboration with China Mobile Group and 13.4% of its revenue from its collaboration with China Unicom Group. If either China Mobile Group and/or China Unicom Group were to terminate its cooperation with the Group, it would be impossible for the Group to find another appropriate mobile operator of a similar scale as a replacement. Any major alteration to the Group’s current cooperation mode with China Mobile Group and China Unicom Group, or even loss of its business relationship with either of these major mobile operators may materially adversely affect the operations and financial performance of the Group. –

Terms of agreements

Renewal of agreements entered into between the Group and the major mobile operators is not guaranteed and new agreements may not be agreed upon in the future. Failure to have such agreements renewed or for new agreements to be entered into may result in an adverse effect on the business and operations of the Group. –1–


SUMMARY –

Operations

Failure to obtain or delay in obtaining approvals with respect to each service offered to the mobile phone subscribers and the pricing for such service from the major mobile operators could place the Group at a disadvantageous position in the market and adversely affect the Group’s revenue and profitability. Besides, the Group relies on China Mobile Group and China Unicom Group to maintain accurate records of the fees paid for the Group’s services by mobile phone subscribers. The business and results of operations of the Group could be adversely affected if any mobile operators miscalculate the revenue generated by the services provided by the Group. –

Compliance with policies

Any future enforcement against the Group by the mobile operators of their customer service policies or guidelines in the event that the Group’s operation has deviated from such policies or guidelines could result in the incurrence of additional charges by the Group or even prohibition from offering certain existing services or new services by the Group. This could in turn materially and adversely impact the business operations of the Group and profitability of the Group. –

Provision of own wireless value-added services as service providers

Given the dominant market positions of China Mobile Group and China Unicom Group, the business of the Group may be adversely affected if either China Mobile Group or China Unicom Group or both were to decide to provide their own wireless value-added services as a service provider, or if they were to provide their own mobile music services to their mobile phone subscribers as a service provider, this will lead to competition with the Group. During the Track Record Period, the Group experienced occasional differences in revenue calculation with China Mobile Group and China Unicom Group. When major differences in such revenue calculation are encountered, the Group would request checking of the data record of the operator against the internal records kept by the Group. The Directors consider that such requests for checking of internal records for revenue calculation have not been frequent and do not relate to a substantial amount of the Group’s transactions with either China Mobile Group or China Unicom Group. The Group started-up as a provider of general wireless value-added services in 2000. It produced and delivered mobile entertainment services including music, wall-papers, games, jokes and entertainment news through SMS, MMS and WAP to the mobile phone subscribers in the PRC. Mr. Liu Xiaosong, an executive Director and the chairman and chief executive officer of the Company, foresaw the growth opportunity in the PRC digital music industry, and noticed the decreasing revenue of the traditional record labels in the PRC due to piracy. The management of the Group then gradually shifted the Group’s primary focus to the provision of services which were mobile-music-related services. In line with such business strategy, the Group has committed itself to become the leading “E-label” in the PRC to promote digital music in the PRC. –2–


SUMMARY The Directors consider that the Group’s reliance on the mobile operators can generally be categorized into three different aspects, namely (1) customer data; (2) settlement platform; and (3) service transmission network. In order to reduce reliance on the mobile operators, the Group has adopted the following strategies: As regards the provision of ringtone services, the Group will allow users to acquire the services through its UGC platform to their personal computer and then transmit them to their mobile phones. In addition, the Group will further strengthen its collaboration with mobile manufacturers to implement its own software like A8Box, which could gather the information for analysis purpose from the mobile phone subscribers, to deliver the Group’s services directly to the mobile phone subscribers and to settle the services fees through third parties. The Directors believe that, with the introduction of more advanced technology in the settlement and delivery channels and the launch of 3G technology, the Group can reduce its reliance on China Mobile Group and China Unicom Group in the following aspects: 1.

The Directors anticipate that the PRC Government is planning to issue licences to mobile operators other than China Mobile Group and China Unicom Group and the Group will enter into business cooperation with such new mobile operators, thereby reducing the Group’s reliance on the two current mobile operators. The Group is planning to expand its current business cooperation with other mobile operators such as China Telecom Group and China Netcom Group;

2.

The Group is trying to expand its settlement channels to prepaid cards which is a channel currently used by other service providers. The Group can launch its own prepaid card and mobile phone subscribers could purchase the prepaid card at designated locations. Subscribers could then subscribe the relevant services by entering the relevant password or verification numbers to purchase songs from A8Box or WAP; and

3.

The Group is exploring the technical possibility of expanding its delivery channels, including but not limited to free WAP and handset preset, to deliver its services to the mobile phone subscribers. By utilizing the free WAP product/portal, the mobile phone subscribers can access and download services from the Group’s WAP portal. The mobile phone subscribers do not need to access the portal of the mobile operator for selection of the Group’s music services. The mobile phone subscribers could directly select their favorite music service from the Group’s WAP portal which also allows the Group to gather and analyze the customer preference. Moreover, the Group may directly charge for the services rendered from mobile phone through prepaid card or electronic currency, so that the Group could further reduce its reliance on the mobile operators in terms of the settlement platform.

–3–


SUMMARY The operations of the Group’s business requires certain specific licences and permits. Huadong Feitian, one of the structured subsidiaries, is required to obtain approval for its Internet publishing business in accordance with the requirements under the Provisional ), Regulations for the Administration of Internet Publishing ( approval for its Internet electronic bulletin business in accordance with the requirements under the Regulations for the Administration of Internet Electronic Notice Services ) and approval for its streaming and downloading services ( in accordance with the requirement under the Internet Visual/Audio regulations. Huadong Feitian has applied and obtained approval from the Administration of Press and Publication of Guangdong Province in December 2007 and has applied for the licence from the General Administration of Press and Publication of the PRC for the approval of its Internet publishing business. Such approval has not yet been granted by the relevant authority and the Group ceased its electronic bulletin services in April 2008 and will not engage any third party agent to provide such services. The Group also ceased all streaming and downloading functions of its UGC platform in April 2008 and in order to comply with the relevant laws and regulations, links are provided on the Group’s UGC platform to third party websites, which possess the necessary licences and/or approvals for streaming and downloading, and such streaming and downloading is provided free of charge so that users of the Group’s UGC platform are able to access the Group’s original independently produced music content from the third party websites through streaming and downloading. The SARFT and the MII jointly held a press conference in relation to the Provisions on Administration of Internet Visual/Audio Programming Services ( ) on 3 February 2008 responding that for Internet visual/audio programs provider who has operated legally prior to the promulgation of such provisions and has no record of illegal activities is able to re-register and continue to operate such services. As at the Latest Practicable Date, supplemental rules in relation to the specific procedures of such re-registration had not been issued by either the SARFT or the MII. It is the Group’s intention to re-register once the supplementing rules are available. As advised by the Company’s legal advisers as to PRC laws, in the event that Huadong Feitian is found to have contravened the Provisional Regulations for the Administration of , the relevant Internet publishing business Internet Publishing may be suspended, the major equipment in connection with such business be seized and Huadong Feitian will be subject to a maximum penalty of 10 times of the revenue attributable to such business. No penalty is expected because, as confirmed by the Directors, no revenue has been generated from such Internet publishing business. As also advised by the Company’s legal advisers as to PRC laws, in the event that the operation of Huadong Feitian is found having exceeded the scope as permitted under the Regulations for the Administration of Internet Electronic Notice Services , all revenue attributable to such business is liable to be confiscated and Huadong Feitian is also liable to a maximum penalty which is equal to five times of such revenue and in case of a serious contravention, the operation of the Internet website will be ordered to be closed down. No penalty is expected and impact to the Group would be immaterial because, as confirmed by the Directors, no revenue has been generated from such business.

–4–


SUMMARY As advised by the Company’s legal advisers as to PRC laws, in the event that Huadong Feitian is found to have contravened the Internet Visual/Audio regulations, the Group might be ordered by authorities to cease such operation and to pay a fine not more than RMB30,000, and the equipment in connection with such operation will be seized and the Group will be subject to a maximum penalty of two times of the total investment to such business in case of severe contravention. Based on the internal financial record on total investment to such business of the Group, the Directors estimate such penalty, if imposed on the Group, will be approximately RMB410,000. The Controlling Shareholders have provided an indemnity to the Group against any penalty, loss, damage or cost imposed on or suffered by any member of the Group arising from or as a result of any of the above non-compliance by any member of the Group with the relevant laws and regulations. COMPETITIVE STRENGTHS The Directors believe the Group possesses the following competitive strengths: •

The Group has one of the largest interactive Internet UGC platforms for collection of original independently produced music content in the PRC

The Group possesses a strong multi-channel promotion capability for its content, in particular, the UGC

The Group is well set to capture the growth in mobile music industry in the PRC with its extensive marketing and sales network and insight into the PRC music market

The Group possesses an integrated marketing and sales model

The Group has an experienced management team

STRATEGIES The Group intends to become one of the largest “E-Labels” utilizing wireless sales channels in the PRC for original independently produced music content. The Directors believe that by achieving such goal, the Group will become one of the leading digital music companies in the PRC. To achieve this goal, the Group intends to leverage on its competitive strengths and undertake the following strategies: •

continue to strengthen its content by improving the interactive UGC collection platform www.a8.com

increase the brand awareness of the A8.com brand through improving the Internet UGC collection platform

strengthen its distribution capacity by further developing A8Box as a new mobile multimedia platform

integrate its business with the introduction of 3G mobile technology –5–


SUMMARY SUMMARY FINANCIAL INFORMATION Combined income statements The following table is a summary of the combined results of the Group for each of the three years ended 31 December 2007. The summary below should be read in conjunction with the Accountants’ Report set out in Appendix I to this prospectus. Year ended 31 December 2005 2006 2007 RMB’000 RMB’000 RMB’000

Revenue Business tax Net revenue Cost of services provided Gross profit Other income and gains, net Gain arising from disposal of an equity interest in a jointly-controlled entity Selling and marketing expenses Administrative expenses Other expenses Finance costs Share of profits and losses of jointlycontrolled entities

233,233 (6,361)

268,438 (8,348)

285,964 (7,860)

226,872 (101,912)

260,090 (127,815)

278,104 (149,375)

124,960

132,275

128,729

926

9,699

20,180

– (67,821) (22,383) (2,757) (4,965)

5,694 (67,073) (21,715) (70) (4,913)

– (69,285) (14,123) (138) (310) (59)

554

(347)

PROFIT BEFORE TAX Tax

41,971 (974)

44,602 (5,314)

60,485 (5,248)

PROFIT FOR THE YEAR

40,997

39,288

55,237

Attributable to: Equity holders of the Company Minority interests

41,842 (845)

39,863 (575)

55,274 (37)

40,997

39,288

55,237

–6–


SUMMARY USE OF PROCEEDS The Directors believe that the Share Offer and the Listing will enhance the corporate profile of the Group and intend to apply the net proceeds from the New Issue to finance the Group’s capital expenditure and business expansion. The Directors believe that the Share Offer will strengthen the Group’s equity base and improve its financial position. Assuming that the Over-allotment Option is not exercised, the net proceeds from the New Issue, after deduction of underwriting commission and estimated expenses payable by the Company, and assuming an Offer Price of HK$2.02 per Offer Share (being the mid-point of the indicative Offer Price range between HK$1.66 per Offer Share and HK$2.38 per Offer Share), are estimated to be approximately HK$132.6 million (equivalent to approximately RMB122.0 million). The Directors currently plan to apply such net proceeds as follows: –

approximately HK$48.5 million (equivalent to approximately RMB44.6 million) (approximately 36.6% of the estimated net proceeds of the New Issue) for potential acquisitions that offer synergy with the current business operation of the Group, through cost saving, technology enhancement or customer base expansion. It is expected the acquisition targets will be music related contents providers and/or mobile application related companies. As at the Latest Practicable Date, the Group had not identified any target;

approximately HK$27.6 million (equivalent to approximately RMB25.4 million) (approximately 20.8% of the estimated net proceeds of the New Issue) for further developing A8Box;

approximately HK$20.8 million (equivalent to approximately RMB19.2 million) (approximately 15.7% of the estimated net proceeds of the New Issue) for integrating its business with the introduction of 3G mobile technology;

approximately HK$12.6 million (equivalent to approximately RMB11.6 million) (approximately 9.5% of the estimated net proceeds of the New Issue) for upgrading the interactive UGC platform www.a8.com;

approximately HK$11.1 million (equivalent to approximately RMB10.2 million) (approximately 8.4% of the estimated net proceeds of the New Issue) for promoting the UGC platform;

approximately HK$11.1 million (equivalent to approximately RMB10.2 million) (approximately 8.4% of the estimated net proceeds of the New Issue) for promoting the original independently produced music content; and

the remaining balance of approximately HK$0.9 million (equivalent approximately RMB0.8 million) as additional working capital for the Group. –7–

to


SUMMARY In the event that the Offer Price is fixed at HK$2.38 per Offer Share, being the highest point of the indicative Offer Price range, the net proceeds will be increased by approximately HK$27.8 million of which approximately HK$15.0 million will be used as additional general working capital and approximately HK$12.8 million will be reserved for potential acquisitions that offer synergy with the current business operation of the Group. In the event that the Offer Price is fixed at HK$1.66 per Offer Share, being the lowest end of the indicative Offer Price range, the net proceeds will be reduced by approximately HK$27.8 million. In such circumstances, the Directors intend to reduce the intended use of proceeds for the above stated purposes on a pro-rata basis. In the event that the Over-allotment Option is exercised in full, and assuming an Offer Price of HK$2.38 per Offer Share (being the highest point of the indicative Offer Price range), the Group will receive additional net proceeds of approximately HK$31.3 million which will be allocated as to approximately HK$28.3 million to fund potential acquisitions of mobile music related businesses. The remaining balance of approximately HK$3.0 million will be used for additional general working capital. In the event that the Over-allotment Option is exercised in full, and assuming an Offer Price of HK$2.02 per Offer Share (being the mid-point of the indicative Offer Price range between HK$1.66 per Offer Share and HK$2.38 per Offer Share), the Group will receive additional net proceeds of approximately HK$26.6 million which will be allocated as to approximately HK$24.0 million to fund potential acquisitions of mobile music related businesses. The remaining balance of approximately HK$2.6 million will be used for additional general working capital. In the event that the Over-allotment Option is exercised in full, and assuming an Offer Price of HK$1.66 per Offer Share (being the lowest point of the indicative Offer Price range), the Group will receive additional net proceeds of approximately HK$21.9 million which will be allocated as to approximately HK$19.9 million to fund potential acquisitions of mobile music related businesses. The remaining balance of approximately HK$2.0 million will be used for additional general working capital.

–8–


SUMMARY OFFERING STATISTICS Based on an Offer Price of HK$1.66 Market capitalization of the Shares(1) ............. Price-to-earnings multiple(2) ........................... Unaudited pro forma net tangible assets value per Share(3) ........................................

Based on an Offer Price of HK$2.38

HK$731,402,640 HK$1,048,199,600 12.2 17.4 HK$0.68

HK$0.81

Notes: (1)

The calculation of market capitalization is based on 440,000,000 Shares plus the Remuneration Shares expected to be in issue immediately upon completion of the Share Offer and the Capitalization Issue.

(2)

The calculation of the price-to-earnings multiple is based on the net profit attributable to the Company’s equity holders of approximately RMB55,274,000 for the year ended 31 December 2007 on a pro forma fully diluted basis at the respective Offer Price of HK$1.66 and HK$2.38 assuming that the Company has been listed since 1 January 2007 and a total of 440,000,000 Shares plus Remuneration Shares have been in issue during the entire year.

(3)

The unaudited pro forma net tangible assets value per Share has been arrived at after adjustments referred to under the paragraph headed “Unaudited pro forma net tangible assets” of the section headed “Financial information” in this prospectus and on the basis of 440,000,000 Shares plus Remuneration Shares expected to be in issue immediately following completion of the Share Offer and the Capitalization Issue.

DIVIDEND POLICY During the Track Record Period, the Group had not declared any dividend. On 26 May 2008, the Group declared a special dividend of HK$108 million to its then shareholders which represents approximately 55.1% of the net asset value of the Group as at 31 December 2007. Given the Group has approximately RMB131.3 million cash and cash equivalents as at 31 December 2007 and expected a positive cash position generated from operating activities by the time the dividend to be paid out, such dividends was paid out of the Group’s internal resources, which was settled on 26 May 2008. Potential investors should note that there is no assurance that dividends of similar amounts or at similar rates will be paid in the future. In this regard, please also refer to the paragraph headed “The historical dividends of the Group should not be treated as an indicator of future dividend policy” in the section headed “Risk factors” in this prospectus. Currently the Group has no intention of paying any dividends after the completion of the Share Offer. However, the Directors intend to pay dividends in the future, and the amount and rates of dividends will be subject to, among other things, the Group’s results of operations, cash flow, financial conditions, operating and capital requirements and other factors which the Directors consider important.

–9–


SUMMARY STRUCTURE CONTRACTS Current PRC laws and regulations limit foreign investment in businesses providing telecommunications value-added services in the PRC. The businesses operated by the Group involve the provision of telecommunications value-added services in the PRC which are regulated by the PRC laws and regulations as to foreign investment, as a result of which the Group has adopted the Contractual Arrangements with, among others, Huadong Feitian and Kuaitonglian to operate that portion of the Group’s businesses. As a foreign-invested enterprise, Cash River does not have licences to provide telecommunications value-added services to mobile phone subscribers in the PRC, including the provision of ringtones, RBTs and IVR Music. Accordingly, the Group conducts parts of its business which involve the provision of telecommunications value-added services through Huadong Feitian and Kuaitonglian pursuant to a number of contracts (collectively, the “Structure Contracts”) entered into between the Group and these companies. The Structure Contracts are designed to provide the Company with effective control over and (to the extent permitted by the PRC laws) the right to acquire the equity interests in and/or assets of Huadong Feitian and Kuaitonglian. Pursuant to such Structure Contracts, the Group is also able to recognize and receive the economic benefit of the business and operation of Huadong Feitian and Kuaitonglian. The Structure Contracts generally provide the Company (through Cash River) with the following rights and obligations: –

to receive the immediately available cash of Huadong Feitian and Kuaitonglian after deducting the aggregate amount of (i) the working capital required to maintain their daily operations and satisfy their needs for their business; (ii) the cash amount required for capital expenditure; and (iii) any other short-term anticipated expenditure, all as determined by the Supervisory Management Board (as defined in the paragraph headed “Structure contracts” in the section headed “History and development” to this prospectus) from time to time (“Surplus Cash”);

to acquire all the equity interests in and the assets of Huadong Feitian and Kuaitonglian, at a nominal price or such higher amount as may be required by the laws, regulations, rules and policies of the PRC;

to use certain intellectual property rights of Huadong Feitian, including trademarks and domain names, at a consideration of RMB1.00 or the lowest amount permitted by the PRC laws;

to have a continuing security interest of first priority and subject to no other encumbrances in the entire equity interests in Huadong Feitian and Kuaitonglian; and

to sell the software used to assist Huadong Feitian and Kuaitonglian to develop interactive entertainment, social networking and other mobile value-added services for their provision of business at an agreed price. – 10 –


SUMMARY These arrangements, taken as a whole, permit the financial results and conditions of Huadong Feitian and Kuaitonglian to be consolidated under the Company’s financial statements as if they were wholly owned subsidiaries of the Company. In addition, because the Structure Contracts effectively transfer the net income and operating cash flows and thereby the economic risks and benefits of Huadong Feitian and Kuaitonglian to the Group and the Group has the power to govern the financial and operating policies of these two companies, in substance, all the voting rights at the general meetings of Huadong Feitian and Kuaitonglian are vested with the Company. The Company’s legal advisers as to PRC laws are of the opinion that: •

the prevailing laws, regulations and regulatory documents in the PRC do not prohibit the Contractual Arrangements regarding the structure of the Group;

each of the Structured Contracts is legal, valid and binding on the contracting parties under the PRC laws, rules and regulations;

the execution, delivery, effectiveness, enforceability and performance of each of the Structure Contracts do not violate any PRC laws, rules and regulations;

neither the Structure Contracts nor the corporate and shareholding structure of the Group described in the paragraph headed “Structure contracts” in the section headed “History and development” in this prospectus contravenes any PRC laws, rules and regulations; and

no filings, registrations, consents, approvals, permits, authorizations, certificates and/or licences of any PRC government authorities, except for registration of the Exclusive Right and Pledge Agreement (as defined in the paragraph headed “Structure contracts” in the section headed “History and development” in this ) prospectus) under the new PRC Property Rights Law ( which has been completed as described on page 109 of this prospectus, are currently required in connection with the execution, delivery, effectiveness and enforceability of the Structure Contracts.

The Company’s legal advisers as to PRC laws are of the view that the operation of Huadong Feitian, Kuaitonglian and their respective subsidiaries under the Structure Contracts is in compliance with their respective articles of association and the Group’s operation under the Contractual Arrangements is in compliance with the current laws and regulations of the PRC, including the Notice regarding Strengthening Administration of Foreign Investment in Operating Telecommunications Value-added Businesses ( ) (“MII Notice”) which prohibits holders of telecommunications value-added businesses operating licences from leasing, transferring or selling their licences to any foreign investors in any form, or providing any resources, sites or facilities to any foreign investors for illegal operation of telecommunications businesses in the PRC. Please refer to the paragraph headed “Regulations in respect of foreign investments in telecommunications value-added industry” in the section headed “Regulatory overview” in this prospectus for details. – 11 –


SUMMARY However, the relevant PRC regulatory authorities may take a different view and determine that such Structure Contracts are in violation of applicable PRC laws, rules or regulations. If these Structure Contracts are found to be in violation of such PRC laws, rules or regulations, the relevant PRC regulatory authorities will have discretion to take action against Huadong Feitian or Kuaitonglian, or their respective shareholders or Cash River for such violation, including unwinding the Contractual Arrangements or prohibiting the Group from operating its business in the PRC. If Huadong Feitian and Kuaitonglian or either of them fails to perform or violates any or all of the Contractual Arrangements, the Group would have to rely on legal remedies under the PRC legal system to enforce these arrangements, which may be less effective than in other jurisdictions. As advised by the Company’s legal advisers as to PRC laws, the Group is able to take legal action against Huadong Feitian and/or Kuaitonglian for failure to perform their obligations in relation to the Structure Contracts and the judgment shall be enforceable. Moreover, pursuant to the Exclusive Right and Pledge Agreement (as defined in the paragraph headed “Structure contracts” in the section headed “History and development” in this prospectus), the Group is (i) granted by the respective shareholders of Huadong Feitian and Kuaitonglian an irrevocable and exclusive right to purchase, or to designate any person to purchase on its behalf, all or part of the equity interests in Huadong Feitian and Kuaitonglian; and (ii) granted by Huadong Feitian and Kuaitonglian an irrevocable and exclusive right to purchase, or to designate any person to purchase on its behalf, all or part of the assets, including, among others, fixed assets, current assets, intellectual property rights, ownership of equity interests in any person within or outside the PRC and the benefit (subject to the burden) of all contracts into by Huadong Feitian and Kuaitonglian. The Directors consider that it is in the best interest of the Group to assume control over Huadong Feitian and Kuaitonglian rather than to seek for remedies by taking legal action against Huadong Feitian and/or Kuaitonglian. Please refer to the paragraph headed “Structure contracts” in the section headed “History and development” in this prospectus for details. The Company and its legal advisers as to PRC laws confirmed that to the best of their respective knowledge, as at the Latest Practicable Date, the relevant PRC authority had not conducted any investigation or examination over the Reorganization and the Contractual Arrangements with each of Huadong Feitian and Kuaitonglian. The Company has consulted and confirmed with officers of the MII that the Structure Contracts do not breach any applicable laws or regulations in the PRC.

– 12 –


SUMMARY RISK FACTORS There are certain risks which a potential investor should evaluate in connection with a possible investment in the Offer Shares. These risks can be categorized as (i) risks relating to the Group; (ii) risks relating to the industry; (iii) risks relating to conducting business in the PRC; and (iv) risks relating to the Share Offer, which are summarized as follows: Risks relating to the Group •

Reliance on or risks in relation to major mobile operators, namely China Mobile Group and China Unicom Group

Reliance on the Contractual Arrangements

Any shortage of UGC provided to the Group may adversely affect the business performance of the Group

Failure to identify music content with potential for popularity may affect the Group’s business

The Group may face increasing competition which could reduce its market share and adversely affect its financial condition and results of operations

The Group may be liable for the provision of improper or illegal content

The Group may not be able to adequately protect its intellectual property rights in relation to its services

The Group’s ability to generate revenue could be adversely affected if the Group fails to promptly respond to the trend of the mobile music market and the services provided by the Group cannot fully satisfy the demand of the mobile phone subscribers

The Group has no business insurance coverage

Reliance on key management personnel

The historical dividends of the Group should not be treated as an indicator of future dividend policy

The Group is subject to credit risk in respect of its accounts receivable

The Group’s gross profit margin may continue to decrease, affecting its competitiveness – 13 –


SUMMARY •

The Group’s overall reputation may be damaged as a result of improper activities by its structured subsidiaries

The Group may not be able to renew the leases for its office premises or staff quarters on favorable terms

Failure to provide proper title documents by the landlords for some of the Group’s leased properties in the PRC

The Group undertook and will continue to undertake equity investments and such investments may be unsuccessful

Risks relating to the industry •

Unexpected network interruptions, security breaches or computer virus attacks could have a material adverse effect on the business, financial condition and results of operations of the Group

Any significant restructuring of any segment of the telecommunications industry in the PRC could adversely affect the business operations of the Group

The operations of the Group’s business requires certain specific licences and permits

Improper activities of other wireless value-added service providers could affect the business performance of the Group or damage the reputation of the Group

Risks relating to conducting business in the PRC •

Political and economic policies of the PRC government

Development of laws and regulations in relation to the Internet or wireless value-added services may affect the Group’s ability to expand its business

The growth of the PRC economy

The government control of currency conversion

PRC foreign exchange control may limit the ability of the Company to utilize the Group’s revenue effectively and affect the ability of the Company to receive dividends and other payments from the Company’s PRC-incorporated subsidiary

The implementation of the PRC Enterprise Income Tax Law may significantly increase the Group’s income tax expenses and materially decrease the Group’s profitability – 14 –


SUMMARY •

Future outbreak of Severe Acute Respiratory Syndrome or any other epidemic in the PRC

There are uncertainties regarding interpretation and enforcement of the PRC laws and regulations

Risks relating to the Share Offer •

Shareholders’ interests in the share capital of the Company may be diluted in the future

Liquidity of the Shares and volatility of the market price

Risk related to the fluctuation of RMB

Additional funds raised through the issue of new Shares for the Group’s future growth will dilute the Shareholders’ equity interests

Investors may experience difficulties in effecting service of legal process and enforcing judgments against the Company and its management

Certain information and statistics contained in this prospectus are derived from various sources and have not been independently verified

Forward-looking statements contained in this prospectus are subject to risks and uncertainties

– 15 –


DEFINITIONS In this prospectus, unless the context otherwise requires, the following expressions have the following meanings. Certain other terms are defined in the section headed “Glossary of technical terms”: “A8 Music”

A8 Music Group Limited (formerly known as Cash River Limited), a company incorporated in the British Virgin Islands with limited liability on 8 October 2003 and a wholly-owned subsidiary of the Company

“Aiyue”

(Beijing Aiyue Cultural Broadcasting Co., Ltd.*), a limited liability company established in the PRC on 22 May 2007 and is wholly owned by Huadong Feitian

“Application Forms”

WHITE Application Form(s), YELLOW Application Form(s) and GREEN Application Form(s) or, where the context so requires, either of them

“Articles of Association” or “Articles”

the Company’s articles of association as currently adopted

“Associate(s)”

has the meaning ascribed thereto in the Listing Rules

“Board”

the board of Directors

“Business Day”

a day (excluding Saturday and Sunday) on which licensed banks in Hong Kong are open for general banking business

“BVI”

the British Virgin Islands

“Capitalization Issue”

the issue of 352,620,000 Shares to be made upon the capitalization of certain sums standing to the credit of the share premium account of the Company as referred to in the paragraph headed “Written resolutions of all Shareholders passed on 26 May 2008” in Appendix V to this prospectus

“Cash River”

(Cash River Information Technology (Shenzhen) Co. Ltd.*), a wholly foreignowned enterprise established in the PRC on 10 December 2003 and an indirect wholly-owned subsidiary of the Company

“CCASS”

the Central Clearing and Settlement System established and operated by HKSCC

– 16 –


DEFINITIONS “CCASS Clearing Participant”

a person admitted to participate in CCASS as a direct clearing participant or general clearing participant

“CCASS Custodian Participant”

a person admitted to participate in CCASS as a custodian participant

“CCASS Investor Participant”

a person admitted to participate in CCASS as an investor participant who may be an individual or joint individuals or a corporation

“CCASS Participant”

a CCASS Clearing Participant or a CCASS Custodian Participant or a CCASS Investor Participant

“China” or “PRC”

the People’s Republic of China, but for the purpose of this prospectus and for geographical reference only (unless otherwise indicated) excludes Taiwan, the Macau Special Administrative Region of the PRC and Hong Kong

“China Mobile Group”

China Mobile Communications Corporation ) and its branches, subsidiaries ( and affiliates, one of the major mobile operators in the PRC and an Independent Third Party

“China Netcom Group”

China Network Communications Group Corporation ) and its branches, subsidiaries ( and affiliates, an Independent Third Party

“China Telecom Group”

China Telecommunications Corporation ) and its branches, subsidiaries and ( affiliates, an Independent Third Party

“China Unicom Group”

China United Telecommunications Corporation Ltd. ) and its branches, ( subsidiaries and affiliates, one of the major mobile operators in the PRC and an Independent Third Party

“Chuangmeng Yinyue”

(Beijing Chuangmeng Yinyue Culture Development Co., Ltd.*), a limited liability company established in the PRC on 31 May 2005 which is owned as to 72% by Kuaitonglian and 28% by Mr. Xu Xiaofeng, an employee of Chuangmeng Yinyue

“CNNIC”

China Internet Network Information Center ( )

“Companies Law”

the Companies Law, Chapter 22 (Law 3 of 1961, as consolidated and revised) of the Cayman Islands – 17 –


DEFINITIONS “Companies Ordinance”

the Companies Ordinance (Chapter 32 of the Laws of Hong Kong), as amended, modified and supplemented from time to time

“Company”

A8 Digital Music Holdings Limited (A8 ) (formerly known as A8 Music International Limited), a company incorporated in the Cayman Islands with limited liability on 2 October 2007 under the Companies Law

“connected person”

has the meaning ascribed thereto under the Listing Rules

“Contractual Arrangements”

the contractual arrangements that Cash River has entered into with Huadong Feitian and Kuaitonglian and their respective shareholders respectively, through the various contracts as described under the paragraph headed “Structure contracts” in the section headed “History and development” in this prospectus

“Controlling Shareholder(s)”

has the meaning ascribed to it under the Listing Rules and, in the context of the Company, means collectively, Mr. Liu Xiaosong, Prime Century, Ever Novel and Grand Idea

“Covenantors”

the Controlling Shareholders

“Deed of Non-compete”

a deed of non-competition dated 26 May 2008 entered into by the Controlling Shareholders in favor of the Company, details of which are disclosed in the section headed “Relationship with Controlling Shareholders”

“Director(s)”

the director(s) of the Company

“Electronic Application Instruction(s)”

instructions given by a CCASS Participant electronically via CCASS to HKSCC, being one of the methods to apply for the Public Offer Shares

“Ever Novel”

Ever Novel Holdings Limited, a limited liability company incorporated in the BVI whose issued share capital is 100% beneficially owned by a family trust set up by Mr. Liu Xiaosong for the benefit of his family members

“Gracenote Mobile MusicID”

a software which extracts digital representation of all or part of the digitized sound from music audio samples, matches such digital representation to the database of commercially recorded and released music contents and provides a single response to each application query

– 18 –


DEFINITIONS “Grand Idea”

Grand Idea Holdings Limited, a limited liability company incorporated in the BVI whose issued share capital is 100% beneficially owned by a family trust set up by Ms. Xie Yuanbi for the benefits of her family members. Ms. Xie Yuanbi is the mother of Mr. Liu Xiaosong

“Green Application Form(s)”

the application form(s) to be completed by White Form eIPO Service Provider

“Group”

the Company and its subsidiaries or, where the context so requires, in respect of the period before the Company became the holding company of its present subsidiaries, such subsidiaries as if they were the Company’s subsidiaries at that time, including Huadong Feitian and its subsidiaries, namely, Aiyue and Yunhai Qingtian and Kuaitonglian and its subsidiaries, namely Yuesheng Feiyang and Chuangmeng Yinyue

“HKSCC”

Hong Kong Securities Clearing Company Limited

“HKSCC Nominees”

HKSCC Nominees Limited, a wholly owned subsidiary of HKSCC

“Hong Kong” or “HK”

the Hong Kong Special Administrative Region of the PRC

“Huadong Feitian”

(Shenzhen Huadong Feitian Network Development Co., Ltd.*) a limited liability company established in the PRC on 22 May 2000 which is beneficially owned as to approximately 75% by Mr. Liu Xiaosong and 25% by Ms. Cui Jingtao and is indirectly controlled by the Company through the Contractual Arrangements

“IFRS”

International Financial Reporting Standards

“Independent Third Party” or “Independent Third Parties”

person(s) or company(ies) who/which is/are independent of and not connected with the Directors, chief executive or substantial shareholders of the Company or any of its subsidiaries, or any of their respective associates, and not otherwise a connected person of the Company

“Internet Visual/Audio regulations”

the Administrative Measures for Visual and Audio Program Transmitted by Information Networks such as the Internet ( ) implemented by the SARFT on 11 October 2004; and the Provisions on Administration of Internet Visual/Audio Programming Services ( ) jointly promulgated by the SARFT and the MII on 20 December 2007 and took effect on 31 January 2008, where references are made to “Internet Visual/Audio regulations” in this prospectus shall mean either one or both of the above – 19 –


DEFINITIONS “Join Reach”

Join Reach Limited, a limited liability company incorporated in the BVI which is beneficially owned as to 100% by Ms. Cheung Lo Samantha, an ex-employee of the Group

“Kuaitonglian”

(Shenzhen Kuaitonglian Technology Co., Ltd.*), a limited liability company established in the PRC on 10 May 2004, the registered capital of which is beneficially owned as to 100% by Mr. Lin Yizhong (alias Lin Hai) and is indirectly controlled by the Company through the Contractual Arrangements

“Latest Practicable Date”

21 May 2008, being the latest practicable date for ascertaining certain information in this prospectus prior to the printing of this prospectus

“Listing”

the listing of the Shares on the Main Board

“Listing Committee”

the Listing Committee of the Stock Exchange

“Listing Date”

the date, expected to be on or about 12 June 2008, on which the Shares are listed and from which dealings therein are permitted to take place on the Stock Exchange

“Listing Rules”

Rules Governing the Listing of Securities on the Stock Exchange

“Lock-up Undertakings”

the undertakings in respect of disposal restriction made by the Controlling Shareholders as set out in the section headed “Underwriting” in this prospectus

“Main Board”

the stock exchange (excluding the option market) operated by the Stock Exchange which is independent from and operated in parallel with the Growth Enterprise Market of the Stock Exchange

“MII”

the Ministry of Information Industry of the PRC ( ) (formerly known as ), including its local counterparts

“MOC”

the Ministry of Culture ( PRC, including its local counterparts

“New Issue”

the issue of the New Shares

– 20 –

) of the


DEFINITIONS “New Shares”

the 80,000,000 new Shares being offered by the Company for subscription at the Offer Price under the Share Offer and where relevant, any additional Shares which may be issued pursuant to the exercise of the Over-allotment Option

“Offer Price”

the final offer price per Offer Share (exclusive of brokerage of 1%, SFC transaction levy of 0.004% and Stock Exchange trading fee of 0.005%) which will be not more than HK$2.38 and is expected to be not less than HK$1.66

“Offer Share(s)”

the Placing Share(s) and the Public Offer Share(s), and where relevant, together with any additional Share(s) issued pursuant to the exercise of the Over-allotment Option

“Over-allotment Option”

the option granted by the Company to the Placing Underwriters under the Underwriting Agreement (exercisable by the Lead Manager on behalf of the Placing Underwriters) whereby the Company may be required to allot and issue up to an aggregate of 13,650,000 additional New Shares, representing 15% of the Shares initially being offered under Share Offer, at the Offer Price to cover over-allocations under the Placing, if any, as described in the section headed “Structure and conditions of the Share Offer” in this prospectus

“Placing”

the conditional placing by the Placing Underwriters of the Placing Shares at the Offer Price with institutional, professional and private investors, details of which are described in the section headed “Structure and conditions of the Share Offer” in this prospectus

“Placing Shares”

the 81,900,000 Shares which comprise 70,900,000 New Shares and 11,000,000 Sale Shares subject to the Overallotment Option and re-allocation as described in the section headed “Structure and conditions of the Share Offer” in this prospectus

“Placing Underwriters”

the underwriters in respect of the Placing named in the paragraph headed “Placing Underwriters” in the section headed “Underwriting” in this prospectus

– 21 –


DEFINITIONS “Pre-IPO Share Option Scheme”

the share option scheme adopted by the Company for granting share options prior to the Listing, a summary of the principal terms of which is set out in the paragraph headed “Pre-IPO Share Option Scheme” in Appendix V to this prospectus

“Price Determination Date”

the date on which the Offer Price is determined, which is expected to be on or about Wednesday, 4 June 2008 and, in any event, not later than 12:00 noon on Thursday, 5 June 2008

“Prime Century”

Prime Century Technology Limited, a limited liability company incorporated in the BVI whose issued share capital is held as to 52.61% by Ever Novel, 18.50% by Ms. Wang Gang, 8.80% by Join Reach and 20.09% by 20 shareholders who are existing or past employees of the Group or their respective investment holding companies and Independent Third Parties each holding less than 5% shares in Prime Century

“Public Offer”

the offer to the public in Hong Kong for subscription of the Public Offer Shares at the Offer Price, on and subject to the terms and conditions stated in this prospectus and in the Application Forms

“Public Offer Shares”

the 9,100,000 New Shares subject to re-allocation initially being offered by the Company for subscription at the Offer Price under the Public Offer

“Public Offer Underwriters”

the underwriters in respect of the Public Offer named in the paragraph headed “Public Offer Underwriters” in the section headed “Underwriting” in this prospectus

“Remuneration Shares”

such number of Shares to be allotted and issued to the Sponsor or one of its associates, credited as fully paid, upon completion of the Share Offer as part of the remuneration of the Sponsor for its services in connection with the Listing (such number being not more than 604,000 Shares and is expected to be not less than 420,000 Shares)

“Reorganization”

the reorganization of the Group prior to the issue of this prospectus, details of which are set out in the paragraph headed “Corporate reorganization” in Appendix V to this prospectus

“SAFE”

the State Administration of Foreign Exchange of China, the PRC governmental agency responsible for matters relating to foreign exchange administration – 22 –


DEFINITIONS “Sale Share(s)”

the 11,000,000 Shares being offered for sale by the Selling Shareholder at the Offer Price under the Placing

“SARFT”

the State Administration of Radio, Film and Television ) (

“Selling Shareholder”

Top Result, a statement of particulars of which is set out in the paragraph headed “Particulars of the Selling Shareholder” in Appendix V to this prospectus

“SFC”

the Securities and Futures Commission of Hong Kong

“SFO”

the Securities and Futures Ordinance (Chapter 571 of the Laws of Hong Kong), as amended, modified and supplemented from time to time

“Share(s)”

share(s) of HK$0.01 each in the share capital of the Company

“Share Offer”

the Placing and the Public Offer

“Share Option Scheme”

the share option scheme conditionally approved and adopted by the Shareholders on 26 May 2008, a summary of the principal terms of which is set out in the paragraph headed “Share Option Scheme” in Appendix V to this prospectus

“Shareholder(s)”

holder(s) of the Share(s)

“Sole Bookrunner” or “Lead Manager”

SBI E2-Capital Securities Limited, a corporation licensed to engage in types 1, 4 and 9 regulated activities under the SFO, the sole bookrunner and lead manager of the Share Offer

“Sponsor”

SBI E2-Capital (HK) Limited, a corporation licensed to engage in types 1 and 6 regulated activities under the SFO

“Stock Borrowing Agreement”

the stock borrowing agreement dated 27 May 2008 entered into between the Lead Manager and Ever Novel, being one of the Controlling Shareholders

“Stock Exchange”

The Stock Exchange of Hong Kong Limited, a wholly owned subsidiary of Hong Kong Exchanges and Clearing Limited

– 23 –


DEFINITIONS “structured subsidiaries”

those entities controlled by Cash River through the Contractual Arrangements, being Huadong Feitian, Kuaitonglian and their respective subsidiaries, branches and representative offices

“Top Result”

Top Result Enterprises Limited, a limited liability company incorporated in the BVI whose issued share capital is 100% beneficially owned by Ms. Cui Jingtao, the spouse of Mr. Li Wei, a non-executive Director

“Track Record Period”

the period comprising the three financial years ended 31 December 2007

“Underwriters”

the Placing Underwriters

“Underwriting Agreement”

the underwriting and placing agreement dated 27 May 2008 and entered into between the Company, the Covenantors, the substantial Shareholders named therein, the Selling Shareholder, the Sponsor, the Lead Manager and the Underwriters relating to the Share Offer, particulars of which are summarized in the section headed “Underwriting” in this prospectus

“Wangle Tianxia”

(Beijing Wangle Tianxia Internet Information Services Co., Ltd.*), a limited liability company established in the PRC on 8 May 2006 which was wholly owned by Huadong Feitian prior to the Reorganization

“White Form eIPO”

the application for Public Offer Shares to be issued in the applicant’s own name by submitting applications online through the designated website at www.eipo.com.hk

“White Form eIPO Service Provider”

the White Form eIPO service provider designated by the Company, as specified on the designated website www.eipo.com.hk

“Yuesheng Feiyang”

(Beijing Yuesheng Feiyang Music Culture Broadcasting Co., Ltd.*), a limited liability company established in the PRC on 26 March 2007 which is wholly owned by Kuaitonglian

“Yunhai Qingtian”

(Shenzhen Yunhai Qingtian Cultural Broadcasting Co., Ltd.*), a limited liability company established in the PRC on 9 December 2004 which is wholly owned by Huadong Feitian – 24 –

Underwriters

and

the

Public

Offer


DEFINITIONS “YY”

YY Music International Limited (previously known as A9 Music Group Limited), a limited liability company incorporated in the BVI on 13 August 2007 which has the same shareholding structure as the Company prior to the Listing

“Zhongge Feiyang”

(Beijing Zhongge Feiyang Culture Broadcasting Co., Ltd.*), a limited liability company established in the PRC on 23 August 2003 which was wholly owned by Kuaitonglian prior to the Reorganization

“Zhongge Liaoliang”

(Beijing Zhongge Liaoliang Music Culture Broadcasting Co., Ltd.*), a limited liability company established in the PRC on 23 January 2006 and owned as to 49% by Zhongge Feiyang (Beijing Broadcast and 51% by Company*)

“HK$” or “HK Dollar(s)” and “cent(s)”

Hong Kong dollar(s) and cent(s) respectively, the lawful currency of Hong Kong

“RMB”

Renminbi, the lawful currency of the PRC

“US$” or “US Dollar(s)”

United States dollar(s), the lawful currency of the United States of America

“sq.ft.” and “sq.m.”

square feet and square metres, respectively

“%”

per cent.

If there is any inconsistency between the Chinese names of the PRC laws and regulations or the PRC entities mentioned in this prospectus and their English translation, the Chinese version shall prevail. For the purpose of this prospectus, unless otherwise specified, conversion of US Dollars and RMB into Hong Kong Dollars are based on the approximate exchange rates of US$1.00 to HK$7.80 and HK$1.00 to RMB0.92 respectively for illustrative purpose only. No representation is made that any amount in Hong Kong Dollars, US Dollars or RMB could have been or could be converted at the above rates or any other rates. * The English names of the PRC entities are not official translation and are for identification purpose only

– 25 –


GLOSSARY OF TECHNICAL TERMS This section contains definitions and other terms as they are used in this prospectus, some of which may not correspond to standard industry definitions. “A8Box”

a “jukebox” software developed by the Group which facilitates mobile phone subscribers to have access to the Group’s mobile music services directly from their mobile phones

“CAGR”

compound annual growth rate

“Internet”

a worldwide and publicly accessible series of interconnected computer networks that transmit data by packet switching using the standard Internet Protocol (IP)

“IVR”

Interactive Voice Response, a phone technology that allows a computer to detect voice and touch tones using a normal phone call. It is a sales and delivery channel for the Group’s services. Mobile phone subscribers can dial a specific telephone number to access the Group’s IVR Music

“IVR Music”

full track songs or song clips to which can be listened by the end users through IVR

“MMS”

Multimedia Messaging Service, a communication technology that allows users to exchange messages combining animated color pictures, sounds, text and motion pictures between capable mobile telephones and other devices

“original independently produced music content or song(s)”

music or music-related content(s) or song(s) whose intellectual property rights are owned by the artists (including composer, lyric writer and performer) who first produce such music, content or song(s) and not by any record company

“RBT(s)”

Ringback Tone, the audible ringing that is heard on the telephone line by the calling party after dialing and prior to the call being answered at the receiving end. As one of the Group’s services, due to its technical nature, it is also a delivery channel of such services

“ringtones”

the sound made by a mobile phone to indicate an incoming call

– 26 –


GLOSSARY OF TECHNICAL TERMS “SIM card”

subscriber identity module card, an electronic card that is inserted into a mobile phone and identifies the subscriber to a network and contains the personal identification number of a subscriber and identifies the network to which the subscriber belongs

“SMS”

short message service, a service that allows text messages, which may comprise words, numbers or an alphanumeric combination, to be transmitted on mobile phones

“UGC”

acronym for user generated content

“WAP”

Wireless Application Protocol, an open international standard for applications that use wireless communications and which enables access to the Internet from a mobile phone

“2G”

second-generation wireless telephone technology, a digital mobile communication system that mainly adopts GSM (Global System for Mobile communications) and narrow band CDMA (Code Division Multiple Access) systems

“2.5G”

second-and-a-half generation wireless telephone technology, which is based on packet-switched domain and interim phase between 2G and 3G

“3G”

third-generation wireless telephone technology of mobile phone standards and technology after 2G which is based on the International Telecommunication Union (ITU) family of standards

– 27 –


RISK FACTORS

Potential investors should consider carefully all of the information set forth in this prospectus and, in particular, should evaluate the following risks in connection with an investment in the Offer Shares. The business, financial condition and results of operations of the Group could be materially adversely affected by any of such risks. The trading price of the Shares could decline due to any of such risks. RISKS RELATING TO THE GROUP Reliance on or risks in relation to major mobile operators, namely China Mobile Group and China Unicom Group The Group offers its services to mobile phone subscribers through two major mobile operators in the PRC, namely China Mobile Group and China Unicom Group. The Group derived approximately 86.3% of its revenue from its collaboration with China Mobile Group and 13.4% of its revenue from its collaboration with China Unicom Group for the year ended 31 December 2007. If either China Mobile Group and/or China Unicom Group were to terminate its cooperation with the Group, it would be impossible for the Group to find another appropriate mobile operator of a similar scale as a replacement. Any major alteration to the Group’s current cooperation mode with China Mobile Group and China Unicom Group, or even loss of its business relationship with either of these major mobile operators may materially adversely affect the operations and financial performance of the Group. –

Term of agreements

Currently, the agreements entered into between those structured subsidiaries and the mobile operators and/or their provincial affiliates are non-exclusive and are of a limited term (generally one year for China Mobile Group and one to two years for China Unicom Group). Based on the records of the Group, most of these agreements are annually renewed. However, such kind of renewal is not guaranteed and new agreements may not be agreed upon in the future. Failure to have such agreements renewed or for new agreements to be entered into may result in an adverse effect on the business and operations of the Group. –

Operations

In terms of operations, the Group relies on the mobile operators in various ways. The Group must obtain approval from China Mobile Group and China Unicom Group with respect to each service offered to the mobile phone subscribers and the pricing for such service. There is no assurance that such approval will be granted and/or granted in a timely manner. Failure to obtain or delay in obtaining such approvals could place the Group at a disadvantageous position in the market and adversely affect the Group’s revenue and profitability. Besides, the Group relies on China Mobile Group and China Unicom Group to maintain accurate records of the fees paid for the Group’s services by mobile phone subscribers. The Group does not bill the mobile phone subscribers directly and therefore it relies on the accuracy and efficiency of the billing systems and records kept by the mobile operators to record the volume of mobile – 28 –


RISK FACTORS music services provided, charge the mobile phone subscribers, collect payments and remit to the Group its portion of the fees. The Group commenced its business cooperation with China Mobile Group since its establishment in 2000 and with China Unicom Group in 2001. During the Track Record Period, the Group experienced occasional differences in revenue calculation with China Mobile Group and China Unicom Group. When major differences in such revenue calculation are encountered, the Group would request checking the data record of the operator against the internal records kept by the Group. The Directors consider such requests for checking of internal records for revenue calculation have not been frequent and do not relate to substantial amount of the Group’s transactions with either China Mobile Group or China Unicom Group. The business and results of operations of the Group could be adversely affected if any mobile operators miscalculate the revenue generated by the services provided by the Group. –

Compliance with policies

Both China Mobile Group and China Unicom Group have a wide range of policies and procedures regarding customer services, quality control and other aspects of the wireless value-added services industry. The mobile operators enforce their customer service policies from time to time. This has resulted in a number of strict penalties being imposed on many wireless value-added services providers. For example, China Mobile Group imposes penalties on service providers which have violated its internal rules regarding pre-set menu for wireless value-added services in mobile phones on their own. In June 2007, the Group experienced a deduction of a substantial amount of points for its MMS services as a result of such violation. Details of such deduction are set out in the paragraph headed “Customers” in the section headed “Business” in this prospectus. Therefore, any future enforcement against the Group by the mobile operators of their policies or guidelines in the event that the Group’s operation has deviated from such policies or guidelines could result in the incurrence of additional charges by the Group or even prohibition from offering certain existing services or new services by the Group. This could in turn materially and adversely impact the business operations of the Group and profitability of the Group. –

Provision of own wireless value-added services as service providers

According to data published by the MII, there were approximately 547.3 million mobile phone subscribers in the PRC in 2007. According to each of their annual reports for the year ended 31 December 2007, China Mobile Group and China Unicom Group had a market share of approximately 69.3% and approximately 29.7% respectively. Given their dominant market positions, the business of the Group may be adversely affected if either China Mobile Group or China Unicom Group or both were to decide to provide their own wireless value-added services as a service provider, or if they were to provide their own mobile music services as a service provider to their mobile phone subscribers, this will lead to competition with the Group. They may also change the cooperation mode with the Group or reduce the resources available for the Group’s business in their wireless networks if they decide to commence their own wireless value-added service business as a service provider. In any such case, the Group’s business may face enhanced competition and there is a risk that, under such circumstances, the Group may be partially or fully denied access to the services of such operators. – 29 –


RISK FACTORS Reliance on the Contractual Arrangements Due to regulatory limitations prohibiting foreign investors from holding a controlling stake in entities which are engaged in the provision of telecommunications value-added services in the PRC, the Group has been conducting some of its business in the PRC through Huadong Feitian, Kuaitonglian and their respective subsidiaries, branches and representative offices. Neither the Company nor its subsidiaries hold any equity interest in any of such entities, branches and representative offices. The Company maintains effective control over these entities through the Contractual Arrangements that Cash River has entered into with Huadong Feitian, Kuaitonglian and their respective shareholders, through which the Company obtains substantially all of the profits of such entities in the form of consulting and service fees. These arrangements are not as secure as direct equity and may not be as effective in providing control over these entities as direct ownership. Details of Contractual Arrangements are set forth in the paragraph headed “Structure contracts” in the section headed “History and development” in this prospectus. There can be no assurance that the interpretation by the Company’s legal advisers as to PRC laws of the effectiveness of the Contractual Arrangements is in line with the interpretation of the PRC government authorities. Nor can there be any assurance that all or some of the Contractual Arrangements will not be deemed by the PRC government authorities to be in violation of the PRC laws. Any determination by the MII or other competent authorities in the PRC that the Contractual Arrangements on any part thereof is not in compliance with any new interpretations or newly issued laws, regulations, rules or policies could result in the Group being required to restructure its organizational structure and operations in the PRC and, thus, may result in material disruption of the Group’s business, diversion of management attention and the incurrence of substantial costs. Moreover, if the Contractual Arrangements are found to be in violation of the PRC laws, rules or regulations, the relevant PRC regulatory authorities will have discretion to take action against Huadong Feitian or Kuaitonglian, their respective shareholders or Cash River for such violation, including unwinding the Contractual Arrangements or prohibiting the Group from operating its business in the PRC. The PRC government may revoke the Telecommunications Value-added Services Operation Licences of Huadong Feitian and Kuaitonglian, require them to discontinue or restrict their operations, restrict the Group’s right to collect revenues or take other regulatory or enforcement actions against the Group that could have a material adverse effect on the business, financial condition and results of operations of the Group. Given that the Group had effectively controlled these entities during the Track Record Period, the financial results of these entities are accounted for by the consolidated accounting method. Their operating results are included in Appendix I to this prospectus. The Company controls Huadong Feitian and Kuaitonglian, together with their respective subsidiaries, branches and representative offices through the Contractual Arrangements. If any of these entities fails to comply with, or refuse to renew, these Contractual Arrangements, the business operations of the Group in the PRC might be disrupted to a material extent and the Company’s revenues could decrease significantly. In addition, if both or either of Huadong – 30 –


RISK FACTORS Feitian and Kuaitonglian fail to perform or violate any or all of the Contractual Arrangements, the Group would have to rely on legal remedies under the PRC legal system to enforce these arrangements, which may be less effective than in other jurisdictions. Any legal proceedings could result in disruption to the Group’s business in the PRC and result in substantial costs to the Group. There can be no assurance that the results of such legal proceedings would be satisfactory to the Group. In addition, these contracts expire at a specific time, and Cash River may have difficulty in renewing these contracts on a timely basis and in forms acceptable to the Group if the Company’s relationship with Huadong Feitian and Kuaitonglian were to deteriorate or due to other reasons. Any shortage of UGC provided to the Group may adversely affect the business performance of the Group The Directors consider that the Group distinguishes itself from other mobile musicrelated telecommunications value-added service providers by its focus on original independently produced music content which are uploaded by artists to its UGC platform. There can be no assurance that the supply of such UGC will be steady or sufficient for the development of the Group or of a standard acceptable to the Group and/or consumers in the future, especially with the emergence of competitors having the same or similar strategy as that of the Group. If the Group fails to attract sufficient original independently produced music content from artists that reach the Group’s standard, it may not be able to generate enough new mobile music content for, among others, its ringtones and RBTs, thereby leading to a decline in the Group’s competitiveness which in turn may negatively affect its business performance. Failure to identify music content with potential for popularity may affect the Group’s business The Directors believe that the success of the Group depends largely on the Group’s ability to identify the UGC uploaded to its www.a8.com platform with potential for popularity. Currently, the Group has a quality control system for its selection of the original independently produced music content in which the UGC will first be screened by staff specifically designated for such task for merit and will then be categorized by nature and style. Such selected and categorized music content is then stored in a platform for rating by a dedicated team comprising staff from various different departments of the Group based on various criteria set out by the Group, such as easiness of singing, rhythm, sympathy, style and performance technique. Songs that meet the Group’s standard will then be selected as targets for promotion by the Group. However, music fashion is fast-changing. In the event that the Group fails to anticipate, gauge, identify and react to the changing demands of the consumers in the future or fails to identify any song which becomes a mainstream hit for a period of time, the demand for the Group’s services may decline and artists may not be willing to further submit original independently produced music content to the Group for publication purposes. There can be no assurance that the Group will be able to continue to anticipate, gauge, identify and react to changing consumers’ demands in the future. – 31 –


RISK FACTORS The Group may face increasing competition which could reduce its market share and adversely affect its financial condition and results of operations There is increasing competition in the mobile music market in the PRC. The Group competes with its competitors primarily on basis of the range of content and services, quality of service and customer support, timing of services offered, technologies being applied, business partners and marketing channels. In addition, the Group also competes with other service providers in terms of retaining and recruiting experienced and talented employees. If the Group is not able to maintain its competitiveness in respect of the foregoing, the business operations, market share and financial condition of the Group may be adversely affected. The Group may be liable for the provision of improper or illegal content The Group may incur liability in relation to the provision of mobile music-related services, such as ringtones and RBTs, or non-music-related services, such as wallpapers or games or jokes, if the content of such services have infringed the copyright or other intellectual property rights of others or are regulated or prohibited by certain laws and regulations, amongst ) and its others, mainly including the Trademark Law of the PRC ( ) and its implementation rules, the Copyright Law of the PRC ( implementation rules, and relevant regulations set forth in the section headed “Regulatory overview” in this prospectus. Other laws that may be applicable include, but not limited to, those regulating pornography. The Group could be found liable under such laws for the supply, delivery or aiming at the supply, delivery, production or possession of regulated or prohibited information or content. This may result in civil and/or criminal penalties including a fine or other sanctions or the loss of the Group’s right to provide its services. Any such liability may have an adverse effect on the financial position, the operations and performance and prospects of the Group. The Group does not currently maintain any insurance in respect of liability arising from the content of its services and any significant liability claim could have a material adverse effect on the Group. The Group may not be able to adequately protect its intellectual property rights in relation to its services The business of the Group relies on the protection offered by intellectual property rights laws currently in effect in the PRC and its contractual arrangements with artists, employees, business partners and others to protect such intellectual property rights. However, the validity, enforceability and scope of protection of intellectual property rights in the music related industries in the PRC are still evolving. The development of the online music market in the PRC has been seriously affected by piracy and the availability of free downloads. The relevant laws may not fully protect intellectual property rights to the same extent as the laws of some other jurisdictions. Every artist must agree to the terms of an electronic licensing agreement with the Group whereby the Group will be granted with certain rights to make use of the music content for its value-added services before such artist can upload the music content to the Group’s UGC platform and the Group will enter into formal written agreements with artists whose songs are selected after the screening process. There is no assurance that the courts in – 32 –


RISK FACTORS the PRC will recognize and enforce such electronic licensing agreements. Accordingly, any piracy, infringement of intellectual property rights or unauthorized use of the content provided to the Group by third parties may adversely affect the Group’s business and reputation. Litigation may also be necessary in the future in order for the Group to enforce the protection of its intellectual property rights, which could result in substantial costs to the Group and diversion of resources, and have a material adverse effect on the business, financial condition and operations of the Group. Moreover, the availability of free downloads of wireless value-added services may affect the sales of the Group’s services and will adversely affect its business performance. The Group’s ability to generate revenue could be adversely affected if the Group fails to promptly respond to the trend of the mobile music market and the services provided by the Group cannot fully satisfy the demand of the mobile phone subscribers The mobile music market in the PRC has evolved rapidly over the past few years, with the introduction of new and advanced wireless value-added services, development of new technologies and adaptation of strategies by existing market players. It is expected that such evolving trends will continue, and consequently the Group will need to continue to adapt new strategies to successfully compete in this market. There is no assurance that the Group will be able to correctly foresee the future trend and formulate strategies of the mobile music industry and failure to meet the new and evolving demand of the fast-changing music industry in the PRC will adversely affect the Group’s business performance. Furthermore, a recession in the global economy, Asia or the PRC or uncertainties regarding future economic prospects of the PRC could affect consumer spending habits and have an adverse effect on the business, operating results and financial condition of the Group to a material extent. The Group has no business insurance coverage The insurance industry in the PRC is still at an early stage of development. Insurance companies in the PRC offer limited business insurance products, and do not, to the Directors best knowledge, offer business liability insurance. As a result, the Group does not have any business liability insurance coverage for its business operations. Any business disruption, litigation or natural disaster might result in substantial costs and diversion of resources of the Group. Reliance on key management personnel The Group’s performance and success is, to a significant extent, attributable to the vision and leadership of Mr. Liu Xiaosong, the founder, the chairman and chief executive officer of the Company and the contribution of several key executives, including Mr. Lin Yizhong (alias Lin Hai), the chief operations officer of the Company. In the event that any of Mr. Liu or Mr. Lin or any other member of the senior management team was to leave the Group, and the Group was not able to engage a suitable replacement on a timely basis, the Group’s business, its operations and financial condition may be materially adversely affected. – 33 –


RISK FACTORS The historical dividends of the Group should not be treated as an indicator of future dividend policy During the Track Record Period, the Group had not declared any dividend. On 26 May 2008, the Group declared a special dividend of HK$108 million, representing approximately 55.1% of the net asset value of the Group as at 31 December 2007, to its then shareholder. Such dividends were settled on 26 May 2008. The payment of such special dividend has reduced the Group’s cash balance and working capital by HK$108 million. There is no assurance that dividends of similar amounts or at similar rates will be paid in the future. Further discussion on the Group’s dividend policy is set out in the section headed “Financial information” in this prospectus. Past dividends should not be used as a reference for the Company’s dividend policy nor used as a basis to forecast dividends payable in the future. The Group is subject to credit risk in respect of its accounts receivable The customers of the Group usually settle the amounts due to the Group within a period of 30 days to 120 days from the date the relevant invoice is issued by the Group. As at 31 December 2005, 2006 and 2007, accounts receivable of the Group amounted to approximately RMB42.9 million, RMB37.6 million and RMB64.8 million respectively, which accounted for 24.1%, 16.2% and 22.3% respectively of the Group’s total assets as at 31 December 2005, 2006 and 2007 respectively. The Group has a concentration of credit risk of trade and other receivables due from the Group’s mobile operator partners, namely China Mobile Group and China Unicom Group. Should such mobile operator partners fail to settle such receivables in full or there is a change in the payment policy of such mobile operators resulting in a longer settlement period for the amount due from such operators, the Group’s financial condition and profitability could be adversely affected. The Group cannot assure that the credit control policies and measures implemented by it are adequate in protecting the Group against material credit risks. Moreover, should the Group’s customers be unable to pay in full for any reason, the Group’s profit and cashflow will be adversely affected. Any delay in the payment by customers may also adversely affect the Group’s operations and financial position. The Group may have to sustain legal costs in pursuing unsettled invoices, a process which is time-consuming and may be affected by a variety of factors including any counterclaim from such non-paying customers. The Group’s gross profit margin may continue to decrease, affecting its competitiveness For the three years ended 31 December 2007, the gross profit margin of the Group decreased from approximately 53.6% to 49.3% and to 45.0% which was mainly due to the increase in revenue share to business alliances. There is no assurance that the trend of increasing in revenue share to business alliances will not continue to impact the gross profit margin of the Group, nor is there any assurance that the effect of this trend will not outpace the increase in the revenue of the Group. As a result, the financial condition of the Group may be adversely affected by the decreasing gross profit margin. – 34 –


RISK FACTORS The Group’s overall reputation may be damaged as a result of improper activities by its structured subsidiaries The Group operates, through the Contractual Arrangements with Huadong Feitian, Kuaitonglian and their respective shareholders, in various regions in the PRC. In the event that any of the branches of Huadong Feitian or, as the case may be, Kuaitonglian were to commit any improper activities in such regions and news in relation of such improper activities were to be widely spread through the media, the Group’s reputation may be adversely affected and such damage in reputation may also adversely affect the Group’s business and performance as a whole. The Group may not be able to renew the leases for its office premises or staff quarters on favorable terms All of the Group’s office premises and staff quarters are located at properties leased from Independent Third Parties. There is no assurance that the leases for these office premises and staff quarters will be renewed on expiry or if renewed, on terms and conditions which are acceptable or favorable to the Group. If such leases are not renewed or cannot be renewed on terms which are acceptable to the Group, the Group will have to relocate its office premises and staff quarters and if the Group is unsuccessful in doing so, the Group’s business, operating results and financial condition may be adversely affected. Failure to provide proper title documents by the landlords for some of the Group’s leased properties in the PRC As at the Latest Practicable Date, the Group had a total of 33 leased properties in the PRC mainly for the purposes of offices and staff quarters. All of such properties are leased from Independent Third Parties. In respect of five of these properties, the lessors have not provided the Group with sufficient document to evidence their respective authority to enter into the relevant leases. If any dispute were to arise as to the legal title of any of such leased properties and/or if the Group’s right to occupy the properties were to come into question, the Group may be required to be vacated from such properties and relocate elsewhere. As a result, the business operations of the Group may be adversely affected if the aforementioned relocation cannot be completed efficiently and on a timely basis.

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RISK FACTORS The Group undertook and will continue to undertake equity investments and such investments may be unsuccessful The Group had cash and cash equivalents of approximately RMB131.3 million as at 31 December 2007, around 2.1% of which were invested into a portfolio of securities that were listed in the PRC in 2007. As at 31 December 2007, the portfolio had an unrealized gain of approximately RMB2.9 million. The Group’s investment policy is to invest, with an upper limit of no more than 10% of cash and cash equivalents of the Group from time to time, into shares offered under initial public offerings and not to hold the securities for more than one year. The Group plans to continue to undertake such kind of equity investments, which may expose the Group to certain market risks. The Group’s inability to maintain positive return from such investments or to generate sufficient revenue to offset the costs and expenses of such investments will adversely affect the Group’s financial condition and operations. RISKS RELATING TO THE INDUSTRY Unexpected network interruptions, security breaches or computer virus attacks could have a material adverse effect on the business, financial condition and results of operations of the Group Any failure to maintain the satisfactory performance, reliability, security and availability of the Group’s network infrastructure may cause significant harm to the reputation of the Group and its ability to attract and retain users. Major risks involved in such network infrastructure include, among others, (1) any break-downs resulting in a sustained shutdown of all or a material portion of the Group’s servers; and (2) any system failures attributable to unauthorized access to the systems causing loss or corruption of data or malfunctions of software or hardware. The network systems are also vulnerable to damage from fire, flood, power loss, telecommunications failures, computer viruses, hackings and similar events. Disruption may also be caused as a result of high level of user flow, but such disruption is usually of a short duration. Any network interruption of the Group’s services or deterioration in the quality of access to such services could reduce user satisfaction and therefore potentially lower the competitiveness of Group’s business. In addition, any security breach caused by hacking or unauthorized access to information or systems causing intentional malfunctions or loss or corruption of data, software, hardware or other computer equipment, and the inadvertent transmission of computer viruses could have a material adverse effect on the Group’s business, financial condition and its results of operations of the Group. The Group does not maintain insurance policies covering losses relating to the systems and does not have business interruption insurance and any disruption of its network system would impose a material adverse effect on the Group.

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RISK FACTORS Any significant restructuring of any segment of the telecommunications industry in the PRC could adversely affect the business operations of the Group The PRC government has extensive involvement in determining the structure and strategic direction of the telecommunications industry in the PRC. During the development of this industry, changes in government policy have resulted in major restructurings of the telecommunications operators, including the establishment of new operators and the combination of all or part of existing operators. Any further significant restructuring of any segment of the telecommunications industry in the PRC, including the status of China Mobile Group, China Unicom Group or any other mobile operators in the PRC and the potential combination of the mobile operations of various mobile operators in the PRC, could adversely affect the business operations of the Group. The operations of the Group’s business requires certain specific licences and permits The provision of wireless value-added services in the PRC is subject to the regulations of the MII, the MOC and other relevant authorities in the PRC, which are responsible for formulating regulations and granting of licences to appropriate Internet content providers and service providers. In order to operate the business of the provision of wireless value-added services, the relevant structured subsidiaries of the Company have to possess the relevant licences, including but not limited to, the Telecommunications Value-added Services Operation Licence ( ) and the Certificate for Use of Access Code of Short Message Service ( ). In addition, Huadong Feitian, one of the structured subsidiaries, is required to obtain approval for its Internet publishing business in accordance with the requirements under the Provisional Regulations for the Administration of Internet Publishing ( ), approval for its Internet electronic bulletin business in accordance with the requirements under the Regulations for the Administration of Internet Electronic Notice Services ( ) and approval for its streaming and downloading services in accordance with the requirement under the Internet Visual/Audio regulations. Huadong Feitian has applied and obtained approval from the Administration of Press and Publication of Guangdong Province in December 2007 and has applied for the licence from the General Administration of Press and Publication of the PRC for the approval of its Internet publishing business. However, such approval has not yet been granted by the relevant authority. As advised by the Company’s legal advisers as to PRC laws, in the event that Huadong Feitian is found having contravened the Provisional Regulations for the Administration of Internet Publishing ( ), the relevant Internet publishing business may be suspended, the major equipment in connection with such business be seized and Huadong Feitian will be subject to a maximum penalty of 10 times of the revenue attributable to such business. No penalty is expected because, as confirmed by the Directors, no revenue has been generated from such Internet publishing business.

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RISK FACTORS As also advised by the Company’s legal advisers as to PRC laws, in the event that the operation of Huadong Feitian is found having exceeded the scope as permitted under the Regulations for the Administration of Internet Electronic Notice Services ( ), all revenue attributable to such business is liable to be confiscated and Huadong Feitian is also liable to a maximum penalty which is equal to five times of such revenue and in case of a serious contravention, the operation of the Internet website will be ordered to be closed down. No penalty is expected and impact on the Group would be immaterial because, as confirmed by the Directors, no revenue has been generated from such business. As advised by the Company’s legal advisers as to PRC laws, in the event that Huadong Feitian is found to have contravened the Internet Visual/Audio regulations, the Group might be ordered by authorities to cease such operation and to pay a fine of not more than RMB30,000, and the equipment in connection with such operation will be seized and the Group will be subject to a maximum penalty of two times of the total investment to such business in case of severe contravention. Based on the internal financial records on the total investment to such business of the Group, the Directors estimate such penalty, if imposed on the Group, will be approximately RMB410,000. As advised by the Company’s legal advisers as to PRC laws, save for the approvals in accordance with the Provisional Regulations for the Administration of Internet Publishing, the Regulations for the Administration of Internet Electronic Notice Services ( ) and the Internet Visual/Audio regulations, which are still pending, the relevant structured subsidiaries of the Company have obtained the necessary licences and approvals to carry on its business. If any such licence was revoked or suspended, or if the relevant structured subsidiaries of the Company fail to renew such licences upon expiry or are unable to obtain new licences required by the PRC laws, the business and operations of the Group would be materially and adversely affected. In addition, in the event that the relevant structured subsidiaries of the Company are unable to secure the necessary licences for the expansion of business, the development potential of the Group might be adversely affected. Improper activities of other wireless value-added service providers could affect the business performance of the Group or damage the reputation of the Group According to the MII, some wireless value-added service providers have been promoting their services by delivering incorrect or unclear information to the public in order to deceive them or to induce mobile phone subscribers to use their services in order to generate profits. Such kinds of activities would lower the confidence of the public in the wireless value-added service industry and may affect the business of the Group. In the event that service providers mislead the public and relate such activities to the A8.com brand, the reputation of the Group may be significantly damaged. Hence, the Group may have to allocate more resources in the future to advertise, market and promote its products and services so as to build up consumers’ awareness in relation to the Group’s brand name. Any significant damage to the Group’s reputation or any significant failure to promote and protect the Group’s brand name and reputation could make it more difficult for the Group to successfully attract mobile phone subscribers for its existing products and services and to launch new products and services, which may have a material adverse effect on the business of the Group. – 38 –


RISK FACTORS RISKS RELATING TO CONDUCTING BUSINESS IN THE PRC Political and economic policies of the PRC government The Group’s results, financial condition and prospects are to a significant degree subject to the economic, political and legal developments of the PRC, as a substantial part of the Group’s assets is located in the PRC and substantially all of its revenue is derived from operations that take place in the PRC. The economic, political and social conditions, as well as government policies, including taxation policies, of the PRC, could affect the Group’s business. The PRC economy differs from the economies of other countries in many respects. The PRC economy has historically been a planned economy and has been in a transitional stage to a more market economy. Although the PRC government has implemented measures emphasizing the use of market forces for economic reform in recent years, there can be no assurance that economic, political or legal systems of the PRC will not develop in a way that is detrimental to the Group’s business, results of operations and prospects. Development of laws and regulations in relation to the Internet or wireless valueadded services may affect the Group’s ability to expand its business Due to the increasing popularity and penetration of the Internet and wireless value-added services, it is possible that the PRC government may adopt various laws and regulations relating to such kinds of transactions. For instance, in September 2006, the MII published the “Notification regarding the regulation of service fee and billing activities related to mobile ) (“Notification”), information services” ( which regulates, among other matters, the billing system of the enterprises in the telecommunications industry. According to the Notification, service providers are required to send a SMS to the relevant mobile phone subscriber, stating, inter alias, the identity of the mobile operator, the name of the services, the billing standard of such services, and the refunding policy requesting the mobile phone subscriber’s confirmation of the subscription of services. The subscription of services has not been completed, and the service provider shall not demand any payment from the mobile phone subscriber, until the mobile phone subscriber has replied to such SMS. Similar kinds of additional regulatory requirements, any introduction of new laws and regulations or changes to any existing laws and regulations which make it more restrictive for the Group to operate and/or lead to an escalation of compliance costs may have an adverse impact on the Group. In particular, business structures and operating systems set up on the basis of one understanding of the legislative regime may, in the event of a misunderstanding or misinterpretation of applicable laws or practices or any changes in such laws or practices or a change in its interpretation or enforcement policy, result in the established business structure and/or operating system being or being considered to be in breach of law or subject to new or additional requirements. If in such event the business structure or operating system cannot be modified to conform to the then applicable law or practice or its interpretation, the Group may be unable to conduct the whole or some part of its business. – 39 –


RISK FACTORS All these factors may limit the growth of the Internet and the industry of wireless value-added services, reduce the number of such transactions, increase the cost of conducting such businesses and/or increase the legal exposure of the relevant service providers, and thus imposing a negative effect on the prospects of the Group’s business. The growth of the PRC economy A slow-down in the PRC economy may negatively affect the growth and profitability of the Group. The Group’s financial results have been, and are expected to continue to be, affected by the growth of the PRC economy and that of the Internet and telecommunications industries. The Group cannot predict that the growth of the PRC economy will continue at current rates, or that any slowdown will not have a negative effect on its business. The government control of currency conversion Most of revenue of the Group is received in RMB. At present, RMB is not freely convertible to other currencies. Under the current foreign exchange regulations, RMB is convertible without approvals from SAFE only with regard to current account transactions, including trade and service related foreign exchange transactions and payment of dividends to foreign investors, while the foreign exchange transactions in respect of capital account items including the foreign currency capital in any foreign investment enterprise in the PRC, the repayment of the principal amount of foreign currency loans and the payment pursuant to foreign currency guarantees, continue to be subject to significant foreign exchange controls and require the prior approval of the SAFE. There can be no assurance that the PRC government will not impose more stringent restrictions on the convertibility of the RMB, especially relating to foreign exchange transactions. PRC foreign exchange control may limit the ability of the Company to utilize the Group’s revenue effectively and affect the ability of the Company to receive dividends and other payments from the Company’s PRC-incorporated subsidiary The Company’s PRC-incorporated subsidiary, Cash River, is subject to the PRC rules and regulations on currency conversion. In the PRC, SAFE regulates the conversion of the RMB into foreign currencies. Currently, foreign investment enterprises (“FIEs”) are required to apply to SAFE for “Foreign Exchange Registration Certificates for FIEs”. With such registration certifications (which need to be examined annually), FIEs are allowed to open foreign currency accounts including the “basic account” and “capital account”. Currently, conversion within the scope of the “basic account” (e.g. remittance of foreign currencies for payment of dividends, etc.) can be effected without requiring the approval of SAFE. However, conversion of currency in the “capital account” (e.g. for capital items such as direct investments, loans, securities, etc.) still requires the approval of SAFE.

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RISK FACTORS The applicable law in respect of conversion of RMB into other currencies is the Regulation for Foreign Exchange Controls of the PRC (“Regulation”) which came into effect on 1 April 1996 and amended as of 14 January 1997. Under the Regulation, conversion of RMB into foreign currencies for the use of recurring items, including the distribution of dividends and profits to foreign investors of FIEs is permissible and the approval of SAFE is not required, and FIEs are permitted to remit foreign currencies from their foreign currency bank accounts in the PRC upon presentation to the banks of board resolutions which authorize the distribution of profits or dividends and subject to other requirements being satisfied. However, conversion of RMB into foreign currencies for capital items, such as repatriation of capital, repayment of loans and for securities investment, is still under control and needs the approval of SAFE. In addition, the Notice on Issues concerning Foreign Exchange Management in Financing by PRC Residents by Overseas Special Purpose Vehicle (“SPV”) and Return Investments (“Notice 75”) promulgated by SAFE which came into force on 1 November 2005 would also apply to the repatriation of revenues by Cash River to the Company in the form of dividend income or otherwise. Pursuant to Notice 75, SPVs are foreign companies that are established by or controlled by PRC residents for raising financing outside of the PRC by way of, including but not limited to, equity issue or convertible debt. Such PRC residents (“Relevant PRC Residents”) are required to file an “overseas investment foreign exchange registration” before the establishment of such SPV and subsequently, to update such registration on the occurrence of specified events (“Specified Events”) such as (i) the injection of assets or shares of a PRC domestic company into the SPV; (ii) subsequent equity financing by such SPV outside of the PRC; (iii) capital reduction; and (iv) share transfers or share swaps. Subject to completion of the aforesaid registration, payment of dividends, profits and other payments to such SPV will be permitted. Each of the Company and A8 Music is a SPV for purposes of Notice 75, and accordingly, the Company will not be able to receive dividends, profits and other payments from Cash River, being the Company’s PRC-incorporated subsidiary, unless and until the aforesaid registration has been carried out. For the purposes of Notice 75, all PRC-resident Shareholders are Relevant PRC Residents under Notice 75. All PRC-resident Shareholders are therefore required to, and have completed, the aforesaid registration with the local SAFE with regard to their ownership of the Company as well as changes in their ownership of the Company in connection with the Reorganization in compliance with the requirements of Notice 75. Notice 75 also requires a Relevant PRC Resident to repatriate, within 180 days, distributed dividends or profits which such Relevant PRC Resident receives from a SPV and/or income deriving from changes in their shareholding in such SPV. Failure by such Relevant PRC Residents to effect repatriation in accordance with Notice 75 would be punishable under the Rules of the PRC on Foreign Exchange Control. All PRC-resident Shareholders are therefore required to repatriate, within 180 days, distributed dividends or profits they receive from the Company and/or income deriving from changes in their shareholdings in the Company. – 41 –


RISK FACTORS As at the Latest Practicable Date, all PRC-resident Shareholders had completed the relevant registration with the local SAFE with regard to their direct or indirect ownership of as well as changes in their ownership of the Company in connection with the Reorganization in compliance with the requirements of Notice 75. Besides, each of the PRC-resident Shareholders has undertaken to the Company to comply with Notice 75 which includes the updating of his/her SAFE registration in respect of the occurrence of any Specified Event. The failure of the PRC-resident Shareholders to register or amend their registrations in a timely manner pursuant to Notice 75 or the failure of future relevant PRC-resident Shareholders to comply with the registration procedures set forth in Notice 75 may subject such Shareholders to fines and legal sanctions and may also limit the ability of Cash River to distribute dividends to the Company or otherwise materially and adversely affect the business of the Group. There is no assurance that the PRC regulatory authorities will not impose further restrictions on the convertibility of the RMB. As all of the revenue of the Group are derived from Cash River in the PRC and these revenues are denominated in RMB, any future restriction on currency exchanges may limit the ability of Cash River to repatriate such revenues to the Company in the form of dividend income or otherwise. As the Company is an investment holding company with no business operation, in the absence of such dividend income from Cash River, the Company will not be able to distribute dividends to the Shareholders even if the Group, on a consolidated basis, is profitable. The implementation of the PRC Enterprise Income Tax Law may significantly increase the Group’s income tax expenses and materially decrease the Group’s profitability During the Track Record Period, the Group was exempted from withholding tax on the dividends received from its subsidiaries in China. Under the PRC Enterprise Income Tax Law that has come into effect on 1 January 2008, enterprises established under the laws of foreign countries or regions whose “de facto management bodies” are located within the PRC territory are considered as “resident enterprises” and thus will normally be subject to Enterprise Income Tax at the rate of 25% on global income. In particular, non-resident enterprises with an institution or establishment in China must pay Enterprise Income Tax at the rate of 25% on taxable income derived by such institution or establishment within China as well as on taxable income earned outside China but which has a “de facto” connection with such institution or establishment. Non-resident enterprises without any institution or establishment within China, or non-resident enterprises whose income has no connection to its institution or establishment inside China must pay a withholding income tax at the rate of 10% on taxable income derived from inside China, unless otherwise exempted pursuant to applicable tax treaties or tax arrangements between the PRC government and the government of other jurisdictions or applicable implementation regulations to be promulgated by the State Council of the PRC. Under the PRC Enterprise Income Tax Law, dividends, bonuses and other equity investment proceeds received by an enterprise are exempted from Enterprise Income Tax if distributed between qualified resident enterprises or if obtained by a non-resident enterprise with institutions or establishments in China from a resident enterprise and having a “de facto” connection with such institutions or establishments. – 42 –


RISK FACTORS The State Council of the PRC has promulgated implementation rules for this new tax law, and the withholding Enterprise Income Tax on the dividends the Group receives from its PRC subsidiaries might be levied at the rate of 10%. However, it cannot be assured that the Group will not be considered a “resident enterprise” under the PRC Enterprise Income Tax Law and therefore not be subject to the Enterprise Income Tax rate of 25% on its global taxable income. If the Company or any of its subsidiaries registered outside PRC is treated as a “resident enterprise” under the PRC Enterprise Income Tax Law, its income tax expenses may increase significantly, and its profitability could decrease materially. Future outbreak of Severe Acute Respiratory Syndrome or any other epidemic in the PRC The outbreak of Severe Acute Respiratory Syndrome (“SARS”) or any other epidemic could have a material adverse effect on the overall business sentiment and environment in the PRC. Any recurrence of severe acute respiratory syndrome, or SARS, or another widespread public health problem in the PRC, where all of the Group’s revenue is derived, and in Shenzhen, where the operations are headquartered, could adversely affect the operations of the Group. The operations of the business may be severely disrupted by several health-related factors, including the sickness or death of the key officers and employees and a general slowdown in the PRC economy. The spread of any severe communicable disease in the PRC may also worsen the operations of the customers and suppliers, which may have a material adverse effect on the financial condition and results of operations of the Group. There are uncertainties regarding interpretation and enforcement of the PRC laws and regulations Although many laws and regulations have been promulgated and amended in the PRC since 1978, the PRC legal system is still not sufficiently comprehensive when compared to the legal systems of certain developed countries. The interpretation of PRC laws and regulations may be influenced by momentary policy changes reflecting domestic political and social changes. In addition, it may also be difficult to enforce judgments and arbitration awards in the PRC. Many laws and regulations in the PRC are promulgated in broad principles and the Central People’s Government has gradually laid down implementation rules and has continued to refine and modify such laws and regulations. As the PRC legal system develops, the promulgation of new laws or refinement and modification of existing laws may affect foreign investors. There can be no assurance that future changes in legislation or the interpretation thereof will not have an adverse effect upon the business, operations or profitability of the Group.

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RISK FACTORS RISKS RELATING TO THE SHARE OFFER Shareholders’ interests in the share capital of the Company may be diluted in the future The Company has in place the Pre-IPO Share Option Scheme under which options entitling the holder thereof to subscribe for an aggregate of 18,702,400 Shares have been granted, representing approximately 4.25% of the Company’s total issued share capital of the Company after completion of the Share Offer (assuming that the Over-allotment Option is not exercised), the Capitalization Issue and the issue of the Remuneration Shares and without taking into account the issue and allotment of Shares pursuant to the exercise of options granted under the Pre-IPO Share Option Scheme and options may be granted under the Share Option Scheme. The Company has also adopted the Share Option Scheme and no options have been granted thereunder. Any exercise of the options granted under the Pre-IPO Share Option Scheme or to be granted under the Share Option Scheme in the future and issuance of Shares thereunder would result in the reduction in the percentage ownership of the Shareholders and may result in a dilution in the earnings per Share and net asset value per Share, as a result of the increase in the number of Shares outstanding after the issue of such additional Shares. Under the IFRS 2, the costs of share options granted or to be granted to employees under the Pre-IPO Share Option Scheme and the Share Option Scheme will be charged to the Group’s income statement over the vesting period by reference to the fair value at the date at which the share options are granted. As a result, the Group’s profitability may be adversely affected. Based on the information available as at 30 April 2008 and assumed that there was no major difference on the key assumptions, such as prevailing interest rate, with those on the date of grant of such options, the Directors estimated that the amount to be charged to the income statement of the Group for the year ending 31 December 2008 should be not less than HK$5.0 million. Such estimation will be subject to changes with reference to the prevailing conditions on the date of grant of the option and will also be subject to review by the Company’s auditors. Liquidity of the Shares and volatility of the market price Prior to the Share Offer, there has been no public market for the Shares. There is no guarantee that a liquid public market for the Shares will develop or be sustained upon completion of the Share Offer. In addition, the Offer Price has been determined by negotiations between the Lead Manager (acting on behalf of all the Underwriters) and the Company, and may not be indicative of the market price of the Shares that will prevail in the trading market and such market prices may be volatile. If an active public market for the Shares does not develop after the Share Offer, the market price and liquidity of the Shares may be adversely affected. Investors may not be able to resell their Shares at or above the initial public offering price. The stock markets of Hong Kong generally have experienced increasing price and volume fluctuations, some of which have been unrelated or have not corresponded to the operating performances of such companies in recent years. Volatility in the price of the Shares may be caused by factors outside the control of the Group and may be unrelated or disproportionate to the operating results of the Group. – 44 –


RISK FACTORS Risk related to the fluctuation of RMB The value of RMB may fluctuate which is subject to the government policy of the PRC. From 1994 to 2005, RMB was pegged to the U.S. Dollar. The conversion of RMB into foreign currencies in the PRC, including Hong Kong and U.S. Dollars, was based on exchange rates published by the People’s Bank of China. The official exchange rate for the conversion of the Renminbi to U.S. Dollar was in general stable during that period. However, since 2005, RMB has been pegged to a basket of currencies instead of the U.S. Dollar alone. Since the Group’s financial statements are denominated in RMB, the termination of the linked exchange rate between the RMB and the U.S. Dollar has increased the uncertainty of the Group’s income and profits. Any unfavorable change in the PRC government’s currency policies and conditions of the currency market may have material adverse effect on the value of dividends, if any, payable in foreign currencies, and also the financial condition of the Group. Additional funds raised through the issue of new Shares for the Group’s future growth will dilute the Shareholders’ equity interests The Group may in the future expand its capabilities and business through acquisition, joint venture and strategic partnership with parties who can add value to the business of the Group. The Company may require additional equity funding after the Share Offer and the equity interest of the Shareholders will be diluted should the Company issue new Shares to finance future acquisitions, joint ventures and strategic partnerships and alliances. Investors may experience difficulties in effecting service of legal process and enforcing judgments against the Company and its management The Company is a company incorporated under the laws of the Cayman Islands with limited liability and the laws of the Cayman Islands differ in some respects from those of Hong Kong or other jurisdictions where investors may be located. As a result, the remedies available to the Company’s minority shareholders may be different from those they would have under the laws of Hong Kong or other jurisdictions. The Company’s corporate affairs are governed by its memorandum and articles of association, the Companies Law and the common law of the Cayman Islands. The rights of Shareholders to take legal action against the Directors and the Company, actions by minority shareholders and the fiduciary responsibilities of the Directors to the Company under the Cayman Islands law are to a large extent governed by the common law of the Cayman Islands. The common law of the Cayman Islands is derived in part from comparatively limited judicial precedent in the Cayman Islands as well as from English common law, which has persuasive, but not binding, authority on a court in the Cayman Islands. The rights of the Company’s shareholders and the fiduciary responsibilities of the Directors under the Cayman Islands law may not be as clearly established as they would be under statutes or judicial precedents in Hong Kong or other jurisdictions where investors may be located. In particular, the Cayman Islands has a less developed body of securities laws. – 45 –


RISK FACTORS In addition, although the Company will be subject to the Listing Rules and the Hong Kong Codes on Takeovers and Mergers and Share Repurchases upon the listing of the Shares on the Stock Exchange, the holders of Shares will not be able to bring actions on the basis of violations of the Listing Rules and must rely on the Stock Exchange to enforce its rules. Furthermore, the Hong Kong Codes on Takeovers and Mergers and Share Repurchases do not have the force of law and provide only standards of commercial conduct acceptable for takeover and merger transactions and share repurchases in Hong Kong. As a result of any or all of the above, the Shareholders may have more difficulty in protecting their interests in the face of actions taken by the Company’s management, directors or major shareholders than they would as shareholders of a Hong Kong company or companies incorporated in other jurisdictions. For further information on the constitution of the Company and the Cayman Islands company law, see “Summary of memorandum and articles of association and Cayman Islands company law” set out in Appendix IV to this prospectus. Certain information and statistics contained in this prospectus are derived from various sources and have not been independently verified Facts, statistics and other information in this prospectus relating to the PRC, the PRC economy and the Internet and telecommunications industries and related industries are compiled from various publications and publicly available government official sources. The Group cannot guarantee the quality and accuracy of the government official statistics. Furthermore, government official statistics gathered from multiple sources may not be prepared on a comparable basis. Neither the Group, the Sponsor, the Lead Manager nor any of the Underwriters has verified the accuracy of the information contained in the government official statistics. The accuracy of such information derived from government official sources may not be consistent with other information compiled within or outside the PRC and may not be complete or up-to-date due to possibly flawed or ineffective collection methods and other problems. For that reason, such information and statistics from government official sources in this prospectus may not be accurate and should not be unduly relied upon. Forward-looking statements contained in this prospectus are subject to risks and uncertainties This prospectus contains certain statements that are “forward-looking” and indicated by the use of forward-looking terminology such as “anticipate”, “believe”, “estimate”, “expect”, “may”, “ought to”, “should” or “will” or similar terms. Prospective investors are cautioned that reliance on any forward-looking statement involves risk and uncertainties and that, although the Directors believes the assumptions related to those forward-looking statements are reasonable, any or all of those assumptions could prove to be inaccurate and as a result, the forward-looking statements based on those assumptions could also be incorrect. The risks and uncertainties in this regard consist of those identified in the risk factors discussed above. In light of these and other risks and uncertainties, the enclosure of forward-looking statements in this prospectus should not be regarded as representations by the Group that the plans and objectives will be achieved, and investors should not place undue reliance on such statements. – 46 –


WAIVERS FROM STRICT COMPLIANCE WITH THE LISTING RULES In preparation for the Listing, the Company has sought the following waivers from strict compliance with the relevant provisions of the Listing Rules: MANAGEMENT PRESENCE Rule 8.12 of the Listing Rules requires that a new applicant applying for a primary listing on the Stock Exchange must have a sufficient management presence in Hong Kong. This will normally mean that at least two of its executive directors must be ordinarily resident in Hong Kong. The business of the Group was developed by Mr. Liu Xiaosong and other senior management members who are PRC nationals based in the PRC. Since the business operations and office premises of the Group are primarily located in the PRC and the Group’s customers are all situated in the PRC, the senior management members of the Group are and will therefore continue to be based in the PRC. At present, Ms. Ho Yip, Betty, an executive Director, the Qualified Accountant and the company secretary of the Company is ordinarily resident in Hong Kong while none of the other executive Directors are Hong Kong residents or are based in Hong Kong. The Company has applied to the Stock Exchange for a waiver from strict compliance with the requirements under Rule 8.12 of the Listing Rules subject to the following conditions: (a)

the Company will appoint two authorized representatives pursuant to Rule 3.05 of the Listing Rules who will act as the Company’s principal channel of communication with the Stock Exchange and ensure that the Group complies with the Listing Rules at all times. The two authorized representatives appointed are Ms. Ho Yip, Betty, an executive Director, the Qualified Accountant and the company secretary of the Company, and Mr. Liu Xiaosong, an executive Director of the Company;

(b)

each of the authorized representatives will be available to meet with the Stock Exchange in Hong Kong within a reasonable time frame upon the request of the Stock Exchange and will be readily contactable by telephone, facsimile or email. Each of them is authorized to communicate on behalf of the Company with the Stock Exchange;

(c)

the Company will appoint a compliance advisor pursuant to Rule 3A.19 of the Listing Rules for the period commencing on the Listing Date and ending on the date on which the Company complies with Rule 13.46 of the Listing Rules in respect of the financial results of the Company for the first full financial year commencing after the Listing Date;

– 47 –


WAIVERS FROM STRICT COMPLIANCE WITH THE LISTING RULES (d)

all of the authorized representatives have means to contact all members of the Board (including the independent non-executive Directors) promptly at all times as and when the Stock Exchange wishes to contact the Directors for any matters. The Company will implement the following policies: (a) each executive Director shall provide his or her respective mobile phone numbers, residential phone numbers, office phone numbers, fax numbers and email address to the authorized representatives; (b) in the event that an executive Director expects to travel, he/she shall provide valid phone number or means of communication to the authorized representatives; and (c) each of the executive Directors will provide their respective mobile phone numbers, residential phone numbers, office phone numbers, fax numbers and email address to the Stock Exchange; and

(e)

the Directors who are not ordinarily resident in Hong Kong have confirmed that they possess valid travel documents to visit Hong Kong to meet with the Stock Exchange upon a reasonable notice.

CONTINUING CONNECTED TRANSACTIONS The Company has entered into certain transactions in the form of structure contracts with its connected persons which would constitute non-exempt continuing connected transactions of the Company under the Listing Rules after the Listing. Such structure contracts are fundamental to the legal structure and business operations of the Group and the Directors consider that it would not be appropriate for the structure contracts to be subject to, amongst other things, the announcement and independent shareholders’ approval requirement under the Listing Rules. The Company has therefore made an application to the Stock Exchange for a waiver from strict compliance with the requirements set out in Chapter 14A of the Listing Rules for such non-exempt continuing connected transactions. Further details of such non-exempt continuing connected transactions and the waiver are set out in the section headed “Connected transactions” in this prospectus.

– 48 –


INFORMATION ABOUT THIS PROSPECTUS AND THE SHARE OFFER DIRECTORS’ RESPONSIBILITY FOR THE CONTENTS OF THIS PROSPECTUS This prospectus, for which the Directors collectively and individually accept full responsibility, contains particulars given in compliance with the Companies Ordinance, the SFO, the Securities and Futures (Stock Market Listing) Rules and the Listing Rules for the purpose of giving information to the public with regard to the Group. The Directors, having made all reasonable enquiries, confirm that, to the best of their knowledge and belief: –

the information contained in this prospectus is accurate and complete in all material respects and not misleading;

there are no other facts or matters the omission of which would make any statement in this prospectus misleading; and

all opinions expressed in this prospectus have been arrived at after due and careful consideration and enquiry and are founded on bases and assumptions that are fair and reasonable.

The Share Offer is made solely on the basis of the information contained and the representations made in this prospectus and the Application Forms and on terms and subject to the conditions set out herein and therein. No person is authorized in connection with the Share Offer to give any information or to make any representation not contained in this prospectus and the Application Forms, and any information or representation not contained herein must not be relied upon as having been authorized by the Company, the Sponsor, the Lead Manager, the Underwriters, any of their respective directors, agents or professional advisors or any other persons or parties involved in the Share Offer. FULLY UNDERWRITTEN The Share Offer comprises the Placing and the Public Offer. A total of 91,000,000 Offer Shares comprising 80,000,000 New Shares and 11,000,000 Sale Shares will initially be made available under the Share Offer, of which 81,900,000 Placing Shares comprising 70,900,000 New Shares and 11,000,000 Sale Shares, representing 90% of the total number of Offer Shares initially being offered under the Share Offer, will initially be placed with institutional, professional and private investors anticipated to have a sizeable demand for the Placing Shares at the Offer Price under the Placing. The remaining 9,100,000 Public Offer Shares, representing 10% of the total number of Offer Shares initially being offered under the Share Offer, will initially be offered to the public in Hong Kong for subscription at the Offer Price under the Public Offer, payable in full on application. The number of Shares offered for subscription under the Placing and the Public Offer will be subject to re-allocation and, in respect of the Placing, the Over-allotment Option. Details of the structure of the Share Offer are described in the section headed “Structure and conditions of the Share Offer” in this prospectus. This prospectus is published in connection with the Share Offer and, together with the relevant Application Forms, sets out the terms and conditions of the Share Offer. – 49 –


INFORMATION ABOUT THIS PROSPECTUS AND THE SHARE OFFER The Share Offer is sponsored by the Sponsor and managed by the Lead Manager. Subject to the terms of the Underwriting Agreement (including the determination of the Offer Price by agreement between the Company (for itself and on behalf of the Selling Shareholder) and the Lead Manager (on behalf of the Underwriters) on or around Wednesday, 4 June 2008, being the expected Price Determination Date or such later time as may be agreed by the Company (for itself and on behalf of the Selling Shareholder) and the Lead Manager (on behalf of the Underwriters) but in any event no later than Thursday, 5 June 2008), the Public Offer Shares are fully underwritten by the Public Offer Underwriters and the Placing Shares are fully underwritten by the Placing Underwriters. For particulars of the Underwriters and the underwriting arrangements, please see the section headed “Underwriting” in this prospectus. DETERMINATION OF THE OFFER PRICE The Offer Shares are being offered at the Offer Price which is expected to be determined by the Lead Manager (on behalf of the Underwriters) and the Company (for itself and on behalf of the Selling Shareholder) on or before the Price Determination Date. If for whatever reasons, the Lead Manager (on behalf of the Underwriters) and the Company (for itself and on behalf of the Selling Shareholder) are unable to reach an agreement on the Offer Price by the Price Determination Date, the Share Offer will not become unconditional and will lapse. OFFER SHARES TO BE OFFERED IN HONG KONG/CERTAIN JURISDICTIONS ONLY No action has been taken to permit any public offering of the Offer Shares or the distribution of this prospectus and the Application Forms in any jurisdiction other than Hong Kong. The distribution of this prospectus and the Application Forms and the offering of the Offer Shares in certain jurisdictions is restricted by law. Accordingly, this prospectus may not be used for the purposes of, and does not constitute, an offer or invitation in any jurisdiction or in any circumstances in which such an offer or invitation is not authorized or to any person to whom it is unlawful to make such an offer or invitation. The following information is provided for guidance only. Prospective applicants for Offer Shares should consult their financial advisors and take legal advice, as appropriate, to inform themselves of, and to observe, all applicable laws and regulations of any relevant jurisdiction. Prospective applicants for the Offer Shares should inform themselves as to the relevant legal requirements of applying for the Offer Shares and any applicable exchange control regulations and applicable taxes in the countries of their respective citizenship, residence or domicile. Hong Kong This prospectus has been registered with the Registrar of Companies in Hong Kong. Accordingly, this prospectus may be issued, circulated or distributed in Hong Kong, and the Offer Shares under the Share Offer may be offered for subscription to: (i) members of the public in Hong Kong; and (ii) any other person in Hong Kong. In addition, advertisements may be made offering or calling attention to an offer or intended offer of the Offer Shares to the public in Hong Kong. – 50 –


INFORMATION ABOUT THIS PROSPECTUS AND THE SHARE OFFER Singapore This prospectus has not been and will not be lodged with and registered by the Monetary Authority of Singapore as a prospectus under the Securities and Futures Act, Chapter 289 of Singapore (“SFA”) and the Offer Shares will be offered in Singapore pursuant to exemptions invoked under Subdivision 4, Division 1 of Part XIII of the SFA. Accordingly, this prospectus may not be issued, circulated or distributed in Singapore, nor the Offer Shares be offered or sold, or be made the subject of an invitation for subscription or purchase, whether directly or indirectly, to persons in Singapore other than (i) an institutional investor under Section 274 of the SFA, (ii) a relevant person pursuant to Section 275(1) of the SFA, (iii) any person pursuant to an offer referred to in Section 275(1A) of the SFA, or (iv) pursuant to and in accordance with the conditions of any other applicable provision of the SFA. Where the Offer Shares are subscribed or purchased by (i) an institutional investor pursuant to Section 274 of the SFA, (ii) a relevant person pursuant to Section 275(1) of the SFA, or (iii) any person pursuant to an offer referred to in Section 275(1A) of the SFA, such Offer Shares shall not be sold within a period of six months from the date of the initial acquisition to any person other than an institutional investor under Section 274 of the SFA, to a relevant person as defined in Section 275(2) of the SFA, or to any person pursuant to an offer referred to in Section 275(1A) of the SFA, and in accordance with the conditions of the SFA. PRC This prospectus may not be circulated or distributed in the PRC and the Offer Shares may not be offered or sold, directly or indirectly or offered or sold to any person for re-offering or resale, directly or indirectly, to any resident of the PRC except pursuant to applicable laws and regulations of the PRC. Cayman Islands No offer of the Offer Shares may be made to members of the public in the Cayman Islands. General Each person acquiring or subscribing for any Offer Shares will be required, or be deemed by his/her/its acquisition of the Offer Shares, to confirm that he/she/it is aware of the restrictions on offer of the Offer Shares as described in this prospectus and that he/she/it is not acquiring, and has not been offered, any such Offer Shares in circumstances that contravene any such restrictions. They should inform themselves about and observe any applicable legal or regulatory requirements.

– 51 –


INFORMATION ABOUT THIS PROSPECTUS AND THE SHARE OFFER APPLICATION FOR THE LISTING ON THE STOCK EXCHANGE Application has been made to the Listing Committee for the granting of the approval for the listing of, and permission to deal in, the Shares in issue, Shares to be issued pursuant to the Capitalization Issue, Shares to be issued pursuant to the Share Offer, the Remuneration Shares and any Shares to be issued upon the exercise of the Over-allotment Option and of any options which have been granted under the Pre-IPO Share Option Scheme or may be granted under the Share Option Scheme, on the Main Board. No part of the equity or debt securities of the Company is listed or dealt in on any other stock exchange and at present, no such listing or permission to deal is being or is proposed to be sought on any other stock exchange. HONG KONG BRANCH REGISTER AND STAMP DUTY All Shares in issue and to be issued pursuant to the Capitalization Issue and the Share Offer, the Remuneration Shares and any Shares to be issued upon exercise of the Overallotment Option, options granted or to be granted under the Pre-IPO Share Option Scheme and the Share Option Scheme respectively will be registered on the Company’s branch register of members to be maintained by Computershare Hong Kong Investor Services Limited in Hong Kong. The Company’s principal register of members will be maintained in the Cayman Islands. Only Shares registered on the Company’s branch register of members maintained in Hong Kong may be traded on the Stock Exchange. Dealings in Shares registered on the Company’s Hong Kong branch register of members will be subject to Hong Kong stamp duty. Unless determined otherwise by the Company, all dividends will be paid in HK dollars in respect of Shares to the Shareholders listed on the Company’s branch register of members to be maintained in Hong Kong, by ordinary post, at the Shareholders’ risk, to the registered address of each Shareholder, or if joint Shareholders, to the firstnamed of such joint shareholders in accordance with the Articles of Association. PROFESSIONAL TAX ADVICE RECOMMENDED If you are unsure about the taxation implications of subscribing for, purchasing, holding, disposing of, dealing in, or the exercise of any rights in relation to, the Offer Shares, you should consult an expert. The Company, the Directors, the Sponsor, the Lead Manager, the Underwriters, any of their respective directors, agents or professional advisors or any other person involved in the Share Offer do not accept responsibility for any tax effects on or liabilities resulting from the subscription for, purchase, holding, disposing of, dealing in, or the exercise of any rights in relation to, the Offer Shares. – 52 –


INFORMATION ABOUT THIS PROSPECTUS AND THE SHARE OFFER SHARES WILL BE ELIGIBLE FOR ADMISSION INTO CCASS Subject to the granting of the approval for the listing of, and permission to deal in, the Shares on the Stock Exchange and the compliance with the stock admission requirements of HKSCC, the Shares will be accepted as eligible securities by HKSCC for deposit, clearance and settlement in CCASS with effect from the date on which the Listing commences or any other date HKSCC chooses. Settlement of transactions between participants of the Stock Exchange is required to take place in CCASS on the second Business Day after any trading day. Investors should seek the advice of their stockbrokers or other professional advisors for details of those settlement arrangements and how such arrangements will affect their rights and interests. All activities under CCASS are subject to the General Rules of CCASS and CCASS Operational Procedures in effect from time to time. All necessary arrangements have been made for the Shares to be admitted into CCASS. COMMENCEMENT OF DEALINGS IN THE SHARES Dealings in the Shares on Main Board of the Stock Exchange are expected to commence on 12 June 2008. Shares will be traded in board lots of 2,000 Shares each. The stock code for the Shares is 00800. The Company will not issue any temporary documents of title. Dealings in the Shares on the Stock Exchange will be effected by participants of the Stock Exchange whose bid and offer quotations will be available on the Stock Exchange’s teletext page information system. Delivery and payment for Shares dealt on the Stock Exchange will be effected two trading days following the transaction date (“T+2”). Settlement of transactions between participants of the Stock Exchange is required to take place in CCASS on the second Business Day after any trading day. Only certificates for Shares registered on the branch share register of the Company will be valid for delivery in respect of transactions effected on the Stock Exchange. If you are unsure about the procedures for dealings and settlement arrangement on the Stock Exchange on which the Shares are listed and how such arrangements will affect your rights and interests, you should consult your stockbroker or other professional advisors. PROCEDURE FOR APPLICATION FOR THE PUBLIC OFFER SHARES The procedure for applying for Public Offer Shares is set out in the section headed “How to apply for the Public Offer Shares” in this prospectus and on the Application Forms. STRUCTURE OF THE SHARE OFFER Details of the structure of the Share Offer, including its conditions, are set out in the section headed “Structure and conditions of the Share Offer” in this prospectus. – 53 –


DIRECTORS AND PARTIES INVOLVED IN THE SHARE OFFER DIRECTORS Name

Address

Nationality

Liu Xiaosong

Room 24A, C Building Jinxiu Garden Nanshan District Shenzhen PRC

Chinese

Ho Yip, Betty

Flat B, 22/F Yuk Sau Mansion 20 Yuk Sau Street Happy Valley Hong Kong

Canadian

Lin Yizhong (alias Lin Hai)

Room 601, Building 9 Golden Garden Futian District Shenzhen PRC

Chinese

Zhong Xiaolin

Building 452 2388 Hongqiao Road Shanghai PRC

Chinese

Li Wei

24C, Yutingxuan Dushi Garden Futian District Shenzhen PRC

Chinese

Executive Directors

Non-executive Directors

– 54 –


DIRECTORS AND PARTIES INVOLVED IN THE SHARE OFFER Independent non-executive Directors Hui, Harry Chi

5A Holly Court 1 Holly Road Happy Valley Hong Kong

Chinese

Song Yong Hua

7 Mallard Way Aldermaston Reading RG74UT UK

British

Chan Yiu Kwong

Flat 5, 12/F Block East Miramar Villa Shiu Fai Terrace Hong Kong

Chinese

– 55 –


DIRECTORS AND PARTIES INVOLVED IN THE SHARE OFFER PARTIES INVOLVED IN THE SHARE OFFER Sponsor

SBI E2-Capital (HK) Limited 43/F, Jardine House One Connaught Place Central Hong Kong

Sole Bookrunner and Lead Manager

SBI E2-Capital Securities Limited 43/F, Jardine House One Connaught Place Central Hong Kong

Placing Underwriters

SBI E2-Capital Securities Limited 43/F, Jardine House One Connaught Place Central Hong Kong CAF Securities Company Limited 13/F, Fairmont House 8 Cotton Tree Drive Central Hong Kong IBTS Asia (HK) Limited 1308B-10, Tower One, Lippo Centre 89 Queensway Hong Kong China Everbright Securities (HK) Limited 36/F, Far East Finance Centre 16 Harcourt Road Hong Kong First Shanghai Securities Limited 19/F, Wing On House 71 Des Voeux Road Central Hong Kong Guoyuan Securities Brokerage (Hong Kong) Limited 18/F, Li Po Chun Chambers 189 Des Voeux Road Central Hong Kong

– 56 –


DIRECTORS AND PARTIES INVOLVED IN THE SHARE OFFER Public Offer Underwriters

SBI E2-Capital Securities Limited 43/F, Jardine House One Connaught Place Central Hong Kong CAF Securities Company Limited 13/F, Fairmont House 8 Cotton Tree Drive Central Hong Kong IBTS Asia (HK) Limited 1308B-10, Tower One, Lippo Centre 89 Queensway Hong Kong China Everbright Securities (HK) Limited 36/F, Far East Finance Centre 16 Harcourt Road Hong Kong First Shanghai Securities Limited 19/F, Wing On House 71 Des Voeux Road Central Hong Kong Guoyuan Securities Brokerage (Hong Kong) Limited 18/F, Li Po Chun Chambers 189 Des Voeux Road Central Hong Kong

Auditors and reporting accountants

Ernst & Young 18/F, Two International Finance Centre 8 Finance Street Central, Hong Kong

Legal advisors to the Company

as to Hong Kong law: Coudert Brothers in association with Orrick, Herrington & Sutcliffe LLP 39/F, Gloucester Tower The Landmark 15 Queen’s Road Central Hong Kong

– 57 –


DIRECTORS AND PARTIES INVOLVED IN THE SHARE OFFER as to PRC law: King & Wood PRC Lawyers 28/F, Landmark 4028 Jintian Road Futian District Shenzhen 518026 China as to Cayman Islands law: Conyers Dill & Pearman Cricket Square Hutchins Drive P.O. Box 2681 Grand Cayman KY1-1111 Cayman Islands Legal advisors to the Sponsor and the Underwriters as to Hong Kong law

Chiu & Partners 41st Floor, Jardine House One Connaught Place Central Hong Kong

Property valuers

Asset Appraisal Limited Room 1303 13th Floor, Beverly House Nos. 93-107 Lockhart Road Wanchai Hong Kong

Receiving bankers

Standard Chartered Bank (Hong Kong) Limited 15th Floor, Standard Chartered Tower 388 Kwun Tong Road Kwun Tong, Kowloon Hong Kong Industrial and Commercial Bank of China (Asia) Limited 33th Floor, ICBC Tower 3 Garden Road Central Hong Kong

– 58 –


CORPORATE INFORMATION Registered office

Cricket Square Hutchins Drive P.O. Box 2681 Grand Cayman KY1-1111 Cayman Islands

Head office

5/F, Fucheng Hi-tech Building South 1 Avenue Southern District of Hi-tech Park Nanshan District Shenzhen City Guangdong Province the PRC

Principal place of business in Hong Kong

Level 28 Three Pacific Place 1 Queen’s Road East Hong Kong

Company’s website

www.a8.com (for business) ir.a8.com (for announcement and circulars) (information contained in these websites does not form part of this prospectus)

Compliance advisor

CAF Securities Company Limited

Company secretary and qualified accountant

Ho Yip, Betty HKICPA, AICPA

Authorized representatives (for the purpose of the Listing Rules)

Liu Xiaosong Room 24A, C Building Jinxiu Garden Nanshan District Shenzhen PRC Ho Yip, Betty Flat B, 22/F Yuk Sau Mansion 20 Yuk Sau Street Happy Valley Hong Kong

– 59 –


CORPORATE INFORMATION Authorized representative (for the purpose of Part XI of the Companies Ordinance)

Ho Yip, Betty

Members of the audit committee

Chan Yiu Kwong (Chairman) Song Yong Hua Hui, Harry Chi

Members of the remuneration committee

Liu Xiaosong (Chairman) Song Yong Hua Hui, Harry Chi

Principal share registrar and transfer office in the Cayman Islands

Butterfield Fund Services (Cayman) Limited Butterfield House 68 Fort Street P.O. Box 705 Grand Cayman KY1-1107 Cayman Islands

Hong Kong branch share registrar and transfer office

Computershare Hong Kong Investor Services Limited Shops 1712-1716, 17th Floor Hopewell Centre 183 Queen’s Road East Wanchai Hong Kong

Principal banker

China Merchants Bank Shenzhen Futian Sub-Branch Block West, 1/F Nanguang Building No. 5 Hua Fu Road Futian District Shenzhen China

– 60 –


INDUSTRY OVERVIEW

The information presented in this section is derived from government or official publications unless otherwise indicated. Whilst the Directors have taken reasonable care to ensure that certain information presented in this section is accurately reproduced from the relevant sources, such information has not been prepared or independently verified by the Directors, the Sponsor, the Lead Manager, the Underwriters and other parties involved in the Share Offer or any of their respective directors, advisors or affiliates. The Group, the Sponsor, the Lead Manager, the Underwriters and any of their respective directors, advisors or affiliates make no representation as to the accuracy or completeness of any government official statistics contained in this section, which may not be consistent with other information available and may not be accurate or complete and consequently should not be unduly relied upon. The statistical data contained in this section are extracted from various research reports prepared by various institutions independent from the Company, which include eMarketer, CNNIC, iResearch Consulting Group (“iResearch”), Informa Telecoms & Media and In-Stat. None of such research reports is commissioned by the Company. ECONOMIC DEVELOPMENT IN THE PRC The PRC economy has grown rapidly. According to the National Bureau of Statistics of China ( ) (“National Bureau of Statistics”), the PRC’s GDP grew from approximately RMB6,079.4 billion in 1995 to approximately RMB21,087.1 billion in 2006, representing a CAGR of approximately 12.0%. According to the data published by the National Bureau of Statistics, the GDP per capita of the PRC grew from approximately RMB5,046.0 in 1995 to approximately RMB16,084.0 in 2006, with a CAGR of approximately 11.1%. The following chart depicts the growth of GDP and per capita GDP from 1995 to 2006 in the PRC. GDP and per capita GDP in the PRC (1995-2006)

Source: National Bureau of Statistics

– 61 –


INDUSTRY OVERVIEW In line with the growth in GDP in the PRC, the per capita annual disposable income of urban households and the per capita annual net income of rural households in the PRC have been in a growing trend. The per capita annual disposable income of urban households in the PRC increased from approximately RMB4,283.0 in 1995 to approximately RMB11,759.5 in 2006, representing a CAGR of approximately 9.6%, while the per capita annual net income of rural households in the PRC increased from approximately RMB1,577.7 in 1995 to approximately RMB3,587.0 in 2006, representing a CAGR of approximately 7.8%, according to the data published by the National Bureau of Statistics. The chart below sets forth the per capita annual disposable income of urban households and the per capita annual net income of rural households in the PRC from 1995 to 2006. Per capita annual income of rural households and per capita annual disposable income of urban households

Source:

National Bureau of Statistics

– 62 –


INDUSTRY OVERVIEW POPULATION GROWTH IN THE PRC Currently, the PRC has the largest population in the world. Its population grew at a CAGR of approximately 0.7% between 1995 and 2006, and reached approximately 1.3 billion in 2006 according to the National Bureau of Statistics. The population grew at a steady pace within these ten years. The chart below illustrates the growth in the PRC population from 1995 to 2006. PRC population (1995-2006)

Source: National Bureau of Statistics

Since the Group generates substantially all of its revenue in the PRC, the business growth of the Group is to a certain extent affected by the growth in GDP and population in the PRC. With a rapid growth in the economy and a stable growth in the population of the PRC, the enlarging customer base together with its growing purchasing power constitutes considerable market potential for companies that provide music-focused content and applications to mobile phone subscribers through wireless networks. DIGITAL MUSIC Digital music generally includes music delivered over online and mobile platforms. Online music services mainly include downloading from the Internet to personal computers or other digital devices. Mobile music services refer to music-related services, which are provided to mobile phone subscribers through wireless networks.

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INDUSTRY OVERVIEW ONLINE MUSIC MARKET The global market According to eMarketer, an Internet market research company independent of the Group, its directors, shareholders and their respective associates, the global online music market generated revenue of approximately US$1.9 billion (equivalent to approximately RMB13.6 billion) in 2006. Based on the estimation of eMarketer, the global online music market will reach approximately US$7.5 billion (equivalent to approximately RMB53.8 billion) in 2011, representing a CAGR of approximately 31.6% within these five years. The PRC market Internet population According to the data published by the CNNIC, the number of Internet users in the PRC has grown rapidly from approximately 22.5 million in 2000 to approximately 210.0 million in 2007 at a CAGR of approximately 37.6%. The robust growth in the number of Internet users provides considerable market potential for Internet-related businesses in the PRC. The chart below shows the growth in the number of Internet users in the PRC from 2000 to 2007 according to the CNNIC. Number of Internet users in the PRC

Source: CNNIC

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INDUSTRY OVERVIEW Market prospects According to iResearch, a PRC-based Internet-related industry market research company independent of the Group, its directors, shareholders and their respective associates, the development of the online music market in the PRC has been seriously affected by piracy and the availability of free downloads. The market turnover of the online music market in the PRC was approximately RMB113.0 million in 2006, which was smaller than the traditional record market in the PRC and other foreign online music markets. In 2006, the number of Internet users having downloaded or listened to music through the Internet reached approximately 119.0 million in the PRC, while, it was estimated that only approximately 1.5 million users paid for such services, representing only approximately 1.3% of the total number of Internet users having downloaded or listened music through the Internet in the PRC. According to the estimation of iResearch, the online music market turnover in the PRC will grow significantly at a CAGR of approximately 58.5% from 2006 to 2009, and will reach approximately RMB450.0 million in 2009. The chart below shows iResearch’s estimate of the online music market turnover in the PRC from 2003 to 2006 and such forecasts for the period from 2007 to 2009. Online music market turnover in the PRC, 2003-2009F

Source: iResearch

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INDUSTRY OVERVIEW In addition, the Directors are of the view that, in recent years, the problem of Internet music piracy in the PRC could be improved since regulations over intellectual property rights launched by the PRC government authorities have become more stringent, details of which are set out in the paragraph headed “Regulations in respect of intellectual property rights” in the section headed “Regulatory overview” in this prospectus. MOBILE MUSIC SERVICES MARKET The global market According to Informa Telecoms & Media, a UK-based research and marketing group which focuses on global telecoms and media markets and is independent of the Group, its directors, shareholders and their respective associates, as quoted by iResearch, mobile music services globally generated approximately US$7,390.0 million (equivalent to approximately RMB53,030.6 million) turnover, which is the largest turnover among various types of mobile entertainment services (including pictures, games and video) in 2006, as shown below. Global turnover from mobile entertainment services in 2006

Source: Informa Telecoms & Media as quoted by iResearch

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INDUSTRY OVERVIEW The PRC market Mobile phone subscribers in the PRC According to data published by the MII and as shown in the diagram below, mobile phone subscribers in the PRC grew from approximately 206.6 million in 2002 to approximately 547.3 million in 2007, representing a CAGR of approximately 21.5% within these five years. As shown in the statistics from the MII, the penetration rate of mobile phones in the PRC grew from 11.2% in January 2002 to 41.6% in December 2007. Number of mobile phone subscribers in the PRC

Source: MII

According to the CNNIC, as at December 2007, there were approximately 210.0 million Internet users and approximately 78.0 million computers in the PRC. It is believed by the Directors that many mobile phone subscribers may have no regular access to the Internet and consequently the mobile network has become one of the most important channels for music lovers who do not have regular access to the Internet to access their favorite music in digital form. This provides significant growth potential to companies that are engaged in musicfocused business via the mobile network.

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INDUSTRY OVERVIEW According to the National Bureau of Statistics, the population aged between 15 and 39 comprised approximately 38.8% of the whole population in the PRC in 2006. The Directors believe that there is a huge potential customer base for mobile music-focused businesses, since the mobile phone is a popular item among young people. It is believed that the rising popularity of mobile phones and related services among the younger age group of the PRC will drive demand for mobile music services in the PRC. MAJOR TELECOMMUNICATIONS OPERATORS IN THE PRC MOBILE MARKET The major telecommunications operators in the PRC market include China Mobile Group, China Unicom Group, China Telecom Group and China Netcom Group. China Mobile Group operates basic mobile voice services and value-added services such as data, IP telephone and multimedia services. China Mobile Group is the largest mobile operator in the world in terms of market value. It has operating licences for Internet services and the international gateways and is famous for its brands like GoTone (“ ”), Easyown (“ ”) and M-Zone (“ ”). China Unicom Group currently operates international and domestic long distance calls, data and Internet services, and other related telecommunications value-added businesses. It also provides various wireless value-added services in different aspects, among others, stock trading information services, music and television programs. China Telecom Group is a state-owned telecom operator which owns various provincial enterprises. China Telecom Group operates various kinds of domestic and international fixed line telecom networks, telecom network-based voice, data, image, multimedia and information services. China Netcom Group is another well-known telecommunications operator in China. China Netcom Group is a provider of fixed-line telephone services and other telecommunications-related services.

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INDUSTRY OVERVIEW WIRELESS VALUE-ADDED SERVICES MARKET IN THE PRC According to iResearch, the total size of the wireless value-added services in the PRC market reached RMB100.0 billion in 2006, representing a growth rate of approximately 31.6% from 2005. iResearch forecasts that the market size will grow at a fast pace between 2008 and 2010 under the influence of the Beijing 2008 Olympic Games. The size of the wireless value-added services market in the PRC is expected to reach approximately RMB208.0 billion in 2010. The chart below sets forth the trend in relation to the size of the wireless value-added service market in the PRC for the period from 2004 to 2006 and the expected trend from 2007 to 2010. Market size of the PRC wireless value-added services in 2004-2010F

Source: iResearch

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INDUSTRY OVERVIEW MOBILE MUSIC-FOCUSED SERVICES MARKET IN THE PRC According to In-Stat, a US-based research company independent of the Group, its directors, shareholders and their respective associates, mobile music has been one of the most successful wireless data services in the PRC, and mobile phone subscribers in the PRC regard mobile music as fashionable and a means of distinguishing themselves by personalized ringtones and RBTs. The mobile music market in the PRC has exhibited continuous growth from 2002 to 2005. In-Stat estimated that in 2005, the mobile music industry in the PRC contributed revenue of approximately US$764.8 million (equivalent to approximately RMB5,488.2 million). Following three years of continuous strong growth, the mobile music market in the PRC slowed down in 2006 as a result of strict regulations governing pricing and other practices of service providers (“SPs”) initiated by the MII. Details of the relevant regulations are set out in the section headed “Regulatory overview” in this prospectus. Mobile music market revenue in the PRC declined slightly to approximately US$703.2 million (equivalent to approximately RMB5,046.2 million) in 2006 due to the above regulations. Nevertheless, In-Stat considers that the negative effect of the SPs regulations in 2006 affecting the mobile music services has been short-term only. According to In-Stat, the SPs regulations in 2006 have been positive for the mobile music market’s continuous development because of the phasing-out of small SPs and recovery of consumer trust in SPs. In-Stat expects that the mobile music market revenue in the PRC market will increase from approximately US$703.2 million (equivalent to approximately RMB5,046.2 million) in 2006 to approximately US$1,083.2 million (equivalent to approximately RMB7,773.0 million) in 2011, representing a CAGR of 9.0% within these five years. The chart below illustrates the forecasted mobile music market revenue in the PRC from 2005 to 2011. PRC’s mobile music market revenue forecast (2005-2011)

Source: In-Stat

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INDUSTRY OVERVIEW As the Group’s operations primarily focus on providing ringtones and RBTs, discussion of the PRC mobile music market also focus on the respective markets for ringtones and RBTs. The following chart shows the forecasted revenue of ringtones and RBTs in the PRC from 2005 to 2011, according to In-Stat. RBTs and ringtones market revenue forecast in the PRC

Source: In-Stat

RBTs – the audible music, voice, or other sound that is heard by the calling party after dialing and prior to the call being answered by the called party. RBT substitutes the standard ringing sound. According to In-Stat, in 2006, RBT revenue in the PRC was approximately US$535.5 million (equivalent to approximately RMB3,842.7 million), which represents around 76.2% of total mobile music market revenue. In-Stat estimates that RBT revenue in the PRC will reach approximately US$880.3 million (equivalent to approximately RMB6,317.0 million) in 2011, representing a CAGR of 8.9% from approximately US$526.6 million (equivalent to approximately RMB3,778.9 million) in 2005. Ringtones – the customizable sound that a mobile phone makes in order to indicate an incoming call. There are three different types of ringtones: monophonic, polyphonic, and truetones. According to In-Stat, ringtones revenue in the PRC was approximately US$165.6 million in 2006 (equivalent to approximately RMB1,188.3 million). In-Stat estimates that ringtone revenue in the PRC will recover following the SPs regulations in 2007 and maintain steady growth between 2007 and 2009 and then begin to move downward afterwards.

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HISTORY AND DEVELOPMENT BUSINESS DEVELOPMENT The Group was founded by Mr. Liu Xiaosong in May 2000 with the incorporation of Huadong Feitian to provide wireless telecommunications value-added services to mobile phone subscribers in the PRC through mobile operators. Mr. Lin Yizhong (alias Lin Hai) joined the Group in August 2000 as a founding member and has been responsible for the daily operations of the Group. The Directors believe that the Group was one of the first group of companies to provide wireless telecommunications value-added services in the PRC. At that time, the channel through which the Group delivered its wireless telecommunications value-added services was mainly WAP. In 2002, the Group entered into an agreement with the Music Copyright Society of China in which the Group was authorized to use certain music content of the Music Copyright Society of China to produce ringtones and the Directors believe that the Company was one of the first ringtone providers authorized by the Music Copyright Society of China to use its music contents for producing ringtones. In addition to the provision of ordinary wireless telecommunications value-added services to mobile phone subscribers in the PRC, the Group extended its services to include wireless value-added services in connection with music-related events. In 2002, the Group participated ” (2002 CCTV-MTV Music Award Ceremony) in the event “2002 CCTV-MTV providing SMS voting services. In 2003, the Group cooperated with certain independent third parties for the provision of ” for the promotion of the “Pepsi” SMS interactive services such as the event “ brand. The Group further cooperated with Beijing Pepsi Cola Beverages Co., Ltd. and the China Mobile Group for the promotion of RBTs regarding the event “ ” in 2006. In 2007, the Group co-operated with (Pepsi (China) Co., Ltd.) in promoting the theme song “I Lemon You” for the “7up” brand through the wireless network in the PRC and the Internet. In February 2004, the Group commenced to provide wireless telecommunications value-added services relating to music content of a record label, the music content of such record label was sold as RBTs through the wireless network of China Mobile Group. Subsequently, the Group commenced cooperation with other record labels, such as Warner Music Beijing and Universal Mobile Hong Kong Limited in 2004 and 2005 respectively. With the Group’s successful launch of music-focused wireless value-added services and to establish a corporate platform for further development of the Group, A8 Music and Cash River were established in October and December 2003 respectively. A8 Music later entered into agreements with a number of financial investors to raise funds for the development of the Group’s mobile music business while Cash River entered into certain structure contracts with each of Huadong Feitian and Kuaitonglian and their respective shareholders for its continuous operation of wireless telecommunications value-added services in the PRC. Please refer to the paragraphs headed “Financial investors” and “Structure contracts” in this section for details of the financial investors and the Contractual Arrangements. – 72 –


HISTORY AND DEVELOPMENT In 2004, the Group launched its Internet UGC platform, www.a8.com, for the collection of original independently produced music content in order to capture the growth of music related wireless business opportunities. In April 2005, the Group launched the “A8“ ” ” which was broadcasted on (Hunan TV). In December 2005, “A8 ” was held by the Group in Beijing. During 2005 to 2006, by selecting songs from its Internet UGC platform, the Group cooperated with independent production companies for the production of the theme songs of various television programmes, namely “ ”, “ ”, “ ”, “ ”, “ ” and “ ”. In June 2007, the Group entered into an agreement with an independent production company in which the Group was granted an exclusive right to produce a theme song of a movie named “ ”. Revenue generated from such cooperation was split at a predetermined percentage between the Group and the independent production companies. Under the terms of some of the cooperation agreements, the Group may retain the sole ownership of copyright of the songs or jointly own such copyright with the other parties and is responsible for the production of the music contents for wireless value-added services including ringtones, RBTs and IVR Music. Another noteworthy event for the Group was its joint participation with an Independent Third Party in a number of events, namely, “ ”, “2006 ” and “2006 ” as the sole wireless value-added service provider. The participation of the Group in such events took various forms, which included the setting up and maintenance of specific Internet website, the provision of voting services through SMS and IVR, supply of entertainment news about roadshows and concerts organized in connection with the relevant events through MMS, while that Independent Third Party promoted the Group’s specifically set-up Internet website and wireless value-added services in press conference, pamphlets, roadshows, concerts and television programmes. The Directors consider that the Group has been effective in the promotion of original independently produced music content collected from its UGC platform and a number of such songs have become popular hits in the PRC. Such popular hits include “ ” and “ ”. According to the internal records of the Group, for the year ended 31 December 2007, approximately 7.8 million downloads and approximately RMB16.1 million in terms of revenue were recorded for the song “ ”. Based on the internal records of the Group, for the year ended 31 December 2007, approximately 5.9 million downloads and approximately RMB11.1 million in terms of revenue were recorded for the song “ ”. In 2007, the Group cooperated with Universal Music (as represented by Beijing Wireless Star Music Ltd.) in the promotion, through the wireless network, of “2007 ” (Jacky Cheung China Tour 2007), together with China Mobile Group, as the sole wireless telecommunications value-added service partner of this event. The Directors consider that this was a recognition of the Group’s strong promotion ability in relation to music content or related events through the wireless network of mobile operators in the PRC. – 73 –


HISTORY AND DEVELOPMENT From using the Internet and WAP at the early stage of ringtones and RBTs download to the recent surge in SMS, MMS and IVR as its major delivery channels, the Directors consider that the Group is able to provide a variety of wireless telecommunications value-added services to mobile phone subscribers in the PRC. In late 2006, the Group undertook an arrangement with Dopod, a mobile phone manufacturer which is an Independent Third Party, for the preliminary launch of A8Box, a software which facilitates mobile phone subscribers to have access to the Group’s mobile music services directly from their mobile phones. The Group has since then entered into similar arrangements with a number of other mobile phone manufacturers who are also Independent Third Parties to increase the use of A8Box in different mobiles. CORPORATE HISTORY The Company The Company was incorporated in the Cayman Islands on 2 October 2007. Please refer to the paragraph headed “Changes in share capital of the Company” in Appendix V to this prospectus for details of changes in the share capital of the Company. A8 Music A8 Music was incorporated in the BVI on 8 October 2003. On 15 November 2003, Mr. Liu Xiaosong and Ms. Ma Yan were allotted 99 and 1 ordinary shares of A8 Music respectively. On 29 March 2004, Mr. Liu Xiaosong and Ms. Ma Yan transferred their entire shareholdings in A8 Music to Prime Century, Grand Idea and Top Result and the shareholding structure of A8 Music after the transfer is set out below: Shareholders

Percentage of shareholdings

Prime Century Top Result Grand Idea

60.276% 21.750% 17.974%

Total:

100%

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HISTORY AND DEVELOPMENT Prime Century is a limited liability company incorporated in the BVI on 18 December 2003 and Ever Novel became the beneficial owner of the entire issued share capital of Prime Century on 29 March 2004. On 1 December 2004, shares in the share capital of Prime Century were issued to Ever Novel, Ms. Wang Gang, certain past and current employees of the Group and other Independent Third Parties. Ms. Wang Gang is the cousin of Mr. Liu Xiaosong. After the issue of shares, the issued shares of Prime Century were held as to 61.41% by Ever Novel, 18.50% by Ms. Wang Gang and 20.09% by the past and present employees of the Group and other Independent Third Parties. Ever Novel owned more than 60% of the issued share capital of Prime Century throughout the Track Record Period. On 26 May 2008, Ever Novel transferred 8.8% equity interest in Prime Century to Join Reach for a consideration of HK$1.00 and as at the date of this prospectus, the issued shares of Prime Century were held as to 52.61% by Ever Novel, 18.50% by Ms. Wang Gang, 8.80% by Join Reach and 20.09% by the past and current employees of the Group and other Independent Third Parties. Please refer to the sub-paragraph headed “Shareholders of Prime Century” in the paragraph headed “Disclosure of interests” in Appendix V to this prospectus for details of the shareholdings of such past and present employees of the Group and other Independent Third Parties in Prime Century. Ever Novel is a limited liability company incorporated in the BVI on 12 December 2003 and Mr. Liu Xiaosong became the beneficial owner of its entire issued share capital on 29 March 2004. Mr. Liu Xiaosong transferred 52.72% and the remaining 47.28% beneficial interests in Ever Novel to a family trust set up for the benefit of his family members on 30 March 2006 and 26 May 2008 respectively. Grand Idea is a limited liability company incorporated in the BVI on 12 December 2003 and Mr. Liu Xiaosong became the beneficial owner of its entire issued share capital on 29 March 2004. On 30 March 2006, the entire issued share capital was transferred to Ms. Xie Yuanbi, the mother of Mr. Liu Xiaosong. Ms. Xie Yuanbi transferred her entire beneficial interests in Grand Idea to a family trust set up for the benefit of her family members on the same day. Top Result is a limited liability company incorporated in the BVI on 18 December 2003 and Ms. Cui Jingtao became the beneficial owner of its entire issued share capital on 24 March 2004 and throughout the Track Record Period.

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HISTORY AND DEVELOPMENT On 30 July 2004, among others, Prime Century, Grand Idea and Top Result entered into an agreement to transfer an aggregate of 5% equity interest in A8 Music to IDG Technology Venture Investments, LP. Please refer to the paragraph headed “Investments in the Group” in this section for details. After the transfer, the shareholding structure of A8 Music was set out below: Percentage of shareholdings

Shareholders Prime Century Top Result Grand Idea IDG Technology Venture Investments, LP

57.26% 20.66% 17.08% 5.00%

Total:

100%

On 11 November 2005, A8 Music increased its authorized share capital and issued preferred shares to a number of investors, details of which are set out in the sub-paragraph headed “Investments in the Group” in this section. After the transactions described therein, the shareholding structure of A8 Music was set out below: Percentage of shareholdings

Shareholders Prime Century Top Result Grand Idea TDF Capital China II, LP IDG Technology Venture Investments, LP

Intel Capital (Cayman) Corporation JAFCO Asia Technology Fund II The Greater China Trust(Note) TDF Capital Advisors, LP

49.90% 16.56% 16.33% 5.20% 5.02%

2.71% 2.71% 1.36% 0.22%

Class of shares ordinary shares ordinary shares ordinary shares preferred shares 4.61% ordinary shares and 0.41% preferred shares preferred shares preferred shares preferred shares preferred shares

Note: The shares are held by Butterfield Bank (Cayman) Limited as trustee of The Greater China Trust.

Please refer to the paragraph headed “Reorganization” in this section for change in share capitals of A8 Music as part of the Reorganization.

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HISTORY AND DEVELOPMENT Cash River Cash River was incorporated on 10 December 2003 as a wholly foreign-owned enterprise in the PRC. It was wholly owned by A8 Music since its incorporation and throughout the Track Record Period. Huadong Feitian Huadong Feitian was incorporated on 22 May 2000 with a registered capital of RMB1 million and it was owned as to 80% by Mr. Liu Xiaosong and 20% by Mr. Zhang Lihao. Mr. Zhang Lihao is an Independent Third Party. Mr. Liu Xiaosong was the sole director of Huadong Feitian upon its incorporation. The registered capital of Huadong Feitian was increased from RMB1 million to RMB5 million in January 2001 and to approximately RMB28.7 million in July 2001, respectively, while the shareholding percentage of Mr. Liu Xiaosong and Mr. Zhang Lihao remained the same as follows: Percentage of shareholdings

Shareholders Mr. Liu Xiaosong Mr. Zhang Lihao

80% 20%

Total:

100%

On 10 September 2001, Mr. Liu Xiaosong entered into an equity transfer agreement with Mr. Zhang Changyu, an Independent Third Party, to transfer 51% equity interest in Huadong Feitian to Mr. Zhang Changyu at a consideration of approximately RMB14.6 million which was determined based on the amount of registered capital of Huadong Feitian represented by such equity interest. After this transfer, the shareholding structure of Huadong Feitian was as follows: Percentage of shareholdings

Shareholders

Mr. Zhang Changyu Mr. Liu Xiaosong Mr. Zhang Lihao

51% 29% 20%

Total:

100%

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HISTORY AND DEVELOPMENT In September 2001, Ms. Xu Xiaohui, Mr. Dong Jiangwu, Mr. Zhang Lihao and Ms. Ma Yan were appointed as directors of Huadong Feitian. Ms. Xu Xiaohui was an employee of Huadong Feitian and is currently the department head of the Finance Department of the Company. Mr. Dong Jiangwu was an employee of Huadong Feitian. Ms. Ma Yan was an employee of Mr. Liu Xiaosong’s other business not related to the Group. On 28 June 2002, Mr. Zhang Changyu entered into an equity transfer agreement with (Shenzhen Shengang Chanxueyan Venture Capital Co., Ltd.*) (“Shengang Chanxueyan”) to transfer 11.33% equity interest in Huadong Feitian to Shengang Chanxueyan at a consideration of RMB5 million which was arrived after negotiation between the parties. After this share transfer, the shareholding structure of Huadong Feitian was as follows: Percentage of shareholdings

Shareholders Mr. Zhang Changyu Mr. Liu Xiaosong Mr. Zhang Lihao Shengang Chanxueyan

39.67% 29.00% 20.00% 11.33%

Total:

100.00%

Shengang Chanxueyan is a limited liability company incorporated in the PRC. As at the Latest Practicable Date, it was owned as to 62% by Ms. Cui Jingtao, a substantial shareholder of the Company and the spouse of Mr. Li Wei, a non-executive Director, and as to 38% by other Independent Third Parties. In July 2002, Ms. Xu Xiaohui resigned from the board of Huadong Feitian and Mr. Li Wei, a non-executive Director of the Company, was appointed as a director of Huadong Feitian. On 12 December 2002, Mr. Zhang Changyu entered into an equity transfer agreement (Shenzhen Shiji Minghua with Shengang Chanxueyan and Enterprise Co., Ltd.*) (“Shiji Minghua”) to transfer 2.33% and 5.34% equity interests in Huadong Feitian to Shengang Chanxueyan and Shiji Minghua, respectively, both at a nominal consideration of RMB1 which was arrived at pursuant to agreement between the parties. Shiji Minghua is a limited liability company incorporated in the PRC. As at the Latest Practicable Date, it was owned as to approximately 71.3% by Mr. Liu Xiaosong, 10% by Mr. Fu Kaiqing, 3% by Mr. Lin Yizhong (alias Lin Hai) and 15.7% by other Independent Third Parties. Mr. Fu Kaiqing was an employee of Mr. Liu’s other businesses not related to the Group and Mr. Lin Yizhong (alias Lin Hai) is an executive Director.

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HISTORY AND DEVELOPMENT On 2 January 2003, Mr. Zhang Changyu entered into an equity transfer agreement with (Shenzhen Advanced Technology Enterprise Co., Ltd.*) (“Shenzhen Advanced”) to transfer 32% equity interest in Huadong Feitian to Shenzhen Advanced at a consideration of RMB10 million which was determined with reference to the net asset value of Huadong Feitian as at 31 December 2002. Shenzhen Advanced is a limited liability company incorporated in the PRC and was an Independent Third Party. On 28 February 2003, Mr. Zhang Lihao entered into an equity transfer agreement with Shiji Minghua to transfer 20% equity interest in Huadong Feitian to Shiji Minghua for a consideration of approximately RMB573,600 which was determined based on negotiation between the parties. On the same date, Mr. Liu Xiaosong entered into an equity transfer agreement with (Shenzhen Diyuan Enterprise Co. Ltd.*) (“Shenzhen Diyuan”) to transfer 29% equity interest in Huadong Feitian to Shenzhen Diyuan at a consideration of RMB831,700 which was determined based on negotiation between the parties. After the above transfers, the shareholding structure of Huadong Feitian was as follows: Percentage of shareholdings

Shareholders Shenzhen Advanced Shenzhen Diyuan Shiji Minghua Shengang Chanxueyan

32.00% 29.00% 25.34% 13.66%

Total:

100.00%

Shenzhen Diyuan is a limited liability company incorporated in the PRC. As at the Latest Practicable Date, it was owned as to approximately 85.9% by Mr. Liu Xiaosong, 2.48% by Ms. Ma Yan and 11.62% by other Independent Third Parties. Ms. Ma Yan was an employee of Mr. Liu’s other businesses not related to the Group. In March 2003, Mr. Dong Jiangwu and Ms. Ma Yan resigned from the board of Huadong Feitian and Mr. Fang Zhonghua and Mr. Zhou Boqin were appointed as directors of Huadong Feitian. Mr. Fang Zhonghua and Mr. Zhou Boqin were representatives of Shenzhen Advanced in the board of directors of Huadong Feitian.

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HISTORY AND DEVELOPMENT On 25 December 2003, Shenzhen Advanced entered into an equity transfer agreement with Shengang Chanxueyan to transfer 32% equity interest in Huadong Feitian to Shengang Chanxueyan at a consideration of RMB17 million which was determined based on the net asset value of Huadong Feitian as at 30 November 2003. After this transfer, the shareholding structure of Huadong Feitian was as follows: Percentage of shareholdings

Shareholders Shengang Chanxueyan Shenzhen Diyuan Shiji Minghua

45.66% 29.00% 25.34%

Total:

100.00%

In December 2003, Mr. Zhang Lihao, Mr. Fang Zhonghua, Mr. Zhou Boqin resigned from the board of Huadong Feitian and Ms. Ma Yan, Mr. Li Zhiyuan, Mr. Li Kunpeng, Mr. Zhang Pei and Mr. Fu Kaiqing were appointed as directors of Huadong Feitian. Mr. Li Zhiyuan was representative of Shengang Chanxueyan in the board of directors of Huadong Feitian while Mr. Zhang Pei was an employee of Mr. Liu Xiaosong’s other businesses not related to the Group. On 30 December 2003, Shengang Chanxueyan entered into an equity transfer agreement with Mr. Li Kunpeng to transfer 20.66% equity interest in Huadong Feitian to Mr. Li at a consideration of approximately RMB11.5 million which was determined based on the value of such equity interest with reference to the audited financial statements of Huadong Feitian as at 30 November 2003. After this share transfer, the shareholding structure of Huadong Feitian was as follows: Percentage of shareholdings

Shareholders Shenzhen Diyuan Shiji Minghua Shengang Chanxueyan Mr. Li Kunpeng (Note)

29.00% 25.34% 25.00% 20.66%

Total:

100.00%

Note: Mr. Li Kunpeng signed a declaration of trust on 31 December 2003 pursuant to which he declared that the equity interest held by him in Huadong Feitian was held on trust for Mr. Liu Xiaosong.

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HISTORY AND DEVELOPMENT On 9 January 2004, Shengang Chanxueyan entered into an equity transfer agreement with Ms. Cui Jingtao to transfer 25% equity interest in Huadong Feitian to Ms. Cui at a consideration of approximately RMB13.3 million which was determined based on the value of such equity interest with reference to the audited financial statements of Huadong Feitian as at 30 November 2003. On 12 January 2004, each of Shiji Minghua and Shenzhen Diyuan separately entered into an equity transfer agreement with Mr. Liu Xiaosong to transfer each of their 25.34% and 29% equity interests in Huadong Feitian to Mr. Liu Xiaosong at considerations of approximately RMB13.5 million and RMB15.4 million, respectively which were based on the value of such equity interest with reference to the audited financial statements of Huadong Feitian as at 30 November 2003. After the abovementioned transfers, the shareholding structure of Huadong Feitian was as follows: Percentage of shareholdings

Shareholders Mr. Liu Xiaosong Ms. Cui Jingtao Mr. Li Kunpeng (Note)

54.34% 25.00% 20.66%

Total:

100.00%

Note: Mr. Li Kunpeng signed a declaration of trust on 31 December 2003 pursuant to which he declared that the equity interest held by him in Huadong Feitian was held on trust for Mr. Liu Xiaosong.

On 1 March 2004, Mr. Li Kunpeng entered into an equity transfer agreement with Mr. Wang Daiqiang to transfer 20.66% equity interest in Huadong Feitian to Mr. Wang at a consideration of approximately RMB11.5 million which was determined based on the value of such equity interest with reference to the audited financial statements of Huadong Feitian as at 30 November 2003. After this transfer, the shareholding structure of Huadong Feitian was as follows: Percentage of shareholdings

Shareholders Mr. Liu Xiaosong Ms. Cui Jingtao Mr. Wang Daiqiang

54.34% 25.00% 20.66%

(Note)

Total:

100.00%

Note: Mr. Wang Daiqiang signed a declaration of trust on 4 March 2004 pursuant to which he declared that the equity interest held by him in Huadong Feitian was held on trust for Mr. Liu Xiaosong.

– 81 –


HISTORY AND DEVELOPMENT In March 2004, Mr. Li Kunpeng resigned from the board of Huadong Feitian and Mr. Wang Daiqiang was appointed as a director of Huadong Feitian. The above shareholding structure of Huadong Feitian remained the same throughout the Track Record Period. Mr. Fu Kaiqing and Mr. Li Zhiyuan resigned as directors of Huadong Feitian in June 2004. During the Track Record Period, Mr. Liu Xiaosong had nominated Mr. Wang Daiqiang to hold equity interests in Huadong Feitian on trust for him. Mr. Wang is Mr. Liu’s cousin. Mr. Wang Daiqiang exercised his rights as a shareholder of Huadong Feitian in accordance with the instructions of Mr. Liu Xiaosong and he received no compensation for acting as such nominee shareholder. Mr. Wang Daiqiang is not an employee of the Group. The Company’s legal advisers as to PRC laws have confirmed that the trust document signed by Mr. Wang Daiqiang is legally binding and enforceable against the parties to the trust documents. On 30 April 2008, Mr. Wang Daiqiang entered into an equity transfer agreement with Mr. Liu Xiaosong to transfer 20.66% equity interest in Huadong Feitian to Mr. Liu. After completion of the relevant filings and procedures of the transfer, Huadong Feitian will be owned as to 75% by Mr. Liu Xiaosong and 25% by Ms. Cui Jingtao. Kuaitonglian Kuaitonglian was incorporated on 10 May 2004 with a registered capital of RMB3 million which was held as set out below: Percentage of shareholdings

Shareholders Mr. Liu Xiaosong Ms. Cui Jingtao (Note) Mr. Wang Daiqiang (Note)

60.28% 21.75% 17.97%

Total:

100.00%

Note: Ms. Cui Jingtao and Mr. Wang Daiqiang separately signed a declaration of trust on 10 May 2004 pursuant to which they declared that the equity interests held by them in Kuaitonglian were held on trust for Mr. Liu Xiaosong.

Mr. Liu Xiaosong was its sole director upon its incorporation. The registered capital of Kuaitonglian was increased to RMB10 million in June 2004 with the same shareholding structure as set out above. – 82 –


HISTORY AND DEVELOPMENT On 26 October 2004, Mr. Liu Xiaosong, Ms. Cui Jingtao and Mr. Wang Daiqiang entered into an equity transfer agreement with Mr. Fu Kaiqing to transfer their 60.28%, 11.75% and 17.97% equity interests in Kuaitonglian to Mr. Fu Kaiqing at considerations of approximately RMB6.03 million, RMB1.18 million and RMB1.80 million, respectively, which were determined based on the amount of registered capital of Kuaitonglian represented by such equity interest, respectively. After the above transfers, the shareholding structure of Kuaitonglian was as follows: Percentage of shareholdings

Shareholders Mr. Fu Kaiqing (Note) Ms. Cui Jingtao (Note)

90% 10%

Total:

100%

Note: Ms. Cui Jingtao and Mr. Fu Kaiqing separately signed a declaration of trust on 10 May 2004 and 30 October 2004 pursuant to which they declared that the equity interests held by them in Kuaitonglian were held on trust for Mr. Liu Xiaosong.

In October 2004, Mr. Fu Kaiqing and Mr. Li Wei were appointed as directors of Kuaitonglian. On 25 May 2007, Mr. Fu Kaiqing entered into an equity transfer agreement with Ms. Gao Keying to transfer 90% equity interest in Kuaitonglian to Ms. Gao at a consideration of RMB9 million which was based on the amount of registered capital of Kuaitonglian represented by such equity interest. After this transfer, the shareholding structure of Kuaitonglian was as set out below: Percentage of shareholdings

Shareholders Ms. Gao Keying (Note) Ms. Cui Jingtao (Note)

90% 10%

Total:

100%

Note: Ms. Cui Jingtao and Ms. Gao Keying separately signed a declaration of trust on 10 May 2004 and 30 May 2007 pursuant to which they declared that the equity interests held by them in Kuaitonglian were held on trust for Mr. Liu Xiaosong.

In May 2007, Mr. Fu Kaiqing resigned from the board of Kuaitonglian and Ms. Gao Keying was appointed as a director of Kuaitonglian.

– 83 –


HISTORY AND DEVELOPMENT During the Track Record Period, Mr. Liu Xiaosong had nominated Ms. Cui Jingtao, Mr. Wang Daiqiang, Mr. Fu Kaiqing and Ms. Gao Keying to hold equity interests in Kuaitonglian on trust for him. Ms. Cui Jingtao is a substantial shareholder of the Company, Mr. Wang Daiqiang is Mr. Liu’s cousin, Mr. Fu Kaiqing is an employee of Mr. Liu’s other business not related to the Group and Ms. Gao Keying is an employee of the Group. All of Ms. Cui Jingtao, Mr. Wang Daiqiang, Mr. Fu Kaiqing and Ms. Gao Keying exercised their rights as a shareholder of Kuaitonglian in accordance with the instructions of Mr. Liu Xiaosong and they received no compensation for acting as such nominee shareholder. Neither Ms. Cui Jingtao, Mr. Wang Daiqiang or Mr. Fu Kaiqing is an employee of the Group. Mr. Wang Daiqiang and Mr. Fu Kaiqing are no longer shareholders of Kuaitonglian. The Company’s legal advisers as to PRC laws have confirmed that the trust documents signed by Ms. Cui Jingtao, Mr. Wang Daiqiang, Mr. Fu Kaiqing and Ms. Gao Keying are legally binding and enforceable against the parties to the trust documents. On 10 March 2008, Ms. Cui Jingtao and Ms. Gao Keying entered into an equity transfer agreement with Mr. Lin Yizhong (alias as Lin Hai) to transfer an aggregate of 100% equity interest in Kuaitonglian to Mr. Lin for a consideration of RMB10 million. After completion of the relevant filings and procedures of the transfer, Kuaitonglian will be owned as to 100% by Mr. Lin Yizhong (alias as Lin Hai). Aiyue Aiyue was incorporated on 22 May 2007 with a registered capital of RMB1 million which was held as to 30% by Ms. Hu Yonghong and as to 70% by Ms. Wu Yingqing. Each of Ms. Hu Yonghong and Ms. Wu Yingqing separately signed a declaration of trust on 31 August 2007 to confirm that the equity interests held by them in Aiyue were held on trust for Mr. Liu Xiaosong. Mr. Liu Xiaosong has signed a declaration to declare that the beneficial interest in Aiyue’s registered capital belonged to Huadong Feitian since the incorporation of Aiyue and he never had any beneficial interest in the registered capital of Aiyue. On 15 November 2007, each of Ms. Hu Yonghong and Ms. Wu Yingqing entered into an equity transfer agreement with Huadong Feitian to transfer each of their 30% and 70% equity interests in Aiyue to Huadong Feitian at considerations of RMB300,000 and RMB700,000 respectively which were based on the amount of registered capital of Aiyue represented by such equity interests. The Company’s legal advisers as to PRC laws have confirmed that the trust documents and the declaration signed by Mr. Liu Xiaosong, Ms. Hu Yonghong and Ms. Wu Yingqing are legally binding and enforceable against the parties to the trust documents.

– 84 –


HISTORY AND DEVELOPMENT Chuangmeng Yinyue Chuangmeng Yinyue was incorporated on 31 May 2005 with a registered capital of RMB5 million which was held as to 60% by Kuaitonglian and 40% by Mr. Xu Xiaofeng. On 7 July 2005, Mr. Xu Xiaofeng entered into an equity transfer agreement with Kuaitonglian to transfer 12% equity interest in Chuangmeng Yinyue to Kuaitonglian at a consideration of RMB60,000 which was determined based on the amount of paid registered capital represented by such equity interest. After this transfer, Chuangmeng Yinyue was owned as to 72% by Kuaitonglian and 28% by Mr. Xu Xiaofeng. Yunhai Qingtian Yunhai Qingtian was incorporated on 9 December 2004 with a registered capital of RMB500,000 which was held as to 80% by Huadong Feitian, 8% by Mr. Zhou Minjian, 6% by Mr. Feng Qiang and 6% by Mr. Yao Yanfei. Mr. Huang Cinan was the sole director of Yunhai Qingtian upon its incorporation. On 26 January 2005, Mr. Feng Qiang entered into an equity transfer agreement with Huadong Feitian to transfer 6% equity interest in Yunhai Qingtian to Huadong Feitian at a consideration of RMB30,000 which was determined based on the amount of registered capital of Yunhai Qingtian represented by such equity interest. After this transfer, the shareholding structure of Yunhai Qingtian was as follows: Percentage of shareholdings

Shareholders Huadong Feitian Mr. Zhou Minjian Mr. Yao Yanfei

86% 8% 6%

Total:

100%

– 85 –


HISTORY AND DEVELOPMENT On 12 September 2005, Mr. Zhou Minjian and Mr. Yao Yanfei entered into an equity transfer agreement with Huadong Feitian and Mr. Huang Cinan to transfer an aggregate of 10% equity interest to Mr. Huang Cinan and 4% equity interest to Huadong Feitian at considerations of RMB50,000 and RMB20,000 respectively which were determined based on the amount of registered capital of Yunhai Qingtian represented by such equity interests. After these transfers, the shareholding structure of Yunhai Qingtian was as follows: Percentage of shareholdings

Shareholders Huadong Feitian Mr. Huang Cinan

90% 10%

(Note)

Total:

100%

Note: Mr. Huang Cinan signed a declaration of trust on 11 September 2005 pursuant to which he declared that the equity interest held by him in Yunhai Qingtian was held on trust for Mr. Liu Xiaosong.

The registered capital of Yunhai Qingtian was increased to RMB3 million in September 2005. On 18 January 2006, Mr. Huang Cinan entered into an equity transfer agreement with Huadong Feitian to transfer 10% equity interest in Yunhai Qingtian to Huadong Feitian at a consideration of RMB100,000 which was arrived after negotiation between the parties. After this transfer, Yunhai Qingtian was wholly owned by Huadong Feitian. The Company’s legal advisers as to PRC laws have confirmed that the trust document signed by Mr. Huang Cinan is legally binding and enforceable against the parties to the trust document. Yuesheng Feiyang Yuesheng Feiyang was incorporated on 26 March 2007 with a registered capital of RMB1 million which was wholly owned by Kuaitonglian. Its shareholding structure remained the same from its incorporation and throughout the Track Record Period, during which Mr. Fu Kaiqing was its sole director. The Company’s legal advisers as to PRC laws have confirmed that the share transfers of the abovementioned entities which are incorporated in the PRC are legal under the then applicable laws and regulations.

– 86 –


HISTORY AND DEVELOPMENT FINANCIAL INVESTORS IDG, TDF Capital China, TDF Capital Advisors, Intel Capital, JAFCO and the GC Trust (as defined below) (collectively, the “Financial Investors”) invested in the Group during the Track Record Period. The background of each of these Financial Investors are more particularly described below. Background of the Financial Investors IDG Technology Venture Investments, LP (“IDG”) IDG is a limited partnership formed under the laws of the State of Delaware in 2000. Its initial limited partner is IDG Technology Venture Investment, Inc., a Massachusetts corporation which is wholly owned by International Data Group, Inc.. Its general partner is IDG Technology Venture Investments, LLC, a limited liability company formed under the laws of the State of Delaware. IDG mainly invests in early-to-growth-stage companies with the focus on hi-tech related sectors such as the Internet, telecommunications, wireless communications, digital media, integrated circuits and life science. TDF Capital China II, LP (“TDF Capital China”) TDF Capital China is an exempted limited partnership registered in the Cayman Islands in 2005. It is a venture capital firm managed by TDF Management II, LLC. It has been focusing on early to expansion stage investments in consumer, media and technology sectors in the Greater China region. Mr. Zhong Xiaolin, a non-executive Director, is a general partner of TDF Capital LLC, an associate of TDF Capital China. TDF Capital Advisors, LP (“TDF Capital Advisors”) TDF Capital Advisors is an exempted limited partnership registered in the Cayman Islands in 2005. It is an affiliated venture capital fund of TDF Capital China. Intel Capital (Cayman) Corporation (formerly known as Intel Capital Corporation) (“Intel Capital”) Intel Capital, a company incorporated in the Cayman Islands, is part of Intel Corporation, a company incorporated in Delaware and listed on NASDAQ. Intel Capital invests in promising technology companies worldwide and focuses on both established and new technologies that help to develop industry standard solutions, drive global Internet growth, facilitate new usage models, and advance the computing and communications platforms.

– 87 –


HISTORY AND DEVELOPMENT JAFCO Asia Technology Fund II (“JAFCO”) JAFCO, a Cayman Islands company, is wholly owned by JAFCO Asia Technology Fund II, L.P. (“JATF II LP”), a limited partnership also registered in the Cayman Islands. JAFCO Asia Technology Holdings II Limited, a Cayman Islands company, is the sole general partner of JATF II LP, and controls the voting and investment power over shares owned by JAFCO. The sole owner of JAFCO Asia Technology Holdings II Limited, JAFCO Investment (Asia Pacific) Ltd (“JAFCO Asia”) is wholly owned by JAFCO Co., Ltd., a public company listed on the Tokyo Stock Exchange. The Greater China Trust (“GC Trust”) Managed by Mitsubishi UFJ Securities (HK) Capital Limited, the GC Trust is an exempted trust registered in the Cayman Islands and it focuses on investing in private companies in diversified sectors in the Greater China region which are at the expansion and pre-IPO stages. Save as disclosed above, each of the Financial Investors has confirmed to the Company that it is independent from the Company, the Directors, Controlling Shareholders and each of the other Financial Investors. The Financial Investors enjoy the same rights as public investors after Listing and have no management role in the Company. The shareholdings of the Financial Investors will be counted towards the public float upon completion of Share Offer in view of their insignificant amount of shareholdings in the Company respectively and the fact that they have the same rights of a shareholder of the Company as the public shareholders. Investments in the Group On 30 July 2004, Prime Century, Grand Idea and Top Result, the then existing shareholders of A8 Music, Mr. Liu Xiaosong, Mr. Wang Daiqiang and Ms. Cui Jingtao entered into an agreement (“IDG Agreement”) with IDG for the sale and purchase of an aggregate of five issued ordinary shares of A8 Music of par value of US$1.00 (equivalent to approximately RMB7.2) each and representing an aggregate of 5% of the then issued share capital of A8 Music, at an adjusted consideration of US$961,933 (equivalent to approximately RMB6.9 million) in cash due to the difference between the committed financial results and actual financial results of the group of A8 Music, with reference to the price-earning ratio of the net profits in 2004 of the group of A8 Music. Pursuant to the IDG Agreement, among other things, IDG was granted a first right to subscribe on a pro-rata basis for new shares of A8 Music from 1 January 2005 to the date on which an application for listing of A8 Music was submitted to a relevant stock exchange (“Relevant Period”). IDG was also entitled to a right to participate in the disposal of the shares of A8 Music to any proposed transferee on a pro-rata basis contemporaneously with the then existing shareholders of A8 Music (“Tag-along Right”). Pursuant to the IDG Agreement, IDG granted to the then existing shareholders of A8 Music an option to require itself to sell all of its shares of A8 Music during the Relevant Period, if (i) the then existing shareholders of A8 Music during the Relevant Period dispose of all their shares of A8 Music and cease to be interested in the issued share capital carrying voting rights in general meetings of A8 Music; and (ii) IDG fails to validly exercise the Tag-along Right. IDG also enjoyed a right to nominate one representative to all directors’ meetings of A8 Music, – 88 –


HISTORY AND DEVELOPMENT Huadong Feitian and Kuaitonglian before the expiry of the Relevant Period, while such representative would not have voting right in such meetings. A8 Music was also under the restriction not to issue any new shares which in aggregate will exceed 10% of its issued share capital as at 30 July 2004 without the prior written consent of IDG prior to 31 December 2004. On 1 November 2005, TDF Capital China, IDG (as investor and purchaser), Prime Century, Grand Idea and Top Result (as sellers), A8 Music and its affiliated entities or subsidiaries (Cash River, Huadong Feitian, Kuaitonglian, Yunhai Qingtian, Chuangmeng Yinyue) (“A8 Music Group Companies”) and the individual beneficial shareholders of A8 Music Group Companies (i.e. Mr. Liu Xiaosong, Ms. Cui Jingtao, Mr. Wang Daiqiang, Mr. Fu Kaiqing, Mr. Xu Xiaofeng and Mr. Huang Cinan) entered into an agreement (“TDF Agreement”) for the acquisition of 500,000 series A redeemable convertible preferred shares of US$0.01 (equivalent to approximately RMB0.07) par value (each, a “Preferred Share”) by TDF Capital China for a total consideration of US$5 million (equivalent to approximately RMB35.9 million), which was arrived at after commercial negotiation between the parties to the TDF Agreement. Of these 500,000 Preferred Shares, 150,000 were newly issued Preferred Shares and 350,000 were Preferred Shares converted from ordinary shares held by Prime Century, Grand Idea and Top Result pursuant to the resolutions referred to below. Under a shareholders’ agreement in relation to the TDF Agreement, all holders of Preferred Shares enjoyed (i) a right of first offer to subscribe on a pro-rata basis for new shares of A8 Music; and (ii) a right of first refusal in respect of the transfer of shares by other shareholders (other than holders of Preferred Shares). Mr. Zhong Xiaolin, a non-executive Director, was nominated by TDF Capital China as a director of A8 Music, and was one of the joint bank signatories to A8 Music’s bank accounts. TDF Capital China was also granted an option (“TDF Option”) to purchase 400,000 additional Preferred Shares at a price of US$10.00 (equivalent to approximately RMB71.8) per share, and a warrant (“TDF Warrant”) to purchase 100,000 additional Preferred Shares at a price of US$14.00 (equivalent to approximately RMB100.5) per share. Both the TDF Option and the TDF Warrant were granted to TDF Capital China at nil consideration. IDG was also granted an option (“IDG Option”) to purchase 30,000 additional Preferred Shares at a price of US$10.00 (equivalent to approximately RMB71.8) per share. The IDG Option was granted to IDG at nil consideration. The TDF Option had a term of 90 days (subject to extension as may be agreed by the parties) and the TDF Warrant had a term of two years. As the TDF Warrant was exercisable for a longer term, it was expected that valuation of the Group would be changed and therefore the exercise price per share was set at US$14 (equivalent to approximately RMB100.5). The TDF Warrant expired in November 2007. On 11 November 2005, A8 Music resolved to subdivide every issued and unissued share of US$1.00 (equivalent to approximately RMB7.2) in its share capital into 100 shares of US$0.01 (equivalent to approximately RMB0.07) each such that following such subdivision, A8 Music had an authorized share capital of US$50,000 (equivalent to RMB358,800.0) divided into 5,000,000 shares of US$0.01 (equivalent to approximately RMB0.07) each with an issued share capital of US$100 (equivalent to approximately RMB717.6) divided into 10,000 shares of US$0.01 (equivalent to approximately RMB0.07) each.

– 89 –


HISTORY AND DEVELOPMENT On the same day, A8 Music resolved to increase its authorized share capital from US$50,000 (equivalent to approximately RMB358,800.0) to US$87,300 (equivalent to approximately RMB626,464.8) by the creation of 2,700,000 ordinary shares of a par value of US$0.01 (equivalent to approximately RMB0.07) each and 1,030,000 Preferred Shares of a par value of US$0.01 (equivalent to approximately RMB0.07) each, resulting in its authorized share capital being comprised two classes of shares, namely, 7,700,000 ordinary shares and 1,030,000 Preferred Shares with each share in either class having a par value of US$0.01 (equivalent to approximately RMB0.07). Pursuant to the memorandum and articles of association of A8 Music, each Preferred Share shall be convertible at the sole discretion of the holder of such Preferred Share into such number of ordinary shares in the capital of A8 Music as may be obtained by dividing the purchase price of such Preferred Share by the conversion price. The initial conversion price for the Preferred Shares shall be equal to the purchase price with no additional cost and is not related to the Offer Price. Thus, one Preferred Share shall be converted into one ordinary share of A8 Music initially. Such initial conversion price shall be subject to adjustments as a result of various circumstances, including a bonus issue of new shares or any dividend in shares of A8 Music. The rights of the Preferred Shares are more particularly described in note 23 to the audited financial statements set out in Appendix I to this prospectus. On 28 November 2005, A8 Music resolved that a sum of US$67,900 (equivalent to approximately RMB487,250.4) be capitalized from the amount standing to the credit of its surplus account and such sum be applied in paying up in full at par 6,790,000 ordinary shares of US$0.01 (equivalent to approximately RMB0.07) each of A8 Music to be allotted and issued, credited as fully paid, to Prime Century, Grand Idea, Top Result and IDG as to 3,887,954 ordinary shares, 1,159,732 ordinary shares, 1,402,814 ordinary shares and 339,500 ordinary shares respectively. Upon closing of the transaction contemplated under the TDF Agreement on 28 November 2005, Prime Century, Grand Idea and Top Result collectively held approximately 87.91%, TDF Capital China held approximately 7.19% and IDG held approximately 4.89% of the issued share capital of A8 Music. On 28 November 2005, TDF Capital China exercised its right of assignment pursuant to the TDF Agreement and assigned the TDF Option to Intel Capital and JAFCO severally, granting each of them a right to exercise half of the TDF Option, namely the right of each to purchase 200,000 Preferred Shares. According to the Deed of Assignments entered into between TDF and (i) Intel Capital; and (ii) JAFCO, both dated 28 November 2005, no monetary consideration for the assignment of the TDF Option was specified therein.

– 90 –


HISTORY AND DEVELOPMENT On 29 November 2005, TDF Capital China entered into a shares sale and transfer agreement with Butterfield Bank (Cayman) Limited as trustee of the GC Trust whereby TDF Capital China sold to the GC Trust 100,000 Preferred Shares at a total consideration of US$1 million (equivalent to approximately RMB7.2 million). On 2 December 2005, Intel Capital and JAFCO severally exercised their respective options pursuant to their portion of the TDF Option to subscribe for 200,000 Preferred Shares at a consideration of US$10.00 (equivalent to approximately RMB71.8) per share, respectively. Each of them was allotted and issued 200,000 Preferred Shares on 5 December 2005. Pursuant to separate Deeds of Adherence to the TDF Agreement, Intel Capital, JAFCO and the GC Trust are bound by the terms and of the TDF Agreement. The provisions of the TDF Agreement shall enure to the benefit of and shall be enforceable by each of them as if it had been a party to the TDF Agreement. On 5 December 2005, 30,000 Preferred Shares were allotted and issued to IDG pursuant to its exercise of the IDG Option on 28 November 2005. On 31 December 2005, A8 Music approved the transfer of 16,080 Preferred Shares held by TDF Capital China to TDF Capital Advisors for a total consideration of US$160,800 (equivalent to approximately RMB1,153,900.8). On 30 March 2006, A8 Music approved the transfer of 106,764 ordinary shares of US$0.01 (equivalent to approximately RMB0.07) each of A8 Music held by Top Results to Grand Idea for a total consideration of US$1,067,640 (equivalent to approximately RMB7,661,384.6). As a result of the TDF Agreement, a total of US$5.8 million (equivalent to approximately RMB41.6 million) was raised from the Financial Investors by the Group. Approximately one third of such proceeds were used for further expansion of the Group, and the remaining was used for the establishment of the “music database” business which was described in the section “Relationship with Controlling Shareholders” in this prospectus. The aforementioned special rights and all other rights enjoyed by the Financial Investors under the IDG Agreement and the TDF Agreement respectively, which are not available to the public investors after the Listing, will be terminated prior to the Listing. As part of the Reorganization, all Preferred Shares and ordinary shares held by the Financial Investors in A8 Music were exchanged with preferred shares and ordinary shares in the Company and such preferred shares with similar rights as the Preferred Shares will be converted into ordinary shares of the Company conditional upon the completion of the Share Offer and the Capitalization Issue and the Underwriting Agreement becoming unconditional and not terminated in accordance with its terms. Upon such conversion, the authorized share capital of the Company, including the issued and unissued share capital, will comprise of only one class of ordinary Shares of HK$0.01 each.

– 91 –


HISTORY AND DEVELOPMENT A brief analysis of the investment cost of each of the Financial Investors is as follows:

Name of Financial Investor IDG TDF Capital China Intel Capital JAFCO GC Trust (Note 2) TDF Capital Advisors

Total investment cost (in US$)

Approximate discount to Offer Price (Note)

1,261,933 3,839,200 2,000,000 2,000,000 1,000,000 160,800

70.5% 13.5% 13.6% 13.6% 13.6% 14.4%

Notes: 1.

The calculation is based on the number of Shares that each Financial Investor will receive pursuant to the Reorganization and the Capitalization Issue and assuming that (i) the Sale Shares have not been disposed of by the relevant Financial Investors under the Share Offer; and (ii) the value of each Share is HK$2.02 (being the mid-point of the indicative Offer Price range between HK$1.66 per Offer Share and HK$2.38 per Offer Share). The comparison of the investment cost to the expected value of the Shares that each Financial Investor will receive as mentioned above is made in US$.

2.

The Shares are held by Butterfield Bank (Cayman) Limited as trustee of the GC Trust.

REORGANIZATION The Company The Company was incorporated in the Cayman Islands on 2 October 2007 as an exempted company with limited liability, which at that time was owned as to 100% by Mr. Liu Xiaosong, an executive Director and the chairman and chief executive officer of the Company. The principal operating entities of the Group The principal operating entities of the Group are: Cash River. Cash River was established as a wholly foreign-owned enterprise in the PRC on 10 December 2003 and is an indirect wholly-owned subsidiary of the Company. It is the principal subsidiary of the Company in the PRC, responsible for providing technological, operational and financial management services to Huadong Feitian and Kuaitonglian, the structured subsidiaries and principal operating entities of the Group. Its principal activities include research and development on communication, telecommunications and computer software, sale of internally-developed technologies, provision of information networking systems technical consultancy services, economy and technology information consultation.

– 92 –


HISTORY AND DEVELOPMENT Huadong Feitian. Huadong Feitian was established on 22 May 2000 as a limited liability company in the PRC. It is indirectly controlled by Cash River through certain structure contracts, the details of which are set out in the paragraph headed “Structure contracts” below. It has been granted the “Telecommunications Value-added Services Operation Licence” which covers the whole of China, the Certificate for Use of Access Code of Short Message Services and the “Licence for Operation of Internet Culture”. Huadong Feitian is principally engaged in the business of, among others, the technological development of computer hardware and software and information networking systems, advertising businesses and telecommunications value-added services. Kuaitonglian. Kuaitonglian was established on 10 May 2004 as a limited liability company in the PRC. It is indirectly controlled by Cash River through certain structure contracts, the details of which are set out in the paragraph headed “Structure contracts” below. It has been granted the “Telecommunications Value-added Services Operation Licence” which covers the whole of China and the Certificate for Use of Access Code of Short Message Services. Kuaitonglian is principally engaged in the business of, among other matters, the technological development of computer hardware and software and information networking systems, and telecommunications value-added services. The restructuring of the Group Reorganization of the Group In contemplation of the Listing, the Group underwent the corporate reorganization prior to the Listing which involves the following steps: –

disposal of Wangle Tianxia by Huadong Feitian

disposal of Zhongge Feiyang and Zhongge Liaoliang by Kuaitonglian

incorporation of the Company and acquisition of the entire issued share capital of A8 Music

Disposal of Wangle Tianxia by Huadong Feitian Wangle Tianxia was dormant before 30 June 2007 and was planned to engage in the music database business which will not form part of the Group after the Listing, therefore, it was disposed of by the Group in 2007. On 25 June 2007, Huadong Feitian entered into an equity transfer agreement with Ms. Hu Yonghong and Ms. Zhang Yingxiu to transfer 20% of equity interest in Wangle Tianxia to Ms. Hu Yonghong for a consideration of RMB200,000 and 80% of equity interest in Wangle Tianxia to Ms. Zhang Yingxiu for a consideration of RMB800,000, both based on the amount of registered capital of Wangle Tianxia. Wangle Tianxia is engaged in the music database business which will not form part of the Group after the Listing and therefore was disposed as part of the Reorganization. Ms. Hu Yonghong is an ex-employee of the Group and Ms. Zhang Yingxiu is an employee of the Group. – 93 –


HISTORY AND DEVELOPMENT Disposal of Zhongge Feiyang and Zhongge Liaoliang by Kuaitonglian On 20 December 2007, Kuaitonglian entered into an equity share transfer agreement with Ms. Xu Lin to dispose the 100% registered capital of Zhongge Feiyang, which owns 49% of the registered capital of Zhongge Liaoliang, for a consideration of RMB17.2 million, which was determined based on the amount of registered capital of Zhongge Feiyang. Zhongge Feiyang is an investment holding company and its sole asset is the equity interests in Zhongge Liaoliang, which is engaged in the production of radio programmes. The original purpose of acquiring Zhongge Feiyang and Zhongge Liaoliang was for the promotion of the Group’s music contents through radio programmes produced by Zhongge Liaoliang in cooperation with (Beijing Broadcast Company), the 51% shareholder of Zhongge Liaoliang. However, the Directors consider that promotion of the Group’s original independently produced music content through self-produced radio programmes was not cost effective and therefore resolved to dispose of the Group’s interest in Zhongge Feiyang and Zhongge Liaoliang as part of the Reorganization. Pursuant to a declaration of trust signed by Ms. Xu Lin on 20 December 2007, she is holding the equity interest in Zhongge Feiyang on trust for Mr. Liu Xiaosong. Ms. Xu Lin is an employee of Wangle Tianxia. Incorporation of the Company and acquisition of entire issued share capital of A8 Music On 2 October 2007, the Company was incorporated in the Cayman Islands. On 26 May 2008, it entered into a sale and purchase agreement to acquire the entire issued share capital of A8 Music in consideration of the Company, among others, crediting as fully paid up capital the following number of ordinary and preferred shares of the Company: Name of shareholders Prime Century Top Result Grand Idea TDF Capital China IDG

Percentage of shareholdings 49.90% 16.56% 16.33% 5.20% 5.01%

Intel Capital JAFCO The GC Trust (Note) TDF Capital Advisors

2.71% 2.71% 1.36% 0.22%

Class of shares ordinary shares ordinary shares ordinary shares preferred shares 4.60% ordinary shares and 0.41% preferred shares preferred shares preferred shares preferred shares preferred shares

Note: The shares are held by Butterfield Bank (Cayman) Limited as trustee of the GC Trust.

Pursuant to a shareholders’ agreement dated 26 May 2008 entered into between the Company, Prime Century, Top Result, Grand Idea and each of the Financial Investors, the preferred shares held by the Financial Investors will be converted into ordinary Shares immediately prior to the Listing.

– 94 –


HISTORY AND DEVELOPMENT CORPORATE STRUCTURE Set out below is the shareholding structure of the Group after the Reorganization and immediately prior to the Share Offer (assuming the Over-allotment Option is not exercised at all), the Capitalization Issue and the issue of the Remuneration Shares:

Notes: 1.

The equity interests in the Company of the Controlling Shareholders were held as to 49.90% by Prime Century, 10.33% by Ever Novel and 6.00% by Grand Idea. Prime Century is a limited liability company incorporated in the BVI whose equity interests are held as to 52.61% by Ever Novel, 18.50% by Ms. Wang Gang, 8.80% by Join Reach and 20.09% by 20 shareholders who are existing or past employees of the Group or their investment holding companies and other Independent Third Parties each holding less than 5% of the issued shares of Prime Century. Ms. Wang Gang is a cousin of Mr. Liu Xiaosong, an executive Director and the chairman and chief executive officer of the Company. Ever Novel is a limited liability company incorporated in the BVI whose equity interests are wholly owned by a family trust set up by Mr. Liu Xiaosong as settlor for the benefits of his family members. The trustee of this family trust is HSBC International Trustee Limited. Grand Idea is a limited liability company incorporated in the BVI whose equity interests are beneficially owned by a family trust set up by Ms. Xie Yuanbi as settlor for her family members. The trustee of this family trust is HSBC International Trustee Limited. Ms. Xie is the mother of Mr. Liu Xiaosong.

2.

The equity interest in the Company is held by wholly owned investment vehicles of Ms. Cui Jingtao, who is the spouse of Mr. Li Wei, a non-executive Director.

3.

The shares held by IDG comprises approximately 4.61% ordinary shares and 0.41% Preferred Shares. The Preferred Shares held by IDG will be converted into ordinary Shares immediately prior to the Listing.

4.

The shares held by TDF Capital China, TDF Capital Advisors, Intel Capital, JAFCO and the GC Trust are Preferred Shares which will be converted into ordinary Shares immediately prior to the Listing. The shares in which the GC Trust is interested are held by Butterfield Bank (Cayman) Limited as trustee of the GC Trust.

– 95 –


HISTORY AND DEVELOPMENT Set out below is the shareholding structure of the Group immediately after the Share Offer (assuming that the Over-allotment Option is not exercised), the Capitalization Issue and the issue of the Remuneration Shares and without taking into account the issue and allotment of Shares pursuant to the exercise of options granted under the Pre-IPO Share Option Scheme and options may be granted under the Share Option Scheme:

Notes: 1.

The Preferred Shares held by IDG, TDF Capital China, TDF Capital Advisors, Intel Capital, JAFCO and the GC Trust will be converted to ordinary Shares immediately prior to the Listing. Since the investments of the Financial Investors in the Group were made well before the Company’s application for the Listing and their shareholdings in the Company are not substantial, the Shares held by them will not be subject to any lock-up provisions. The Shares in which the GC Trust is interested are held by Butterfield Bank (Cayman) Limited as trustee of the GC Trust.

2.

Remuneration Shares, not being part of Share Offer, are to be issued to the Sponsor or one of its associates immediately prior to the Listing and assuming the Offer Price is the mid-point of the range i.e. HK$2.02. The Sponsor will not be granted any right for Board representation. The Remuneration Shares will be counted towards the minimum public float upon completion of Share Offer.

On 8 September 2006, six PRC authorities, including the Ministry of Commerce of the PRC and the China Securities Regulatory Commission (“CSRC”), implemented the Measures Governing the Foreign Mergers and Acquisition of Domestic Enterprise ) (“M&A Regulation”), which states that the ( overseas listing involving an acquisition of a domestic company by an overseas company by way of equity swap (“Equity Swap”) is required to be approved by the CSRC in advance. The Company’s legal advisers as to PRC laws are of the opinion that: (1) the M&A Regulation was implemented on 8 September 2006 and shall not be applied retrospectively to the foreign acquisition activities which were completed before 8 September 2006; and (2) there is no specific requirement that any overseas listing which involves an acquisition of a domestic company by an overseas company the consideration for which is settled, other than Equity – 96 –


HISTORY AND DEVELOPMENT Swap, by cash or in other manner shall be approved by the CSRC in advance. As regards the Group, the acquisition of a domestic company by an offshore special purpose vehicle of the Group was completed prior to the implementation of the M&A Regulation and the registered capital of Cash River was paid up in cash and the Contractual Arrangements between Cash River and each of Huadong Feitian and Kuaitonglian and their respective shareholders do not involve any acquisition involving Equity Swap. Based on the above facts, the Company’s legal advisers as to PRC laws are of the view that the M&A Regulation is not applicable to the Listing and the Listing is not required to be approved by the CSRC in advance. The Notice on Issues concerning Foreign Exchange Management in Financing by PRC Residents by Overseas Special Purpose Vehicle (“SPV”) and Return Investments (“Notice 75”) promulgated by SAFE which came into force on 1 November 2005 would apply to the repatriation of revenues by Cash River to the Company in the form of dividend income or otherwise. Pursuant to Notice 75, SPVs are foreign companies that are held by PRC residents for raising financing outside of the PRC by way of, including but not limited to, equity issue or convertible debt. Such PRC residents are required to file an “overseas investment foreign exchange registration” before the establishment of such SPV and subsequently, to update such registration on the occurrence of specified events such as (i) the injection of assets or shares of a PRC domestic company into the SPV; (ii) subsequent equity financing by such SPV outside of the PRC; (iii) capital reduction; and (iv) share transfers or share swaps. Subject to completion of the aforesaid registration, payment of dividends, profits and other payments to such SPV will be permitted. Each of the Company and A8 Music is a SPV for purposes of Notice 75. As at the Latest Practicable Date, all ultimate beneficial owners of the Shares who are PRC residents had completed the relevant registration with the local SAFE with regard to their direct or indirect ownership of the Company as well as changes in their ownership of the Company in connection with the Reorganization in compliance with the requirements of Notice 75. The Company’s legal advisers as to PRC laws are of the view that up to the Latest Practicable Date, all necessary approvals or permits required under the PRC laws and regulations in connection with each step of the Reorganization have been obtained. STRUCTURE CONTRACTS Current PRC laws and regulations limit foreign investment in businesses providing telecommunications value-added services in the PRC. The businesses operated by the Group involve the provision of telecommunications value-added services in the PRC which are regulated by the PRC laws and regulations as to foreign investment, as a result of which the Group has adopted the Contractual Arrangements with, among others, Huadong Feitian and Kuaitonglian to operate that portion of the Group’s businesses. As a foreign-invested enterprise, Cash River does not have licences to provide telecommunications value-added services to mobile phone subscribers in the PRC, including the provision of ringtones, RBTs – 97 –


HISTORY AND DEVELOPMENT and IVR Music. Accordingly, the Group conducts parts of its business which involve the provision of telecommunications value-added services through Huadong Feitian and Kuaitonglian pursuant to a number of contracts (collectively, the “Structure Contracts”) entered into between the Group and these companies. As at the Latest Practicable Date, Huadong Feitian was beneficially owned as to 75% by Mr. Liu Xiaosong and 25% by Ms. Cui Jingtao and Kuaitonglian was beneficially owned as to 100% by Mr. Lin Yizhong (alias Lin Hai). As confirmed by the Company’s legal advisers as to PRC laws, according to the current PRC laws in relation to the operation of telecommunications value-added business, Mr. Liu Xiaosong, Ms. Cui Jingtao and Mr. Lin Yizhong (alias Lin Hai), being owners of Huadong Feitian and Kuaitonglian, are not required to obtain any approvals and licences for holding their respective interests in Huadong Feitian and Kuaitonglian and no commission or other benefit has been granted to them for holding their respective equity interests in Huadong Feitian and Kuaitonglian and their respective subsidiaries. The Structure Contracts are designed to provide the Company with effective control over and (to the extent permitted by the PRC laws) the right to acquire the equity interests in and/or assets of Huadong Feitian and Kuaitonglian. Pursuant to such Structure Contracts, the Group is also able to recognize and receive the economic benefit of the business and operation of Huadong Feitian and Kuaitonglian. The Structure Contracts generally provide the Company (through Cash River) with the following rights and obligations: –

to receive the immediately available cash of Huadong Feitian and Kuaitonglian after deducting the aggregate amount of (i) the working capital required to maintain their daily operations and satisfy their needs for their business; (ii) the cash amount required for capital expenditure; and (iii) any other short-term anticipated expenditure, all as determined by the Supervisory Management Board (as defined below) from time to time (“Surplus Cash”);

to acquire all the equity interests in and the assets of Huadong Feitian and Kuaitonglian, at a nominal price or such higher amount as may be required by the laws, regulations, rules and policies of the PRC;

to use certain intellectual property rights of Huadong Feitian, including trademarks and domain names, at a consideration of RMB1.00 or the lowest amount permitted by the PRC laws;

to have a continuing security interest of first priority and subject to no other encumbrances in the entire equity interests in Huadong Feitian and Kuaitonglian; and

to sell the software used to assist Huadong Feitian and Kuaitonglian to develop interactive entertainment, social networking and other mobile value-added services for their provision of business at an agreed price. – 98 –


HISTORY AND DEVELOPMENT These arrangements, taken as a whole, permit the financial results and conditions of Huadong Feitian and Kuaitonglian to be consolidated under the Company’s financial statements as if they were wholly owned subsidiaries of the Company. In addition, because the Structure Contracts effectively transfer the net income and operating cash flows and thereby the economic risks and benefits of Huadong Feitian and Kuaitonglian to the Group and the Group has the power to govern the financial and operating policies of these two companies, in substance, all the voting rights at the general meetings of Huadong Feitian and Kuaitonglian are vested with the Company. Under the Structure Contracts, a supervisory board (“Supervisory Management Board”) was established for each of Huadong Feitian and Kuaitonglian to, among other matters, oversee their respective business and operations. The Supervisory Management Board, over which the Group maintains control by virtue of its authority to appoint two out of three of the total number of its members, advise, supervise and effectively control the businesses of Huadong Feitian and Kuaitonglian. Under the Structure Contracts, the Supervisory Management Board determines and devises approval mechanisms to assist Huadong Feitian and Kuaitonglian in their efficient provision of the mobile value-added services (“Pre-Approved Authority”). The Pre-Approved Authority is required to be consistent throughout the Group and can be amended, supplemented and replaced by the Supervisory Management Board. The Company’s legal advisers as to PRC laws are of the opinion that: •

the prevailing laws, regulations and regulatory documents in the PRC do not prohibit the Contractual Arrangements regarding the structure of the Group;

each of the Structured Contracts is legal, valid and binding on the contracting parties under the PRC laws, rules and regulations;

the execution, delivery, effectiveness, enforceability and performance of each of the Structure Contracts do not violate any PRC laws, rules and regulations;

neither the Structure Contracts nor the corporate and shareholding structure of the Group described in this section contravenes any PRC laws, rules and regulations; and

no filings, registrations, consents, approvals, permits, authorizations, certificates and/or licences of any PRC government authorities, except for registration of the Exclusive Right and Pledge Agreement (as defined in this section) under the new ) which has been completed as PRC Property Rights Law ( described on page 109 of this prospectus, are currently required in connection with the execution, delivery, effectiveness and enforceability of the Structure Contracts.

The Company’s legal advisers as to PRC laws are of the view that the operation of Huadong Feitian, Kuaitonglian and their respective subsidiaries under the Structure Contracts is in compliance with their respective articles of association and the Group’s operation under – 99 –


HISTORY AND DEVELOPMENT the Contractual Arrangements is in compliance with the current laws and regulations of the PRC, including the Notice regarding Strengthening Administration of Foreign Investment in Operating Telecommunications Value-added Businesses ( ) (“MII Notice”) which prohibits holders of telecommunications value-added businesses operating licences from leasing, transferring or selling their licences to any foreign investors in any form, or providing any resources, sites or facilities to any foreign investors for illegal operation of telecommunications businesses in the PRC. Please refer to the paragraph headed “Regulations in respect of foreign investments in telecommunications value-added industry” in the section headed “Regulatory overview” in this prospectus for details. However, the relevant PRC regulatory authorities may take a different view and determine that such Structure Contracts are in violation of applicable PRC laws, rules or regulations. If these Structure Contracts are found to be in violation of such PRC laws, rules or regulations, the relevant PRC regulatory authorities will have discretion to take action against Huadong Feitian or Kuaitonglian, or their respective shareholders or Cash River for such violation, including unwinding the Contractual Arrangements or prohibiting the Group from operating its business in the PRC. If Huadong Feitian and Kuaitonglian or either of them fails to perform or violates any or all of the Contractual Arrangements, the Group would have to rely on legal remedies under the PRC legal system to enforce these arrangements, which may be less effective than in other jurisdictions. As advised by the Company’s legal advisers as to PRC laws, the Group is able to take legal action against Huadong Feitian and/or Kuaitonglian for failure to perform their obligations in relation to the Structure Contracts and the judgment shall be enforceable. Moreover, pursuant to the Exclusive Right and Pledge Agreement (as defined in this section), the Group is (i) granted by the respective shareholders of Huadong Feitian and Kuaitonglian an irrevocable and exclusive right to purchase, or to designate any person to purchase on its behalf, all or part of the equity interests in Huadong Feitian and Kuaitonglian; and (ii) granted by Huadong Feitian and Kuaitonglian an irrevocable and exclusive right to purchase, or to designate any person to purchase on its behalf, all or part of the assets, including, among others, fixed assets, current assets, intellectual property rights, ownership of equity interests in any person within or outside the PRC and the benefit (subject to the burden) of all contracts into by Huadong Feitian and Kuaitonglian. The Directors consider that it is in the best interest of the Group to assume control over Huadong Feitian and Kuaitonglian rather than to seek for remedies by taking legal action against Huadong Feitian and/or Kuaitonglian. As at the Latest Practicable Date, Huadong Feitian was beneficially owned as to 75% by Mr. Liu Xiaosong and 25% by Ms. Cui Jingtao while Kuaitonglian was 100% beneficially owned by Mr. Lin Yizhong (alias Lin Hai). Mr. Liu is a Controlling Shareholder, an executive Director and the chairman and the chief executive officer of the Company. Mr. Lin is an executive Director and Ms. Cui Jingtao will be interested in approximately 11.04% of the issued shares of the Company after the Share Offer (assuming the Over-allotment Option is not exercised at all), the Capitalization Issue and the issue of the Remuneration Shares. Accordingly, their interests are in line with the interests of the Group. – 100 –


HISTORY AND DEVELOPMENT On 20 September 2004, the following Structure Contracts were entered into: 1.

Coordination agreement was entered into between Cash River with each of (i) Huadong Feitian and (ii) Kuaitonglian, respectively (“Coordination Agreement”).

2.

Agreement for provision of consultancy services was entered into between Cash River and each of (i) Huadong Feitian and (ii) Kuaitonglian, respectively (“Consultancy Agreement”).

3.

Agreement for purchase and sale of software was entered into between Cash River and each of (i) Huadong Feitian and (ii) Kuaitonglian, respectively (“Software SPA”).

4.

Agreement for the exclusive licensing of trademarks was entered into between Cash River and Huadong Feitian (“Trademark Licence Agreement”).

5.

Agreement for the licensing of domain names was entered into between Cash River and Huadong Feitian (“Domain Name Licence Agreement”).

6.

Agreement in relation to grant of exclusive right to purchase and pledge of equity interests was entered into by Cash River with each of (i) Huadong Feitian and its shareholders and (ii) Kuaitonglian and its shareholders, respectively (“Exclusive Right and Pledge Agreement”).

The Coordination Agreement, which laid out the framework of the Structure Contracts, recorded the terms on which Cash River and Huadong Feitian and Kuaitonglian, respectively, had implemented the Contractual Arrangements since 1 January 2004 and, as stipulated in the Coordination Agreement, the implementation of the terms of the Coordination Agreement started on 1 January 2004. The implementation agreements signed pursuant to the Coordination Agreement became effective since their signing date, i.e. 20 September 2004. The Company’s legal advisers as to PRC laws have confirmed that Cash River, Huadong Feitian and Kuaitonglian had been conducting business in compliance with relevant laws and regulations prior to the implementation of the Structure Contracts. Mr. Liu Xiaosong, an executive Director and one of the Controlling Shareholders of the Company, beneficially owns more than 30% equity interests in Huadong Feitian and Mr. Lin Yizhong (alias Lin Hai), an executive Director, beneficially owns more than 30% equity interests in Kuaitonglian. Accordingly, each of Huadong Feitian and Kuaitonglian are associates of Mr. Liu and Mr. Lin respectively and therefore connected persons of the Company. Furthermore, Ms. Cui Jingtao, a substantial Shareholder, is the spouse of Mr. Li Wei, a non-executive Director, and she holds 25% equity interest in Huadong Feitian and she is a connected person of the Company. The Structure Contracts described in this section will constitute connected transactions of the Company and, unless an exemption is available under the Listing Rules, the Company must comply with the applicable reporting, announcement and independent shareholders’ approval requirements of Chapter 14A of the Listing Rules. Please – 101 –


HISTORY AND DEVELOPMENT refer to the section headed “Connected transactions” to this prospectus for details of the relevant requirements and waiver from such requirements applied and granted. One of the conditions of such waiver was on the basis that the Structure Contracts provide an acceptable framework for the relationship between the Group and subsidiaries, on one hand, and Huadong Feitian and Kuaitonglian, on the other hand, that framework may be renewed and/or cloned upon the expiry of the existing arrangements or in relation to any existing or new wholly foreign-owned enterprise or operating company that the Group might wish to establish, without obtaining the approval of the Group’s shareholders, on substantially the same terms and conditions as described in this section. The directors, chief executive or substantial shareholders (as defined in the Listing Rules) of any existing or new wholly foreign-owned enterprise or operating company that the Group may establish upon renewal and/or cloning of the Structure Contracts will be treated as the Group’s connected persons and transactions between these connected persons and the Group shall comply with Chapter 14A of the Listing Rules. This condition is subject to the relevant laws, regulations and approvals of the PRC. Set out below is a brief summary of the terms of the Structure Contracts. Coordination Agreement Cash River entered into the Coordination Agreement on 20 September 2004 with each of Huadong Feitian and Kuaitonglian (each, an “Operator”), respectively, pursuant to which, among other matters: •

the parties to the agreement have established the Supervisory Management Board, which consists of three members, two of which shall be appointed by Cash River and one of which shall be appointed by the Operator. There is no obligation on the two members nominated by Cash River to vote similarly in meeting of the Supervisory Management Board and according to the Coordination Agreement the Supervisory Management Board shall make all decisions by majority vote of the members present or represented by proxy at its meeting;

the Supervisory Management Board provides various services in connection with the provision of mobile value-added services and technology and information services by the Operator and Cash River respectively;

Cash River shall or shall cause its affiliates to provide certain technology and information services to the Operator so as to facilitate the Operator’s provision of mobile value-added services;

if so decided by the Supervisory Management Board, Cash River shall collect payment from the relevant customers, users and telecommunications operators on the Operator’s behalf;

Cash River may second its personnel to the Operator for full-time employment if the Supervisory Management Board deems it necessary for Cash River to carry out certain technology and information services; – 102 –


HISTORY AND DEVELOPMENT •

if necessary for the Operator to provide mobile value-added services and if agreed to by the Supervisory Management Board, Cash River shall purchase, acquire, develop or procure additional assets for use by the Operator;

both parties shall and shall cause their relevant affiliates to enter into such agreements as may be required to fulfill the obligations of each party, including a trademark licence agreement, a domain name licence agreement, a consultancy services agreement and an agreement for purchase and sale of software (together, the “Implementation Agreements”); and

in consideration for the information and technology services and assets provided to the Operator by Cash River, the Operator shall pay a service fee to Cash River an amount which is equal to the Surplus Cash in such year.

The Coordination Agreements are effective from 1 January 2004 and remain in effect for the term of incorporation of the Operator, though Cash River may terminate the Coordination Agreements at its sole discretion with one month’s notice to the Operator. Upon the occurrence of any of the following events, Cash River may terminate the Coordination Agreements immediately upon Cash River’s sending of a written notice to such effect: •

the Operator fails to comply with any of the obligations, provisions and conditions of the Coordination Agreement and it fails to correct any default within 30 calendar days after Cash River has given the Operator a written notice thereof; or

the Operator ceases to provide any of the mobile value-added services or to do business, becomes insolvent or bankrupt, or is the subject of proceedings for liquidation or dissolution, or becomes unable to pay its debts as they become due or is dissolved in accordance with law.

Implementation Agreements Pursuant to the Coordination Agreement, Cash River has entered into the following Implementation Agreements with Huadong Feitian and Kuaitonglian: Consultancy Agreement Cash River entered into the Consultancy Agreement on 20 September 2004 with each of Huadong Feitian and Kuaitonglian (each, a “Consultee”), respectively, pursuant to which, among other matters: •

Cash River agrees to provide the Consultee with technical consultancy services, including, among other matters, the following: (1)

technical consultancy services in relation to the provision of mobile valueadded services; – 103 –


HISTORY AND DEVELOPMENT

(2)

assistance to the Consultee in raising its technical ability; and

(3)

services to assist the Consultee in its technical analysis;

Cash River also agrees to provide the Consultee with information consultancy services, including, among other matters, the following: (1)

information consultancy services in relation to the finance, marketing and management of the provision of mobile value-added services;

(2)

up-to-date analysis of international business developments; and

(3)

customer support and media services; and

the Consultee agrees to pay Cash River a monthly consultancy service fee in an amount as determined by the Supervisory Management Board taking into account the revenue of the Consultee, costs, content and quality of the services provided by Cash River, the performance and profitability of the Consultee and the importance of Cash River’s services for the Consultee’s provision of mobile value-added services subject to a maximum amount of RMB40 million for any financial year of the Consultee. This amount would not limit the amount of the Surplus Cash receivable by Cash River under the Coordination Agreement.

The Consultancy Agreement is valid for three years from 20 September 2004 onwards and shall be automatically renewed for further three-year periods unless Cash River gives the Consultee notice of its intention not to extend the term at least one month prior to the expiration of the then current term. Software SPA Cash River entered into the Software SPA on 20 September 2004 with each of Huadong Feitian and Kuaitonglian (each, a “Purchaser”), respectively, pursuant to which, among other matters: •

Cash River agrees to sell and the Purchaser agrees to purchase the software used to assist the Purchaser to develop interactive entertainment, social networking and other mobile value-added services for the Purchaser’s provision of its business.

the exact amount of the consideration shall be confirmed by separate detailed contracts for individual specific software.

The Software SPA is effective from 20 September 2004 and remain in effect until full performance of both parties of their respective obligations under the terms of the agreement. The Software SPA is a framework agreement and the Directors consider that the demand for the relevant software from Huadong Feitian and Kuaitonglian is recurrent in nature, and thus full performance of the parties’ obligations had not yet been fulfilled as at the Latest Practicable Date. Cash River may terminate the Software SPA at its sole discretion at any time by giving notice to the Purchaser with immediate effect. – 104 –


HISTORY AND DEVELOPMENT Trademark Licence Agreement Cash River entered into the Trademark Licence Agreement on 20 September 2004 with Huadong Feitian, pursuant to which, among other matters: •

Huadong Feitian grants an exclusive licence to Cash River in respect of its registered trademarks or trademarks being applied for registration that it owns (“Licensed Trademarks”) in the PRC at RMB1 or at the lower amount permitted by the PRC laws; and

Cash River undertakes to use the relevant trademarks only in the course of manufacturing, selling and distributing products with the relevant Licensed Trademarks.

The licence with respect to each Licensed Trademark is valid for the effective period (including the renewal period) of that particular Licensed Trademark, provided that the Trademark Licence Agreement is not terminated in accordance with its terms and conditions. Domain Name Licence Agreement Cash River entered into the Domain Name Licence Agreement on 20 September 2004 with Huadong Feitian, pursuant to which, among other matters: •

Huadong Feitian grants an exclusive licence to Cash River in respect of its registered domain names (“Licensed Domain Names”) at RMB1 or at the lowest amount permitted by the PRC laws.

The licence with respect to each Licensed Domain Name is valid for the effective period (including the renewal period) of that particular Licensed Domain Name, provided that the Domain Name Licence Agreement is not terminated in accordance with its terms and conditions. Due to the following reasons, the above Licenced Trademarks and the Licenced Domain Names remain licensed by Huadong Feitian to Cash River: (i) the MII Notice does not prohibit the licensing of trademarks and/or domain names by telecommunications value-added licence holders, (ii) Cash River does not operate any telecommunications value-added business or use the relevant trademarks or domain names in its business operation and (iii) the purpose of the licensing arrangement was for Cash River to obtain control over the important operating assets of Huadong Feitian under the Structure Contract arrangements.

– 105 –


HISTORY AND DEVELOPMENT The Company has been advised by its legal advisers as to PRC laws that the licence of the domain names and trademarks by Huadong Feitian to Cash River does not contravene the MII Notice because (1) Article 2 of the MII Notice only requires that telecommunications value-added services business operators or their shareholders shall directly own the domain names and trademarks used by such operators in their daily operation but the MII Notice does not prohibit such operators from licensing the relevant domain names and trademarks to other parties. Moreover, Cash River undertakes in the relevant agreement not to conduct any activities which may have adverse effects on Huadong Feitian’s ownership over the domain names and trademarks; (2) Article 3 of the MII Notice stipulates that provincial-level communication administrative bureau shall revoke the Telecommunications Value-added Service Operation Licence if the operator does not comply with requirements set out in the MII Notice. The Telecommunications Value-added Service Operation Licence held by each of Huadong Feitian and Kuaitonglian has passed an annual inspection conducted by the relevant communication administrative bureau in 2006 whereby Huadong Feitian is able to continue conducting telecommunications value-added services business legally; (3) as set forth in Article 4 of the MII Notice, provincial-level communication administrative bureaus shall require telecommunications value-added services business operators to conduct a selfassessment of their conformity with provisions in the MII Notice and Huadong Feitian submitted its self-assessment report in October 2006 to Guangdong Communication Administration stating its compliance with the relevant provisions of the MII Notice. As at the Latest Practicable Date, no objection had been received by Huadong Feitian from Guangdong Communication Administration or the MII in relation to its operation of telecommunications value-added services business. The trademarks registered under the name of Huadong Feitian and licensed to the Group were trademarks used in the operations of the Group when the Trademark Licence Agreement was signed. Such trademarks were used in the promotion of the Group’s telecommunications value-added services. “A8” was subsequently adopted as the principal logo of the Group and related trademark applications are made under the name of Cash River. Such trademarks would be used in the promotion and marketing channel or materials of the Group such as the user-interface in the mobile handset of the mobile phone subscribers in the PRC using the Group’s services, the Group’s UGC website and commercial advertisements placed by the Group in magazines and posters and physical promotion activities of the Group. None of the trademarks registered under the name of Huadong Feitian are currently used by the Group in its business operation and its value-added telecommunications business. All domain names registered under the name of Huadong Feitian were used by the Group in the past for advertising and promotional purposes. The Directors confirm that none of such domain names, except www.a8.com, is currently used by the Group in its daily operation and its value-added telecommunications business.

– 106 –


HISTORY AND DEVELOPMENT The absolute amount and percentage of revenue and profit of the Group attributable to Huadong Feitian, Kuaitonglian and their subsidiaries during the Track Record Period were as follows: The Group Year ended 31 December 2005 2006 2007 RMB’000 RMB’000 RMB’000 Revenue Net profit attributable to shareholders of the Company

233,233

268,438

285,964

41,842

39,863

55,274

Year ended 31 December Approximate Approximate Approximate 2005 2006 2007 % to the % to the % to the RMB’000 Group RMB’000 Group RMB’000 Group Huadong Feitian only Revenue

Net profit/(loss) attributable to shareholders of the Company

Subsidiaries of Huadong Feitian only Revenue

Net profit/(loss) attributable to shareholders of the Company

Kuaitonglian only Revenue

Net profit/(loss) attributable to shareholders of the Company

Subsidiaries of Kuaitonglian only Revenue

Net profit/(loss) attributable to shareholders of the Company

232,710

(806)

(834)

2

(1,584)

520

(3,512)

100%

(2%)

0%

(2%)

0%

(4%)

260,854

97%

251,338

88%

7,637

19%

26,955

49%

0%

5,793

2%

(2%)

3,365

6%

1%

25,340

9%

(1%)

(3,431)

(6%)

(905)

3,917

(301)

0%

3,667

1%

3,493

1%

(8%)

(1,927)

(5%)

1,641

3%

– 107 –


HISTORY AND DEVELOPMENT Huadong Feitian, Kuaitonglian and their subsidiaries in aggregate

Revenue

Net profit/(loss) attributable to shareholders of the Company

2005 RMB’000

% to the Group

233,233

100%

(6,736)

Year ended 31 December 2006 % to the RMB’000 Group

(16%)

2007 RMB’000

% to the Group

268,438

100%

285,964

100%

4,504

11%

28,530

52%

The net profit of the Group is significantly different from the aggregate net profits of Huadong Feitian, Kuaitonglian and their subsidiaries mainly because (i) Cash River was also included in the Group’s consolidated accounts; (ii) the Group’s operating results also included operating expenses incurred by Cash River during the Track Record Period; (iii) there was an intra-group technical consultancy service fee income charged by Cash River to Huadong Feitian for each of the years during the Track Record Period; and (iv) the intra-group transaction was eliminated on consolidation. Exclusive Right and Pledge Agreement On 20 September 2004, Cash River entered into the Exclusive Right and Pledge Agreement with each of Huadong Feitian and Kuaitonglian, individually (each the “Grantor”) and the respective Grantor’s shareholders (“Grantor’s Shareholders”), pursuant to which, among other matters: •

the Grantor’s Shareholders grant Cash River an irrevocable and exclusive right to purchase, or to designate any person to purchase on its behalf, all or part of their respective equity interests in the Grantor, in one or more transfers as determined by Cash River in its sole discretion;

the purchase price for the said transfer(s) shall be RMB1.00 or such higher amount as required by the PRC laws;

the Grantor grants Cash River an irrevocable and exclusive right to purchase, or to designate any person to purchase on its behalf, all or part of its assets, including, among others, fixed assets, current assets, intellectual property rights, ownership of equity interests in any person within or outside the PRC and the benefit (subject to the burden) of all contracts entered into by the Grantor;

the purchase price for the said assets shall be RMB1.00 or such higher amount as required by the PRC laws;

as collateral security for the prompt and full performance of the Grantor’s Shareholders’ obligations under the agreement, the Grantor’s Shareholders grant to Cash River a continuing security interest of first priority and subject to no other encumbrances in their respective equity interests in the Grantor; – 108 –


HISTORY AND DEVELOPMENT •

the Grantor’s Shareholders jointly and severally covenant that he/she will, among others, waive his/her right of first refusal or pre-emptive right to acquire any equity interests in the Grantor being transferred by another Grantor’s Shareholder; and

the Grantor covenants that it will, among others, not distribute profits to the Grantor’s Shareholders directly or indirectly, not acquire or make any investment in any person without Cash River’s prior written consent.

Each of the Exclusive Right and Pledge Agreements is effective from 20 September 2004 and remain in effect until the earliest of (i) the discharge in full of the Grantor’s Shareholders’ obligations under the agreement; (ii) the completion of the disposal of the equity interests in the Grantor in accordance with the terms of the agreement; or (iii) the expiry of the entire term of incorporation of the Grantor as such term may be extended in accordance with PRC laws. Notwithstanding anything contained in the agreement, the agreement shall terminate automatically upon the exercise in full by Cash River of its right to purchase the registered capital of the Grantor or upon the dissolution of the Grantor. As advised by the Company’s legal advisers as to PRC laws, according to the new PRC Property Rights Law ( ) which became effective on 1 October 2007, the Group is required to register the Exclusive Right and Pledge Agreements with the relevant registration authority. The Group has registered the Exclusive Right and Pledge Agreements with the Shenzhen Administration of Industry and Commerce ( ) on 24 December 2007. The Company and its legal advisers as to PRC laws confirmed that, to the best of their respective knowledge, as at the Latest Practicable Date, the relevant PRC authority had not conducted any investigation or examination over the Reorganization and the Contractual Arrangements with each of Huadong Feitian and Kuaitonglian. The Company has consulted and confirmed with officers of the MII that the Structure Contracts do not breach any applicable laws or regulations in the PRC and the Company has been advised by its legal advisers as to PRC laws that save as the approvals under the Regulations for the Administration of Internet Electronic Notice Services ( ), the Provisional Regulations for the Administration of Internet Publishing ( ) and the Internet Visual/Audio regulations, Huadong Feitian and Kuaitonglian comply with all relevant laws and regulations in the PRC in relation to their business operations.

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BUSINESS OVERVIEW The Group is an integrated digital music company. It sources its music content from its own interactive Internet UGC platform, www.a8.com, as well as from other international and domestic record labels. The Group promotes such music content through the wireless network of mobile operators and on the Internet. It sells the music content in form of ringtones, RBTs and IVR Music to mobile phone subscribers in the PRC. The music content distributed by the Group can be put into two broad categories namely, the original independently produced music content and other music content. The original independently produced music content is uploaded by artists to the Group’s own interactive Internet UGC platform, www.a8.com, while other music content is licensed from international and domestic record labels. The Group distributes its service through the wireless network of mobile operators such as China Mobile Group and China Unicom Group. In addition, the Group sells non-music content which include games, wall-papers, entertainment news and jokes. The Group started-up as a provider of general wireless value-added services in 2000. It produced and delivered mobile entertainment services including music, wall-papers, games, jokes and entertainment news through SMS, MMS and WAP to the mobile phone subscribers in the PRC. Mr. Liu Xiaosong, an executive Director and the chairman and chief executive officer of the Company, foresaw the growth opportunity in the PRC digital music industry, and noticed the decreasing revenue of the traditional record labels in the PRC due to piracy. The management of the Group then gradually shifted the Group’s primary focus to the provision of services which were mobile-music-related services. In line with such business strategy, the Group has committed itself to become the leading “E-label” in the PRC to promote digital music in the PRC. In order to strengthen and enrich its content, the Group has established www.a8.com as the UGC platform for artists or users to upload their original independently produced music content and songs. It has accumulated over 50,000 songs of such nature so far and created a ” and “ ”. number of popular songs such as “ The Group’s competitive strengths lie in its promotion and distribution capabilities. The Group has an alliance of Internet website advertising network, which, as at the Latest Practicable Date, had over 1,000 Internet websites. Members of such advertising network help promote the Group’s music content. Through its cooperation with mobile phone manufacturers in the PRC, the Group has also developed a “jukebox” software, namely A8Box, which facilitates mobile phone subscribers to have access to the Group’s mobile music services directly from their mobile phones. The Group has 21 sales offices having businesses covering more than 30 provinces, autonomous regions and administrative municipalities throughout the PRC to work closely with mobile operators and to gain local trend and data in each location. The majority of the Group’s revenue is settled through China Mobile Group and China Unicom Group by a revenue sharing model. The Group’s music content is sold to the mobile phone subscribers through the wireless network of its mobile operator partners. – 110 –


BUSINESS The Group’s objective is to further enhance its collectability of music contents through mergers and acquisitions of other service/content providers and to expand its services to full track download when 3G technology is launched in the PRC. COMPETITIVE STRENGTHS The Directors believe the Group possesses the following competitive strengths: The Group has one of the largest interactive Internet UGC platforms for collection of original independently produced music content in the PRC Up to the Latest Practicable Date, the Group’s Internet UGC platform, www.a8.com, had collected contributions from over 10,000 artists and over 50,000 original independently produced music content and songs. Some of such original independently produced music ” and “ ”. According to content and songs have been popular hits including “ the internal records of the Group, for the year ended 31 December 2007, approximately 7.8 million downloads and approximately RMB16.1 million in terms of revenue were recorded for the song “ ”. Based on the internal records of the Group, for the year ended 31 December 2007, while approximately 5.9 million downloads and approximately RMB11.1 million in terms of revenue were recorded for the song “ ”. The Directors believe that the success of such original independently produced songs proves the Group’s awareness of local PRC consumer preferences and its ability to identify music content with potential for popularity. In addition to daily uploads, the Group also conducts marketing campaigns with a view to increasing the amount of music content uploaded to its Internet UGC platform www.a8.com. A recent example of this was “ ” (Yuansheng Feiyang Top Ten Gold Songs), held in mid-October 2007. In addition, the Group also participates in the organization or co-organization of various competitions and events. In 2005, the Group participated in the event “A8 “ ” ” which was broadcast on (Hunan TV). In December 2005, “A8 ” was held by the Group in Beijing. A large number of artists participated in this event and such ceremony was reported by various Internet websites and newspaper. During 2005 to 2006, by selecting songs from its Internet UGC platform, the Group cooperated with independent production companies for the production of the theme songs of various television programmes, namely “ ”, “ ”, “ ”, “ ”, “ ” and “ ”. In June 2007, the Group entered into an agreement with an independent production company in which the Group was granted an exclusive right to produce a theme song of a movie named “ ”. The Group also provided relevant wireless value-added services for such movie. In 2006, the Group cooperated with Beijing Pepsi Cola Beverages Co., Ltd. and China Mobile Group for the promotion of RBTs regarding the event “ ”. – 111 –


BUSINESS The Group capitalizes on the original independently produced music content and songs by consumerizing them into mobile music entertainment content such as ringtones, RBTs and IVR Music. The Directors believe that the user-generated and interactive features of www.a8.com will support and enhance the popularity of the Group’s music collection Internet UGC platform among artists and mobile phone subscribers in the PRC. The Group possesses a strong multi-channel promotion capability for its content, in particular, the UGC The Group uses various channels to market its content, in particular, the original independently produced music content collected from its UGC platform. Such channels include Internet advertisements, advertising to mobile phone subscribers through cooperation with mobile operators and the A8Box, a “jukebox” software developed by the Group which is more particularly described below. The Group is allied with an Internet network, which as at the Latest Practicable Date, comprised over 1,000 Internet websites. The Group has also developed the A8Box in cooperation with mobile manufacturers. A8Box is a “jukebox” software which facilitates mobile phone subscribers to have access to the Group’s mobile music services directly from their mobile phones. As a result of its strong capability to engage in marketing activities for its UGC through various channels, the Group also enters into cooperative arrangements with international and domestic record labels to promote songs produced by them. Such record labels enter into cooperative co-promotion arrangements with the Group whereby the Group promotes the songs of such record labels on the Internet and to mobile phone subscribers through the mobile operators. In addition, the Group cooperates with major mobile operators in the PRC to organize promotion and marketing campaigns for well-known brand names such as “Pepsi” and “7up”and famous artist such as Jacky Cheung. In addition, in April 2007, the Group entered (Samsung Networks (Beijing) Co., Ltd.) into an agreement with to promote Samsung’s “ ” (Samsung Dream Club) through the Group’s value-added services promotion network for an initial period of one year. The Group is well set to capture the growth in mobile music industry in the PRC with its extensive marketing and sales network and insight into the PRC music market The Group, through Huadong Feitian, Kuaitonglian and their respective subsidiaries and branches, has established a sales network in the PRC comprising 21 sales offices having businesses covering more than 30 provinces, autonomous regions and administrative municipalities in the PRC. By strategically locating its sales force around the PRC, not only the Group can strengthen its relationships with mobile operators, but also the Group’s sales representatives can gain access to local trend information and data in each location. Such data and information allows the local business development personnel of the Group to gain insight into local consumers’ preference, enabling the Group to arrange its sales and marketing efforts to be location-specific. – 112 –


BUSINESS The subsidiaries of mobile operators in each province have their own music database, billboard and local marketing strategies. Through the combination of the Group’s extensive sales network who are working closely with mobile operators throughout the PRC and the market intelligence, the Group obtained insight into the local preferences of PRC mobile phone ” subscribers. The Directors attribute the Group’s success in promoting the hits of “ ” to its capability of obtaining such local information. and “ The Directors believe that the future growth in the mobile music industry in the PRC, with the launch of 3G mobile services, will provide increasing business opportunities which the Group’s extensive wireless sales network will be well set to capture. The Group possesses an integrated marketing and sales model The major channels through which the Group markets its music content are the same as the channels through which the Group provides its telecommunications value-added services. The Directors believe that this integration of marketing and sales channels enhances the speed and efficiency with which the Group conducts its business. For example, an advertisement sent by a mobile operator to a mobile phone subscriber may stimulate impulse buy by such subscriber. In addition, the Directors consider that every sale of the Group’s music content increases the popularity of that music content, thus increases the likelihood of further sales of such music content. Besides, sales of service are noted for marketing purposes which provides the Group with further insight into and instruction for marketing and sales tactics. The Directors consider that the Group’s integrated marketing and sales model creates a closed feedback loop, thus making the Group’s operations streamlined and efficient. The Group has an experienced management team The executive Directors and senior management team of the Group have extensive experience and professional knowledge in the PRC technology, media and telecom industry. The Company’s chairman, chief executive officer and executive Director, Mr. Liu Xiaosong, has over 15 years of experience in the information technology, media and telecom industry. Mr. Liu Xiaosong has invested in various IT-related companies. He invested in and was one of the founders of Tencent Holdings Limited. In addition, the Company’s chief operations officer and executive Director, Mr. Lin Yizhong (also known as Mr. Lin Hai), has over 12 years of experience in the technology, media and telecom industry. The Group’s senior management has broad experience in sales and marketing, wireless network operation and financial management. The Directors believe that the depth and extensive experience of its senior management team has contributed to the successful development of the Group’s business. The Group has adopted the Pre-IPO Share Option Scheme and the Share Option Scheme to motivate the senior management team. Accordingly, the Directors believe the interests of the senior management team of the Group are highly aligned with those of the shareholders of the Company and that the senior management team are incentivized to create value for the business of the Group. – 113 –


BUSINESS STRATEGIES The Group intends to become one of the largest “E-Labels” utilizing wireless sales channels in the PRC for original independently produced music content. The Directors believe that by achieving such goal, the Group will become one of the leading digital music companies in the PRC. To achieve this goal, the Group intends to leverage on its competitive strengths and undertake the following strategies: The Group will continue to strengthen its content by improving the interactive UGC collection platform www.a8.com The Group intends to expand and improve its interactive Internet UGC collection platform by further enhancing the platform. In particular, the Group intends to focus on improving the management of the Internet UGC platform by taking measures, among others, to increase server capacity, to increase user supporting services and to adapt the platform to be more user-friendly. In addition, the Group will, if necessary, increase its control over the UGC by introducing more stringent measures regarding the copyrights of the UGC. The Group will increase the brand awareness of the A8.com brand through improving the Internet UGC collection platform The Group intends to increase the brand awareness of A8.com by making improvements to its existing Internet UGC collection platform. Some improvements are directed at the platform itself, such as making new features available to users of the platform including original music video uploading and sharing. The Directors believe that such improvements offer a user-friendly multi-dimensional platform that will attract more artists as well as cultivate platform users’ interactions among themselves and thus in turn facilitate and encourage the development of the Group’s UGC platform further. Other improvements include increasing marketing, advertising and publicity for the Group’s Internet UGC collection platform and the Group’s A8.com brand, and to put greater efforts on the Group’s capabilities and strengths at promotional events, shows and collaborations. The Directors believe that such efforts and emphasis on the Group’s capabilities will further increase the PRC music industry’s awareness of the A8.com brand which will in turn attract more artists to the Group as well as further establish the Group as a leading digital music company among wireless consumers in the PRC and thus promote the sales of the Group’s services.

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BUSINESS The Group will strengthen its distribution capacity by further developing A8Box as a new mobile multimedia platform The Group has developed A8Box in collaboration with mobile phone manufacturers. A8 Box is a “jukebox” software which facilitates mobile phone subscribers to have access to the Group’s wireless value-added services directly from their mobile phones. With A8Box, mobile phone subscribers can view payment details for the service purchased directly from their mobile phones. Based on data collected from A8Box, the Group will also be able to monitor and analyze a specific mobile phone subscriber’s behavior and adjust marketing strategies accordingly. The Directors believe that A8Box can cultivate the loyalty of the mobile phone subscribers to the Group’s services because of the easy accessibility to the Group’s service menu and the personalized music services. The Group launched A8Box with Dopod on a promotional basis in late 2006. Based on the Group’s internal records, over 60,000 mobile phone subscribers had used such software. To prepare for future collaboration, the Group is further developing the A8Box with a view to facilitating easier interfacing with various forms of mobile phone hardware and platforms. The Group will integrate its business with the introduction of 3G mobile technology The Directors believe that, with the full-scale introduction of 3G mobile technology in the PRC, the Group will be able to provide new music services to mobile phone subscribers. The Directors also believe that the Group’s A8Box will facilitate the Group’s business transition to 3G because, to the best knowledge and belief of the Directors, A8Box already supports, or can be easily modified to support, depending on the mobile platform with which it is interfaced, the advent of service applications which will be introduced by 3G, such as video and mobile television. In addition, the Group already has experience of working with 3G technology through its cooperation with Hutchison Telecommunications (Hong Kong) Limited, a mobile operator in Hong Kong with 3G network capabilities. The Directors believe that the advent of 3G to the PRC mobile market will attract more wireless users and thus increase the exposure of the Group’s A8.com brand. In the beginning of 2008, the Group cooperated with Hutchison Telecommunications (Hong Kong) Limited’s mobile operations arm in establishing a music channel, focusing on original independently produced music content in the 3G network in Hong Kong. A music event known as “ ” (Yuansheng Feiyang Chinese Original Music Competition) was also launched. Such event allowed relevant mobile phone subscribers to vote via their 3G handsets for their favorite songs. The Directors believe that such kind of cooperation could expand and develop the market of the Group and integrate the Group’s business with the 3G mobile technology.

– 115 –


BUSINESS BUSINESS MODEL The Group is an integrated digital music company. It sources its music content from its own interactive Internet UGC platform, www.a8.com, as well as from other international and domestic record labels. It promotes such music content through the wireless network of mobile operators and on the Internet. The Group monetizes the music content in form of ringtones, RBTs and IVR Music to mobile phone subscribers in the PRC. The music content distributed by the Group can be put into two broad categories namely original independently produced music content and other music content. The original independently produced music content is uploaded by artists to the Group’s own interactive Internet UGC platform, www.a8.com, while other music content is licensed from international and domestic record labels. It distributes its services through the wireless network of mobile operators such as China Mobile Group and China Unicom Group. In addition, the Group sells non-music content such as games, wallpapers, entertainment news and jokes. The business model of the Group can be summarized as follows:

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BUSINESS MUSIC CONTENT COLLECTION PLATFORM The Group’s Internet UGC collection platform, www.a8.com, allows registered users to upload their original independently produced music and music-related content to this platform. The following diagram sets out the process by which original independently produced music and music content are collected, screened and processed by the Group before it is promoted and marketed by the Group.

Note 1: Others include full-track downloads and music video clips.

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BUSINESS Currently, the Group has a quality control system for its selection of music content in which the original independently produced songs will first be screened by staff specifically designated for such task for merit and will then be categorized by nature and style. Such selected and categorized songs will then be stored in a platform for rating by a dedicated team comprising staff from various different departments of the Group based on various criteria set out by the Group, such as easiness of singing, rhythm, sympathy, style and performance technique. Songs so selected are verified in terms of copyright ownership. After the signing of formal written agreements with the artists, information relating to the songs may be released and promotion of the songs or other related services may then be conducted. The UGC platform allows submission of music and music-related content, including songs, lyrics, melodies or instrumental performance by visitors of the website and users of the platform. The Group conducts marketing campaigns to stimulate the amount and rate of music content uploaded to its UGC platform, www.a8.com, including “ ” (Yuansheng Feiyang Top Ten Gold Songs). In 2005, the Group participated in the event “A8 “ (Hunan TV). In ” ” which was broadcast on December 2005, “A8 ” was held by the Group in Beijing. A large number of artists participated in this event and such ceremony was reported by various Internet websites and newspaper. During 2005 to 2006, by selecting songs from its Internet UGC platform, the Group cooperated with independent production companies for the production of the theme songs of various television programmes, namely “ ”, “ ”, “ ”, “ ”, “ ” and “ ”. In June 2007, the Group entered into an agreement with an independent production company in which the Group was granted an exclusive right to produce a theme song of a movie named “ ”. The Group also provided relevant wireless value-added services for such movie. In 2006, the Group cooperated with Beijing Pepsi Cola Beverages Co., Ltd. and China Mobile Group for the promotion of RBTs regarding the event “ ”. According to the Group’s internal records, the Group recorded UGC uploads of 18,743 times, 16,505 times and 19,664 times for the three years ended 31 December 2007. Upon submission of the material, the registered user must agree to terms and conditions set out in an electronic licensing agreement. Such agreement, for a term of three years, grants the Group certain rights to make use of the UGC for its value-added services and that profit generated from the Group’s use of the specified content will be split at a predetermined percentage between the Group and the original artist or artists during the term of such agreement. The Group, in most cases, only retains certain rights of the song while the copyright is retained by the artist, and such agreement does not compel the Group to commit the registered users for future works.

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BUSINESS As regards UGC, the Group has adopted the following procedures in respect of copyright ownership verification: –

Firstly, the submitted UGC is screened by the Group’s designated quality control staff for merit and such staff will also, based on their experience, compare and judge whether any such UGC is similar to or are likely to infringe others’ intellectual property rights. Those songs which are identified as likely to be plagiarized other sources or may have infringed others’ intellectual property rights will not be chosen for promotion purpose.

Secondly, upon submission of the UGC, the registered user must agree to terms and conditions set out in an electronic licensing agreement. Under such electronic licensing agreement, the registered user is required to give warranties in favor of the Group to the effect that, among others, (i) the registered user owns the right to license the relevant material to the Group and if the Group infringes others’ copyrights by using the material pursuant to the agreement, the registered user will bear all relevant legal liabilities; and (ii) the registered user has obtained the approval from all other party/parties (if any) who has/have contributed to the submitted work.

Moreover, pursuant to the formal written agreement entered into between the Group and the relevant registered user of the song selected by the Group, among others, (i) the registered owner will give a warranty in favor of the Group that there will not be any infringement against others’ right and he/she will bear all responsibilities if disputes arise as a result of the Group’s use of the selected UGC in accordance with the terms of the agreement; (ii) the registered owner will authorize the Group to pursue any action in relation to infringement of copyright and he will provide any relevant documents to assist the Group in this regard; and (iii) if the registered user has granted any licence to others prior to the signing of the agreement, relevant disclosures will be made to the Group. For the sake of prudence, the Group would also advise the registered users of the selected UGC to register their works with the Music Copyright Society of China and/or other relevant music copyright societies. Based on the above, the Directors consider that the Group has exerted due care and taken all reasonable and necessary procedures, which the Directors consider effective and sufficient for the purpose, against the infringement of the intellectual property rights up to the Latest Practicable Date. The Sponsor concurs with the view of the Directors as such. To further improve the verification procedures, the Group has obtained a licence to use a software, namely Gracenote Mobile MusicID, to assist its copyright ownership verification process in October 2007. Gracenote Mobile MusicID is a computer software search engine which possesses a database of published songs dedicated by the software developer which will optimize such database with commercially recorded materials. The software was launched in April 2008. Such software offers the Group another safeguard to verify whether, in an objective – 119 –


BUSINESS manner, the submitted UGC is substantially similar to or the same as other published songs which are stored in the database by comparing the submitted UGC with the database for similarity (if any). In case similarities have been identified, the Group will then, through its designated staff, compare the relevant published song with the submitted UGC content, so as to determine the copyright ownership issue. Gracenote Mobile MusicID performs the function of verifying the originality of the independent produced music content of the Group and safeguarding the Group against potential copyright claims. The Music Database Business, where details are disclosed in the section headed “Relationship with Controlling Shareholders” in this prospectus, is a separate business of the Controlling Shareholders of the Group which focuses on building a music database of songs attached with different attributes so that the users of such database can search particular songs with relevant attributes. In addition, the Group has adopted a set of procedures on how to deal with UGC, the copyright ownership of which may be subject to dispute. In brief, such procedures involve: (1) the removal of the relevant information of such UGC from the Group’s website; (2) the mediation between the registered user and the alleged copyright owner with a view to verifying the ownership of the copyright; and (3) the reaching of a dispute resolution between the parties. The Directors have confirmed that during the Track Record Period, the Group had not encountered any material dispute of such nature. In the usual case, before the selected UGC is repackaged into ringtones, RBTs or IVR Music for marketing purpose, the Group will procure that the artist or artists of the song re-record the song at the Group’s recording studio until it meets the quality standards set by the Group. If the Group decides to turn the song into a mobile music service in the form of a ringtone, RBTs or as IVR Music, the artist must enter into a formal written licensing agreement which restates the terms and conditions set out in the electronic licensing agreement already accepted by the artist prior to submission of his or her content to the Group’s UGC platform with appropriate amendments. As a promotional strategy, the Group’s website will provide links on its website to other websites where streaming and full-track download of the selected UGC are available to increase the exposure of the selected UGC among potential customers. The Group does not possess the licence to provide streaming and download of such UGC on its website and will not provide the streaming and download of UGC unless it has obtained all relevant licences and approvals under the applicable PRC laws and regulations. Currently, on the Group’s UGC platform, there are links to third party websites providing streaming and downloading services. The Group had provided streaming and download of music contents during the Track Record Period and please refer to the paragraphs headed “Regulations in respect of Internet publication” and “Regulations in respect of Visual/Audio (V/A) program transmitted on the Internet” in the section headed “Regulatory overview” in this prospectus for details. In addition to daily uploads and marketing campaigns as mentioned above, the Group is also allied with an Internet network, which as at the Latest Practicable Date, comprised over 1,000 Internet websites to promote the selected original independently produced songs. Occasionally, the Group also promotes the songs through radio programmes. – 120 –


BUSINESS The Group intends to enter into collaborative arrangements with traditional record labels so that artists of the traditional record labels may record the original independently produced songs submitted to the Group’s Internet UGC platform. Under such arrangements, the Group and the traditional record labels together select songs from its internet UGC platform and cooperate in the promotion of the songs and the artists. The traditional record labels will be responsible for artists’ image design and music production while the Group will be responsible for the promotion of songs and artists through its wireless and internet channels. In such cases, it is expected that each of the parties involved, including the registered user of the Group’s Internet UGC platform who submitted the song to the Group’s UGC platform, the Group and the traditional record label will receive a percentage of the profit generated by the song so recorded and published. Traditional record labels in cooperation with the Group under this (Yinen Xinrui International Cultural arrangement include ( ) (Zhongsi Asia Pacific Publishing Co., Ltd.*) and International Media Advertisement (Beijing) Co., Ltd.*). The Group has not experienced disputes with such traditional record labels in this arrangement. DISTRIBUTION Marketing and promotion model The Group markets its services through wireless networks, the Internet as well as traditional media. The Group also cooperates with various partners in its promotional activities. Wireless The Group utilizes mobile advertising to mobile phone subscribers by sending advertisements and service-related information to the mobile phone subscribers in cooperation with the Group’s mobile operator partners. The Group has also developed a software, A8Box, in cooperation with mobile manufacturers. A8Box is a “jukebox” software which facilitates mobile phone subscribers to have access to the Group’s mobile music services directly from their mobile phones. Internet The Group is allied with an Internet network, which as at the Latest Practicable Date, comprised over 1,000 Internet websites which help market its services. As a promotional strategy to popularize original independently produced music content and songs collected by the Group’s Internet UGC platform, the Group’s website, www.a8.com, also provides links on its website to other websites where streaming and full-tracks download of selected original independent produced music contents collected by the Group are available to increase the exposure of the selected UGC among potential customers. Such a marketing strategy is intended to help popularize the Group’s original independent produced songs, thus creating a demand for them in the PRC’s music market. This strategy also serves to market the Group’s mobile services. The Group’s Internet UGC platform, www.a8.com, provides music related – 121 –


BUSINESS information to its users in the form of, among others, electronic bulletin services and Huadong Feitian has not obtained the relevant approval for such operations throughout the Track Record Period and ceased such operations in April 2008. Please refer to the paragraph headed “Regulations in respect of electronic bulletin services” in the section headed “Regulatory overview” in this prospectus for details. The Group does not possess the licence to provide streaming and download of such UGC on its website and will not provide the streaming and download of UGC unless it has obtained all relevant licences and approvals under the applicable PRC laws and regulations. The Group provided streaming and download of music content during the Track Record Period and ceased all streaming and downloading functions of its UGC platform in April 2008 and adopted the following changes to comply with the relevant laws and regulations: •

on the Group’s UGC platform, there are links to third party websites, which possess the necessary licences and/or approvals for streaming and downloading, and such streaming and downloading is provided free of charge so that users of the Group’s UGC platform are able to access the Group’s original independently produced music content from the third party websites through streaming and downloading.

Please refer to the paragraphs headed “Regulations in respect of Internet publication” and “Regulations in respect of Visual/Audio (V/A) program transmitted on the Internet” in the section headed “Regulatory overview” in this prospectus for details. The Group’s website, www.a8.com, has various features which include, among others, tutorials on song-recording. The Group also allows the registered users of its Internet UGC platform to maintain blogs where the user can share his or her original songs, lyrics, pictures, music preferences and personal information with visitors or other registered users. Visitors of those blogs can listen to or download the original independently produced songs and provide feedback to the relevant artists. The Directors believe that the Group’s website is a key marketing tool to increase the popularity of the UGC collected from the Group’s website by attracting users and visitors to listen to the original independently produced songs. Traditional media The Group also advertises its services through traditional means such as advertisements placed in magazines and advertising through television. Occasionally the Group promotes songs and artists directly through radio programmes. The Group will utilize its established network to distribute recordings of the selected song to radio program, thus creating a room for the song to increase its popularity. The Group sometimes engages in marketing and sales events such as CD releases where it simultaneously carries out its promotional campaigns. Such efforts, varying with different situations, include inviting and showcasing the Group’s original artists, the artists of the traditional record labels or the songs on which the Group is focusing at the time or distributing promotional recordings so as to gain exposure for the relevant artist or songs. – 122 –


BUSINESS Cooperation with various partners In addition to marketing of the original and independently produced songs collected from the Group’s Internet UGC platform and other non-music content, the Group also serves as a collaborative marketer for songs and non-music services or events of other companies. The Group collaborates with the major mobile operators in the PRC, and participated in various events involving some famous brands and artist, including the “Pepsi” brand and Jacky Cheung, a well-known singer. In addition, in April 2007 the Group entered into an agreement (Samsung Networks (Beijing) Co., Ltd.) to promote with ” (Samsung Dream Club) through the Group’s value-added Samsung’s “ services promotion network for an initial period of one year. Sales and/or delivery channels The Group’s various sales and/or delivery channels for its products and services can be categorized in the following ways: Wireless –

RBT: A mobile phone subscriber can customize his or her RBT with a wide variety of music content. RBT as one of the Group’s services, due to its technical nature, is also a delivery channel of such service. The Group offers a variety of RBTs, including songs, melodies, sound effects or voice recordings. For the year ended 31 December 2007, the percentage of the Group’s net revenue effected through this channel was approximately 31.3%.

SMS and MMS: Being one of the Group’s sales channels, SMS is used to provide mobile phone subscribers with a channel through which they can request their interested wireless value-added services. A mobile phone subscriber can send a SMS request to a specific service code of the Group to obtain its mobile services. For China Mobile Group, where the Group had approximately 14.0 million subscribers during the three months ended 31 December 2007, the Group’s number used to be 3333. For China Unicom Group, where the Group had approximately 4.3 million subscribers during the three months ended 31 December 2007, the Group’s number used to be 9333. With effect from 1 November 2007, the MII assigns the SMS access number based on the identity of a service provider. As a result of this change, all access numbers for the Group’s mobile operator partners will be streamlined so that one access number can be used for all mobile operators. Upon sending a SMS request to such number (for Huadong Feitian, 10663333, and for Kuaitonglian, 10669334), the mobile phone subscribers can use their mobile phones to directly access the menu of the Group’s available services. The Group will then send the purchased service to the mobile operators, which will make such service available to the mobile phone subscribers. Subject to the nature of value-added services requested, the mobile operators will deliver such services through SMS, MMS or WAP. – 123 –


BUSINESS For simple value-added messages or content, it will be delivered to customers through SMS. For the value-added services related to multimedia objects (like color images, audio, video and rich text), it could be delivered to customers through MMS. For the year ended 31 December 2007, the percentage of the Group’s net revenue effected through this channel was approximately 51.4%. –

WAP: A mobile phone subscriber can directly access the Group’s mobile services menu by means of WAP. Upon purchase of the service, the Group enables the mobile phone subscribers to download the purchased services via WAP. For the year ended 31 December 2007, the percentage of the Group’s net revenue effected through this channel was approximately 4.1%.

IVR: A mobile phone subscriber can dial a specific IVR number assigned to the Group by the mobile operator with whom such subscriber has a mobile account. In terms of national access, for China Mobile Group, the assigned number of the Group is 12590715; for China Telecom Group, the assigned number of the Group is 16839330; and for China Netcom Group, the assigned number of the Group is 11696833. Upon being connected to this number, the mobile phone subscriber will be able to access the IVR menu of the Group’s services and such subscriber can then follow the procedures in the pre-set voice message to purchase the Group’s services. Purchased service will then be made available to the subscribers through SMS, MMS or WAP. For the year ended 31 December 2007, the percentage of the Group’s net revenue effected through this channel was approximately 12.6%.

A8Box: The Group’s A8Box, developed in collaboration with mobile phone manufacturers, facilitates mobile phone subscribers to have access to the Group’s mobile music services directly from their mobile phones. The subscribers can purchase the service directly from the menu accessed from their mobile phones. With the A8Box, mobile phone subscribers can also view payment details for services purchased directly from their mobile phones. A8Box has generated an insignificant amount of net revenue for the Group for the year ended 31 December 2007.

Internet Mobile phone subscribers can access the Group’s website at www.a8.com to select the service which they wish to purchase and to enter the mobile phone number they wish such service be made available. Once the mobile operators have verified the identity of the purchaser, the Group will then make available the purchased service directly to the intended receiver through SMS, MMS or WAP.

– 124 –


BUSINESS Set forth below are the sales and/or channels, major types of service and major promotional channels of the Group: Sales and/or delivery channels

Major types of service

Major promotional channels

SMS

Ringtones

www.a8.com

Wallpapers/pictures/ animated icons and screen savers

The central or provincial MonternetTM

Pre-set menu in SIM card

Internet web sites of various alliances

Radio/television/newspaper/ magazine/leaflet

Sending a SMS request to a specific service code

Co-promotion with mobile manufacturers

Games

Jokes

Entertainment news

Music video clips

MMS

SMS interactive services

Ringtones

www.a8.com

Wallpapers/pictures/ animated icons and screen savers

The central or provincial MonternetTM

Pre-set menu in SIM card

Internet web sites of various alliances

Radio/television/newspaper/ magazine/leaflet

Sending a SMS request to a specific service code

Co-promotion with mobile manufacturers

• •

Games Music video clips

– 125 –


BUSINESS Sales and/or delivery channels RBT

IVR

WAP

Note

Major types of service •

RBTs

Note

Major promotional channels •

www.a8.com

The central or provincial MonternetTM

www.12530.com

Dialing at 12580

Dialing at 12530

Leaflet

IVR Music/games/jokes

www.a8.com

Ringtones

The central or provincial MonternetTM

Internet web sites of various alliances

Dialing at a specific IVR number

Ringtones

The central or provincial WAP Portal

Wallpaper/pictures/ animated icons and screen savers

Co-promotion with mobile manufacturers

WAP-based games

WAP-based horoscopes, jokes and entertainment news

Music video clips

Full-track downloads

Note: RBT is a service offered to mobile phone subscribers to customize the ringing sound heard on the telephone line by the calling party after dialing and prior to the call being answered at the receiving end with a clip of music. Such service is delivered through the mobile operators instead of delivering to the mobile phone subscribers directly. Due to this technical nature, RBT is not only a service but also a delivery channel.

– 126 –


BUSINESS SERVICES The Group’s revenue is substantially generated from the fees paid by mobile phone subscribers to mobile operators in respect of the downloading of ringtones, RBTs, access to IVR Music and other mobile music-related and non-music-related services provided by the Group. Set out below is a breakdown of the Group’s revenue by principal services during the Track Record Period: Year ended 31 December 2005 2006 2007 Approximate Approximate Approximate RMB’000 % RMB’000 % RMB’000 % Music-related revenue – Ringtones services – RBTs services – IVR Music services – Other music-related services

85,798 13,260 15,706

36.8 5.7 6.7

96,395 42,086 7,160

35.8 15.7 2.7

72,206 89,498 20,748

25.3 31.3 7.2

13,032

5.6

13,618

5.1

14,990

5.2

Subtotal

127,796

54.8

159,259

59.3

197,442

69.0

Non-music-related revenue

105,437

45.2

109,179

40.7

88,522

31.0

Total

233,233

100.0

268,438

100.0

285,964

100.0

Music-related services Music-related services had generated revenue of approximately RMB127.8 million, RMB159.3 million and RMB197.4 million for the Group during the Track Record Period respectively, representing approximately 54.8%, 59.3% and 69.0% of the Group’s gross revenue during the respective year. Mobile music services Most of the Group’s services are music-related services for mobile devices. These music services are partly derived from the original independently produced music content collected by the Group’s UGC platform and partly obtained from other international and domestic record labels which license the Group to sell music content in which they own the intellectual property rights. The principal mobile music-related services of the Group comprise ringtones, RBTs, and IVR Music, which in aggregate generated revenue of approximately RMB114.8 million, RMB145.6 million and RMB182.5 million for the Group during the Track Record Period, representing approximately 89.8%, 91.4% and 92.4% of the Group’s revenue generated from mobile music-related services during the respective year. The music-related services provided by the Group for mobile devices are set out below. −

Ringtones: Ringtones are truncated clips of songs, which replace the normal ringing of the mobile phone which sounds upon receipt of an incoming call. There are – 127 –


BUSINESS different types of ringtones, including monophonic, polyphonic and true tone. The Group pushes the ringtone file through the mobile operators’ wireless network to the mobile phone subscriber upon receiving an order and confirming payment. The songs which the Group uses to make its ringtones are either licensed to the Group by the traditional record labels or are original independently produced songs collected by the Group’s own online UGC platform. −

Ring-back tones (RBTs): RBTs are clips of songs which replace the normal ringing sound heard by the caller while waiting for the receiving mobile phone subscribers to answer the phone. RBTs are sent by the Group to the mobile operators with which the purchasing mobile phone subscriber has a mobile account. Thus, the RBT is associated with the mobile account of the mobile phone subscriber as maintained by the mobile operator and not the mobile phone. The songs which the Group uses to make its RBTs are either licensed to the Group by the traditional record labels or are original independently produced songs collected by the Group’s own online UGC platform. The Group also provides a service package named “Music Box” on the websites of China Mobile Group and China Unicom Group. Each “Music Box” normally contains 3 to 11 RBTs based on different themes of a “Music Box”. RBTs packaged in the “Music Box” are randomly played. All the RBTs packaged in the “Music Box” are periodically updated. Each “Music Box” normally prices from RMB1 to RMB5 per month.

IVR Music: IVR Music, like RBTs, is a service which the Group maintains with the cooperation of mobile operators. A mobile phone subscriber, upon purchasing an IVR service, may access the song by dialing a specified number assigned to that service by the mobile operator. The songs which the Group uses to make its IVR content are either licensed to the Group by the traditional record labels or are original independently produced songs collected by the Group’s own online UGC platform.

Other music-related services: Other than the major music services mentioned above, the Group also provides various music services, such as music video clips, full-track downloads, artist’s wallpaper and picture. The revenue generated for the Group from this segment of the Group’s business amounted to approximately RMB13.0 million, RMB13.6 million and RMB15.0 million during the Track Record Period, representing approximately 5.6%, 5.1% and 5.2% of the Group’s revenue during the respective year.

Non-music-related services To further efficiently utilize the marketing and sales resources available to the Group, the Group also markets and sells some mobile non-music-related services. Such non-music-related mobile entertainment services, mainly consisted of games and wallpaper, which in aggregate accounted for, based on the internal financial record of the Company, more than 65% of the total non-music-related services for the year ended 31 December 2007. – 128 –


BUSINESS •

Games

Company offered a wide range of interactive prize quiz. Mobile phone subscribers answer the quiz via IVR or SMS message. It also provided some text driven multi-player role playing games by SMS. •

Wallpaper

Company provided a numerous types of photos mainly categorized by idols, animals, landscapes and human. Mobile phone subscribers can obtain the photos by MMS or via WAP to download. The rest of non-music related services included jokes, entertainment news and some interactive communication services. These services are sent to mobile phone subscribers by wireless via mobile operators through SMS, MMS and WAP, depending on the service. They are produced by the Group or sourced from other content providers. Non-music-related mobile entertainment services are priced by the Group at prices ranging from RMB0.5 to RMB2 per item, or RMB6 to RMB20 per month, depending on the service. Altogether, non-music-related mobile entertainment services have generated revenue of approximately RMB105.4 million, RMB109.2 million and RMB88.5 million for the Group during the Track Record Period, representing 45.2%, 40.7% and 31.0% of the Group’s revenue during the respective year. Service pricing The Group sets the price of its mobile entertainment services subject to the approval of its mobile operator partners in the PRC. For some services, the price varies depending on market factors such as popularity of a particular song and complexity of the service. Mobile phone subscribers can choose to pay for each purchase or they may subscribe for subscription packages. A monthly subscription package ranges from RMB2 to RMB20 depending on the service package. As at the Latest Practicable Date, the price range and the monthly subscription price range of the Group’s mobile entertainment services in the PRC were given below.

Service

Price range

Ringtones RBTs IVR Music Stories Games News Jokes Wallpapers/Pictures Music video clips Full-track downloads

RMB0.5 to RMB2 RMB0.5 to RMB3 RMB0.5 to RMB2 RMB0.5 to RMB2 RMB0.5 to RMB2 RMB0.5 to RMB2 RMB0.5 to RMB2 RMB0.5 to RMB2 RMB0.5 to RMB2 RMB2 per item

Monthly subscription price range per per per per per per per per per

clip clip minute item item item item item item

RMB6 to RMB20 RMB1 to RMB5 RMB3 to RMB10 RMB6 to RMB15 RMB6 to RMB15 RMB6 to RMB15 RMB6 to RMB15 RMB6 to RMB20 RMB6 to RMB20 Not Applicable(2)

Notes: (1)

For purposes of promotion and increasing customer loyalty, the Group offers some services to mobile phone subscribers free of charge.

(2)

Currently, no monthly subscription is offered for full-track downloads.

– 129 –


BUSINESS TECHNOLOGY Sales and/or delivery channels –

RBT: The Group maintains a website (http://rbt.a8.com) that holds all the RBTs for which the Group has copyright. The Group has developed its own system to collect and analyze relevant data obtained from the central and provincial websites of China Mobile Group. This system allows the Group to record the number of downloads of a RBT and the price of a RBT and generate different analysis so as to improve its marketing strategies.

SMS and MMS: The Group has implemented the Technical Platform for TeleMusic (“TPTM”) focusing on the operational efficiency of the SMS and MMS services. TPTM helps segregate the technological process and the creation processes involved in the production of SMS and MMS services. The technical staff inputs some basic functional modules for the SMS and MMS services on the TPTM, while other staff can base on such basic functional modules to further expand or develop different kinds of services. TPTM enables the division of labor between different departments of the Group and hence enhances its production efficiency.

IVR: The Group has obtained access to the national network of China Mobile Group, China Netcom Group and China Telecom Group for IVR. The Group also obtained local network access through provincial branches of China Mobile Group, China Unicom Group, China Telecom Group and China Netcom Group. The IVR system of the Group is laid out in the diagram below.

WAP: The Group has obtained access to the national network of China Mobile Group and China Unicom Group for WAP. The Group has also obtained local network access through provincial branches of China Mobile Group and China Unicom Group. – 130 –


BUSINESS The Group experienced some network interruptions, security breaches and computer virus attacks during the Track Record Period, resulting in the temporary shutdown of a portion of the Group’s customer service, all of which was of a short duration and caused insignificant impact on the Group’s business, financial condition and its results of operations. After these accidents, the Group has taken effective measures to guard against network interruptions and security breaches, including the increase in bandwidths, distribution system and front-end servers. The Group has also installed relevant anti-virus software to guard against computer virus attacks. Such software is updated regularly to maintain its effective operation. On the other hand, all the servers relating to the Group’s major business (such as SMS, MMS, IVR, RBT and WAP) are internally protected by firewalls and are only connected to the ports of the platforms of operators. The Directors confirm that such servers had not been attacked during the Track Record Period. Moreover, it is the Group’s policy to maintain its major services on relatively new servers and avoid maintaining such important services on servers which have been used for more than three years so as to ensure a more stable system. In case there is a system failure caused by computer virus, the Group will disconnect the server immediately and conduct a virus scan or delete relevant files so as to minimize the effect of the virus attack and to fix the problem. In addition, the Group also has back-up servers for its core databases to maintain continuous operation. Furthermore, the Directors confirm that during the Track Record Period the Group did not experience any system failure. RESEARCH AND DEVELOPMENT The information technology and research and development department of the Group comprised 54 staff as at 31 March 2008. Prior to the promotional launch of A8Box in late 2006, the information technology and research and development department of the Group carried out various technology advancement, system supporting and UGC website maintenance functions. As these research and development works are part of the Group’s normal process of providing services, the costs of which have been absorbed in the costs of services provided and no separate research and development cost had been recorded for the two years ended 31 December 2006. The Group is currently upgrading its UGC platform and developing its A8Box in terms of its compatibility and quality. The Directors currently plan to apply from the estimated net proceeds approximately RMB11.6 million for upgrading the interactive UGC platform www.a8.com, approximately RMB25.4 million for further developing A8Box and approximately RMB19.2 million for integrating its business with the introduction of 3G mobile technology. For details, please refer to the section headed “Future plans and use of proceeds” in this prospectus.

– 131 –


BUSINESS A8Box The Group’s A8Box is a “jukebox” software, which facilitates mobile phone subscribers to have access to the Group’s mobile music services directly from their mobile phones, designed for mobile phones based on the technology of 2.5G to 3G. At present, the Directors believe that A8Box is compatible with MTK (a software platform created by MediaTek Inc.), Windows Mobile and SmartNX (a smartphone platform created by Chipnuts Technology Inc.) platforms and it also supports Microsoft Windows. The following diagram shows the way in which A8Box is useful to mobile phone subscribers.

UGC collection platform The Group’s UGC collection platform maintains a system to monitor the provision of the Group’s services so as to enhance the system performance and stability of the Group’s website. The platform also adopts precautionary measures to protect its security. SUPPLIERS The suppliers of the Group can be broadly categorized into content providers and business alliances. Content providers refer to the business partners of the Group which supply the Group with various mobile phone content, which can be divided into music and non-music content. Business alliances refer to the business partners of the Group which possess promotional and/or advertising channels or technical capacity. During the Track Record Period, the top five largest suppliers of the Group, in aggregate accounted for approximately 18.4%, 31.9% and 25.3% respectively of the Group’s total cost of services provided. During the Track Record Period, the largest supplier of the Group accounted for approximately 9.6%, 20.9% and 15.0% respectively of the Group’s total cost of services provided. – 132 –


BUSINESS None of the Directors, their associates or Shareholders who is interested in 5% or more of the issued share capital of the Company immediately following the completion of the Share Offer (assuming that the Over-allotment Option is not exercised), the Capitalization Issue and the issue of the Remuneration Shares and without taking into account the issue and allotment of Shares pursuant to the exercise of options granted under the Pre-IPO Share Option Scheme and options to be granted under the Share Option Scheme nor any of their respective associates has any interest in any of the five largest suppliers of the Group for each of the three years ended 31 December 2007. Content providers Independent individual original artists The Group’s primary sources for its mobile original independently generated music content comprise singers, lyric writers, composers, instrumentalists or self-recorded artists who upload their music to the Group’s UGC platform. Upon submission, the artist must agree to the terms and conditions set out in an electronic licensing agreement. Such agreement, generally has a term of three years, grants to the Group certain rights to make use of the music content so collected for its value-added services. The revenue share to independent artists or artists normally ranged from 15% to 50% of the Group’s revenue net of its revenue shared and charged by mobile operators and other direct relevant charges during the term of such agreement. There are also one-off purchases of the copyrights. The Group, in most cases, only retains certain rights of the song while the copyright is retained by the artist, and such agreement does not compel the Group to commit the artist for future works. The written licensing agreement subsequently entered into between the Group and the artist may give the Group the right to exclusive licence to the song. Traditional record labels The Group also sources music contents from traditional music labels to produce mobile music content for its telecommunications value-added services. The Group’s five largest suppliers in this category include Shunde Peacock Gallery Video Appliance Co., Ltd., Universal Mobile Hong Kong Limited (as represented by Beijing Wireless Star Music Ltd.) and Rock Mobile (Beijing) Corporation and Warner Music Beijing. Other domestic PRC traditional music labels also supply content to the Group. The Group enters into licensing agreements with such music labels which, as content providers, grant the Group non-exclusive licences to convert and sell music content in the form of mobile music services including ringtones, RBTs, and IVR Music. Under the terms of such agreements, the Group splits the revenue of mobile services sourced from the song of a specific traditional music label with that label. The revenue share to traditional music labels normally varies from 14% to 75% of the Group’s revenue net of its revenue shared and charged by mobile operators depending on various factors including the music company and the song used. Some of the the Group to pay Such agreements Group to attain a

agreements which the Group enters into with suppliers of this type require upfront fees for the licensing of the music of the traditional label partner. also usually include a minimum earnings stipulation which requires the certain revenue within a set probationary period. – 133 –


BUSINESS Business alliances The Group cooperated with over 180 business alliances during the Track Record Period. Sale and promotion To further enhance its promotional capability, the Group has been cooperating with various business alliances which include, but not limited to, service providers of internet websites, traditional record labels, mobile phone manufacturers and traditional media operators. For details of how the Group cooperates with these business alliances, please refer to the sub-paragraph headed “Marketing and promotion model” under the paragraph headed “Distribution” in this section. The Group normally cooperates with its business alliances pursuant to a revenue sharing arrangement. The revenue sharing ratio with its business alliances normally varies from 10% to 80% of the revenue net of revenue shared and charged by mobile operators and relevant charges, depending on the bargaining power and the significance of each business alliance. Each existing business alliance can check relevant information in relation to its services, including the number of users and the amount of revenue generated, on an online system offered by the Group against its internal records. The Directors confirm that no significant dispute had arisen as to the revenue sharing amount during the Track Record Period. Technical outsourcing Apart from cooperating with business alliances for sale and promotion of its contents, the Group also cooperates with business alliances for technical outsourcing. •

Content providers of value-added non-music content

The Group’s non-music mobile content, such as jokes, wallpapers, stories and entertainment news, is either produced by the Group or sourced from independent third party mobile content providers. The Group enters into agreements with these content providers which usually occur on an as-needed basis. Terms of these agreements vary depending on the service and content provider. Payment is usually made monthly by the Group to the content provider upon settlement of accounts with the mobile operator. Such payment is usually calculated based on a revenue-sharing ratio of approximately 25% of the revenue net of the revenue shared and charged by mobile operators and relevant charges or a fixed payment arrangement set out in the agreement between the Group and the content provider. As the agreements entered into are in general on an “as-needed” basis, consequently their terms vary from time to time. •

Mobile music services formatting process

The process of converting a full-track song into the formats of mobile music services is outsourced by the Group to independent third-party technical service providers. The Group supplies the song to the technical service provider, specifying certain requirements including the format and the length of the ringtones and RBTs. The Group only pays the technical service provider if the Group is satisfied with the specifications of the services. – 134 ���


BUSINESS The terms of the Group’s agreements with these technical service providers stipulate, inter alias, that the songs provided by the Group to the technical service providers are confidential and are exclusive to the Group’s one-time project with the relevant technical service provider. CUSTOMERS In the primary revenue-generating business model of the Group, the customers of the Group are mobile operators while the end-users of the Group’s mobile services are mobile phone subscribers. The Group’s primary customers are China Mobile Group and China Unicom Group. China Mobile Group is the Group’s largest customer, representing 94.6%, 86.5% and 86.3% of the Group’s revenue for the three years ended 31 December 2007 respectively. During the Track Record Period, the top five largest customers of the Group (including the individual entity within the China Mobile Group and the China Unicom Group) in aggregate accounted for approximately 62.4%, 45.5% and 58.9% respectively of the Group’s total revenue. During the Track Record Period, the single largest customer of the Group accounted for approximately 29.1%, 15.0% and 30.1% respectively of the Group’s total revenue. Under the cooperation agreements, the mobile operators provide the network by which the mobile phone subscriber orders and the Group delivers its telecommunications value-added services. The mobile operators are responsible to verify the credit limit of the mobile phone subscriber and reject the order if the available funds standing to the credit of the mobile account of the mobile phone subscriber are inadequate for the purchase. None of the Directors, their associates or Shareholders who is interested in 5% or more of the issued share capital of the Company immediately following the completion of the Share Offer (assuming that the Over-allotment Option is not exercised), the Capitalization Issue and the issue of the Remuneration Shares and without taking into account the issue and allotment of Shares pursuant to the exercise of options granted under the Pre-IPO Share Option Scheme and options to be granted under the Share Option Scheme nor any of their respective associates has any interest in any of the five largest customers of the Group for each of the three years ended 31 December 2007. If the purchase is successful, the mobile operator deducts the agreed amount from the mobile account holder’s mobile account and credits it to the Group. On a monthly basis, the Group checks its records of revenue against those provided by the mobile operators. If there is significant difference between the records, reconciliation is required. Upon agreement on settlement, the mobile operator then deducts a set percentage, ranged from 15% to 50% of the earned revenue, as service fee for providing the platform and also for collecting the payment from the mobile phone subscribers .The fee charged depends on the type of services and the platforms on which the Group’s business is conducted. For the same type of service to be provided, such as IVR Music, the revenue sharing ratio between mobile operators and the Group could range from 30% to 50% among different provinces. In addition, the revenue sharing ratio between different services, like RBT and IVR Music varies from 15% to 50%.

– 135 –


BUSINESS All mobile operator partners of the Group provide an online information sharing platform for the Group, through which the Group can access its final account information with the mobile operator as well as general news updates and announcement sent by the mobile operator to its service provider partners. In addition, China Mobile Group’s online revenue gateway interfaces with the Group’s which allows the Group to access the account information of the mobile phone subscriber, such as whether there is any outstanding balance of the mobile account, the province in which the mobile phone subscriber is located, and the number of purchases and the status of purchases by that mobile phone subscriber. The Group commenced its business cooperation with China Mobile Group since the Group’s establishment in 2000 and with China Unicom Group in 2001. The Group experienced occasional differences in revenue calculation with China Mobile Group and China Unicom Group. When major differences in such revenue calculation are encountered, the Group would request checking of the data record of the operator against the internal records kept by the Group. The Directors consider that such requests for checking of internal records for revenue calculation have not been frequent and do not relate to substantial amount of the Group’s transaction with either China Mobile Group or China Unicom Group. Mobile operators have been adopting a penalty system, whereby, if a company violates rules and regulations set by the mobile operators, penalties will be imposed. Under such penalty system, each service provider is assigned a basic point ranging from 70 to 90 points depending on its length of cooperation with the mobile operator and its compliance record with the rules and regulations of such mobile operator. Points will then be deducted from, or added back to, the basic level: for a minor violation of the rules and regulations, points will be deducted while points will be added back to the basic level if the service provider has not committed any violation and has performed the relevant agreement to the satisfaction of the mobile operator during a specified period. The maximum points that a service provider can accumulate is 100. The reasons for penalties range from complaints by mobile phone subscribers to breach of relevant agreement or regulations. Monthly review on such scheme of point accumulation of the service providers are conducted by the mobile operators. In cases where the service provider has committed a very serious breach, the mobile operator may cease business co-operation with such service provider. The Group has had point being deducted by the mobile operators. Deductions of points by China Mobile Group were mainly due to breaches of rules of China Mobile Group by the Group mainly in relation to service quality, price dispute, spamming and pre-set menu in mobile phone. For instance, in June 2007, the Group received a deduction of 20 points for its MMS services as a result of violation of the internal rules of China Mobile Group regarding the pre-set menu of one of the wireless value-added services in mobile phones. Subsequently China Mobile Group issued a notice in November 2007 which stated that service providers which had pre-set menus in mobile phones (including the Group) were permitted by the MII to continue to use their pre-set menus for wireless value added services till December 2010.

– 136 –


BUSINESS China Mobile Group did not deduct any more points from the Group in respect of the Group’s continued co-operation with mobile phone manufacturers for the pre-set menu in mobile phones subsequent to the notice mentioned above. There was, however, no reference in such notice that any penalty imposed previously on the relevant service providers would be reversed. Up to December 2007, the points of SMS, MMS and IVR of the Group under the system of China Mobile Group were 91.00 points, 95.96 points and 97.87 points respectively. Under the penalty system of China Mobile Group, for example, a service provider which has had points deducted to a level below 59 points for each of SMS, MMS and IVR will be restricted from conducting various activities such as cooperating with other platforms and expanding its types of services. For service providers which have less than 20 points, settlement of payment, offer of delivery channels and cooperation between those service providers and China Mobile Group may be ceased. As the Group has accumulated 91.00, 95.96 and 97.87 points for each of SMS, MMS and IVR respectively up to December 2007, the Directors consider that the Group has maintained a good cooperation relationship with China Mobile Group. Moreover, the Group has implemented various measures in order to prevent deduction of points. Such measures include (i) strengthening the monitoring on the promotion of the Group’s services so as to comply with the requirements of the mobile operators or other regulatory authorities; (ii) reinforcing communication with mobile operators so as to enhance better cooperation; (iii) providing more training for its staff in the customers’ service department to improve the manner in handling complaints; and (iv) improving the efficiency in tackling complaints, solving problems and responding to customers’ enquiries. Regarding the strengthening of the monitoring on the promotion of the Group’s services for compliance with the requirements of the mobile operators or other regulatory authorities, the Group has adopted the following measures: (i) the senior management of the Group has issued written warnings to staff that they must not be involved in any information distribution during the promotion process that is not in compliance with the applicable regulations; (ii) the Group has increased its resources in relation to the monitoring of all relevant notices and regulations issued by the MII, local Telecommunications Administrative Bureaus and mobile network operators by assigning specific officers to monitor and analyze such notices and regulations and compiling analysis for its staff to review. Potential risk will be highlighted to the staff who are responsible for the promotional activities of the Group; and (iii) the Group has imposed numerous penalty measures for any staff who acts in violation of the applicable notices and regulations. Another kind of penalty imposed by mobile operators is to request certain delivery “codes” of a service provider to be ceased temporarily. A delivery “code” is allocated to a specific product of service offered by a service provider. Usually, when a service provider is found to have breached the relevant regulations of a mobile operator, its delivery “code” will then be ceased temporarily. Such temporary cessation may be either regional or national. During the Track Record Period, the Group had not experienced any temporary national cessation of its delivery “code”. In addition, the Group usually has more than one delivery “code” for each type of service and thus it can offer other delivery “codes” to its customers in case a delivery code is temporarily ceased.

– 137 –


BUSINESS The Directors consider that the Group’s reliance on the mobile operators can generally be categorized into three different aspects, namely (1) customer data; (2) settlement platform; and (3) service transmission network. In order to reduce reliance on the mobile operators, the Group has adopted the following strategies: As regards the provision of ringtone services, the Group will allow users to acquire the services through its UGC platform to their personal computer and then transmit them to their mobile phones. In addition, the Group will further strengthen its collaboration with mobile manufacturers to implement its own software like A8Box, which could gather the information for analysis purpose from the mobile phone subscribers, to deliver the Group’s services directly to the mobile phone subscribers and to settle the services fees through third parties. The Directors believe that, with the introduction of more advanced technology in the settlement and delivery channels and the launch of 3G technology, the Group can reduce its reliance on China Mobile Group and China Unicom Group in the following aspects: 1.

The Directors anticipate that the PRC Government is planning to issue licences to mobile operators other than China Mobile Group and China Unicom Group and the Group will enter into business cooperation with such new mobile operators, thereby reducing the Group’s reliance on the two current mobile operators. The Group is planning to expand its current business cooperation with other mobile operators such as China Telecom Group and China Netcom Group.

2.

The Group is trying to expand its settlement channels to prepaid cards which is a channel currently used by other service providers. The Group can launch its own prepaid card and mobile phone subscribers could purchase the prepaid card at designated locations. Subscribers could then subscribe the relevant services by entering the relevant password or verification numbers to purchase songs from A8Box or WAP.

3.

The Group is exploring the technical possibility of expanding its delivery channels, including but not limited to free WAP and handset preset, to deliver its services to the mobile phone subscribers. By utilizing the free WAP portal, the mobile phone subscribers can access and download services from the Group’s WAP portal. The mobile phone subscribers do not need to access the portal of the mobile operator for selection of the Group’s music services. The mobile phone subscribers could directly select their favorite music service from Group’s WAP portal which also allows the Group to gather and analyze the customer preference. Moreover, the Group may directly charge for the services rendered from mobile phone through prepaid card or electronic currency, so that the Group could further reduce its reliance on the mobile operators in terms of the settlement platform.

– 138 –


BUSINESS CREDIT POLICY The Group will evaluate at each balance sheet date all accounts to identify any that were in dispute or unlikely to be collected, then a specific provision would be made to the respective account balance. The bad debts provision is less than 3% of the total accounts receivable during the three years ended 31 December 2007. Provision for bad debts amounted to RMB138,000, RMB1,118,000 and Nil for the three years ended 31 December 2007 respectively. The Group and its customers, which are mobile operators, maintain interfacing online accounts records which are updated every month. The Group invoices its customers within one month after reconciliation of the services amount with the customers. In situations where there are discrepancies between the Group’s records and the mobile operators’ records, the two parties will discuss and compromise on a settlement. After first deducting an agreed handling fee, the mobile operators will remit the payment made by or deducted from the accounts of the relevant mobile phone subscribers to the Group for the purchased services. Mobile operators usually settle the amounts due to the Group within a period of 30 days to 120 days from the date the relevant invoice is issued by the Group. The significant difference in settlement period has been due to the difference of settlement policy of each of mobile operators in different provinces with respect to each of services provided. Therefore, for the same service provided, the settlement arrangement may vary with different mobile operators. The Group does not directly invoice mobile phone subscribers for the services purchased. Credit terms for project-based collaborations vary and are determined by the Group together with its partners on a case-to-case basis. All mobile operators will settle their invoice amount by directly transferring the amount to the Group’s bank accounts. In situations of default payment from regional mobile operators, the Group will notify its relevant regional office which will then communicate with such mobile operator. The Group has not experienced serious difficulty in recovering such default payment. Situations of default payment by the Group’s customers are rare. During the Track Record Period, the Group had not experienced a default in payment by a customer which has materially adversely affected the Group’s business.

– 139 –


BUSINESS QUALITY CONTROL Quality control standards and quality review are undertaken in many aspects of the Group’s business, especially in relation to the Group’s collected UGC, mobile services, sales services and customer services. UGC Submitted UGC will undergo a quality control process whereby the Group’s designated quality control staff will screen submissions for merit and will then be categorized by nature and style. Such selected and categorized music content is then stored in a platform for rating by a dedicated team comprising staff from various different departments of the Group based on criteria such as easiness of singing, rhythm, sympathy, style and performance technique. Songs that meet the Group’s standard will then be selected as targets for promotion by the Group. Mobile services The mobile services provided by the Group undergo quality control measures which vary depending on the type of mobile product. The Group utilizes the sales and marketing process to assess quality for some products. Factors taken into account by the Group include such indexes as to the number of purchases, the number of new consumers and the success rate of the transactions. In addition, the Group also gathers feedback from customer and mobile phone subscribers regarding the quality of the Group’s products, and uses this feedback to improve its products. Sales services The Group’s various departments monitor the efficiency with which the sales of the Group’s services are conducted. The efficiency standard adopted by the Group comprises an efficiency index which is measured by means of a ratio of the amount of income generated divided by the costs incurred for a promotional event. Every promotional event has to be approved by the relevant departments in respect of its efficiency index before it can be implemented. Customer services The Group’s customer service department monitors the efficiency with which calls to the Group’s 24-hour call center are handled. The Group’s customer service department maintains a hotline through which mobile phone subscribers can contact the Group regarding its services and activities with complaints and feedback. The quality of service on this hotline is monitored and reviewed by the Group’s customer service department. In addition, the Group has also installed a computer system involved in customer service which monitors and records, among others, the status of each hotline, the responsible customer service staff and its staff number. Reports are also prepared based on each feedback or complaint. These reports assist the customer service department to allocate resources so as to deal with the enquiries of the customers efficiently. – 140 –


BUSINESS AWARDS AND ACHIEVEMENTS During the Track Record Period, the Group obtained various awards and achievements. Details of these awards and achievements are given in the table below: Month/Year November 2007

Award

Awarding Organization

2007 (China Creative Industry Annual Awards 2007) − (Top 100 Enterprises in China Creative Industry) − (Leading Enterprises Award in China Creative Industry)

The Group (Organizing Committee for the China Creative Industry Annual Awards)

September 2007

July 2007 2007

(Shoujiquan) (Gold Olive Award for the Best Mobile Music Operator) (2007 Zero2IPO – Venture 50) 2007 Top 100 Private Companies of 2007

November 2006

Recipient

Zero2IPO

The Group The Group The Group The Group

Red Herring 2006

(Best Mobile Music Operator Award) (The 1st Mobile Multimedia Applications Competition, 2006 China) August 2006

2005-2006 (Communications Weekly), (2005-2006 China Wireless Entertainment Music Platform Contribution Award)

The Group

, 2006 (Organizing Committee of the 2006 International Wireless Entertainment Forum organized by China Center of Information Industry Development (CCID))

2006

2006

2006

2006

December 2005

2005 2005

2006 “ ” (2006 Top 100 China 3G Operators Survey wireless value-added services selection “The Best Music Operator”) 2006 (“2006 China High-tech, High-growth Top 50 Enterprises”) 2006 (2006 Emerging Companies with the greatest Growth Potential) 2006 3G SP (2006 China 3G Innovative SP Content Award) China Internet Industry Survey, Comprehensive Music No. 1 China Internet Industry Brand 50 2005 Deloitte Technology Fast 500 Asia Pacific Winner ” “2005 (Ranked 6th in the final list of “2005 China High-tech, High-growth Top 50 Enterprises”)

– 141 –

(Discovering Value) and

The Group

(The Economic Observer) (Deloitte)

(Stars of the Future)

(Analysys International Making Better Business Decisions) Internet Society of China

(Deloitte) (Deloitte)

The Group The Group The Group www.a8.com

The Group The Group


BUSINESS COMPETITION While the Directors consider that the Group has no direct competition due to its unique integrated business model, the Group may face competition in the following aspects: Market share According to In-Stat, there were over 16,000 service providers in the PRC wireless value-added service market by the end of 2005. The total size of the wireless value-added services market in the PRC, according to iResearch Consulting Group, reached RMB100 billion in 2006, representing a growth rate of 31.6% from 2005. Moreover, according to In-Stat, the mobile music market in the PRC is dispersed and the Group was one of the top five service providers of the mobile music market in the PRC in terms of revenue that service providers received from mobile phone subscribers before sharing with mobile operators and content providers other than function fee for RBTs (which is what mobile phone subscribers pay mobile operators to subscribe for the RBT services) for the year ended 31 December 2006. The aggregate market share of the top five service providers amounted to approximately 54%. The market share of the largest service provider in the mobile music market in the PRC accounted for approximately 14% and the Group’s market share was approximately 9%. The table below shows the respective revenue (except for Rock Mobile Corporation because it is not a listed company) and the types of wireless value-added services of these top five service providers for the year ended 31 December 2006. Approximate revenue1 (US$ million)

Types of wireless value-added services3

Ranking

Service providers

1

Tom Online Inc (Stock code: 8282)

168.4

Ringtones, RBTs, mobile music and IVR download

2

Linktone Ltd. (NASDAQ: LTON)

79.8

Customizable monophonic and polyphonic ringtones and a variety of audio-related services

3

Tencent Holdings (Stock code: 700)

390.3

Mobile and telecommunications value-added services1

4

Rock Mobile Corporation

No public financial information available2

Ringtones and RBTs

5

The Group

37.4

Ringtones, RBTs, and mediainteractive products – 142 –


BUSINESS Notes: 1.

Source from respective annual report of relevant companies for the year ended 31 December 2006 (other than the Group).

2.

That company is not a listed company.

3.

Source from In-Stat unless otherwise mentioned.

Demand The growth in demand for ringtones, RBTs and other mobile music content is primarily driven by the growth in the total number of mobile phone subscribers in the PRC. As mentioned in the paragraph headed “The PRC market” under the section headed “Industry overview” in this prospectus, mobile phone subscribers in the PRC grew from approximately 206.6 million in 2002 to approximately 547.3 million in 2007, representing a CAGR of approximately 21.5% within these five years according to the data published by the MII. The Directors believe that the reason why mobile music has become one of the most successful wireless value-added services in the PRC was due to the fact that the mobile phone subscribers in the PRC regard it as fashionable to distinguish themselves by personalized ringtones and RBTs. Supply According to In-Stat, major service providers generally source music content from traditional record labels for their mobile music services. Apart from cooperating with traditional record labels for sourcing of music content, the Group also sources its music content from its own interactive Internet UGC platform, www.a8.com. The Group focuses on the original independently produced music content uploaded by artists for the production of its services including ringtones, RBTs and IVR Music. While the Group distinguishes itself from other major wireless value-added service providers by emphasizing on its collection of UGC, the Group competes with other online UGC collectors in terms of both music content and the attention of the mobile phone subscribers. Distribution The Directors believe that the Group currently maintains a competitive edge in that, unlike other wireless value-added service providers which only collect and provide wireless value-added services, the Group also markets and promotes its services in the form of ringtones, RBTs and IVR Music, created by original independent artists and collected by the Group’s Internet UGC platform. In addition, the Group markets its mobile music-related services by organizing competitions on its own Internet UGC platform to attract artists to upload their music content.

– 143 –


BUSINESS Pricing As far as the Directors are aware, the pricing of all mobile entertainment services by service providers in the PRC is subject to the approval of their mobile operator partners. Mobile phone subscribers may choose to pay for the relevant service per each purchase or they may subscribe for monthly subscription packages. The Group adopts such pricing arrangement as its competitors. Entry barrier Service providers are difficult to distinguish themselves from other competitors due to product homogeneity. The Group’s competitive strengths are its well-established Internet UGC platform, strong multi-channel promotion capability and its integrated marketing and sales model. The Group has one of the largest interactive Internet UGC platform, www.a8.com, for collection of original independently produced music content in the PRC. The Group’s UGC platform has collected over 10,000 artists and over 50,000 original independently produced music content and songs. The Group has also allied with over 1,000 Internet websites to promote the songs. Its latest development of the “jukebox” software, A8Box, enables the Group to further improve its bargaining power with its business alliances. Also, its extensive sales network covering more than 30 provinces, autonomous regions and administrative municipalities, enables the Group to localize its marketing strategy based on the specific preferences of each location. The Group’s ability to collect original independently produced music content and its integrated marketing and sales model created entry barriers to other service providers targeting at the same market. Reliance on major mobile operators Service providers generally rely significantly on mobile operators. The Group derived substantial portion of its revenue from its collaboration with China Mobile Group and China Unicom Group. The Group has placed heavy reliance on these two mobile operators. Any major alteration of the Group’s current cooperation mode with China Mobile Group and China Unicom Group, or even loss of its business relationship with either of these major mobile operators, may materially adversely affect the operation and financial performance of the Group. Therefore, as mentioned in paragraph headed “Customers” under this section, the Group has adopted strategies to lessen its reliance on these two mobile operators.

– 144 –


BUSINESS INSURANCE The Group maintains a group accident injury insurance policy for the senior managers of Cash River and it also maintains a group accident injury insurance policy for its employees of Huadong Feitian. The Group’s insurance policies also cover social insurance for its employees. During the Track Record Period, the Group had made contributions in relation to the retirement of its employees in accordance with applicable laws and regulations in the PRC which require contribution by both the Group’s employees and the Group at a fixed percentage of the employees’ salaries. Save for the insurance policies disclosed above, the Group has not maintained other insurance policy and the Directors believe this is in line with the general practice in the Group’s industry in the PRC. The Group has maintained all mandatory insurance policies under applicable laws and regulations in the PRC. PROPERTY INTERESTS The headquarters and major operational facilities of the major operating companies of the Group are located in Shenzhen in the PRC. As at the Latest Practicable Date, the Group had a total of 33 leased properties in the PRC mainly for the purposes of offices and staff quarters. All of such properties are leased from Independent Third Parties. The tenancy agreements of 28 of these leased properties have not yet completed the leasing registration mainly due to the owner will be charged the rent tax after register. The Directors believe that the failure to register the tenancy agreements of these properties does not impose a significant negative impact on the Group’s business as these are properties leased by the Group for its operation either for office or store-room purposes or as staff quarters and can be easily relocated to other locations, if necessary, and none of such properties house any material operating assets of the Group. Accordingly, in the view of the Directors, none of the leased properties are crucial to the operation of the Group. Moreover, as confirmed by the Company’s legal advisers as to PRC laws, an unregistered tenancy agreement does not render it to be invalid nor undermine the Group’s legal right in occupying the property concerned. The Directors also take the view that if in case the Group is required to evict from these properties, there would not be any difficulty for the Group to identify alternative properties for relocation. The Group is liaising with owners to register the properties but the Group cannot guarantee all of them can finish the registration before listing.

– 145 –


BUSINESS As at the Latest Practicable Date, in respect of five of these properties, the lessors had not provided the Group with sufficient documents to evidence their respective authority to enter into the relevant leases. These properties are utilized as the Group’s branch offices and staff quarters and are not considered material to the business and operation of the Group. However, the Company’s legal advisers as to PRC laws consider that, if the relevant lessor of these properties can provide the Group with proper title documents and authority documents, the relevant leases are effective. The Directors also confirm that the Group will not renew the relevant tenancy agreements with the relevant landlords upon their respective expiry dates and will relocate the relevant offices unless they can evidence their respective authority to enter into the relevant leases. The relocation costs of the leased properties without certificates of title and/or which tenancy agreements are not registered is estimated to be approximately RMB210,950. The Controlling Shareholders have provided an indemnity for the potential costs and losses as a result of the relocation of any of the leased properties. Among the leased properties of the Group, the main offices of Cash River, Huadong Feitian and Kuaitonglian are more crucial to the operations of the Group and they are capable of satisfying the relevant requirements of the Stock Exchange for properties owned in the PRC because (i) the lessor of the offices had obtained valid land title certificates; (ii) the Company’s legal advisers as to PRC laws advised that the leases are legal, valid and enforceable; and (iii) the leases have been duly registered with the relevant authorities in the PRC. INTELLECTUAL PROPERTY RIGHTS Trademarks As at the Latest Practicable Date, a number of trademarks under which the Group operated were in the process of being registered to the Group. For details on the trademarks registered to and in the process of being registered to the Group, please refer to Appendix V to this prospectus. Domain names As at the Latest Practicable Date, the Group either owned or was in the process of being granted the rights to the Internet domain names under which the Group operates. For details on these domain names, please refer to Appendix V to this prospectus. Save as already disclosed in paragraph headed “Legal proceedings” in this section, the Directors are not aware of any incident in which the trademarks and/or domain names were infringed by others during the Track Record Period.

– 146 –


BUSINESS EMPLOYEES As at 31 March 2008, the Group employed 258 employees. The following table shows a breakdown of the Group’s employees by function as at that date: Number of employees

Function Management Product development and support Sales and marketing Original music production operations Information and technology and research and development

38 42 104 20 54

Total

258

Save as disclosed in the paragraph headed “Legal proceedings” in this section, the Group had not experienced any significant problems with its employees or material disruption to operations due to labor disputes during the Track Record Period, nor has it experienced any difficulties in the recruitment or retention of experienced staff. The Directors believe that the Group has a good working relationship with its employees. Director and staff remuneration The Group determines the remuneration of its staff based on various factors such as qualifications and years of experience. Including the Directors’ and senior management’s emoluments, the staff costs amounted to approximately RMB30.2 million, RMB35.2 million and RMB32.2 million for the three years ended 31 December 2007, respectively. LEGAL PROCEEDINGS During the Track Record Period, the Group was involved in a number of legal proceedings and arbitration proceedings in relation to employment dispute, copyright infringement, broadcasting rights infringement, contractual dispute, salary dispute, music royalty dispute and dispute on declaration. All such proceedings were related to claims of less than RMB1 million. The legal costs incurred amounted to RMB37,878, nil and RMB269,800 for the three years ended 31 December 2007 respectively.

– 147 –


BUSINESS To the best knowledge of the Directors, save as disclosed below, the Group is not involved in any legal or arbitration proceeding in which the judgment or arbitration award has not been made. The Group is involved in two arbitration and one legal proceedings which have either been settled between the parties or are in the execution of judgment stage. The Company has not maintained insurance coverage to cover potential losses resulting from legal proceedings. The Directors do not consider it necessary to purchase insurance policy to cover losses resulting from legal proceedings as such proceedings are isolated and incidental. The Controlling Shareholders have provided an indemnity to the Group for any actual and potential costs, losses and damages arising from the legal proceedings instituted by or against any member of the Group in relation to events occurred on or before the date on which the Share Offer becomes unconditional. The Directors confirm that the Group has not experienced any past litigation proceedings which materially adversely affected its business. The outstanding case in which the Group is currently involved is a legal proceeding. Huadong Feitian initiated against an ex-employee of Huadong Feitian for the compensation of approximate RMB130,000 relating to damages suffered by Huadong Feitian from acts of such ex-employee, and no counter-claim has been raised by the ex-employee. The Company’s legal advisers as to PRC laws are of the opinion that Huadong Feitian will not be subject to any liability in this case. HEALTH, LABOR AND SAFETY ISSUES The Group provides social insurance to its employees including pension insurance, medical insurance, work injury insurance, unemployment insurance and birth insurance in compliance with the applicable laws and regulations of the PRC. Besides, the Group has purchased group accident injury insurance policies for its senior management and employees in high risk positions. The Group had not experienced any industrial accidents and had complied with all the safety laws and regulations during the Track Record Period. The Group is considering to purchase director responsibility insurance to lessen or discharge the potential compensation responsibility of the director incurred from his exercise of director’s power. The Group is also considering to purchase property insurance to lessen the potential risk that important properties of the Group may be exposed to. The costs for providing social insurance to employees were approximately RMB2.4 million, RMB2.7 million and RMB3.0 million for each of the three years ended 31 December 2007 respectively, the exact amount based on the salaries of each employee in accordance with the applicable laws and regulations of the PRC. The Group estimates that the costs for providing social insurance will change with the change of the number of employees and their respective salaries. The costs for providing the group accident injury insurances for the relevant employees were approximately RMB20,000 to RMB30,000 per year. – 148 –


REGULATORY OVERVIEW OVERVIEW The PRC government has imposed extensive and stringent measures to regulate telecommunications and Internet services. The State Council of the PRC (“State Council”), the MII and other relevant authorities in the PRC have issued various laws and regulations in respect of the telecommunications and Internet services sector. The principal laws and regulations with respect to the business and operations of the Group are summarized in this section. In the opinion of the Company’s legal advisers as to PRC laws, unless otherwise stated in this prospectus, no consent, approval or licence other than those already obtained by the Group is required under any of the existing laws and regulations of the PRC for the businesses, ownership structure and operations of the Group or for the Share Offer. The Directors confirm that, to the best of their knowledge, save as disclosed in this prospectus, the Group has complied with all applicable local laws and regulations. Regulations in respect of telecommunications services On 25 September 2000, the State Council issued the Regulations on Telecommunications ) (“Regulations on Telecommunications”) of the PRC ( regulating the telecommunications activities and other activities related to the telecommunications sector in the PRC. The telecommunications sector in the PRC is classified according to the types of telecommunications service and is regulated under a licensing system. The MII and the provincial-level communications administrative bureaus (“CABs”) supervise and regulate the telecommunications industry in the PRC and in their respective administrative regions. The Regulations on Telecommunications divide the telecommunications sector into basic telecommunications services and telecommunications value-added services. The operation of telecommunications value-added services is subject to the examination, approval and the granting of licences by the MII or the CABs. In accordance with the Catalog of Classes ) which became effective on 1 April of Telecommunications Businesses ( 2003, provision of information services through mobile networks and the Internet is classified as the “Second Category Telecommunications Value-added Services”. On 26 December 2001, the MII issued the Administrative Measures for ) (which Telecommunications Business Operating Licences ( became effective on 1 January 2002), which set out the basic requirements for applying for the operation of telecommunications value-added services business in the PRC, mainly including the following: 1.

to operate telecommunications value-added services business in the whole country or various provinces, regions and cities, the minimum registered capital of a company shall be RMB10,000,000;

2.

feasibility research report and relevant technical proposals shall be available;

3.

necessary premises and facilities shall be available; and – 149 –


REGULATORY OVERVIEW 4.

there shall be no severe illegal act committed by a company within the recent three years.

Such administrative measures also stipulate the required materials for application, the application and approval procedures and the guidelines for the use of the licences. The Trans-regional Telecommunications Value-added Services Operation Licence ) shall be approved by the MII while the ( ), Telecommunications Value-added Services Operation Licence ( which is only operative within a provincial region, shall be approved by the relevant CAB. The period of validity of the Trans-regional Telecommunications Value-added Services Operation Licence is five years, and the company may apply to the relevant authority for renewal at least 90 days prior to the expiration. Huadong Feitian and Kuaitonglian have been granted the relevant Telecommunications Value-added Services Operation Licence which covers the whole of China. On 13 March 2005, the MII issued the Specification for Telecommunications Services ), specifying the service quality index and the communication quality index ( to which telecommunications service operators shall conform. At the same time, it specifies that telecommunications service operators shall establish a sound service quality management system and report to the relevant telecommunications authorities in accordance with the specified time, content and manner. Regulations in respect of foreign investments in telecommunications value-added industry According to the Administrative Rules for Foreign Investments in Telecommunications ) which became effective on 1 January 2002, Enterprises ( foreign investors’ ultimate equity ownership in an entity providing telecommunications value-added services in the PRC may not exceed 50% and a foreign investor wishing to acquire any equity interest in a telecommunications value-added business in the PRC must demonstrate a good track record and is experienced in providing telecommunications value-added services overseas. In July 2006, the MII issued the Notice regarding Strengthening Administration of Foreign Investment in Operating Telecommunications Value-Added Businesses ) (“MII Notice”) which prohibits holders ( of telecommunications value-added businesses operating licences from leasing, transferring or selling their licences to any foreign investors in any form, or providing any resources, sites or facilities to any foreign investors for illegal operation of telecommunications businesses in the PRC. The MII Notice sets out several principal requirements, namely, (1) the holders of valued-added telecommunications business operating licences or their shareholders must directly own the domain names and trademarks used by such licence holders in their daily operations; and (2) each licence holder must have necessary facilities for its approved business operations and maintain such facilities in the regions covered by its licence; and (3) all value-added telecommunications service providers are required to maintain network and – 150 –


REGULATORY OVERVIEW Internet security in accordance with the standards set forth in relevant PRC regulations. If a licence holder fails to comply with the requirements in the MII Notice and remedy such non-compliance, the MII or its local counterparts have the discretion to take measures against such license holders, including revoking their valued-added telecommunications business operating licences. On 18 October 2006, each of Huadong Feitian and Kuaitonglian submitted a self-assessment report to Guangdong Communication Administration, stating Huadong Feitian’s and Kuaitonglian’s compliance with the relevant provisions of the MII Notice. As at the Latest Practicable Date, no challenge had been received by Huadong Feitian or Kuaitonglian from Guangdong Communication Administration in relation to the selfassessment report. Regulations in respect of Internet information services On 25 September 2000, the State Council issued the Administrative Measures on Internet ) to regulate the provision of information Information Services ( services to online users through the Internet. In accordance with such administrative measures, Internet information services are divided into services of an operative nature and services of a non-operative nature. Internet information services of an operative nature shall be subject to a licensing system and those of a non-operative nature shall be subject to a filing system. The Internet information services offered by Huadong Feitian and Kuaitonglian are of an operative nature, and so it is necessary for the Group to apply to the MII or the relevant CAB for the licence to operate its Internet information services. Each of Huadong Feitian and Kuaitonglian has respectively obtained the Telecommunications Value-added Services Operation Licence which covers the whole of China. The scope of such licence covers the provision of Internet information services. Regulations in respect of the content of Internet information It is specified by the Administrative Measures on Internet Information Services ) that the Internet information services regarding, among others, ( news, publication, education, medical and health care, pharmacy and medical appliances shall be examined, approved and regulated by the relevant authorities. Internet information services regarding electronic bulletin services require special application or special filing in accordance with relevant regulations. Internet content providers shall not provide services beyond the scope of the content that has been licensed or registered. Furthermore, such administrative measures clearly specify the list of the prohibited content. Internet content providers shall monitor and control whether the information transferred by their websites includes prohibited content and, if found, shall terminate the transmission immediately, keep the relevant record and report immediately to the related authorities. Regulations in respect of short message services On 15 April 2004, the MII issued the Notice on Certain Issues Regarding Standardizing ) (“Notice on Short Short Message Services ( Message Services”) specifying that only those information service providers holding the – 151 –


REGULATORY OVERVIEW relevant licence can provide short message services in the PRC. Meanwhile, such notice also specifies that information service providers shall examine the contents of the short messages and automatically record the time of sending and receiving the short messages, the mobile numbers or codes of the sending terminal and receiving terminal of the short messages and keep such records for five months. Regulations in respect of electronic bulletin services On 6 November 2000, the MII issued the Regulations for the Administration of Internet ) to regulate the provision of Electronic Notice Services ( information to online users on the Internet in the form of, among others, electronic bulletin boards, electronic whiteboards, electronic forums, Internet chat-rooms and message boards. Before Internet content providers can offer Internet electronic bulletin services, they shall initiate a special application or a special registration to the relevant communication authorities. The Internet electronic bulletin service providers shall record the content and time of information being released, the website or domain name in its electronic bulletin services system and keep such records for 60 days, so as to supply them to the relevant authorities upon request. Set out below are the approval mechanism and procedures in relation to the application for the operation of Internet electronic bulletin services: 1.

Application criteria: The applicant must possess the following criteria: (a)

specific electronic bulletin services classification and column shall be available on the website;

(b)

mature rules regarding electronic bulletin services shall be available;

(c)

security measures regarding electronic bulletin services, including online-users registration procedures, online-users information administration rules and technical safeguard measures, shall be available; and

(d)

relevant managing staff and technical staff who are capable of administrating the Internet electronic bulletin services shall be available.

2.

Application procedure: Specific application shall be submitted to the MII or relevant CABs.

3.

Approval time frame: The MII or relevant CABs shall determine whether to grant a licence within 60 days after receiving an application. – 152 –


REGULATORY OVERVIEW The Group’s Internet UGC platform, www.a8.com, provided music related information to its users in the form of, among others, Internet electronic bulletin services and Huadong Feitian had not obtained the relevant approval for such operations throughout the Track Record Period. The Group ceased its Internet electronic bulletin services in April 2008 and will not engage any third party agent to provide such services. The Directors consider that the cessation to provide Internet electronic bulletin services will not have any material impact on the business of the Group because such Internet electronic bulletin services do not make any substantial contribution to the revenue or to the promotional resources of the Group. The Company has been advised by its legal advisers as to PRC laws that the operations without the relevant approvals from the authorities were not in compliance with the relevant regulations and the Group might be ordered by the authorities to cease the provision of its Internet electronic bulletin services and pay a fine calculated based on the amount of revenue generated from such services and, in cases of serious breaches, closure of the website through which such Internet electronic bulletin services are provided. However, as (i) Huadong Feitian has ceased such operation in April 2008; (ii) the Group had not recorded any revenue for such Internet electronic bulletin services during the Track Record Period and up to the Latest Practicable Date; and (iii) the Group’s Internet UGC platform has been registered with the MII, the Company’s legal advisers as to PRC laws have advised that it is unlikely that the Group would be ordered by the relevant PRC authorities to close its Internet UGC platform. As the Group has obtained relevant licences for telecommunications value-added services and relevant Internet information services which are the major business operations of the Group, the Directors do not consider that the Group’s previous non-compliance will have material impact to the business of the Group. As at the Latest Practicable Date, no penalty had been imposed on the Group for its non-compliance in the provision of Internet electronic bulletin services during the Track Record Period. The Controlling Shareholders have provided an indemnity to the Group against any penalty, loss, damage or cost imposed on or suffered by any member of the Group arising from or as a result of any non-compliance by any member of the Group with the relevant laws and regulations in respect of the provision of Internet electronic bulletin services by the Group. Regulations in respect of Internet publication On 1 August 2002, the General Administration of Press and Publication of the PRC and the MII implemented the Provisional Regulations on the Administration of Internet Publishing ( ) defining “Internet publication” as the online distribution conduct through which Internet content providers upload the content created by themselves or others (subsequent to certain selection and edition) on the Internet or send such content to the users’ terminals through the Internet for the public to browse, read, use or download. Such content includes audio visual products which have been published formally or published on other medias. The operation of Internet publication shall be approved by the relevant news publication administration and telecommunications authorities. The aforementioned provisional regulations also clearly list out the prohibited content in relation to Internet publication. – 153 –


REGULATORY OVERVIEW Set out below are the approval mechanism and procedures in relation to the application for the operation of the Internet publication: 1.

Application criteria: The applicant must possess the following: (a)

specific publication scope;

(b)

articles of association in compliance with PRC laws;

(c)

necessary editing and publishing department and professional staff; and

(d)

requisite funds, facilities and premises in connection with the publication services.

2.

Application procedure: The General Administration of Press and Publication of the PRC shall determine whether to grant licence after approved by relevant provinciallevel Press and Publication Bureau.

3.

Approval time frame: Relevant authorities shall determine whether to grant a licence within 60 days after receiving an application.

In order to provide Internet publishing business in the form of streaming and downloading of music content from its UGC platform, Huadong Feitian has applied and obtained approval ) from the Administration of Press and Publication of Guangdong Province ( in December 2007 and has applied for the licence from the General Administration of Press and Publication of the PRC for such operations. Huadong Feitian had commenced to provide streaming and downloading of music contents since 2004 and has not obtained relevant approvals for such services because the major operations of the Group were conducted through the mobile wireless network in the PRC for which the Group has obtained relevant licences and approvals. Such Internet streaming and downloading services were provided to visitors of the Group’s UGC platform free of charge so they could listen to the music content through streaming or downloading. These services were only one of the many promotion methods utilized by the Group for its original independently produced music content and the Group did not record any revenue from such services as they were provided free of charge. The Company has been advised by its legal advisers as to PRC laws that such operations prior to the obtaining of approvals from the authorities were not in compliance with the relevant regulations and different orders might be made by the authorities against the Group, namely cessation of such streaming or downloading services, confiscation of facilities and equipment for the provision of such services and its related gains and payment of a fine calculated based on the amount of revenue generated from such services. However, as (i) Huadong Feitian has obtained the approval from the Administration of Press and Publication of Guangdong Province in December 2007; and (ii) the Group had not recorded any revenue – 154 –


REGULATORY OVERVIEW for such streaming or downloading services during the Track Record Period and up to the Latest Practicable Date; the Company’s legal advisers as to PRC laws have advised that it is unlikely the Group would be subject to confiscation of its major operating facilities or equipment which are utilized for the Group’s business of sales of music contents through SMS, MMS and IVR Music instead of streaming and downloading of music contents through its website. The Directors do not consider that the Group’s non-compliance is material to the business of the Group. The Directors consider such streaming and downloading services to be a channel through which artists, who upload music contents to the Group’s UGC platform, can publish their work and they serve as one of the many promotion media utilized by the Group for its original independently produced music content. Such services are free of charge and do not contribute any revenue to the Group and therefore are not considered to be material to the business of the Group. The Group ceased all streaming and downloading functions of its UGC platform in April 2008 and adopted the following changes to comply with the relevant laws and regulations: •

on the Group’s UGC platform, there are links to third party websites, which possess the necessary licences and/or approvals for streaming and downloading, and such streaming and downloading is provided free of charge so that users of the Group’s UGC platform are able to access the Group’s original independently produced music content from the third party websites through streaming and downloading.

The Directors consider that there is a large number of such kinds of third party websites in the PRC, so it is not difficult for the Group to find alternate websites if such third party websites cease their business. There is no risk that the Group will lose any of the songs arising from those third party websites ceasing operation of their businesses, because the Group has saved all the original independently produced music content into a database for backup purposes. Such third party websites are in most cases owned by state-owned enterprises in the PRC and are therefore Independent Third Party and the Group is able to confirm whether they have obtained the relevant licences and/or approvals to provide streaming and downloading services through publicly available resources. The Group may or may not enter into formal agreements with such enterprises in the future and there is no guarantee that the Group will be able to continue to provide streaming and downloading services under such arrangement or find other suitable websites. The Directors, however, do not consider it is necessary to enter into formal agreements with such enterprises in view of the sufficient number of similar websites available in the PRC. Based on the internal records of the Group, during the Track Record Period, the number of songs of the Group downloaded by the mobile subscribers through the mobile wireless network in the PRC were 40,994,349, 48,221,575 and 92,044,865 respectively.

– 155 –


REGULATORY OVERVIEW The Company’s legal advisers as to PRC laws have advised that such arrangement does not contravene applicable laws and regulations in the PRC. The Controlling Shareholders have provided an indemnity to the Group against any penalty, loss, damage or cost imposed on or suffered by any member of the Group arising from or as a result of any non-compliance by any member of the Group with the relevant laws and regulations in respect of its provision of streaming and downloading services at its UGC platform. Regulations in respect of Internet advertisement ) and the It is required by the Advertising Law of the PRC ( ) to obtain approval from the Regulations on Advertising Administration ( State Administration of Industry and Commerce or its relevant local branches in order to to publish advertisement on websites. The business scope of Huadong Feitian, approved by Shenzhen Administration of Industry and Commerce Bureau, covers the advertising business. Regulations in respect of Internet culture According to the Provisional Rules on Administration of Internet Culture ) implemented by the MOC on 1 July 2003 and the Notice ( regarding Relevant Issues Concerning Implementation of the Provisional Rules on < > ) Administration of Internet Culture ( promulgated subsequently, Internet cultural activities refer to activities of supplying Internet cultural products and related services. Internet cultural products include audio and visual products and Internet audio and visual products which are produced, transmitted and circulated on the Internet. The Internet content providers shall be approved by the cultural administrative authorities and telecommunications administrative authorities and be granted the Licence for ) before engaging in any Internet Operation of Internet Culture ( cultural activities. Huadong Feitian has obtained the Licence for Operation of Internet Culture ). ( Regulations in respect of Visual/Audio (V/A) program transmitted on the Internet The Administrative Measures for Visual and Audio Program Transmitted by Information ) (“Measures”), Networks such as the Internet ( implemented by the SARFT on 11 October 2004, specifies that persons or entities engaging in transmitting V/A programs through the Internet shall be granted the Licence for Transmitting V/A Program over the Internet. According to the Decisions regarding Access of Non-Public Investment to Cultural ) (“Decisions”), issued by the State Industries ( Council on 13 April 2005, non-public investment is not allowed in the development of V/A programs through information networks. On 20 December 2007, the SARFT and the MII jointly promulgated the Provisions on Administration of Internet Visual/Audio Programming ) (“Provisions”), which took effect on 31 January Services ( 2008, supplementing the Measures and the Decisions. The Provisions define Internet V/A – 156 –


REGULATORY OVERVIEW programming services as the production, editing, integration and delivery of V/A programs to the public via the Internet, and services to upload and transmit V/A content provided by third parties. The Provisions set forth a prerequisite that a licencee for online V/A programs services must either be a State-owned or State-controlled entity. The SARFT and the MII jointly held a press conference in relation to the Provisions on 3 February 2008 responding that for Internet V/A programs provider who has operated legally prior to the promulgation of the Provisions and has no record of illegal activities is able to re-register and continue to operate such services. As at the Latest Practicable Date, supplemental rules in relation to the specific procedures of such re-registration had not been issued by either the SARFT or the MII. It is the Group’s intention to re-register once the supplementing rules are available. The Company has been advised by its legal advisers as to PRC laws that streaming and downloading of music content through its UGC website are regarded as providing audio programs through the Internet. Huadong Feitian had commenced to provide streaming and downloading of music content since 2004 and has not obtained the relevant approvals and licences. Huadong Feitian has not obtained the relevant approval and licence for such services because the major operations of the Group were conducted through the mobile wireless network in the PRC for which the Group has obtained relevant licences and approvals and such Internet streaming and downloading services were only one of the many promotion methods utilized by the Group for its original independently produced music content and the Group did not record any revenue from such services. The Company has been advised by its legal advisers as to PRC laws that such operations prior to obtaining of approvals from the authorities were not in compliance with the relevant regulations and different orders might be made by the authorities against the Group, namely cessation of such streaming or downloading services and payment of a fine not more than RMB30,000, and the equipment in connection with such operation might be seized and the Group will be subject to a maximum penalty of two times of the total investment to such operation in case of severe contravention. Based on the internal financial records on total investment to such business of the Group, the Directors estimate such penalty, if imposed on the Group, will be approximately RMB410,000. However, as (i) Huadong Feitian has ceased to provide streaming or downloading of music content at the Group’s UGC website since April 2008; (ii) the music content provided by the Group for streaming and downloading did not have contents which had breached the criminal laws in the PRC, the Directors do not consider that the Group’s non-compliance is material to the business of the Group. As at the Latest Practicable Date, no penalty had been imposed against the Group for any non-compliance against the provision of such streaming or downloading services during the Track Record Period. The Controlling Shareholders have provided an indemnity to the Group against any penalty, loss, damage or cost imposed on or suffered by any member of the Group arising from or as a result of any non-compliance by any member of the Group with the relevant laws and regulations in respect of the provision of such streaming or downloading services by the Group.

– 157 –


REGULATORY OVERVIEW Regulations in respect of telecoms networks code number resources On 29 January 2003, the MII issued the Administrative Measures on Telecoms Networks ) to administer the code number Code Number Resources ( resources including mobile communications network code number. According to such administrative measures, the entity which applies for a code number to be used in the trans-provincial range shall apply to the MII, and the entity which applies for a code number to be used within the provincial-level administrative region shall apply to the relevant CAB. Meanwhile, such administrative measures specifies the qualification of a code number applicant, application materials required and the application procedures. Each of Huadong Feitian and Kuaitonglian has obtained the relevant Certificate for Use of Access Code of Short ). Message Services ( Regulations in respect of software development activities On 27 October 2000, the MII issued the Administrative Measures for Software Products ) to regulate development, manufacture, sale and import of computer ( software or software embedded in information system or equipment provided to users and computer software in conjunction with computer information systems integration or application services or other technical services. Such administrative measures forbids the development, production, sale and import of the software products which infringe intellectual property rights of third party, contain computer virus, harm computer systems security, or contain contents prohibited by PRC laws. According to such administrative measures, the software products must be tested by a software testing organization authorized by the MII, and examined by software products registration organization. The software products which are accepted by testing shall be approved by the information industry administrative authorities and granted the software registration number and software product registration certificate and reported to the relevant department for filing. Such administrative measures also specifies that the business scope of the software products manufacturers must include the software business and the software products manufacturers must own the corresponding production conditions and technical strength, fixed production base and the procedure and ability to ensure the quality of products. Regulations in respect of intellectual property rights China has established a legal framework for intellectual property rights administration and protection in a comprehensive way. China has entered into many major international conventions on protection of intellectual property rights and became the member of the Agreement on Trade Related Aspects of Intellectual Property Rights upon its accession to the World Trade Organization in 2001. â&#x20AC;&#x201C; 158 â&#x20AC;&#x201C;


REGULATORY OVERVIEW The registered trademark in the PRC is protected by the Trademark Law of the PRC ( ) which came into effect in 1982 and revised in 2001. A trademark can be registered in the Trademark Administration Bureau. The period of validity of a registered trademark shall be 10 years and the renewal of the registration shall be allowed. The period of validity of each renewed registration shall be 10 years. Copyrights

shall

be protected by the Copyright Law of the PRC ) which was revised in 2001 and has expanded the protection ( scope of copyrights to activities of information network and products transmitted on information network. Copyrights shall be reserved by the author, unless specified by the laws otherwise. The copyright owner can permit or transfer its work to others for use. Except that it is specified by the laws that the permission is not necessary, use of the works of others shall be subject to conclusion of a licensing contract with the copyright owner. The period of protection of works shall be 50 years and the period of protection of the owner’s right of authorship, right of alteration, right of integrity to the works are not restricted. On 30 April 2005, the National Copyright Administration of the PRC and the MII jointly issued the Administrative Protection Methods for Copyright on the Internet ) to carry out the administrative protection of the information ( network propagation right that may be involved in the process of editing, modifying or selecting the stored or transmitted content through the functions of uploading, storage, linkage or searching of the content such as work, audio and video products automatically provided by the Internet via the instructions of the Internet content provider (Internet content provider herein refers to the online user distributing related contents on the Internet) in Internet information service activities. In case a copyright owner finds that his or her copyright is infringed by the content popularized on the Internet, it can send a notice to the Internet information service provider and ask it to remove the related content immediately. On 18 May 2006, the State Council issued the Regulations on Protection of Information ) which came into effect on 1 July Network Propagation Right ( 2006. It requires that any organization or individual shall obtain permission from the obligee and compensate in case of providing others’ works, performances and audio or visual products through information network, unless otherwise stated by laws and administrative rules. The application and administration of an Internet domain name in China are regulated by the Administrative Measures on the PRC Internet Domain Name ) which came into effect by the MII on 20 December 2004 and ( the Implementation Rules of Registration of Domain Name ) which was promulgated by PRC’s domain ( name registrar, China Internet Network Information Center (“CNNIC”), and came into effect on 1 December 2002. Domain name service organizations shall be responsible for the acceptance of application for network domain names and domain name registration applicants shall become owner of the registered domain name after registration. The CNNIC shall be responsible for the administration of CN domain names and Chinese domain names. Disputes in respect of domain names shall be regulated by the Measures on Solution of Disputes ) which was regarding Domain Name ( promulgated by CNNIC and revised on 14 February 2006, and such disputes shall be settled by settlement organizations approved by the CNNIC. – 159 –


REGULATORY OVERVIEW Regulations in respect of Internet privacy ) provides that freedom and privacy The Constitution of the PRC ( of communications of the PRC citizens are protected by laws and no organization or individual may, on any ground, infringe such rights. The relevant authorities have formulated rules regarding the use of the Internet so as to protect personal information and prohibit unauthorized disclosure. Internet content providers offering electric bulletin services must keep users’ personal information confidential and must not disclose such information to any third party without consent of the users unless the laws require such disclosure in accordance with the Regulations for the Administration of Internet Electronic Notice Services ( ). In case of a breach of the confidential obligations, the telecommunications administration authorities have the right to order the Internet content providers to rectify or in the event of losses or damage caused to the user, the Internet content provider shall be held legally responsible. In relation to the failure of the Group to obtain relevant approvals under the Regulations for the Administration of Internet Electronic Notice Services ( ) for its Internet electronic bulletin services, the Provisional Regulations for the Administration of Internet Publishing ( ) for its operation of the Internet publishing and the Internet Visual/Audio regulations for its streaming and downloading services, the Controlling Shareholders have provided an indemnity to the Group against any penalty, loss, damage or cost imposed on or suffered by any member of the Group arising from or as a result of any non-compliance by any member of the Group with the relevant laws and regulations. REGULATORY COMPLIANCE As disclosed above, the Group had not obtained all the licences and/or approvals necessary for its business operations under the applicable rules and regulations during the Track Record Period. During the preparation for the Share Offer, the Group engaged its legal advisers as to PRC Laws to conduct a thorough review of its business operations and to advise on all necessary licences, permits and certificates in respect of the Group’s business activities. The Group has ceased all operations in respect of which it has not obtained the relevant approvals and/or licenses including streaming and downloading services and the Internet electronic bulletin services on its Internet UGC platform. In order to ensure compliance with the applicable PRC laws and regulations and to avoid any subsequent non-compliance issues, the Group will implement the following measures as an internal guideline to improve compliance issues and the Group’s corporate governance in general before the Listing. The measures include the following: •

the Group’s management and employees will report to a compliance officer (who will be assisted by the senior management responsible for legal and compliance matters) when they encounter any new legal and regulatory issues. The compliance officer will then consult the Company’s legal advisers as to PRC Laws and report to the Board on the advice provided by the Company’s legal advisers as to PRC Laws. The Board will then make a decision on the necessary actions to be taken by the Group; – 160 –


REGULATORY OVERVIEW •

the compliance officer will conduct quarterly reviews of legal compliance issues based on an internal compliance checklist; and

the compliance officer will also liaise with the Company’s legal advisers as to PRC Laws from time to time in respect of any updates on the PRC legal requirements.

These compliance measures will be reviewed quarterly and may be amended, revised or modified to ensure compliance with the prevailing laws, rules, regulations, codes and practices. A compliance manual (“Compliance Manual”) will be distributed to the Directors and each member of the Group accordingly. In order to ensure that these measures will be adhered to by members of the Group, the following measures will be implemented: •

with the assistance of the senior management responsible for legal and compliance matters, compliance advisor, legal advisors or other advisors as necessary, the compliance officer will provide training to members of the senior management of the Group on the requirements of the Compliance Manual;

after receiving training from the compliance officer, each member of the senior management of the Group will provide training to the employees under his supervision, aiming at improving the employees’ knowledge and awareness of the PRC laws and regulations and promoting the employees’ general law-abiding spirit; and

each member of the senior management of the Group will conduct quarterly reviews of compliance issues based on an internal compliance checklist and report to the compliance officer.

The Directors have designated Mr. Lin Yizhong (alias Lin Hai), an executive Director and the chief operations officer of the Company, to be the compliance officer. In performing his duties as the compliance officer, Mr. Lin will be assisted by the Company’s legal advisers as to PRC Laws, in relation to PRC compliance issues. One of his main duties is to ensure that the Group complies with all applicable PRC laws and regulations at all times. The compliance officer will report to the Board whenever he becomes aware of or suspect that there is any deviation from the requirements, practice or procedures as set out in the Compliance Manual or there is any potential breach of the relevant laws and regulations committed by any employees.

– 161 –


CONNECTED TRANSACTIONS NON-EXEMPT CONTINUING CONNECTED TRANSACTIONS According to the Administrative Rules for Foreign Investments in Telecommunications Enterprises, which were issued on 11 December 2001 by the State Council of the PRC and became effective on 1 January 2002, a foreign investor is currently prohibited from owning more than 50% of the equity interest in a PRC entity that provides telecommunications value-added services. Provision of mobile value-added services and products is classified as telecommunications value-added services, and a commercial operator of such services must obtain a Telecommunications Value-added Services Operation Licence from the appropriate telecommunications authorities in order to carry on any commercial provision of mobile value-added services and products business in the PRC. In July 2006, the MII issued a notice which prohibits holders of telecommunications value-added business operating licences from leasing, transferring or selling their licences to any foreign investors in any form, or providing any resources, sites or facilities to any foreign investors for their illegal operation of telecommunications businesses in the PRC. The notice also requires that holders of telecommunications value-added business operating licences or their shareholders directly own the domain names and trademarks used by such licence holders in their daily operations. For additional information regarding the notice mentioned here and other PRC regulations governing the industry in which the Group’s business operates, please refer to the section headed “Regulatory overview” in this prospectus. As a result of the restrictions on the Group’s business set by the PRC laws and in order for the Group to be able to carry on its business in the PRC, the Group has entered into a series of structure contracts with Huadong Feitian and Kuaitonglian, severally, and their respective shareholders. These structure contracts enable the Group, through its wholly-owned subsidiary, Cash River, to exercise control over Huadong Feitian and Kuaitonglian and to consolidate these companies’ financial results into the Group’s results. Huadong Feitian and Kuaitonglian hold the requisite telecommunications value-added business operating licences. For details of the Group’s structure contracts arrangement with Huadong Feitian and Kuaitonglian, please refer to the section headed “History and development” in this prospectus. Mr. Liu Xiaosong, an executive Director and one of the Controlling Shareholders, beneficially owns more than 30% equity interests in Huadong Feitian and Mr. Lin Yizhong (alias Lin Hai), an executive Director, beneficially owns more than 30% equity interests in Kuaitonglian. Accordingly, each of Huadong Feitian and Kuaitonglian is an associate of Mr. Liu and Mr. Lin respectively and therefore connected persons of the Company. Furthermore, Ms. Cui Jingtao, a substantial Shareholder, is the spouse of Mr. Li Wei, a non-executive Director, and she holds a 25% equity interest in Huadong Feitian and she is a connected person of the Company. Certain transactions under the structure contracts would therefore be considered connected transactions and, unless an exemption is available under the Listing Rules, the Company must comply with the applicable reporting, announcement and independent shareholders’ approval requirements of Chapter 14A of the Listing Rules.

– 162 –


CONNECTED TRANSACTIONS The Directors (including the independent non-executive Directors) are of the view that the structure contracts are fundamental to the Group’s legal structure and business operations and are entered in the ordinary and usual course of business of the Group on normal commercial terms and are fair and reasonable or to the advantage of the Group and are in the interests of the Shareholders as a whole. The Directors also believe that the Group’s structure whereby the financial results of Huadong Feitian and Kuaitonglian are consolidated into the Group’s financial statements as if they were the Group’s wholly-owned subsidiaries, and the economic benefit of their business flows to the Group, places the Group in a special position in relation to the connected transaction rules. Accordingly, notwithstanding that the structure contracts technically constitute continuing connected transactions for the purposes of Chapter 14A of the Listing Rules, the Directors consider that it would not be appropriate and that it would be unduly burdensome and impractical for all transactions under the structure contracts to be subject to strict compliance with the requirements set out by Chapter 14A of the Listing Rules, including, amongst other things, the periodic announcement and approval of the independent shareholders of the Company. The Company’s legal advisers as to PRC laws have confirmed that the structure contracts among Cash River, Huadong Feitian and Kuaitonglian and their respective shareholders are valid and legally binding and are enforceable under, and will not result in any violation of, the existing PRC laws or regulations. The Sponsor is of the view that such continuing connected transactions are entered in the ordinary and usual course of business of the Group on normal commercial terms and are fair and reasonable and in the interests of the Shareholders as a whole. Accordingly, the Group has applied for, and the Stock Exchange has granted, a waiver from strict compliance with the requirements set out in Chapter 14A of the Listing Rules in respect of the continuing connected transactions under the structure contracts for so long as Shares are listed on the Stock Exchange and with the following conditions: •

changes without independent non-executive Directors’ approval: Except as described below, no changes to the structure contracts will be made without the approval of the independent non-executive Directors.

changes without independent shareholders’ approval: No changes to the structure contracts will be made without the approval of the Company’s independent shareholders.

economic benefits flexibility: The structure contracts continue to enable the Group to receive the economic benefits derived by Huadong Feitian and Kuaitonglian through: (i) the Group’s potential right (if and when PRC law releases the restriction on foreign investment in telecommunications value-added services) to acquire Huadong Feitian and Kuaitonglian’s equity interests and/or assets; (ii) the business structure under which the revenue generated by the cooperation between the Group and Huadong Feitian and Kuaitonglian is mainly retained by the Group; and (iii) the Group’s right to govern the financial and operating policies as well as, in substance, all of the voting rights of Huadong Feitian and Kuaitonglian. – 163 –


CONNECTED TRANSACTIONS •

renewal and cloning: The framework of the structure contracts may be renewed and/or cloned upon the expiry of the existing arrangements or, in relation to any existing or new wholly foreign-owned enterprise or operating company that the Group might wish to establish, without obtaining the approval of the Company’s shareholders, on substantially the same terms and conditions as the structure contracts. The directors, chief executive or substantial shareholders (as defined in the Listing Rules) of any existing or new wholly foreign-owned enterprise or operating company that the Group may establish upon renewal and/or cloning of the structure contracts will be treated as the Group’s connected persons and transactions between these connected persons and the Group other than those under similar structure contracts shall comply with Chapter 14A of the Listing Rules. This condition is subject to the relevant laws, regulations and approvals of the PRC.

ongoing reporting and approvals: The Group will disclose details relating to the structure contracts on an ongoing basis as follows: –

details of the structure contracts will be disclosed in the Company’s annual reports and accounts in accordance with the relevant provisions of the Listing Rules.

the independent non-executive Directors will review the structure contracts annually, and confirm in the Company’s annual reports and accounts for the relevant year that: (i) the transactions carried out during such year have been entered into in accordance with the relevant provisions of the structure contracts so that the revenue generated by Huadong Feitian and Kuaitonglian and their subsidiaries has been mainly retained by the Group; (ii) no dividends or other distributions have been made by Huadong Feitian and Kuaitonglian to their shareholders; and (iii) any new structure contracts entered into, renewed or reproduced between the Group and Huadong Feitian and Kuaitonglian during the relevant financial period are fair and reasonable, or advantageous, so far as the Group is concerned and in the interests of the Company’s shareholders as a whole.

the Group’s auditors will carry out review procedures annually on the transactions under the structure contracts and will provide a letter to the Directors with a copy to the Stock Exchange, at least ten Business Days before the bulk-printing of the Company’s annual report, confirming that the transactions have received the approval of the Directors, have been entered into in accordance with the relevant structure contracts and that no dividends or other distributions have been made by Huadong Feitian and Kuaitonglian to their shareholders.

– 164 –


CONNECTED TRANSACTIONS –

for the purposes of Chapter 14A of the Listing Rules, Huadong Feitian and Kuaitonglian will be treated as wholly-owned subsidiaries of the Company, and the respective directors, chief executives or substantial shareholders (as defined in the Listing Rules) of Huadong Feitian and Kuaitonglian and their respective associates will be connected persons, and transactions between these connected persons and the Group, other than those under the structure contracts, will be subject to requirements under Chapter 14A of the Listing Rules.

Huadong Feitian and Kuaitonglian will undertake that they will provide the Group’s management and auditors with full access to their relevant records for the purpose of the Group’s auditors’ review of the connected transactions.

In addition to the current structure contracts, there may be other contracts in the future between the Group and Huadong Feitian and Kuaitonglian. Given that the financial results of Huadong Feitian and Kuaitonglian are consolidated into the Group’s financial results, and given the relationship between the Group and Huadong Feitian and Kuaitonglian created by the structure contracts, transactions between the Group and Huadong Feitian and Kuaitonglian will be exempted from the “continuing connected transactions” provisions of the Listing Rules.

– 165 –


DIRECTORS, SENIOR MANAGEMENT AND STAFF DIRECTORS Executive Directors ), aged 42, an executive Director, the chairman and the chief Mr. Liu Xiaosong ( executive officer of the Company. Mr. Liu graduated from Hunan University in the PRC in 1984, with a Bachelor’s degree in Electrical Engineering. In 1987, Mr. Liu graduated from China Electric Power Research Institute in the PRC with a Master’s degree in Engineering. He has over 15 years of experience in the technology, media and telecommunications industry. He was one of the founders of Tencent Holdings Limited, a company listed on the Stock Exchange. In 2004, Mr. Liu was admitted to the Shenzhen Experts Working Union. Mr. Liu was appointed as the Vice President of the Copyright Union of the Internet Society of China and the Copyright Society of China in August 2007 and September 2007 respectively. He is also the Vice President of the Shenzhen Hi-tech Association. He is a founder of the Group and has been the chief executive officer of the Group since May 2000. He was appointed as a Director on 2 October 2007. Mr. Liu is currently responsible for the overall management and strategic planning of the Group. Ms. Ho Yip, Betty ( ), aged 39, is the chief financial officer of the Company and an executive Director. Ms. Ho graduated from the University of Toronto in 1993, with a Bachelor’s degree in Commerce. She was admitted as a member of the American Institute of Certified Public Accountants in 1997 and is a member of the Hong Kong Institute of Certified Public Accountants. Ms. Ho has over 15 years of diversified experiences in corporate finance, private equity, retail and operations. Ms. Ho was a director of Strategic Capital Group (HK) Limited, an e-commerce private equity firm, from 2000 to 2001. She held the position of Vice President of Corporate Development from 2001 to 2007 at Lorenzo Jewelry Limited, a wholly owned subsidiary of LJ International, Inc. (NASDAQ: JADE), was responsible for financial planning, corporate finance, investor relations and matters relating to mergers and acquisitions of the group. She joined the Group in July 2007 as its Chief Financial Officer and was appointed as an executive Director on 9 November 2007. Ms. Ho currently oversees the accounting and financial matters of the Group. Mr. Lin Yizhong (alias Lin Hai) ( ), aged 34, is the chief operations officer of the Company and an executive Director. Mr. Lin graduated from Tsinghua University in the PRC in 1995, with a Bachelor’s degree in Materials, Science and Engineering. Mr. Lin has over 12 years of experience in the technology, media and telecom industry. He joined the Group in August 2000 as its senior manager and was appointed as an executive Director on 9 November 2007. Mr. Lin is currently responsible for the general management, sales and marketing and technological system of the Group.

– 166 –


DIRECTORS, SENIOR MANAGEMENT AND STAFF Non-executive Directors Mr. Zhong Xiaolin ( ), aged 43, is a non-executive Director. Mr. Zhong graduated from Huazhong University of Science and Technology in the PRC in 1986 and 1989, with a Bachelor’s and a Master’s degree in Engineering respectively. He further obtained a degree of Doctor of Philosophy in the area of Robotics and Artificial Intelligence from the Napier University, Edinburgh in the United Kingdom in 1996 and a degree of Master of Business Administration from the University of Western Ontario in 2003. Mr. Zhong is a general partner of KPCB China and a general partner of TDF Capital LLC, an associate of the Financial Investors. He was appointed as a director of A8 Music on 28 November 2005. Mr. Zhong has about nine years of venture capital investment experiences and over eight years of experience in management and operation of technology companies. Mr. Zhong was appointed as a non-executive Director on 9 November 2007. ), aged 44, is a non-executive Director. Mr. Li graduated from Peking Mr. Li Wei ( University in 1985, with a Bachelor’s degree in Science. He further obtained a degree of Master of Economics in 1991 and a degree of Executive Master of Business Administration in 2005 from Peking University. He is currently a director of , a Vice President of each of Shenzhen Venture Capital Association, and Shenzhen Angel Investor Club, and a committee member of (Venture Capital Profession Commission of Science and Technology Financial Promotion Association of China). Mr. Li was appointed as a non-executive Director on 9 November 2007. Mr. Li is the spouse of Ms. Cui Jingtao, a shareholder of Huadong Feitian and a substantial shareholder of the Company. Independent non-executive Directors ), aged 44, is an independent non-executive Director. Mr. Mr. Hui, Harry Chi ( Hui obtained a Master of Business Administration degree in 1992 from the University of Southern California. Mr. Hui has over 12 years of experience in the media and music industry. He was the Managing Director of Warner/Chappell Music Publishing, Inc., Hong Kong. From 1998 to 2000, Mr. Hui had been the senior vice president/general manager of MTV Asia LDC. From 2002 to 2005, Mr. Hui was the President of the South East Asia division of Universal Music Limited. Since January 2007, Mr. Hui has been the Vice President, Marketing, China Beverages Business Unit of Pepsico International. He was appointed as an independent non-executive Director on 9 November 2007. ), aged 44, is an independent non-executive Director. Mr. Mr. Song Yong Hua ( Song graduated from Sichuan University with a Bachelor’s degree in Engineering in 1984. In 1987 and 1989, Mr. Song obtained a Master’s degree in Electrical Engineering and a degree of Doctor of Engineering from the China Electric Power Research Institute respectively. He further obtained a degree of Doctor of Science from Brunel University in 2002. Mr. Song was ) under the Cheung Kong Scholars Program a Cheung Kong Scholar ( ). He was elected as a fellow of the Royal Society for the encouragement ( of Arts, Manufactures & Commerce in 2001 and the Royal Academy of Engineering in 2004. – 167 –


DIRECTORS, SENIOR MANAGEMENT AND STAFF He is also a fellow of The Institution of Electrical Engineering. Currently, Mr. Song is the Professor of Electrical Engineering and the Pro-Vice-Chancellor of the University of Liverpool. He is also the Executive President of Xian Jiaotong Liverpool University, Suzhou, China. He was appointed as an independent non-executive Director on 9 November 2007. Mr. Chan Yiu Kwong ( ), aged 43, is an independent non-executive Director. Mr. Chan graduated from the University of Hong Kong with a Bachelor’s degree in Social Sciences in 1988. He was admitted as a fellow member of the Association of Chartered Certified Accountants and a fellow member of the Hong Kong Institute of Certified Public Accountants in 1999 and 2005 respectively. During June 2004 to July 2006, Mr. Chan served as an independent non-executive director of Beijing Enterprises Water Group Limited, a company listed on the Main Board of the Stock Exchange. During March 2001 to December 2007, Mr. Chan served as an executive director of Hi Sun Technology (China) Limited, a company listed on the Main Board of the Stock Exchange. Mr. Chan is an independent non-executive director of a company listed on the Stock Exchange, namely Biosino Bio-Technology and Science Incorporation. He has over 15 years of experience in auditing, business advisory and corporate management. He was appointed as an independent non-executive Director on 9 November 2007. Directors’ remuneration For each of the three years ended 31 December 2007, the aggregate of the remuneration paid and benefits in kind granted to the Directors by any member of the Group was approximately RMB399,000, RMB677,000 and RMB918,000 respectively. Each of the Directors has entered into a service agreement or an appointment letter with the Company for an initial fixed term of three years commencing from the Listing Date. Under the present arrangement, the aggregate of the Directors’ remuneration in cash and in kind for the year ending 31 December 2008 is estimated to be approximately RMB2.8 million. Further details of the terms of the above service agreements and appointment letters are set out in the paragraph headed “Further information about the Directors” in Appendix V to this prospectus. AUDIT COMMITTEE The Company established an audit committee on 6 May 2008 with written terms of reference in compliance with the Code of Corporate Governance Practices as set out in Appendix 14 to the Listing Rules. The primary duties of the audit committee are to regularly review and monitor the financial reporting process and internal control system of the Group. The audit committee has three members who are Mr. Chan Yiu Kwong, Mr. Song Yong Hua and Mr. Hui, Harry Chi, being the independent non-executive Directors. Mr. Chan Yiu Kwong has been appointed as the chairman of the audit committee. – 168 –


DIRECTORS, SENIOR MANAGEMENT AND STAFF REMUNERATION COMMITTEE The Company established a remuneration committee on 6 May 2008 with the primary duties of establishing and reviewing the policy and structure of the remuneration for the Directors and senior management. The remuneration committee has three members who are Mr. Liu Xiaosong, being an executive Director, and Mr. Song Yong Hua and Mr. Hui, Harry Chi, being independent non-executive Directors. Mr. Liu Xiaosong has been appointed as the chairman of the remuneration committee. The remuneration committee makes recommendations regarding the remuneration of directors and senior management by considering several factors, such as, salaries paid by comparable companies, time commitment and responsibilities of the directors and senior management, employment conditions and the desirability of performance-based remuneration. The remuneration committee also reviews and approves remuneration based on performance by reference to corporate goals. SENIOR MANAGEMENT OF THE GROUP ), aged 31, graduated from Sun Yat-Sen University with a Mr. Wang Hua ( Bachelor’s degree in International Economy and Trade in 1999. He started his career in the computer software industry following his graduation from university and joined the telecommunications and value-added services industry in 2003. He joined the Group in May 2006. Currently, Mr. Wang is the department head of the Wireless Sales Department of the Company and is responsible for the general operation of the sales of wireless services of the Group. Ms. Xu Xiaohui ( ), aged 38, passed the Tertiary Education Self-learning Examination majoring in Finance (International Finance) in Wuhan University in 1999. She was admitted as a non-practising member of the Hubei Institute of Certified Public Accountants in 2005. She joined the Group in April 2000. Currently, Ms. Xu is the department head of the Finance Department of the Company and is responsible for handling the general financial matters of the Group. Mr. Lu Zhonggang ( ), aged 33, graduated from Dalian University of Foreign Languages with a Bachelor’s degree in Arts in 1998. After his graduation, he worked as a news reporter of a television station in the PRC. From 2001 to 2005, he was employed as a department head and a manager of a computer software company where he obtained extensive experience in human resources and management. He joined the Group in November 2005. Currently, Mr. Lu is the department head of the Human Resources Department of the Company and is responsible for the management of the matters regarding human resources, administration and customer services of the Group. – 169 –


DIRECTORS, SENIOR MANAGEMENT AND STAFF Mr. Liu Zhenyu ( ), aged 30, graduated from Northeastern University of Qinhuangdao with a Bachelor’s degree in Engineering in 1999. Since his graduation, Mr. Liu has been working in the technology, software and mobile value-added services industry. He joined the Group in 2004. Currently, he is the department head of the Technology Department of the Company and is responsible for, among other matters, the development of the supporting technological systems, upgrading of the wireless value-added services platforms and testing of new products of the Group. Ms. Gao Keying ( ), aged 33, graduated from Zhengzhou University with a Bachelor’s degree in Statistics in 1998 and was awarded as an outstanding graduate in Henan Province by the Henan Education Committee in the same year. Ms. Gao further obtained her Master degree of Corporate Management from Tianjin University of Commerce in 2001. Ms. Gao has five years of experience in corporate management. She joined the Group in 2004. Currently, she is the Senior Manager of the Corporate Finance Department of the Company and is responsible for, among other matters, the coordination and management of the corporate matters of the Group. Mr. Zhao Qingtong ( ), aged 33, graduated from Yuzhou University with a Bachelor’s degree in Computer Information Management in 1996. Mr. Zhao has nine years of experience in sales and marketing. He joined the Group in October 2001. Currently, he is the manager of the Sales and Operations department of the Company. Ms. Cheng Heping ( ), aged 33, graduated from Zhongnan University of Economics and Law with a Master of Business Administration in 2004. Ms. Cheng has six years of experience in sales operations. She joined the Group in 2002. Currently, she is the manager of the Sales and Marketing department of the Company. QUALIFIED ACCOUNTANT AND COMPANY SECRETARY Ms. Ho Yip, Betty. She is also an executive Director of the Company. Biographical details of Ms. Ho Yip, Betty are set out in the paragraph headed “Directors” above.

– 170 –


DIRECTORS, SENIOR MANAGEMENT AND STAFF STAFF Overview As at 31 March 2008, the Group employed 258 employees. The following table shows a breakdown of the Group’s employees by function as at that date: Number of employees

Function Management Product development and support Sales and marketing Original music production operations Information technology and research and development

38 42 104 20 54

Total

258

Benefit schemes The employees of the Group in the PRC are members of a state-managed social welfare scheme operated by the local government of the PRC. Under the scheme, the Group provides retirement, medical, employment injury, unemployment and maternity benefits to its employees in the PRC in accordance with the relevant PRC rules and regulations. The Group is required to contribute a specified percentage of their payroll costs to the social welfare scheme to fund the benefits. The only obligation of the Group with respect to the social welfare scheme is to make the specified contributions. During each of the three years ended 31 December 2007, the Group contributed approximately RMB2.4 million, RMB2.7 million and RMB3.0 million to the scheme respectively. The Company’s legal advisers as to PRC laws confirmed that other than the social welfare scheme, there was no other benefit scheme which the Group needed to comply with during the Track Record Period. The Group’s relationship with staff Save as disclosed in the paragraph headed “Legal proceedings” in the section headed “Business” in this prospectus, the Group had not experienced any significant problems with its employees or material disruption to its operations due to labor disputes during the Track Record Period nor has it experienced any difficulties with the recruitment or retention of experienced staff. The Directors believe that the Group maintains a good working relationship with its employees. Pre-IPO Share Option Scheme and Share Option Scheme The Group has conditionally approved and adopted the Pre-IPO Share Option Scheme and the Share Option Scheme. A summary of the principal terms of the Pre-IPO Share Option Scheme and the Share Option Scheme is set out in the paragraphs headed “Pre-IPO Share Option Scheme” and “Share Option Scheme” in Appendix V to this prospectus. – 171 –


DIRECTORS, SENIOR MANAGEMENT AND STAFF COMPLIANCE ADVISOR The Company has appointed CAF Securities Company Limited as its compliance advisor pursuant to Rule 3A.19 of the Listing Rules. Pursuant to Rule 3A.23 of the Listing Rules, the compliance advisor will advise the Company in the following circumstances: (1)

before the publication of any regulatory announcement, circular or financial report;

(2)

where a transaction, which might be a notifiable or connected transaction, is contemplated including share issues and share repurchase;

(3)

where the Company proposes to use the net proceeds of the Share Offer in a manner different from that detailed in this prospectus or where the business activities, developments or results of the Company deviate from any forecast, estimate, or other information in this prospectus; and

(4)

where the Stock Exchange makes an inquiry of the Company regarding unusual movements in the price or trading volume of the securities of the Company.

The term of the appointment shall commence on the Listing Date and end on the date on which the Company distributes its annual report in respect of its financial results for the first full financial year commencing after the Listing. Rule 8.12 of the Listing Rules Pursuant to Rule 8.12 of the Listing Rules, the Company must have a sufficient management presence in Hong Kong. This normally means that at least two executive Directors must be ordinarily resident in Hong Kong. As the business of the Group was developed by Mr. Liu Xiaosong and other senior management members who are PRC nationals and based in the PRC, the business operations and office premises of the Group are primarily located in the PRC and the Group’s customers are all situated in the PRC, the senior management members of the Group are and will therefore continue to be based in the PRC. At present, an executive Director and the company secretary of the Company, Ms. Ho Yip, Betty, of the Company is ordinarily resident in Hong Kong but none of the other executive Directors are Hong Kong residents or are based in Hong Kong. The arrangement of the Company is to appoint two authorized representatives namely Ms. Ho Yip, Betty, an executive Director and the company secretary of the Company who is ordinarily resident in Hong Kong, and Mr. Liu Xiaosong, an executive Director and the chief executive officer of the Company, to act as the Company’s principal communication channel with the Stock Exchange and will ensure that they comply with the Listing Rules at all times. Accordingly, the Company applied to Stock Exchange for, and the Stock Exchange has granted a waiver under Rule 8.12 of the Listing Rules. – 172 –


RELATIONSHIP WITH CONTROLLING SHAREHOLDERS CONTROLLING SHAREHOLDERS Immediately after completion of the Share Offer (assuming the Over-allotment Option is not exercised at all), the Capitalization Issue and the issue of 496,000 Shares as the Remuneration Shares (assuming the Offer Price is the mid-point of the range i.e. HK$2.02) and without taking into account the issue and allotment of Shares pursuant to the exercise of options granted under the Pre-IPO Share Option Scheme and options to be granted under the Share Option Scheme, the Controlling Shareholders will control the exercise of voting rights of 54.13% of the Shares eligible to vote in the general meeting of the Company. Business retained by the Controlling Shareholders The Controlling Shareholders have retained substantial ownership of the following existing business outside of the business of the Group (“Excluded Businesses”), which has the same shareholding structure of A8 Music prior to the Reorganization: YY Music Database (“YYMD”) YYMD is a solution that enables a user to search his/her favorite songs/music according to criteria specified by such user and manage his/her favorite songs or music. YYMD categorizes each individual song through a wide variety of attributes. These attributes include, among others, identity of artists (including singers and song-writers etc.), tempo, language, style, date of publication and different types of emotions (such as happiness, love, sadness, blue and moodiness) (“Attributes”). As at the Latest Practicable Date, YYMD had approximately 170,000 songs which had been previously released by the record labels and more than 8.5 million related Attributes with an average of 50 Attributes per song. A user can utilize this database by entering the name of his/her favorite song or artist, or a few key description of his/her mood. YYMD will, through its music intelligence algorithm, search its entire database of categorized songs to find relevant songs that match with the user’s criteria. YYMD also enables users to identify and categorize songs and music by albums and artists. It also recommends other songs/music in the database based on the requested songs/music to its users. For example, a user can use a specific song/music that he/she likes as a “seed” which helps the user to search for other songs/music in the YYMD that are similar to the “seed” in terms of certain Attributes. As a result, a user can gradually build up and categorize its personal database based on the Attributes of the specific song/music that he/she likes. YYMD does not own any copyrights of the songs stored in its database and, instead, it gets licences from relevant record labels. YYMD or the manufacturers of equipment in which YYMD is installed will enter into licence agreements with relevant record labels for the use of their songs in YYMD in the equipment and the terms will be based on commercial negotiation between the parties. As YYMD is still at its development and trial stage, therefore no such licence agreement has been entered into with record labels. – 173 –


RELATIONSHIP WITH CONTROLLING SHAREHOLDERS YYMD has a website at www.yy.com which acts as a window for the user to access the YYMD. YYMD, through its website, collects and stores all its users’ behavior and preferences, based on, among others, the kind of services they look for and the Attributes they usually choose. YYMD is then able to analyze the users’ behavior and to revise and personalize the users’ play list based on their preferences. In addition, YYMD itself could be improved through the collection of data in relation to the users’ behavior. In general, www.yy.com is the interface for YYMD’s music intelligence (collectively the “Intelligence Algorithm Technology”). YYMD is a solution provider and it intends to obtain revenue from licence fees and will cooperate with home audio entertainment system manufacturers, automobile manufacturers and mobile and portable music device manufacturers. Before YYMD was started, it was the plan of the Shareholders that this business would be developed and operated independently from the Group due to their difference in many aspects as described below. A new entity would be incorporated to operate this business and the Group would operate YYMD on behalf of this new entity before its incorporation in consideration of a monthly management fee of RMB150,000, which was determined based on the amount of administrative expenses incurred by the Group for this arrangement. For the three years ended 31 December 2007, the Group charged management fees of Nil, RMB1.8 million and RMB0.9 million and incurred expenses of approximately Nil, RMB18.9 million and RMB6.4 million, respectively. The Directors confirm that the Group has charged no management fee on YYMD since 1 July 2007. All the expenses paid on its behalf were settled in February 2008 and the Group has no longer paid expenses on behalf of YYMD since then. Clear delineation of businesses The Directors believe that there is clear delineation between the business of the Group and those of YYMD. The exclusion of YYMD from the Group was determined in view of the difference in the operations and model between the two businesses and the fact that YYMD is still very premature and may require continuous input of substantial amount of investments without foreseeable returns in the near future. The Directors are not aware of any current plan of the Controlling Shareholders to inject any of the Excluded Businesses into the Company. The business of the Group can be delineated from YYMD in the following key aspects: •

The Group and YYMD are in different industrial sectors and focus on different markets The Group is an integrated digital music company and it sells music content to the mobile phone subscribers in the PRC in the form of ringtones, RBTs and IVR Music as telecommunications value-added services through the mobile wireless network in the PRC. It competes with other value-added service providers in the PRC including Tom Online Inc, Linktone Ltd. and Tencent Holdings Limited for the mobile phone subscriber market in the PRC.

– 174 –


RELATIONSHIP WITH CONTROLLING SHAREHOLDERS YYMD has established a database of commercially recorded and released songs and plans to obtain revenue from licence fee and revenue shared with home audio entertainment system manufacturers, automobile manufacturers and mobile and portable music device manufacturers. The Directors consider this business model a new concept in the PRC market and such database can be utilized by any business which can adopt the database into their products or services for the general consumer market in the PRC. The Group and YYMD do not share one music database and instead they maintain separate music databases for their respective business. Some of the songs of the traditional music record labels promoted by the Group through the mobile wireless network are also in the music database maintained by YYMD. However, for original independently produced music content, the users of the Group’s UGC platform can only download full track songs of such original independently produced music content through third-party websites or the mobile wireless network via A8Box. The Group does not provide any streaming and downloading service for songs from the traditional music record labels. •

The Group and YYMD have different products The products of the Group consist of music content in the form of ringtones, RBTs and IVR Music and non-music content such as games, wall-papers, entertainment news and jokes. All such products are provided to the mobile phone subscribers as telecommunications value-added services through the mobile wireless network. The Directors consider this is a business to customer model. The products of YYMD comprise a database of commercially recorded and released music content. The database is intended for sales to businesses which can adopt it into their products or services. The Directors consider that this is a business to business model.

The Group and YYMD have different customers and end-users The customers of the Group are the mobile network operators in the PRC and the end-users of the telecommunications value-added services provided by the Group are the mobile phone subscribers in the PRC. The Group directly delivers its music content and other services to the mobile phone subscribers and the mobile network operators are responsible for recording and settlement of the relevant revenue. The customers of YYMD are businesses which can adopt the database into their products and services such as home audio entertainment system manufacturers, automobile manufacturers and mobile and portable music device manufacturers. The database is not intended for direct sales to consumers and the businesses which purchase the database will sell their products or services directly to the consumers instead. – 175 –


RELATIONSHIP WITH CONTROLLING SHAREHOLDERS •

The Group and YYMD focus on different music content in a different way The Group focuses on the promotion and sales of original independently produced music content collected through its UGC website and the focus is to identify music content with potential of popularity among the public in the PRC. The revenue of the Group is dependent on the popularity of its music content and therefore the Group’s resources devoted to different music content are different. YYMD focuses on establishing a database of commercially recorded and released songs and the focus is to cover as many songs as possible. Each song is given different attributes for conducting searches of the database and the resources committed to the music content are generally the same. The revenue of YYMD is not solely dependent on to the popularity of the music content in its database.

Other different features in the business of the Group and YYMD The Group is an integrated digital music company and it mainly collects, promotes and sells the original independently produced music content to the mobile phone subscribers in the PRC. The Group cooperates with the artists in the promotion of the music content and share the revenue generated from the sales of the music content with the artists. The Directors consider the strengths of the Group are its promotion and sales network for music content through the mobile wireless network in the PRC. YYMD does not promote or sell individual music content nor does it need the cooperation, nor share revenue, with the artists. The Directors consider that the strengths of YYMD comprise the mass quantity of different music content in its database and the technology employed in the user-interface.

The operations and management of the Group and YYMD are separated The business of the Group and YYMD are operated and managed by a separate and independent team. Save for Mr. Liu Xiaosong, who is an executive Director, the Chairman and chief executive officer of the Company and the non-executive chairman of YYMD, none of the senior management of the Group is working for YYMD. The Group and YYMD employ their employees separately, are situated at different office premises and do not share computer equipment or software or other resources. Their business operations are also separate and they have their own major websites and have separate databases and servers to store their data.

– 176 –


RELATIONSHIP WITH CONTROLLING SHAREHOLDERS The Directors confirm that, as at the Latest Practicable Date, YYMD was still at its development and trial stage and no concrete revenue model or pricing of its products have been formulated. The Directors understand that YYMD will be officially launched to the market between the third and fourth quarter of 2008. The Directors, including the independent non-executive Directors, are of the view that it is to the best interests of the Company and the Shareholders not to include YYMD in the Group. Investment retained by Mr. Liu Xiaosong Mr. Liu, an executive Director and the chairman and chief executive officer of the Company, was one of the founders of Tencent Holdings Limited (“THL”), which is a leading provider of Internet services and mobile value-added services in the PRC. As at the Latest Practicable Date, Mr. Liu had no management role in THL and holds less than 5% equity interest. Such equity interest is Mr. Liu’s personal investment and is unrelated to the business of the Group and Mr. Liu has no plan to inject such equity interest into the Group. There is no overlapping in management, business or financial operation between the Group and THL and there was no transaction between the parties during the Track Record Period nor is there any planned cooperation in the future. The Directors consider Mr. Liu’s equity interest in THL to be completely unrelated and independent from his role in the Group. Independence of the Group from the Controlling Shareholders The Directors believe that the Group is able to carry on its business independently of the Controlling Shareholders after Listing. Management independence Each of the Directors is aware of his or her fiduciary duties as a Director which require, among other things, that he or she acts for the benefit and in the best interests of the Group and does not allow any conflict between his or her duties as a Director and his or her personal interest. In the event that there is a potential conflict of interest arising out of any transaction to be entered into between the Group and its directors or their respective associates, the interested Director shall abstain from voting at the relevant board meetings of the Company in respect of such transactions and shall not be counted in the quorum. Having considered the above factors, and in light of the fact that the Controlling Shareholders have signed the Deed of Non-compete, the Directors are satisfied that they are able to perform their roles in the Group independently and are of the view that they are capable of managing the business of the Group independently after Listing.

– 177 –


RELATIONSHIP WITH CONTROLLING SHAREHOLDERS Operational independence As a result of the restrictions on the Group’s business set by the PRC laws and in order for the Group to be able to carry on its business in the PRC, the Group has entered into a series of structure contracts with Huadong Feitian and Kuaitonglian and their respective shareholders respectively. These structure contracts enable the Group to exercise effective control over these entities for the Group’s business operation in the PRC. Mr. Liu Xiaosong, an executive Director and the chairman and chief executive officer of the Company, and Mr. Lin Yizhong (alias Lin Hai), an executive Director and the chief operation officer of the Company, hold a controlling stake in these two entities respectively. The Directors do not consider Mr. Liu’s and Mr. Lin’s equity interests in Huadong Feitian and Kuaitonglian will affect the operational independence of the Group as these entities are legally bound by the structure contracts for the Group to exercise control over their operations. The Directors consider that the Group is able to maintain relationships with its customers and suppliers without the assistance of the Controlling Shareholders. The Group will not share any resource in its operations with the Controlling Shareholders. Financial independence The Group has an independent financial system and makes financial decisions according to its own business needs. The Directors confirm that as at the Latest Practicable Date, loans provided by Mr. Liu Xiaosong to the Group had either been settled in full or capitalized. NON-COMPETITION UNDERTAKING Each of the Controlling Shareholders, namely Mr. Liu Xiaosong, Prime Century, Ever Novel and Grand Idea, has entered into the Deed of Non-compete in favor of the Company (for itself and the benefits of other members of the Group), pursuant to which he/it has undertaken to the Company that he/it would not, and would procure that his/its associates would not, during the restricted period set out below, directly or indirectly, either on his/its own account or in conjunction with or on behalf of any person, firm or company, among other things, carry on, participate or be interested or engaged in or acquire or hold (in each case whether as a shareholder, partner, agent, employee or otherwise) any business which is or may be in competition with the business of any member of the Group from time to time (the “Restricted Business”). Such non-competition undertaking does not apply to: (a)

any opportunity to invest, participate, be engaged in and/or operate with a third party any Restricted Business has first been offered or made available to the Company in writing, and at the request of the Company, the offer should include: (i) terms of offer between the Company and such third party, or (ii) terms for the Company to engage in the Restricted Business with the Controlling Shareholders (or any of them) and/or their associates, and the Company, after review and approval

– 178 –


RELATIONSHIP WITH CONTROLLING SHAREHOLDERS by the independent non-executive Directors, has declined such opportunity to invest, participate, be engaged in or operate the Restricted Business with such third party or together with Controlling Shareholders (or any of them) and/or their associates, provided that the principal terms by which any Controlling Shareholder (or his/its relevant associate(s)) subsequently invests, participates, engages in or operates the Restricted Business are not more favorable than those disclosed to the Company. The Company will have 60 days to consider the opportunity and can extend a further 30 days; or (b)

having interests in the shares of a company which operates business(es) that compete(s), directly or indirectly, with the businesses of the Group provided that: (i)

the Controlling Shareholders (or any of them) or his/its associate or nominee, whether singly or jointly, is not the single largest shareholder or group of shareholders of such company; and

(ii) none of the Controlling Shareholders or his/its associate or nominee control the appointment of the majority member of the board of directors of such company; and (iii) none of the Controlling Shareholders or his/its associate or nominee has any executive role or executive post in such company; and (iv) such company does not operate any Restricted Business when the Controlling Shareholders (or any of them) or his/its associate or nominee acquire the interests in such company. The “restricted period” stated in the Deed of Non-compete refers to the period during which: (i)

the Shares of the Company remain listed on the Stock Exchange;

(ii) regarding any member of the Controlling Shareholders, so long as he or his associates directly or indirectly holds an equity interest in the Group; and (iii) the Controlling Shareholders jointly are entitled to exercise or control the exercise of not less than 30% in aggregate of the voting power at general meetings of the Company.

– 179 –


RELATIONSHIP WITH CONTROLLING SHAREHOLDERS CORPORATE GOVERNANCE MEASURES The Company will adopt the following measures to manage the conflict of interests arising from YYMD and to safeguard the interests of the Shareholders: (i)

the independent non-executive Directors will review, on an annual basis, the compliance with the undertaking by the Controlling Shareholders under the Deed of Non-compete including the right of first refusal under paragraph (a) in the paragraph headed “Non-competition undertaking” in this section;

(ii) the Controlling Shareholders undertake to provide all information requested by the Company which is necessary for the annual review by the independent nonexecutive Directors and the enforcement of the Deed of Non-compete; (iii) the Company will disclose decisions on matters reviewed by the independent non-executive Directors relating to compliance and enforcement of the undertaking of the Controlling Shareholders, including decisions reached in respect of first rights of refusal referred to in paragraph (a) in the paragraph headed “Non-competition undertaking” in this section, under the Deed of Non-compete in the annual reports of the Company; and (iv) the Controlling Shareholders will make an annual declaration on compliance with their undertaking under the Deed of Non-compete in the annual report of the Company. DIRECTORS’ COMPETING BUSINESS Save as disclosed in the paragraph headed “Investment retained by Mr. Liu Xiaosong” in this section, each of the executive Directors has confirmed to the Company that he or she is not engaged in any business, which competes or is likely to compete, either directly or indirectly, with the business of the Group. The terms of the service contracts for the executive Directors will have relevant provisions to restrict the executive Directors from participating in business which competes or is likely to compete with the business of the Group.

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SUBSTANTIAL SHAREHOLDERS Each of the following persons will, immediately following completion of the Share Offer, the Capitalization Issue and the issue of 496,000 Shares as the Remuneration Shares (assuming the Offer Price is the mid-point of the price range i.e. HK$2.02) (without taking into account the Shares which may be issued upon the exercise of the Over-allotment Option or Shares which may be issued pursuant to the exercise of any options granted under the Pre-IPO Share Option Scheme or which may be granted under the Share Option Scheme), have an interest or short position in Shares or underlying Shares of the Company which would be required to be disclosed to the Company and the Stock Exchange under the provisions of Divisions 2 and 3 of Part XV of the SFO, or directly or indirectly, be interested in 10% or more of the nominal value of any class of share capital carrying rights to vote in all circumstances at general meetings of the Company and other members of the Group: Long position in the Company: Approximate Number of percentage Shares of interest

Name

Capacity/Nature of interest

Mr. Liu Xiaosong

Interest of a controlled corporation(1) Beneficial owner Beneficial owner Interest of a controlled corporation(1) Beneficial owner Interest of a controlled corporation(2)

216,839,025

49.23%

179,644,976 37,194,049 179,644,976

40.78% 8.44% 40.78%

48,609,756 48,609,756

11.04% 11.04%

Interest of a controlled corporation(2)

48,609,756

11.04%

Prime Century Ever Novel

Top Result Success Profit Investments Limited Ms. Cui Jingtao

(1)

Ever Novel is entitled to exercise or control the exercise of one third or more of the voting power at the general meeting of Prime Century and therefore is deemed to be interested in all the Shares held by Prime Century. Ever Novel is ultimately owned by a family trust set up by Mr. Liu Xiaosong who is deemed to be interested in all the Shares held by Ever Novel.

(2)

Ms. Cui Jingtao is deemed to be interested in Top Result’s interest in the Company by the SFO because Top Result is wholly owned by Success Profit Investments Limited, which is wholly owned by Ms. Cui.

– 181 –


SUBSTANTIAL SHAREHOLDERS Long position in other member of the Group:

Name

Capacity/ Nature of interest

Mr. Xu Xiaofeng

Beneficial owner

Name of the member of the Group Chuangmeng Yinyue

Approximate percentage of interest in registered capital 28%

Save as disclosed herein, the Directors are not aware of any person who will, immediately following the Share Offer, the Capitalization Issue and the issue of 496,000 Shares as the Remuneration Shares (assuming the Offer Price is the mid-point of the price range i.e. HK$2.02) (without taking into account the Shares which may be issued upon the exercise of the Over-allotment Option or Shares which may be issued pursuant to the exercise of any options granted under the Pre-IPO Share Option Scheme or which may be granted under the Share Option Scheme), have an interest or short position in Shares or underlying Shares of the Company which would be required to be disclosed to the Company and the Stock Exchange under the provisions of Divisions 2 and 3 of Part XV of the SFO, or directly or indirectly, be interested in 10% or more of the nominal value of any class of share capital carrying rights to vote in all circumstances at general meetings of the Company or other members of the Group.

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SHARE CAPITAL The authorized and issued share capital of the Company are as follows: Authorized:

HK$

3,000,000,000

Shares

30,000,000

Issued and to be issued, fully paid and credited as fully paid: 7,380,000

352,620,000

496,000

80,000,000

Shares in issue as at the date of this prospectus (Note 1) Shares to be issued pursuant to the Capitalization Issue Shares to be issued as Remuneration Shares (assuming the Offer Price is the mid-point of the price range i.e. HK$2.02) (Note 2) Shares to be issued pursuant to the New Issue

Total: 440,496,000

73,800

3,526,200

4,960

800,000

Total: 4,404,960

Notes: 1.

These shares comprise 6,450,000 ordinary shares and 930,000 preferred shares of the Company which will be converted into ordinary Shares upon Listing.

2.

The number of the Remuneration Shares is subject to change and is expected to be not more than 604,000 Shares and not less than 420,000 Shares. The Sponsor will not be granted any right for Board representation. The Remuneration Shares will be counted towards the public float upon completion of Share Offer.

The above table assumes (i) the Share Offer and the Capitalization Issue become unconditional and the issue of Shares pursuant thereto is made as described herein and (ii) 496,000 Remuneration Shares will be issued. It takes no account of any Shares which may be allotted and issued under the Over-allotment Option, upon the exercise of any options granted under the Pre-IPO Share Option Scheme or any options that may be granted under the Share Option Scheme or of any Shares which may be allotted and issued or repurchased by the Company under the Mandates to allot, issue and repurchase shares as described in the paragraphs headed “General Mandate” and “Repurchase Mandate” in this section below.

– 183 –


SHARE CAPITAL RANKING The Offer Shares, the Remuneration Shares and the Shares which may be issued under the Over-allotment Option, upon the exercise of any options granted under the Pre-IPO Share Option Scheme or any options that may be granted under the Share Option Scheme will rank equally with all of the Shares in issue or to be issued, and will qualify for all dividends or other distributions declared, made or paid on the Shares after the date of this prospectus, except for the entitlements under the Capitalization Issue. GENERAL MANDATE Conditional on the Share Offer becoming unconditional, the Directors have been granted a general unconditional mandate to allot, issue and deal with unissued Shares with an aggregate nominal value not exceeding the sum of: •

20% of the total nominal amount of Shares in issue and to be issued (as set out in the above table but excluding Shares to be issued pursuant to the exercise of the Over-allotment Option, the options granted under the Pre-IPO Share Option Scheme and the options which may be granted under the Share Option Scheme), and

the total amount of share capital of the Company repurchased by the Company (if any) pursuant to the Repurchase Mandate.

The Directors may, in addition to the Shares which they are authorized to issue under the mandate, allot, issue and deal in the Shares pursuant to a rights issue, an issue of Shares pursuant to the exercise of subscription rights attaching to any warrants of the Company, scrip dividends or similar arrangements or the exercise of options granted under the Share Option Scheme or any other option scheme or similar arrangement for the time being adopted. This mandate will expire: •

at the conclusion of the next annual general meeting of the Company; or

upon the expiration of the period within which the next annual general meeting of the Company is required by the Articles or any applicable laws of the Cayman Islands to be held; or

the passing of an ordinary resolution of the Shareholders in general meeting revoking, varying or reviewing such mandate,

whichever is the earliest. For further details of this mandate, please refer to the paragraph headed “Written resolutions of all Shareholders passed on 26 May 2008” in Appendix V to this prospectus. – 184 –


SHARE CAPITAL REPURCHASE MANDATE Conditional on the Share Offer becoming unconditional, the Directors have been granted a general unconditional mandate to exercise all the powers of the Company to repurchase Shares with a total nominal value of not more than 10% of the aggregate nominal amount of the share capital of the Company in issue and to be issued as set out in the table above (but excluding Shares which may be issued pursuant to the exercise of the Over-allotment Option, the options granted under the Pre-IPO Share Option Scheme and the options which may be granted under the Share Option Scheme). This mandate only relates to repurchases made on the Stock Exchange, and/or on any other stock exchange on which the Shares are listed (and which is recognized by the SFC and the Stock Exchange for this purpose), and which are in accordance with the Listing Rules. A summary of the relevant Listing Rules is set forth in the section headed “Repurchase of Shares” in Appendix V to this prospectus. This mandate will expire: •

at the conclusion of the next annual general meeting of the Company;

or upon the expiration of the period within which the next annual general meeting of the Company is required by the Articles or any applicable laws of the Cayman Islands to be held; or

the passing of an ordinary resolution of the Shareholders in general meeting revoking, varying or renewing such mandate,

whichever is the earliest. For further information about this repurchase mandate, please refer to the paragraph headed “Written resolutions of all Shareholders passed on 26 May 2008” in Appendix V to this prospectus.

– 185 –


FINANCIAL INFORMATION

The following discussion and analysis of the financial condition and results of operations of the Group should be read together with the combined audited financial statements of the Group as at and for the three years ended 31 December 2007, and the accompanying notes included in the Accountants’ Report set out in Appendix I to this prospectus. The Accountants’ Report has been prepared in accordance with IFRS. The following discussion contains certain forward looking statements that involve risks and uncertainties.

OVERVIEW The Group is an integrated digital music company. It sources its music content from its own interactive Internet UGC platform, www.a8.com, as well as from other international and domestic record labels. The Group promotes such music content through the wireless network of mobile operators and on the Internet. It sells the music content in form of ringtones, RBTs and IVR Music to mobile phone subscribers in the PRC. The music content distributed by the Group can be put into two broad categories namely, original independently produced music content and other music content. The original independently produced music content is uploaded by artists to the Group’s own interactive Internet UGC platform, www.a8.com, while other music content is licensed from international and domestic record labels. The Group distributes its products through the wireless network of mobile operators such as China Mobile Group and China Unicom Group. In addition, the Group sells non-music content which include games, wall-papers, entertainment news and jokes. The Group recorded revenue of approximately RMB233.2 million, RMB268.4 million and RMB286.0 million for each of the three years ended 31 December 2007, representing an annual growth rate of approximately 15.1% and 6.5% in 2006 and 2007 respectively. The Directors attribute the slow growth of the Group in 2007 to the temporary downturn of the whole China mobile music market which the Directors believe was mainly resulted from the enforcement of new regulations on service providers initiated by the MII (as described in the paragraph headed “Rules and regulations relating to the telecommunications value addedservices industry in the PRC” below). These rules and regulations were meant to correct the improper ways used by service providers to induce mobile phone subscribers to subscribe for certain services. The Directors are of the view that the introduction of such rules and regulations has made mobile phone subscribers more cautious in subscribing for the relevant services and hence adversely affected the wireless value-added services industry in the PRC to a certain extent. This caused a temporary downturn in the industry in late 2006 and early 2007, however, it was gradually recovered as the mobile phone subscribers regained their confidence.

– 186 –


FINANCIAL INFORMATION In addition, the Directors are of the view that, even though such new regulations affected the mobile music market in the PRC in the short-term, it is positive for the continuing healthy development of the entire mobile music market in the PRC and that the Group will benefit from the continuous tightening of regulatory requirements as the Directors consider that such action will raise the entry barriers to the industry, resulting in more opportunities for potential mergers and acquisitions and elimination of some industry players. MAJOR FACTORS AFFECTING THE RESULTS OF OPERATIONS AND FINANCIAL PERFORMANCE OF THE GROUP The results of operations and financial performance of the Group have been and will continue to be affected by a number of factors, including those set out below. Rules and regulations relating to the telecommunications value-added services industry in the PRC With the increasing popularity and penetration rate of the Internet and wireless value-added services, the PRC government has adopted various rules and regulations to protect the interests of mobile phone subscribers and regulate the market. For instance, in September 2006, the MII published the “Notification regarding the regulation of service fee and billing activities related to mobile information services” (“Notification”), which regulates, among other matters, the billing system of the enterprises in the telecommunications industry. According to the Notification, service providers are required to send a SMS to the relevant mobile phone subscriber, stating, inter alia, the identity of the mobile operator, the name of the services, the billing standard of such services and the refunding policy to request the mobile phone subscriber’s confirmation for the subscription of services. The subscription of services has not been completed and the service provider shall not demand any payment from the mobile phone subscriber until the mobile phone subscriber has confirmed acceptance of the relevant terms. This makes the process for orders through the Internet and wireless value-added services more complex and difficult from the service providers’ viewpoint. Such rules and regulations also make mobile phone subscribers more cautious on subscribing for the relevant services and hence adversely affected the wireless value-added services industry, including the Group, in the PRC in late 2006 and early 2007. For the two years ended 31 December 2006, the revenue of the Group amounted to approximately RMB233.2 million and RMB268.4 million respectively, which represented an annual growth rate of approximately 15.1%. However, because of the tightening policy of the MII as mentioned above, the Group only recorded an approximately 6.5% increase in revenue, which reached approximately RMB286.0 million for the year ended 31 December 2007. The double confirmation requirement under the Notification affected the services of the Group delivered through SMS the most. The unaudited revenue of the Group’s ringtone services for the eight months ended 31 August 2006, amounted to approximately RMB74.1 million, represented

– 187 –


FINANCIAL INFORMATION approximately 76.9% of the full year revenue for that services for 2006, indicating that a majority of the Group’s revenue of its ringtone services for the year ended 31 December 2006 had been already recognized during the first eight months in 2006 before the implementation of these rules and regulations. The modest growth of approximately 15.1% in the revenue of the Group in 2006 was mainly attributable to the diversification of the Group’s services to RBT (for which double confirmation by mobile phone subscribers is not required), which recorded approximately RMB42.1 million in 2006, representing a growth rate of approximately 217.4% as compared with that in 2005. In general, the Directors are of the opinion that, the digital music business in the wireless value-added services industry in the PRC may undergo a market consolidation process, because further implementation of regulations or new rules may increase the related compliance costs resulting in higher operating cost to the industry players. Relationship with China Mobile Group and China Unicom Group According to the MII, there were approximately 547.3 million mobile phone subscribers in PRC in 2007. According to the annual report of each of China Mobile Group and China Unicom Group for the year ended 31 December 2007, China Mobile Group had a market share of approximately 69.3%, while China Unicom Group had a market share of approximately 29.7%, of mobile phone subscribers in China. The Group derived approximately 86.3% of its revenue from its collaboration with China Mobile Group and 13.4% of its revenue from its collaboration with China Unicom Group in 2007. Therefore, a key element of the Group’s strategy for revenue growth is to utilize the sales channels of both mobile operators and expand the Group’s service to additional geographic areas within the PRC. However, if China Mobile Group and/or China Unicom Group were to terminate their cooperation with the Group, it would be difficult for the Group to find another appropriate mobile operator with similar scale as a replacement. Any major alteration to the Group’s current cooperation mode with China Mobile Group and China Unicom Group, or even loss of its business relationship with either of these major mobile operators, may materially adversely affect the operations and financial performance of the Group. In addition, given their dominant market position, the business of the Group may also be adversely affected if China Mobile Group and/or China Unicom Group were to decide to provide their own mobile music services as a service provider to their mobile phone subscribers with the same or similar content as those provided by the Group. In such case, the Group’s business may face severe competition from either or both of them.

– 188 –


FINANCIAL INFORMATION Therefore, as discussed in the paragraph headed “Competitive strengths” under the section headed “Business” in this prospectus, the Group has been striving to strengthen its relationships with both China Mobile Group or China Unicom Group by strategically locating its sales and marketing force around China. Moreover, in order to enhance its competitiveness, the Group has made efforts to distinguish itself from other mobile music focused service providers by focusing on original independently produced songs. Taxation Substantially all the revenue of the Group during the Track Record Period was derived from the PRC and is therefore subject to the PRC income tax. The normal statutory PRC foreign invested enterprise income tax rate and local income tax rate are 30% and 3% respectively, of the assessable income as determined in accordance with the relevant PRC income tax rules and regulations unless it is qualified for certain tax exemptions or reductions. There are various types of preferential tax treatment applicable to different enterprises provided by the PRC national and local tax laws. Enterprises that located in some special region and cities or qualify as an “advanced technology enterprise” enjoy a preferential tax rate or tax reduction, which is significantly lower than the normal tax rate. Some of the subsidiaries of the Company, namely Huadong Feitian, Cash River, Kuaitonglian and Yunhai Qingtian, were established and operated in the Shenzhen Special Economic Zone of the PRC and are entitled to various levels of preferential tax treatment. According to the provisions stipulated in the tax circular, Shendishuierhan [2004] No. 349, Huadong Feitian is exempted from income tax for one year commencing from the first year of profitable operations after offsetting prior years’ tax losses, followed by a 50% reduction for the following two years (“Huadong Feitian Tax Holiday”). The first profitmaking year of Huadong Feitian was 2002 and the Huadong Feitian Tax Holiday commenced in that year. Income tax was supposed to be levied at 15% for the three years ended 31 December 2007. However, on 28 December 2007, Huadong Feitian was granted a 50% tax reduction from 2005 to 2007. As a result, the income tax rate was levied at 7.5% from 2005 to 2007. According to the provisions stipulated in the tax circular, Shenguoshuifu Jianmian [2005] No. 0015, Cash River was qualified as a software enterprise in 2004 and therefore was exempted from income tax for two years commencing from the first year of profitable operations after offsetting prior years’ tax losses, followed by a 50% reduction for the following three years (“Cash River Tax Holiday”). The first profit-making year of Cash River was 2004 and the Cash River Tax Holiday commenced in that year and ended in 2008. Income tax was levied at 7.5% on its assessable profits for the two years ended 31 December 2007.

– 189 –


FINANCIAL INFORMATION Kuaitonglian and Yunhai Qingtian were established in 2004 and had no assessable profits for the three years ended 31 December 2007. Yuesheng Feiyang and Aiyue were granted a 100% tax reduction for 2007. Chuangmeng Yinyue had no assessable profits for the three years ended 31 December 2007. The following table is a summary of the applicable tax rate on the subsidiaries of the Company, including those enjoying preferential tax treatment for state income tax rate, for the three years ended 31 December 2007: For the year ended 31 December 2005 2006 2007

Name of company A8 Music Huadong Feitian Cash River Yunhai Qingtian Kuaitonglian Zhonge Feiyang (Acquired on 24 April 2006 and disposed on 20 December 2007) Chuangmeng Yinyue (Established on 31 May 2005) Aiyue (Established on 22 May 2007) Yuesheng Feiyang (Established on 26 March 2007) Wangle Tianxia (Established on 8 May 2006 and disposed of on 25 June 2007)

17.5% 7.5% 0% 15.0% 15.0%

17.5% 7.5% 7.5% 15.0% 15.0%

17.5% 7.5% 7.5% 15.0% 15.0%

N/A

33.0%

33.0%

33.0%

33.0%

33.0%

N/A

N/A

0%

N/A

N/A

0%

N/A

33.0%

33.0%

For the three years ended 31 December 2005, 2006 and 2007, the effective tax rate was approximately 2.3%, 11.9% and 8.7% respectively. Fluctuations in the effective tax rates and deviation from standard rate are primarily due to the combined effect of the tax exemptions and tax reduction enjoyed by some of the subsidiaries of the Group as described above and increase or decrease in assessable profit of each of the subsidiaries of the Group. Termination or revision of the various types of preferential tax treatment that the subsidiaries of the Group currently enjoy will have a negative impact on the results of operations and financial condition of the Group.

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FINANCIAL INFORMATION Share-based expense The Company has established a Pre-IPO Share Option Scheme under which certain employees of the Company and its subsidiaries and individuals or entities, who are in the opinion of the Board has contributed or will contribute to the growth and development of the Group and the proposed listing on the Stock Exchange, have been granted options to subscribe for Shares at specified prices. Options granted under the Pre-IPO Share Option Scheme entitled the holders thereof to subscribe for an aggregate of 18,702,400 Shares, representing approximately 4.25% of the Company’s total issued share capital after completion of the Share Offer (assuming that the Over-allotment Option is not exercised) and the Capitalization Issue and the issue of Remuneration Shares and without taking into account the issue and allotment of Shares pursuant to the exercise of options granted under the Pre-IPO Share Option Scheme and options to be granted under the Share Option Scheme. The Company has also adopted the Share Option Scheme and no options have been granted thereunder. Generally, the options granted by the Company under the Pre-IPO Share Option Scheme are subject to a vesting period of three years. Each option granted under the Pre-IPO Share Option Scheme has an exercise period of four years. In accordance with IFRS 2, a share-based expense will arise from the granting of such options, which are measured by reference to the fair value of the share options as of the date they are granted, and amortized over the vesting period. Options were granted under the Pre-IPO Share Option Scheme on 21 May 2008, it is expected that a share-based expense will be recognized in the income statement of the Group for the period from 2008 to 2011 and therefore will have a negative impact on the financial results of the Group. Based on the information available as at 30 April 2008 and assumed that there was no major difference on the key assumptions, such as prevailing interest rate, with those on the date of grant of such options, the Directors estimated that the amount to be charged to the income statement of the Group for the year ended 31 December 2008 should be not less than HK$5.0 million. Such estimation will be subject to changes with reference to the prevailing conditions on the date of grant of the option and will also be subject to review by the Company’s auditors. CRITICAL ACCOUNTING POLICIES AND ESTIMATES The discussions and analysis of the financial position and results of operations of the Group are based on the combined financial statements prepared in accordance with the principal accounting policies set forth in the accountants’ report as set out in Appendix I to this prospectus. The Group’s reported financial position and results of operations are sensitive to accounting methods, assumptions and estimates that underlie the preparation of the combined financial statements. The Group bases its assumptions and estimates on historical experience and other assumptions that the Group believes to be reasonable, the results of which form the basis for making judgments about the carrying amounts of assets and liabilities and the Group’s results. Results may differ from these estimates under different assumptions and conditions.

– 191 –


FINANCIAL INFORMATION The selection of critical accounting policies, the judgments and uncertainties affecting application of those policies and the sensitivity of reported results and financial condition to changes in conditions and assumptions are factors to be considered when reviewing the Group’s combined financial statements. The Group believes that the following critical accounting policies involve the most significant judgments and estimates used in the preparation of its combined financial statements. Revenue recognition Gross revenue of the Group is recognized based on the mobile and telecom service fees, net of the amount of uncollectibles. China Mobile Group and China Unicom Group are entitled to commissions, which are calculated based on agreed percentages of the mobile and telecom service fees received or receivable by these mobile operators. In addition, in certain cases, the two mobile operators charge a network usage fee based on a fixed per-message fee multiplied by the excess of messages sent over messages received between the platforms of the Group and these two mobile operators. These commission and network usage fees (collectively referred to as “Mobile and Telecom Charges”) are retained by the mobile operators, and are reflected as cost of services provided in the combined income statements of the Group. The Mobile and Telecom Charges are withheld and deducted from the gross mobile and telecom service fees collected by the two mobile operators from the users, with the net amounts remitted to the Group. The mobile and telecom service fees and the Mobile and Telecom Charges, or the net amount of the two, are confirmed and/or advised by subsidiaries of China Mobile Group and China Unicom Group to the Group on a regular basis. For revenue whose amount is not confirmed/advised by the two mobile operators at the time of reporting the financial results of the Group, management of the Group estimates the amount receivable based on historical data, which reflect developing trends in customer payment delinquencies. Historical data used in estimating revenues include the most recent history of the mobile and telecom service fees actually derived from the operators, the number of subscriptions and the volume of data transmitted between the network gateways of the Group, China Mobile Group and China Unicom Group. Adjustments are made in subsequent periods in case the actual revenue amounts are different from the original estimates. Income tax Income tax comprises current and deferred tax. Income tax is recognized in the income statement, or in equity if it relates to items that are recognized in the same or a different period directly in equity. Current tax assets and liabilities for the current and prior periods are measured at the amount expected to be recovered from or paid to the taxation authorities. – 192 –


FINANCIAL INFORMATION Deferred tax is provided, using the liability method, on all temporary differences at the balance sheet date between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes. Deferred tax liabilities are recognized for all taxable temporary differences, except: •

where the deferred tax liability arises from the initial recognition of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss; and

in respect of taxable temporary differences associated with interests in subsidiaries and joint ventures, where the timing of the reversal of the temporary differences can be controlled and it is probable that the temporary differences will not reverse in the foreseeable future.

Deferred tax assets are recognized for all deductible temporary differences, carryforward of unused tax credits and unused tax losses, to the extent that it is probable that taxable profit will be available against which the deductible temporary differences, and the carryforward of unused tax credits and unused tax losses can be utilized, except: •

where the deferred tax asset relating to the deductible temporary differences arises from the initial recognition of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss; and

in respect of deductible temporary differences associated with interests in subsidiaries and joint ventures, deferred tax assets are only recognized to the extent that it is probable that the temporary differences will reverse in the foreseeable future and taxable profit will be available against which the temporary differences can be utilized.

The carrying amount of deferred tax assets is reviewed at each balance sheet date and reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the deferred tax asset to be utilized. Conversely, previously unrecognized deferred tax assets are reassessed at each balance sheet date and are recognized to the extent that it is probable that sufficient taxable profit will be available to allow all or part of the deferred tax asset to be utilized. Deferred tax assets and liabilities are measured at the tax rates that are expected to apply to the period when the asset is realized or the liability is settled, based on tax rates (and tax laws) that have been enacted or substantively enacted at the balance sheet date. Deferred tax assets and deferred tax liabilities are offset if a legally enforceable right exists to set off current tax assets against current tax liabilities and the deferred taxes relate to the same taxable entity and the same taxation authority. – 193 –


FINANCIAL INFORMATION Goodwill Goodwill arising on the acquisition of subsidiaries represents the excess of the cost of the business combination over the Group’s interest in the net fair value of the acquirees’ identifiable assets acquired, and liabilities and contingent liabilities assumed as at the date of acquisition. Goodwill arising on acquisition is recognized in the combined balance sheets as an asset, initially measured at cost and subsequently at cost less any accumulated impairment losses. The carrying amount of goodwill is reviewed for impairment annually or more frequently if events or changes in circumstances indicate that the carrying value may be impaired. The Group performs its annual impairment test of goodwill as at 31 December. For the purpose of impairment testing, goodwill acquired in a business combination is, from the acquisition date, allocated to each of the Group’s cash-generating units, or groups of cash-generating units, that are expected to benefit from the synergies of the combination, irrespective of whether other assets or liabilities of the Group are assigned to those units or groups of units. Impairment is determined by assessing the recoverable amount of the cash-generating unit (group of cash-generating units) to which the goodwill relates. Where the recoverable amount of the cash-generating unit (group of cash-generating units) is less than the carrying amount, an impairment loss is recognized. An impairment loss recognized for goodwill is not reversed in a subsequent period. Where goodwill forms part of a cash-generating unit (group of cash-generating units) and part of the operation within that unit is disposed of, the goodwill associated with the operation disposed of is included in the carrying amount of the operation when determining the gain or loss on disposal of the operation. Goodwill disposed of in this circumstance is measured based on the relative values of the operation disposed of and the portion of the cash-generating unit retained. The Group determines whether goodwill is impaired at least on an annual basis by assessing the recoverable amount of the cash-generating unit to which the goodwill relates. Where the recoverable amount of the cash-generating unit is less than the carrying amount, an impairment loss is recognized.

– 194 –


FINANCIAL INFORMATION Goodwill arose from the acquisition of Zhongge Feiyang on 24 April 2006 is allocated to the production of music programme cash-generating unit. The recoverable amount of the production of music programme cash-generating unit has been determined based on its fair value less costs to sell. The fair value is determined based on the total consideration receivable by the Group upon the disposal of the cash-generating unit on 20 December 2007. The carrying amount of goodwill at 31 December 2006 was RMB7,466,000 (31 December 2005 and 2007: Nil). Further details of the impairment testing of goodwill are set out in note 14 to the audited financial statements of the Group set out in Appendix I to this prospectus. Property, plant and equipment and depreciation Depreciation of the property, plant and equipment of the Group is calculated on the straight-line basis to write off the cost of each item of property, plant and equipment to its residual value over its estimated useful lives as follows: Computer equipment Furniture, fixtures and office equipment Motor vehicles Leasehold improvements

3 to 5 years 5 years 5 years Over the shorter of the lease terms and useful lives

The Group reviews the useful life of the plant, equipment and other fixed assets of the Group annually and when there are changes in circumstances that indicate the current expectations differ from previous estimates. The residual values, useful lives and depreciation method of the assets of the Group are reviewed and, if considered appropriate, adjusted at each balance sheet date. Impairment of non-financial assets other than goodwill At each balance sheet date, the Group reviews the carrying amounts of the non-financial assets of the Group to determine whether there is any indication that those assets have suffered an impairment loss. Where an indication of impairment exists, or when annual impairment testing for an asset is required (other than financial assets and goodwill), the asset’s recoverable amount is estimated. An asset’s recoverable amount is calculated as the higher of the asset’s or cash-generating unit’s value in use and its fair value less costs to sell, and is determined for an individual asset, unless the asset does not generate cash inflows that are largely independent of those from other assets or groups of assets, in which case, the recoverable amount is determined for the cash-generating unit to which the asset belongs. An impairment loss is recognized only if the carrying amount of an asset exceeds its recoverable amount. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. An impairment loss is charged to the income statement in the period in which it arises. – 195 –


FINANCIAL INFORMATION An assessment is made at each reporting date as to whether there is any indication that previously recognized impairment losses may no longer exist or may have decreased. If such indication exists, the recoverable amount is estimated. A previously recognized impairment loss of an asset other than goodwill is reversed only if there has been a change in the estimates used to determine the recoverable amount of that asset, however not to an amount higher than the carrying amount that would have been determined (net of any depreciation/amortization), had no impairment loss been recognized for the asset in prior years. A reversal of such impairment loss is credited to the income statement in the period in which it arises. Impairment of financial assets The Group assesses at each balance sheet date whether there is any objective evidence that a financial asset or a group of financial assets is impaired. Assets carried at amortized cost If there is objective evidence that an impairment loss on loans and receivables carried at amortized cost has been incurred, the amount of the loss is measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows (excluding future credit losses that have not been incurred) discounted at the financial asset’s original effective interest rate (i.e., the effective interest rate computed at initial recognition). The carrying amount of the asset is reduced either directly or through the use of an allowance account. The amount of the impairment loss is recognized in the income statement. Loans and receivables together with any associated allowance are written off when there is no realistic prospect of future recovery. If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognized, the previously recognized impairment loss is reversed. Any subsequent reversal of an impairment loss is recognized in the income statement, to the extent that the carrying value of the asset does not exceed its amortized cost at the reversal date. In relation to trade receivables, a provision for impairment is made when there is objective evidence (such as the probability of insolvency or significant financial difficulties of the debtor) that the Group will not be able to collect all of the amounts due under the original terms of an invoice. The carrying amount of the receivables is reduced through the use of an allowance account. Impaired debts are derecognized when they are assessed as uncollectible.

– 196 –


FINANCIAL INFORMATION Derecognition of financial assets A financial asset (or, where applicable, a part of a financial asset or part of a group of similar financial assets) is derecognized where: •

the rights to receive cash flows from the asset have expired;

the Group retains the rights to receive cash flows from the asset, but has assumed an obligation to pay them in full without material delay to a third party under a “pass-through” arrangement; or

the Group has transferred its rights to receive cash flows from the asset and either (a) has transferred substantially all the risks and rewards of the asset, or (b) has neither transferred nor retained substantially all the risks and rewards of the asset, but has transferred control of the asset.

Where the Group has transferred its rights to receive cash flows from an asset and has neither transferred nor retained substantially all the risks and rewards of the asset nor transferred control of the asset, the asset is recognized to the extent of the Group’s continuing involvement in the asset. Continuing involvement that takes the form of a guarantee over the transferred asset is measured at the lower of the original carrying amount of the asset and the maximum amount of consideration that the Group could be required to repay. Where continuing involvement takes the form of a written and/or purchased option (including a cash-settled option or similar provision) on the transferred asset, the extent of the Group’s continuing involvement is the amount of the transferred asset that the Group may repurchase, except in the case of a written put option (including a cash-settled option or similar provision) on an asset measured at fair value, where the extent of the Group’s continuing involvement is limited to the lower of the fair value of the transferred asset and the option exercise price. Derecognition of financial liabilities A financial liability is derecognized when the obligation under the liability is discharged or cancelled or expires. When an existing financial liability is replaced by another from the same lender on substantially different terms, or the terms of an existing liability are substantially modified, such an exchange or modification is treated as a derecognition of the original liability and a recognition of a new liability, and the difference between the respective carrying amounts is recognized in the income statement.

– 197 –


FINANCIAL INFORMATION SUMMARY OF RESULTS OF OPERATIONS The following table is a summary of the combined results of the Group for each of the three years ended 31 December 2007. The summary below should be read in conjunction with the Accountants’ Report set out in Appendix I to this prospectus. Year ended 31 December 2005 2006 2007 RMB’000 RMB’000 RMB’000

Revenue Business tax Net revenue Cost of services provided Gross profit Other income and gains, net Gain arising from disposal of an equity interest in a jointly-controlled entity Selling and marketing expenses Administrative expenses Other expenses Finance costs Share of profits and losses of jointlycontrolled entities

233,233 (6,361)

268,438 (8,348)

285,964 (7,860)

226,872 (101,912)

260,090 (127,815)

278,104 (149,375)

124,960

132,275

128,729

926

9,699

20,180

– (67,821) (22,383) (2,757) (4,965)

5,694 (67,073) (21,715) (70) (4,913)

– (69,285) (14,123) (138) (310) (59)

554

(347)

PROFIT BEFORE TAX Tax

41,971 (974)

44,602 (5,314)

60,485 (5,248)

PROFIT FOR THE YEAR

40,997

39,288

55,237

Attributable to: Equity holders of the Company Minority interests

41,842 (845)

39,863 (575)

55,274 (37)

40,997

39,288

55,237

– 198 –


FINANCIAL INFORMATION MAJOR PROFIT AND LOSS ITEMS Revenue Most of the Group’s revenue is derived from music related services which mainly include ringtones, RBTs and IVR Music. Other music-related services mainly refer to the provision of photos and wallpaper of artists to mobile phone subscribers. During the Track Record Period, revenue of the music related services continued to be the major source of revenue of the Group. For the three years ended 31 December 2007, the revenue derived from revenue of music related content contributed approximately 54.8%, 59.3% and 69.0% of the Group’s total revenue respectively. Set out below is a breakdown of the Group’s revenue by principal services during the Track Record Period:

2005 RMB’000

Music-related revenue – Ringtones – RBTs – IVR Music – Others

Year ended 31 December 2006 2007 % RMB’000 % RMB’000

%

85,798 13,260 15,706 13,032

36.8 5.7 6.7 5.6

96,395 42,086 7,160 13,618

35.8 15.7 2.7 5.1

72,206 89,498 20,748 14,990

25.3 31.3 7.2 5.2

127,796

54.8

159,259

59.3

197,442

69.0

Non-music-related revenue

105,437

45.2

109,179

40.7

88,522

31.0

Total

233,233

100.0

268,438

100.0

285,964

100.0

Subtotal

In general, the Group’s revenue move positively with the market trend of the PRC wireless value-added services. The Group recorded revenue of approximately RMB233.2 million, RMB268.4 million and RMB286.0 million for each of the three years ended 31 December 2007, representing an annual growth rate of approximately 15.1% and 6.5% in 2006 and 2007 respectively. The growth of the Group in 2007 slowed down principally because of the temporary downturn in the China mobile music market which mainly resulted from the enforcement of new regulations on service providers initiated by the MII as mentioned above. As shown in the above table, ringtones had been a major source of revenue of the Group during the Track Record Period. Revenue generated from ringtones demonstrated a modest growth from approximately RMB85.8 million for the year ended 31 December 2005 to approximately RMB96.4 million for the year ended 31 December 2006. The Group diversified into other products like RBTs and IVR Music, as a result of which the relative weighting of the Group’s revenue derived from ringtones was reduced to 67.1%, 60.5% and 36.6% of the Group’s total music-related revenue for the three years ended 31 December 2007 respectively. – 199 –


FINANCIAL INFORMATION During the Track Record Period, the Group diversified its business into RBTs and other music related products. Out of which, revenue from RBTs grew significantly from approximately RMB13.3 million for the year ended 31 December 2005 to approximately RMB89.5 million for the year ended 31 December 2007. As RBT is a relatively new service of the Group which was launched in 2004, the Directors expected it to become another major revenue growth driver for the Group. The Group launched its IVR Music services in 2005. During the three years ended 31 December 2007, IVR Music contributed approximately RMB15.7 million, RMB7.2 million and RMB20.7 million to the Group’s revenue respectively. The non-music-related products of the Group primarily consist of jokes, wallpapers and entertainment news. The revenue of such products has also remained at a relatively stable level (in terms of monetary value) as a supplement to the Group’s music-related products for the three years ended 31 December 2007. Cost of services provided The cost of services provided mainly comprises revenue share of mobile operators and business alliances, music copyright cost for copyright licensed from record label companies and direct costs. Set out below is a breakdown of the Group’s cost of services provided according to principal items during the Track Record Period:

2005 RMB’000 Revenue share of mobile operators Revenue share of business alliances Copyright cost Direct costs Total

Year ended 31 December 2006 2007 % RMB’000 % RMB’000

%

57,868

56.8

56,493

44.2

67,969

45.5

31,717 4,082 8,245

31.1 4.0 8.1

48,689 10,633 12,000

38.1 8.3 9.4

64,332 9,460 7,614

43.1 6.3 5.1

101,912

100.0

127,815

100.0

149,375

100.0

Among these items, the revenue share of mobile operators accounted for a significant portion. It represented a range of charge rate from 15% to 50% of the total revenue settled from network platforms provided by the mobile operators for services of the Group offered through their network platforms and had been the greatest portion of the cost of services provided during the Track Record Period. The revenue share of business alliances represented the portion of revenue paid to business alliances including various Internet hosts, services provider and content providers. Copyright cost mainly represented the licence fee of copyright from record label companies. The direct costs mainly comprised direct labor cost, Internet and server charges and depreciation expense for the servers. – 200 –


FINANCIAL INFORMATION For the three years ended 31 December 2007, the cost of services provided represented approximately 43.7%, 47.6% and 52.2% of the revenue of the Group respectively. The increase in cost of services provided as a percentage of the total revenue of the Group resulted from the increase in revenue share with business alliances in order to enhance its market share and the diversification of services into the services such as RBTs and IVR Music which were charged at a higher revenue sharing rate by the mobile operators. Other income and gains The Group’s other income and gains mainly include the rendering of value-added services on mobile phone cards, fair value gain on derivative financial instruments, interest income, government grant, and realized and unrealized gain from investment. Selling and marketing expenses The Group’s selling and marketing expenses mainly include promotional and advertising expenses, salaries and bonus, publication, entertainment and expenditure incurred by the selling and marketing departments. Administrative expenses Administrative expenses comprise the headquarters expenses mainly relating to management and back office staff salaries and bonuses, rental expenses, professional and consultancy fee as well as depreciation (other than depreciation expense for services). Other expenses Other expenses mainly represent the provision for impairment of accounts and other receivable. Finance costs Finance costs mainly include accrued interest and amortization of transaction costs of the convertible redeemable preferred shares. Minority interests Minority interests represent the interest outside shareholders in the results and net assets of the non-wholly-owned subsidiary of the Group.

Subsidiary Chuangmeng Yinyue

Place and date of incorporation/ establishment PRC 31 May 2005 – 201 –

Minority interests 28%

Principal activities Distribution of musical products


FINANCIAL INFORMATION MANAGEMENT DISCUSSION AND ANALYSIS OF THE RESULTS OF THE GROUP Review of historical operating results Year ended 31 December 2007 compared to year ended 31 December 2006 Revenue In September 2006, the MII had imposed stringent rules and regulations to govern the wireless value-added services industry which was described in details in the paragraph headed “Rules and regulations relating to the telecommunications value-added services industry in the PRC” in this section above, the Directors are of the view that this makes mobile subscribers more cautious on subscribing the relevant services and hence adversely affect the wireless value-added services industry, including the Group, in the PRC to different extent. As a result, a lot of service providers who had been providing services through the improper ways were adversely affected by these rules and regulations and hence their revenue was significantly reduced. These regulatory developments caused a temporary downturn in the industry in late 2006 and early 2007. However, there was a gradual recovery as the mobile subscribers regained their confidence. For the year ended 31 December 2007, the revenue of the Group amounted to approximately RMB286.0 million, representing an annual growth rate of approximately 6.5% from approximately RMB268.4 million as compared with 2006. The slow growth was mainly due to the temporary downturn in the wireless value-added services industry which the Directors consider primarily resulted from the enforcement of new regulations on service providers initiated by the MII. In light of this, the Group changed its promotional strategies to focus on a “per-click” basis rather than monthly subscriptions and diversified its services to RBT and IVR Music, all of which are not required by these rules and regulations to be double confirmed by the mobile subscribers. Though the operation of the Group has been adjusted for such requirements, the operation of the Group for the year ended 31 December 2007 was still in a recovering stage and therefore the revenue of the Group for the year ended 31 December 2007 was recorded a modest growth compared with last year. Cost of services provided For the year ended 31 December 2007, the cost of services provided by the Group amounted to approximately RMB149.4 million, representing an increase of approximately 16.9% from approximately RMB127.8 million in 2006. The increase was due to increase in the revenue share with business alliances and the shift of significance of product mix from ringtones to RBTs, which were charged at a higher revenue sharing rate by the mobile operators.

– 202 –


FINANCIAL INFORMATION Gross profit For the year ended 31 December 2007, the gross profit of the Group amounted to approximately RMB128.7 million, representing a decrease of approximately 2.7% from approximately RMB132.3 million in 2006. The overall gross profit margin of the Group decreased from approximately 49.3% to 45.0%. Such decrease was mainly due to the increase in cost of services provided resulting from increase in revenue share with business alliances in order to enhance its market share and the shift of significance of product mix from ringtones to RBTs which were charged at a higher revenue sharing rate by the mobile operators. Net other income and gains For the year ended 31 December 2007, net other income and gains of the Group increased significantly to approximately RMB20.2 million from approximately RMB9.7 million in 2006. The significant increase was mainly derived from ad hoc mobile music related projects with mobile operators, investment income and fair value gain on derivative financial investments. The Group entered into contracts with a mobile operator in relation to the production of music related service for a consideration of approximately RMB7.0 million. The contracts were signed with China Mobile Group Heilongjiang Co. Ltd. Harbin Branch (“China Mobile (Harbin)”), an independent third party, which launched a promotional campaign on RBT, MMS and MP3 related business and provided a “RBT package” for its subscribers. The Group was engaged to embed values of all related RBT, MMS and MP3 to the mobile phone SIM cards for China Mobile (Harbin). The Group in turn receives a percentage of the revenue generated from this promotion. The investment income represented the total of the realized and unrealized gain on securities which amounted to approximately RMB6.0 million. The fair value gain on derivative financial instruments of approximately RMB3.1 million was generated from the exercise of the TDF Warrant and the embedded derivatives of the Preferred Shares. Selling and marketing expenses For the year ended 31 December 2007, selling and marketing expenses of the Group amounted to approximately RMB67.1 million, representing a decrease of approximately 1.0% from approximately RMB67.8 million as compared with 2006. The decrease was mainly attributable to the reduction of publication cost to approximately RMB2.5 million in 2007 from approximately RMB5.2 million in 2006 but partly offset by the increase of approximately RMB1.9 million of employee benefit expense in 2007. Administrative expenses For the year ended 31 December 2007, administrative expenses of the Group amounted to approximately RMB21.7 million, representing a decrease of approximately 3.1% from approximately RMB22.4 million as compared with 2006. The decrease in administrative expenses was primarily due to the decrease of employee expenses resulting from decrease in approximately 10% headcount in 2007 as compared with 2006. – 203 –


FINANCIAL INFORMATION Finance costs The Group had no bank loans for the year ended 31 December 2007. The finance costs represented an amortization of transaction costs of approximately RMB0.8 million and the accrued interest expenses of approximately RMB4.1 million which is measured at a cumulative interest rate of 5% per annum on the sum of the convertible redeemable preferred shares and the amortization of transaction cost at inception. Details of the convertible redeemable preferred shares are set out in note 23 to the audited financial statements of the Group set out in Appendix I to this prospectus. Tax For the year ended 31 December 2007, the income tax of the Group decreased to approximately RMB5.2 million from approximately RMB5.3 million in 2006. The effective tax rates of the Group decreased to approximately 8.7% from approximately 11.9% in 2006. The decrease was mainly due to the increase in deductible advertising expenses and staff costs for the year ended 31 December 2007 and the approval of tax exemption for Aiyue and Yuesheng Feiyang for the year ended 31 December 2007. Profit attributable to equity holders of the Company For the year ended 31 December 2007, the profit attributable to equity holders of the Company amounted to approximately RMB55.3 million, representing an increase of 38.6% as compared to approximately RMB39.9 million in 2006. The increase was mainly due to the other income generated from the provision of value-added services on mobile phone card increased from approximately RMB2.0 million in 2006 to approximately RMB7.0 million in 2007. Moreover, the Group recorded a gain on disposal of a jointly-controlled entity of approximately RMB5.7 million and total investment income of approximately RMB6.0 million as mentioned in the sub-paragraph headed “Net other income and gains” above. The net profit margin attributable to the equity holders of the Group increased from approximately 14.8% to approximately 19.3% as compared with 2006. Equity investments at fair value through profit and loss The Group had cash and cash equivalents of approximately RMB131.3 million as at 31 December 2007, around 2.1% of the surplus cash were invested into a portfolio of securities that were listed in the PRC in 2007. The maximum investment amount of securities portfolio of the Group was approximately RMB3.6 million during the Track Record Period. The Group had maintained a positive operating cash flow status during the Track Record Period. Setting aside part of cash for working capital, the Group still had around RMB100 million of surplus cash on hand as at 31 December 2007. Accordingly, the Group determined to allocate a small part of the surplus cash for equity investment purpose, while the majority of surplus cash had been reserved for the development of the Group’s business. As at 31 December 2007, the portfolio has an unrealized gain of approximately RMB2.9 million. The Directors consider that the risk associated with shares offered under initial public offerings in the PRC is relatively low, and consequently the Group’s investment policy is to only invest with an upper limit of no more than 10% of cash and cash equivalents of the Group from time to time, into shares offered under initial public offerings and not to hold the securities for more than one year. The investment portfolio is evaluated twice a year. The Directors are of the view that the Group’s securities investment activity may be ceased after listing if there is an adverse change in the securities market condition in the PRC. – 204 –


FINANCIAL INFORMATION Other payables and accruals Other payables and accruals of the Group mainly represented the balance of payment for the acquisition of Zhongge Feiyang and accrued cost for bonus and salary and various relevant taxes. Other payables and accruals increased in 2007 mainly because there were more accruals for advertising and promotion expenses, where invoices had not been received, as at 31 December 2007 as compared to 31 December 2006, and the increase of the accrual of bonus of approximately RMB1.6 million. Year ended 31 December 2006 compared to year ended 31 December 2005 Revenue For the year ended 31 December 2006, the Group’s revenue amounted to approximately RMB268.4 million, representing an increase of approximately 15.1% from approximately RMB233.2 million in 2005. The Directors attributed the slow down of the level of increase in revenue growth to the enforcement of more stringent regulations initiated by the MII in September 2006, which had a temporary negative impact on the whole wireless value-added services industry in the PRC and thus reduced the growth rate of the Group’s revenue from the second half of 2006 and affected the potential for growth in revenue for the whole year. Cost of services provided For the year ended 31 December 2006, the cost of services provided by the Group amounted to approximately RMB127.8 million, representing an increase of approximately 25.4% from approximately RMB101.9 million in 2005. The increase was primarily due to the increase of revenue share with business alliances and the licence of the copyright from music labels. Gross profit The gross profit of the Group remained at approximately the same level at approximately RMB125.0 million and approximately RMB132.3 million for the two years ended 31 December 2006 respectively. This was in line with the flat revenue growth in the same year. The Group’s gross profit margin decreased from approximately 53.6% to approximately 49.3% in the year 2006. The decrease was due to the increase in revenue share to business alliances in order to enhance its competitiveness for the sake of offsetting the negative impact from the enforcement of new regulations initiated by the MII. Net other income and gains For the year ended 31 December 2006, the net other income and gains of the Group amounted to approximately RMB9.7 million, significantly increased from approximately RMB926,000 for the year ended 31 December 2005. Such significant increase in net other income and gains were derived from the ad hoc contracts for the services rendered by the Group in relation to the production of music related products of approximately RMB2.0 million, a management fee income of approximately RMB1.8 million, a government grant of approximately RMB1.5 million, and a fair value gain on derivative financial instruments of approximately RMB935,000. – 205 –


FINANCIAL INFORMATION The ad hoc contracts were signed in 2006 when China Mobile (Harbin), an independent third party, launched a promotional campaign on RBT, MMS and MP3 related business which provided a “RBT package” for its subscribers. The Group was engaged to embed values of all related RBT, MMS and MP3 to the mobile phone SIM cards for China Mobile (Harbin). The Group in turn received a percentage of the revenue generated from this promotion. The management fee of approximately RMB1.8 million (i.e approximately RMB150,000 per month) was charged to the Excluded Businesses (as defined in the section headed “Relationship with Controlling Shareholders” in this prospectus) for its operating costs. It represented the costs incurred of sharing offices expenditure which including rental, management fees, utilities and offices supplies. Though similar government grant was still available, it was awarded to the Company on an one-off basis for subsidizing its high-tech related fixed assets investment. Since the government payment was granted upon its satisfaction on the actual capital investment made by the Group according to pre-agreed proposal, there is no unfulfilled obligation to the Group. Selling and marketing expenses For the year ended 31 December 2006, the Group’s selling and marketing expenses were controlled at about the same level at approximately RMB67.8 million as compared with that at approximately RMB69.3 million in 2005. Administrative expenses For the year ended 31 December 2006, the Group’s administrative expenses amounted to approximately RMB22.4 million, representing an increase of approximately 58.9% from approximately RMB14.1 million for the year ended 2005. The increase was due to an increase in staff costs and bonus payment to support the business growth. In addition, it was due to an increase of rental expense and related property and management fee and an increase of professional fees in relation to the issuance of the convertible redeemable preferred shares to various private equity firms, details of which are set out in note 23 to the audited financial statements of the Group set out in Appendix I to this prospectus. Other expenses For the year ended 31 December 2006, the Group had other expenses amounting to approximately RMB2.8 million. This represented the provision of doubtful debt of approximately RMB1.1 million and the impairment of other receivables of approximately RMB1.4 million. Finance costs The Group’s financial costs increased from approximately RMB310,000 in 2005 to approximately RMB5.0 million in 2006 which comprises an accrued interest of approximately RMB4.1 million and an amortization of transaction costs of approximately RMB0.9 million, representing an increase of approximately 16 times as compared with that in 2005. The increase was primarily due to the provision of the accrued interest expenses of the convertible redeemable preferred shares. – 206 –


FINANCIAL INFORMATION Tax For the year ended 31 December 2006, the income tax of the Group significantly increased to approximately RMB5.3 million from approximately RMB1.0 million, representing an increase of approximately 430.0% as compared with 2005. The effective tax rates of the Group increased to approximately 11.9% from approximately 2.3% in 2005. The increase was mainly due to the expiration of the tax exemption period of Cash River and the increase in non-deductible advertising expenses and staff costs for tax purpose. Profit attributable to equity holders of the Company As a result of the above, the profit for the year attributable to equity holders of the Company were approximately at the same level at approximately RMB41.8 million and approximately RMB39.9 million for the two years ended 31 December 2006 respectively. The net profit margin attributable to the equity holders of the Group decreased from approximately 17.9% in 2005 to approximately 14.8% in 2006. Other payables and accruals Other payables and accruals of the Group mainly represented accrued cost for the licensing of copyrights, revenue share with business alliance, bonus and salary and various relevant taxes. The increase of other payables and accruals of the Group in 2006 was mainly due to the balance of payment for the acquisition of Zhongge Feiyang in 2006 for approximately RMB2.2 million and the increase in cost of licensing of the copyrights amounted to approximately RMB1.2 million and the increase of the promotional expenses payable to suppliers amounted to approximately RMB2.5 million. Prepayments, deposits and other receivables Prepayments, deposits and other receivables of the Group mainly represented the cash advances to staff of provincial sales offices for daily operations, deposits and prepayment for operation related expenses. The balance amount in 2005 mainly consisted of a short-term interest free loan of RMB12.7 million advanced to a then shareholder of Zhongge Feiyang. Since the loan was made with an intention to acquire the entire equity interest of Zhongge Feiyang but pending the finalization of the consideration, the loan was in substance a prepayment for the acquisition of Zhongge Feiyang. As advised by the legal advisers to the Company as to PRC laws, no lending and borrowing of money between corporations in the PRC is allowed under the current PRC laws and regulations. Therefore, such loan agreement was nullified. However, in case disputes arise regarding such loan agreement, the Company can have the principal amount repaid.

â&#x20AC;&#x201C; 207 â&#x20AC;&#x201C;


FINANCIAL INFORMATION INTERESTS IN JOINTLY-CONTROLLED ENTITIES

Share of net assets Unrealized gain arising from a transfer of assets from Huadong Feitian

2005 RMB’000

31 December 2006 RMB’000

2007 RMB’000

7,572

13,516

(1,691)

(1,450)

5,881

12,066

Any Music Limited (“Any Music”) was established in the PRC by Huadong Feitian and three other independent investors on 24 December 2002, when Huadong Feitian held a 51% equity interests of Any Music. According to the articles of association of Any Music, significant operating and financial decisions should be made by its board of directors (which comprised representative(s) of each investor) unanimously despite the fact that 51% of its equity interests was held by Huadong Feitian. As a result, Huadong Feitian did not have the unilateral control over the operating and financial activities of Any Music and it was treated as a jointly-controlled entity of the Group in the combined financial statements of the Group. In December 2002, Huadong Feitian signed an assets transfer agreement with Any Music and undertook to transfer a set of assets, which included domain names, servers, software and other assets, used in the development of RBTs and related music data at a total consideration of RMB8,500,000. The transfer of assets (“Transfer”) occurred and was completed in 2003 and the net book value of these assets as at the date of the Transfer was approximately RMB359,000 as reported in the accounting record of Huadong Feitian. As a result, Huadong Feitian recognized a gain of approximately RMB8,141,000 as other income for the year ended 31 December 2003 in its individual financial statements. Upon preparing the combined financial statements of the Group, the unrealized gain relating to the Transfer computed based on the equity interest held by Huadong Feitian in Any Music amounting to RMB3,737,000 was reversed as a reduction against both other income and investment in a jointly-controlled entity in 2003. This unrealized gain is realized by matching the depreciation and amortization of these assets over their estimated useful lives of eight years made by Any Music and recognized as other income in the combined financial statements of the Group. ADVANCES TO RELATED PARTIES As advised by the legal advisers to the Company as to PRC laws, no lending and borrowing of money between corporations in the PRC is allowed under the current PRC laws and regulations. Such transactions shall be conducted through licensed banks and financing corporations. Otherwise, the financing agreements concerned will be nullified. In case disputes arise regarding such kind of financing agreements, the lender can have the principal amount repaid. However, the right to receive the interest charged or agreed to be charged (“Relevant – 208 –


FINANCIAL INFORMATION Interest Income”) will not be protected under the PRC laws. In addition, the lender may also be subject to a fine which is equal to one to five times of the Relevant Interest Income. During the Track Record Period, the Group had no recorded interest income in respect of its lending of money to others. The Controlling Shareholders have undertaken to indemnify the Group for any potential losses or damages arising from such advances made. Details of the advances made by the Group are set out in note 31 to the audited financial statements of the Group set out in Appendix I to this prospectus. The following are the reasons for the Group making advances to the relevant parties: 1.

During the Track Record Period, the Group paid on behalf of Mr. Liu Xiaosong, Ms. Cui Jingtao and Mr. Wang Daiqiang (“Registered Owners”) certain expenses relating to the personal investments by the Registered Owners. For the two years ended 31 December 2007, Mr. Liu Xiaosong bore all the cost on behalf of the shareholders of the A8 Music for the Music Database Business during the course of the Reorganization.

2.

Sales proceeds of RMB1,000,000 and RMB17,200,000 for disposal of Wangle Tianxia and Zhongge Feiyang.

3.

Huadong Feitian entered into an entrustment agreement with Shengang Chanxueyan on 1 April 2004 whereby Shengang Chanxueyan was entrusted to invest a sum of RMB9,000,000 into the equity market of the PRC for Huadong Feitian. In January and June 2005, each of Kuaitonglian and Huadong Feitian entered into an entrustment agreement with Shengang Chanxueyan with a sum of RMB8,500,000 and RMB5,000,000 respectively for the same purpose. As advised by the legal advisers to the Company as to PRC laws, all entrustment arrangements mentioned above do not violate any existing PRC laws. The amount of RMB5,000,000 was repaid in full in cash to Huadong Feitian by Shengang Chanxueyan in August 2005. Each of the amount of RMB9,000,000 and RMB8,500,000 were converted into an advance to Shengang Chanxueyan by each of Huadong Feitian and Kuaitonglian on 15 December 2005 and 9 January 2005 respectively and those advances were repaid by 31 December 2005.

4.

The advance to Shenzhen Xinlide Electronic Co., Ltd., being a company invested by Mr. Liu Xiaosong, arose from a loan borrowed by such company for its general operations.

5.

The advance due from Mr. Zhou Minjian arose as a result of shareholder borrowing. Mr. Zhou Minjian was a minority shareholder of Yunhai Qingtian.

6.

The balance with Jiangsu TVT Co. Ltd. arose as a result of a proposed acquisition that ended up unsuccessful. The advance represented an initial payment of deposit.

7.

The advance due from Wangle Tianxia represented expenses paid for the daily operation of Wangle Tianxia, a then subsidiary, which was disposed of by the Group on 25 June 2007. – 209 –


FINANCIAL INFORMATION All of the above loans have been properly approved by relevant shareholders’ meetings or board of directors meetings and have been properly documented as shareholders’ minutes or board of directors’ minutes. All of the above loans had been settled in February 2008. In order to ensure compliance with applicable PRC laws and regulations and to avoid any subsequent non-compliance issues, the Group will implement relevant measures as internal guidelines to improve compliance issues and the Group’s corporate governance in general before the Listing. Details of such measures are set out in the paragraph headed “Regulatory compliance” in the section headed “Regulatory overview” in this prospectus. INDEBTEDNESS Borrowings and debt securities As at the close of business on 31 March 2008, being the latest practicable date for the purpose of ascertaining the information contained in this indebtedness statement, the Group did not have any outstanding bank borrowings and banking facilities. As at 31 December 2007, the Group had an outstanding liability of approximately RMB68.5 million arising from the issue of 930,000 convertible redeemable preferred shares (“Preferred Shares”) by a member of the Group and such liability represented the liability component of such Preferred Shares carried on the amortized cost basis on such date. For a more detailed discussion of the principal terms of the Preferred Shares, please refer to note 23 to the audited financial statements of the Group set out in Appendix I to this prospectus. All of the 930,000 Preferred Shares will be converted into ordinary shares of the Company upon Listing and the outstanding liability will be decreased by RMB68.5 million accordingly. Contingent liabilities The Group had no material contingent liabilities as at 31 March 2008. Apart from intra-group liabilities, normal trade and other payables, as at the close of business on 31 March 2008, the Group did not have any outstanding mortgages, charges, debentures, loan capital, bank loans and overdrafts, debt securities or other similar indebtedness, finance leases or other purchase commitments, guarantees or other material contingent liabilities. The Directors have confirmed that there have been no material changes in the Group’s indebtedness and contingent liabilities since 31 March 2008.

– 210 –


FINANCIAL INFORMATION LIQUIDITY AND CAPITAL RESOURCES Overview Up to the Latest Practicable Date, the Group generally financed its operations through a combination of shareholders’ equity and cash flow from operation. Following completion of the Share Offer, the Group expects its capital and operating requirements will be funded through cash flows from operation, the net proceeds from the Share Offer and cash at bank and in hand. The Directors believe that in the long term, the Group’s operations will be funded by internally generated cash flows and, if necessary, equity or debt financing. Cash flows The following table sets out selected cash flow data from the Group’s combined cash flow statements for the year indicated: For the year ended 31 December 2005 2006 2007 RMB’000 RMB’000 RMB’000 Net cash inflow from operating activities Net cash outflow from investing activities Net cash inflow/(outflow) from financing activities Net increase in cash and cash equivalents Cash and cash equivalents at end of year

16,615 (404) 43,109

46,292

17,221

(16,716)

(5,911)

(116)

59,320

29,460

11,310

93,899

123,359

131,315

Cash flows from operating activities Net cash inflow from operating activities of the Group for the year ended 31 December 2007 was approximately RMB17.2 million, resulted from cash generated from operations of approximately RMB26.6 million and tax paid of approximately RMB9.4 million. Operating profit before working capital changes was approximately RMB51.7 million. The decrease in net cash inflow from operating activities was mainly due to the increase of accounts receivable of approximately RMB27.3 million though it was partly offset by the increase of accounts payable of approximately RMB5.6 million. The increase of accounts receivable was mainly due to the change of the payment policy of a mobile operator starting from January 2007 which required a longer settlement period. In addition, the settlement period for the Group’s newly developed business launched in April 2007 was longer than the average turnover days of 2006 (50.4 days). The increase of accounts payable was mainly due to the increase of the revenue share by the Group’s business alliance in 2007.

– 211 –


FINANCIAL INFORMATION Net cash inflow from operating activities of the Group for the year ended 31 December 2006 was approximately RMB46.3 million, resulted mainly from cash generated from operations of approximately RMB49.4 million and income tax paid of approximately RMB3.1 million. Operating profit before working capital changes was approximately RMB51.0 million. For the year ended 31 December 2006, the changes in working capital was approximately RMB1.6 million primarily as a result of an decrease in accounts receivable of approximately RMB4.2 million, increase in accounts payables of approximately RMB2.9 million and increase in other payables and accruals of approximately RMB2.1 million, which was offset primarily by increase in prepayments, deposits and other receivables of approximately RMB10.7 million. The decrease in accounts receivables was in line with decrease in revenue of the Group mainly resulted from the temporary downturn in the wireless value-added industry in late 2006. The increase in accounts payables and other payables and accruals was due to the Group’s intention to make the best use of its payment terms within the allowable period in view of the relatively stagnant market in the second half of 2006. The increase in prepayment, deposits and other receivable was due to the advance of approximately RMB5.2 million to two employees of the Group, the advance of approximately RMB1.3 million to staff of provincial sales offices for daily operations and the prepayment of approximately RMB2.3 million for music copyright. Net cash inflow from operating activities of the Group for the year ended 31 December 2005 was approximately RMB16.6 million, resulted mainly from cash generated from operations of approximately RMB17.0 million and income tax paid of approximately RMB0.4 million. Operating profit before working capital changes was approximately RMB44.9 million. For the year ended 31 December 2005, changes in working capital amounted to approximately RMB27.9 million primarily as a result of the increase in accounts payables of approximately RMB4.4 million and increase in other payables and accruals of approximately RMB6.8 million, which were offset primarily by increase in accounts receivable of approximately RMB18.7 million, increase in prepayments, deposits and other receivables of approximately RMB16.5 million and decrease in amount due to a jointly-controlled entity of approximately RMB3.9 million. The increase of accounts receivable were in line with the increase of the revenue. The increase of prepayments, deposits and other receivables was mainly due to the loan to the then shareholder of Zhongge Feiyang amounted to RMB12.7 million. Cash flows from investing activities Net cash outflow from investing activities of the Group for the year ended 31 December 2007 was approximately RMB5.9 million, which was mainly due to the increase in amounts due from related parties of approximately RMB22.3 million resulted from cost incurred for the operation of the Excluded Businesses on behalf of the then shareholders of the Group. The amount was subsequently settled in February 2008. The outflow was partly set off by the inflow from proceeds from the disposal of an interest in Any Music amounting to approximately RMB13.2 million, details of which are described in note 16 to the audited financial statements of the Group set out in Appendix I to this prospectus. Any Music is mainly engaged in the provision of total solution of wireless entertainment. The Group disposed of it in May 2007 so as to focus on the existing business of the Group. – 212 –


FINANCIAL INFORMATION Net cash outflow from investing activities of the Group for the year ended 31 December 2006 was approximately RMB16.7 million, which was primarily resulted from the increase in amounts due from related parties of approximately RMB17.5 million but offset by the proceeds from sale of investment of listed securities in the PRC of approximately RMB3.9 million. The increase in amounts due from related parties was due to the cost incurred for the operation of the Excluded Businesses on behalf the then shareholders of the Group. Net cash outflow from investing activities for the year ended 31 December 2005 was approximately RMB0.4 million, which was primarily resulted from the purchase of items of property, plant and equipment such as servers and computers of approximately RMB6.2 million and investment cost incurred for the acquisition of minority interests of approximately RMB0.7 million. It was offset by the decrease in amounts due from related parties of approximately RMB6.5 million. Cash flows from financing activities There were no financing activities for the year ended 31 December 2007. The Group recorded a cash outflow of approximately RMB0.1 million from financing activities in 2006 because of settlement of expenditure on the issue of convertible redeemable preferred shares in 2005. Net cash inflow from financing activities amounted to approximately RMB43.1 million in 2005. The net cash inflow from financing activities in 2005 was mainly resulted from the receipt of the gross proceeds from the issue of convertible redeemable preferred shares of approximately RMB45.9 million, netting off its related expenses of approximately RMB5.0 million.

â&#x20AC;&#x201C; 213 â&#x20AC;&#x201C;


FINANCIAL INFORMATION Net current assets The table below sets out the Group’s current assets, current liabilities and net current assets as at 31 March 2008: RMB’000 (Unaudited) Current assets Accounts receivable Amounts due from related parties Prepayments, deposits and other receivables Equity investments at fair value through profit or loss Cash and cash equivalents

88,114 100,000 24,616 3,601 109,347

Total

325,678

Current liabilities Accounts payables Other payables and accruals Amounts due to a minority shareholder Amount due to a jointly controlled entity Tax payable Derivative financial instruments

(33,188) (29,699) – – (2,121) –

Total

(65,008)

Net current assets

260,670

Note 1:

The amount of HK$108 million advanced to New Media Group Overseas Limited was planned for dividend distribution to the shareholders of A8 Music but was not paid as such pending the completion of the Reorganization and the relevant receivable would be set off against by the same amount of dividend to be declared immediately prior to the completion of the Reorganization.

ANALYSIS OF THE ACCOUNTS RECEIVABLES The following table set forth the turnover day(s) of the accounts receivables for the year indicated: For the year ended 31 December 2005 2006 2007 (Note) (Note) (Note) Trade receivable turnover day(s)

66.2

50.4

81.6

Note: Accounts receivable are as at the end of the year. Turnover of accounts receivable equals to accounts receivable at the end of the year divided by revenue and multiplied by 360 days.

– 214 –


FINANCIAL INFORMATION The Group’s turnover days of accounts receivable had been stable at a range of approximately 50.4 to 66.2 days for the two years ended 31 December 2006. The increase of the accounts receivable and the Group’s turnover days for the year ended 31 December 2007 was mainly due to the change starting from January 2007 of the payment policy of China Unicom Group in respect of which the amount due from such operator will be settled in a longer period after relevant services rendered. In addition, the settlement agreements of the Group’s newly developed business launched in April 2007, including Kuaitonglian’s new IVR business with China Mobile Group and the Group’s China Mobile’s Central Music Platform with China Mobile Group were signed in November 2007. The payment terms of the Central Music Platform business were agreed to be 90 days and those relating to the new IVR business were agreed to be 60 days after the invoiced date. Ageing analysis of accounts receivable The following table sets forth the age of accounts receivable of the Group as at the dates indicated:

2005 RMB’000

As at 31 December 2006 2007 % RMB’000 % RMB’000

%

Within 30 days Between 31 days to 60 days Between 61 days to 90 days Between 91 days to 120 days Over 120 days

19,328

45.1

16,446

43.8

29,091

44.9

11,651

27.2

10,300

27.4

13,658

21.1

5,649

13.2

5,615

15.0

7,282

11.2

2,548 3,682

5.9 8.6

2,079 3,113

5.5 8.3

6,100 8,678

9.4 13.4

Total

42,858

100.0

37,553

100.0

64,809

100.0

55,409

85.5

9,400

14.5

Subsequent settlement by 30 April 2008

The Group normally invoices its customers one month after the closures of the month’s accounts. The customers of the Group usually settle the amounts due to the Group within a period of 30 days to 120 days from the date of which the relevant invoice is issued by the Group. The aging analysis indicates that there were approximately RMB8.7 million accounts receivable remain outstanding over 120 days as at 31 December 2007. The outstanding balances as at 31 December 2007 principally represented few pro-longed reconciliation with mobile operators, out of which over 85.5% had already been settled as at 30 April 2008. As confirmed by the Company, there was no accounts receivable aged over one year as at 31 December 2007. – 215 –


FINANCIAL INFORMATION ACCOUNTS PAYABLE The accounts payable of the Group mainly related to the revenue sharing with business alliances in relation to the sale and promotional activities and copyrights cost incurred for the music related content. The following table set forth the turnover day(s) of the accounts payable for the year indicated: For the year ended 31 December 2005 2006 2007 (Note) (Note) (Note) Accounts payable turnover day(s)

33.7

35.0

43.5

Note: Accounts payable are as at the end of the year. Turnover of accounts payable equals to accounts payable at the end of the year divided by cost of services provided and multiplied by 360 days

The Group’s turnover days of accounts payable had been stable at a range of approximately 33.7 to 43.5 days for the Track Record Period. The gradual increase of the accounts payable during the Track Record Period was due to the increase of the revenue share by the Group’s business alliances over the years. The settlement period was normally maintained at 30 to 60 days. The increasing trend was due to the payment terms of licence of copyright. In 2006, most of the copyrights were on a minimum guarantee basis which was prepaid. However, starting from 2007, the minimum guarantee has become smaller in amount, and most of the copyright has been paid on revenue share basis with 90 to 120 days payment terms. Ageing analysis of accounts payable The following table sets forth the age of accounts payable of the Group as at the dates indicated:

2005 RMB’000 Within 30 days Between 31 days to 90 days Between 91 days to 180 days Over 180 days Total

%

As at 31 December 2006 RMB’000 %

2007 RMB’000

%

3,553

37.2

3,665

29.5

8,576

47.5

3,717

39.0

6,390

51.4

7,073

39.2

1,677 594

17.6 6.2

1,798 578

14.5 4.6

702 1,698

3.9 9.4

9,541

100.0

12,431

100.0

18,049

100.0

– 216 –


FINANCIAL INFORMATION TAXATION Hong Kong No Hong Kong profits tax was provided for the Track Record Period as there were no assessable profits arose from such period. PRC Substantially all the revenue of the Group during the Track Record Period was derived in the PRC and was therefore subject to the PRC income tax. The normal statutory PRC foreign invested enterprise income tax rate and local income tax rate are 30% and 3% respectively, of the assessable income as determined in accordance with the relevant PRC income tax rules and regulations unless it is qualified for certain tax exemptions or reductions. Some of the subsidiaries of the Group, namely Huadong Feitian, Cash River, Kuaitonglian and Yunhai Qingtian, were established and operate in the Shenzhen Special Economic Zone of the PRC and therefore are entitled to various levels of preferential tax treatment. The rest of the subsidiaries including Yuesheng Feiyang and Chuangmeng Yinyue, enjoy no preferential tax treatment or tax reduction and are therefore subject to income tax rate of 33%. For details, please refer to note 10 to the audited financial statements of the Group set out in Appendix I to this prospectus. Overseas The Company was incorporated in the Cayman Islands as an exempted company with limited liability under the Companies Law and, accordingly, is exempted from payment of the Cayman Islands income tax. General The Group has submitted all necessary tax filings and has concluded with the relevant tax authorities in the PRC and Hong Kong on the amount of tax liabilities and, as far as the Directors are aware, there were no disputes with these tax authorities during the Track Record Period. An analysis of the income tax charges during the Track Record Period is as follows: Year ended 31 December 2005 2006 2007 RMB’000 RMB’000 RMB’000 Group Current – PRC Charge for the year Under-provision Total tax charge for the year

– 217 –

607 367

5,314 –

5,248 –

974

5,314

5,248


FINANCIAL INFORMATION A reconciliation of the tax expense applicable to profit before tax using the statutory rate where the Company and the majority of the its subsidiaries are domiciled to the tax expense at the effective tax rate, and a reconciliation of the applicable rate (i.e., the statutory tax rate) to the effective tax rate during the Track Record Period, are as follows:

2005 RMB’000

Profit before tax

Tax calculated at the statutory tax rate Effects of tax holiday on assessable profits Adjustments in respect of current tax of previous periods (note a) Income not subject to tax (note b) Expenses not deductible for tax purposes (note c) Tax losses not recognized Profit and losses attributable to jointlycontrolled entities Tax charge at the Group’s effective rate

Year ended 31 December 2006 2007 % RMB’000 % RMB’000

41,971

44.602

3,148

7.5

(3,506)

60,485

3,345

7.5

(8.4)

367

0.9

(40)

(0.1)

600 401

1.4 1.0

4

974

2.3

(658)

2,257 412

(42)

5,314

%

(1.5)

5.1 0.9

(0.1)

11.9

4,536 (401)

– (614)

7.5 (0.6)

– (1.0)

1.174 527

1.9 0.9

26

5,248

8.7

Notes: (a)

These amounts mainly represent under-provision of current tax in prior year.

(b)

These amounts mainly represent other income and gains, including fair value gain on investment at fair value through profit or loss, realization of unrealized gain arising from a transfer of assets from Huadong Feitian to a jointly-controlled entity, fair value gain on derivative financial instruments and government grant.

(c)

These amounts mainly represent the excess of advertising and entertainment expenses, and staff cost and benefits above an upper limit, which is calculated with reference to a certain percentage of revenue/deduction threshold, for deductible expenses in accordance with PRC tax rules and regulations.

– 218 –


FINANCIAL INFORMATION DIVIDEND POLICY During the Track Record Period, the Group had not declared any dividend. On 26 May 2008, the Group declared a special dividend of HK$108 million to its then shareholders which represents approximately 55.1% of the net asset value of the Group as at 31 December 2007. Given the Group has approximately RMB131.3 million cash and cash equivalents as at 31 December 2007 and expected a positive cash position generated from operating activities by the time the dividend to be paid out, such dividends was paid out of the Group’s internal resources, which was settled on 26 May 2008. Potential investors should note that there is no assurance that dividends of similar amounts or at similar rates will be paid in the future. In this regard, please also refer to the paragraph headed “The historical dividends of the Group should not be treated as an indicator of future dividend policy” in the section headed “Risk factors” in this prospectus. Currently, the Group has no intention of paying any dividends after the completion of the Share Offer. However, the Directors intend to pay dividends in the future, the amount and rates of dividends will be subject to, among other things, the Group’s results of operations, cash flow, financial conditions, operating and capital requirements and other factors which the Directors consider important. PROPERTY INTERESTS IN THE PRC The headquarters and major operational facilities of the major operating companies of the Group are located in Shenzhen, the PRC. As at the Latest Practicable Date, the Group did not own any property. The Group’s headquarters, all of its offices and operational facilities are housed in leased properties. The Group’s headquarters are located at the 4th and 5th Floor, Fucheng Hi-tech Building, Southern District of Hi-tech Park, Nanshan District, Shenzhen City, Guangdong Province, the PRC, which occupy gross floor area of approximately 3,600 sq.m.. The Group also maintains branch offices and representative offices in major cities such as Beijing, Shanghai, Nanjing, Guangzhou, Guiyang, Shijiazhuang, Wuhan, Chengdu, Shenyang, Xian, Zhengzhou, Fuzhou, Hefei, Hangzhou, Changsha, Jilin and Jinan in the PRC. These offices are used to facilitate the development of business and relationships between the Company and business partners. As at the Latest Practicable Date, the Group had a total of 33 leased properties in the PRC mainly for the purposes of offices and staff quarters. All of such properties are leased from Independent Third Parties. In respect of five of these properties, the lessors have not provided the Group with sufficient document to evidence their respective authority to enter into the relevant leases. However, the Company’s legal advisers as to PRC laws consider that if the relevant lessor of these properties can provide the Group with proper title documents and authority document, the relevant leases are effective. The Directors also confirm that the Group will not renew the relevant tenancy agreements with the relevant landlords upon their respective expiry dates and will relocate the properties unless such landlords can evidence their respective authority to enter into the relevant leases. The Group believes that it will be able to obtain adequate facilities, principally through the leasing of appropriate properties, to accommodate its future expansion plans. – 219 –


FINANCIAL INFORMATION Details relating to property interests of the Group are set out in Appendix III to this prospectus. Asset Appraisal Limited, an independent property valuation firm, has valued the properties leased by the Group as of 31 March 2008. The text of its letter, summaries of values and valuation certificates are set out in Appendix III to this prospectus. MARKET RISKS The Group is, in its normal course of business, exposed to market risks primarily relating to fluctuations in credit, interest rates and exchange rates risk. The Group’s risk management strategy aims to minimize the adverse effects of the following risks on its financial performance. Credit risk The credit risk associated with the services provided by the Group has been shared between the Group and the mobile operators. The Group’s customers usually settle the amounts due to the Group within a period of 30 to 120 days. As at 31 December 2005, 31 December 2006 and 31 December 2007, the Group’s accounts receivable amounted to approximately RMB42.9 million, RMB37.6 million and RMB64.8 million respectively, representing approximately 24.1%, 16.3% and 22.3% of the total assets of Group. In the event that the outstanding accounts receivables continue to increase, the burden on the Group’s working capital will increase accordingly and its financial performance may be adversely affected. The Group has a credit policy in place and the exposures to credit risks are monitored on an ongoing basis. Interest rate risk The Group’s exposure to changes in interest rates is mainly attributable to its term deposits placed with bank. Since the Group currently has no interest rate hedging policy, the net income of the Group may be affected if the prevailing interest rate goes down. Foreign exchange risk The Group mainly operates in the PRC with most of the transactions settled in RMB. However, the Group’s convertible redeemable preferred shares are denominated in US Dollars. The Group does not have a foreign currency hedging policy in respect of the possible redemption of such preferred shares.

– 220 –


FINANCIAL INFORMATION WORKING CAPITAL The Directors are of the opinion that, taking into consideration the financial resources available to the Group, including internally generated funds and the estimated net proceeds from the New Issue, the working capital available to the Group is sufficient for its present requirements, that is for at least the next 12 months from the date of this prospectus. UNAUDITED PRO FORMA NET TANGIBLE ASSETS An unaudited pro forma statement of adjusted net tangible assets of the Group, which is prepared based on the audited combined net tangible assets of the Group as at 31 December 2007 as shown in the Accountants’ Report, the text of which is set out in Appendix I to this prospectus, and the related adjustments, are shown below: Adjusted combined net tangible assets of the Group as at 31 December 2007 (Note 1) RMB’000

Estimated net Unaudited proceeds pro forma from the net tangible New Issue assets of (Note 2) the Group RMB’000 RMB’000

Unaudited pro forma net tangible assets per Share (Note 3) RMB HK$

Based on 80,000,000 New Shares at the Offer Price of HK$2.38 each, being the upper limit of the price range

181,124

147,601

328,725

0.75

0.81

Based on 80,000,000 New Shares at the Offer Price of HK$1.66 each, being the lower limit of the price range

181,124

96,464

277,588

0.63

0.68

– 221 –


FINANCIAL INFORMATION Notes: 1.

The adjusted combined net tangible assets of the Group attributable to equity holders of the Company as at 31 December 2007 is based on the audited combined net assets of the Group attributable to equity holders of the Company as at 31 December 2007 of approximately RMB181,484,000, as extracted from the Accountants’ Report set out in Appendix I to the Prospectus, with an adjustment for excluding the intangible assets of the Group as at 31 December 2007 of RMB360,000.

2.

The estimated net proceeds from the Share Offer are based on the Offer Price of HK$1.66 and HK$2.38 per Offer Share after deduction of the estimated related expenses in connection with the Share Offer borne by the Company. The net proceeds are translated into RMB at the exchange rate of HK$1.00 to RMB0.92. No account has been taken of the Shares which may fall to be issued upon the exercise of the Over-allotment Option or any Shares which may be issued upon exercise of the options which have been granted under the Pre-IPO Share Option Scheme and which may be granted under the Share Option Scheme and any Shares which may fall to be allotted and issued or repurchased by the Company pursuant to the general mandates referred to in the paragraph headed “Written resolutions of all Shareholders passed on 26 May 2008” in Appendix V to this prospectus or otherwise.

3.

The calculation of the unaudited pro forma net tangible assets of the Group per Share is based on 440,420,000 or 440,604,000 (as the case may be) Shares in issue after the completion of the Capitalization Issue, the issue of the Remuneration Shares and the Share Offer. No account has been taken of the Shares which may fall to be issued upon the exercise of the Over-allotment Option or any Shares which have been granted under the Pre-IPO Share Option Scheme and which may be issued upon exercise of the options which may be granted under the Share Option Scheme and any Shares which may fall to be allotted and issued or repurchased by the Company pursuant to the general mandates referred to in the paragraph headed “Written resolutions of all Shareholders passed on 26 May 2008” in Appendix V to this prospectus or otherwise.

4.

The calculation of the unaudited pro forma net tangible assets has not taken into account of the special dividend of HK$108 million as disclosed in the paragraph headed “Dividend Policy” under the section headed “Financial Information”. If the special dividend has been included in the above calculation, the unaudited pro forma net tangible asset would have been reduced accordingly.

DISCLOSURE UNDER RULES 13.13 TO 13.19 OF THE LISTING RULES The Directors confirm that, as at the Latest Practicable Date, there had been no circumstances that would give rise to a disclosure obligation under Rules 13.13 to 13.19 of the Listing Rules. NO MATERIAL ADVERSE CHANGE The Directors confirm that they have performed sufficient due diligence on the Company to ensure that, up to the date of issue of this prospectus, there has been no material adverse change in the financial position of the Group since 31 December 2007, the date to which the latest consolidated audited financial statements of the Group were prepared and that there is no event that has occurred since 31 December 2007 which would materially affect the information shown in the Accountants’ Report as set out in Appendix I to this prospectus. DISTRIBUTABLE RESERVES As at 31 December 2007, the Company had no reserves available for distribution to the Shareholders. – 222 –


FUTURE PLANS AND USE OF PROCEEDS FUTURE PLANS It is the mission of the Group to become one of the leading digital music companies in the PRC. To accomplish this mission, the Group intends to implement the following strategies: Upgrading the interactive UGC platform www.a8.com The Group is expanding and improving its interactive Internet UGC collection platform by further enhancing the platform. For hardware enhancement, the Group plans to increase the number of servers and bandwidths throughout the country, thereby increasing the capacity for storage of the songs. In addition, the Group plans to upgrade the platform to be more user-friendly in order to enhance the UGC collection ability. The total hardware cost is expected to be approximately RMB9.2 million, out of which approximately RMB6.1 million and RMB3.1 million are expected to be used in year 2008 and 2009 accordingly. For software enhancement, the Group plans to develop a song management system. This system enables the Group to identify, record and file uploaded songs by various factors, including type, name and date. The development cost of such software is expected to be approximately RMB2.4 million, out of which approximately RMB1.5 million and RMB0.9 million are expected to be used in year 2008 and 2009 accordingly. Enhancing the brand awareness of the A8.com Promoting the UGC platform To increase the brand awareness of www.a8.com, the Group plans to promote the platform by organizing events to encourage users to upload their contents, conducting regular competition events and promotional events with other media. The Group plans to cooperate with traditional media, like TV, radio and magazines, as well as Internet websites, to collect original independently produced songs through its UGC platform for movies, TV series and record companies. The Group expects to assign approximately RMB1.7 million for such plan. Various competitions are expected to be held and the total costs of the competitions are approximately RMB4.4 million. A series of promotional events has also been planned during 2008 and 2009. The Group has planned to assign approximately RMB4.1 million in this regard. The total budget for promoting the UGC platform is approximately RMB10.2 million and it is expected that approximately RMB6.8 million will be used in 2008 and RMB3.4 million will be used in 2009.

â&#x20AC;&#x201C; 223 â&#x20AC;&#x201C;


FUTURE PLANS AND USE OF PROCEEDS Promoting original independently produced music content Apart from improving its existing Internet UGC collection platform, the Group also intends to increase the popularity of its original independently produced music content by advertising through Internet and traditional media. The Group plans to assign approximately RMB8.8 million for such promotions and RMB1.4 million to expand the current original music management team. Of the aforementioned aggregate amount, approximately RMB6.6 million and RMB3.6 million are expected to be expensed in 2008 and 2009 accordingly. Further developing A8Box The Group plans to further develop its A8Box in terms of its compatibility and quality. Firstly, the Group plans to further develop A8Box so that it can be compatible with different kinds of mobile phone. Approximately RMB5.5 million is planned for this development. Secondly, the Group has budgeted approximately RMB7.1 million to improve the quality of A8Box. Finally, the Group plans to acquire a wider range of music contents like full track songs, and pictures and information of artists and lyrics. Approximately RMB5.7 million is budgeted in this regard. In addition, a budget of RMB4.1 million and RMB3.0 million has been set aside for further research and development and promotion. The total cost for further development of A8Box is approximately RMB25.4 million, out of which RMB15.7 million and RMB9.7 million are expected to be utilized in 2008 and 2009 respectively. Integrating its business with the introduction of 3G mobile technology In anticipation of the launch of the 3G technology, the Group plans to improve the technology platform with the 3G applications and to acquire 3G specific contents. The Group has budgeted approximately RMB9.1 million for software and hardware development, and RMB7.3 million was budgeted for content acquisition like music video, full track download and music video ringtones. The Group plans to use around RMB2.8 million for marketing to promote its 3G services. The total cost amounts to approximately RMB19.2 million, out of which RMB13.0 million and RMB6.2 million are expected to be utilized in 2008 and 2009 respectively. Potential acquisitions The Group also intends to explore growth opportunities through acquisitions. The Group would focus in two major areas for its acquisition targets: music related contents providers and/or mobile applications related companies. â&#x20AC;&#x201C; 224 â&#x20AC;&#x201C;


FUTURE PLANS AND USE OF PROCEEDS The Group believes that these business opportunities will help strengthen its business development as well as expand its scope of services and products, which allows the Group to obtain a competitive position in the market. The Group has assigned approximately RMB44.6 million for mergers and acquisitions activities, out of which RMB38.2 million and RMB6.4 million are expected to be used in 2008 and 2009 respectively. USE OF PROCEEDS The Directors believe that the Share Offer and the Listing will enhance the corporate profile of the Group and intend to apply the net proceeds from the New Issue to finance the Group’s capital expenditure and business expansion. The Directors believe that the Share Offer will strengthen the Group’s equity base and improve its financial position. Assuming that the Over-allotment Option is not exercised, the net proceeds from the New Issue, after deduction of underwriting commission and estimated expenses payable by the Company, and assuming an Offer Price of HK$2.02 per Offer Share (being the mid-point of the indicative Offer Price range between HK$1.66 per Offer Share and HK$2.38 per Offer Share), are estimated to be approximately HK$132.6 million (equivalent to approximately RMB122.0 million). The Directors currently plan to apply such net proceeds as follows: –

approximately HK$48.5 million (equivalent to approximately RMB44.6 million) (approximately 36.6% of the estimated net proceeds of the New Issue) for potential acquisitions that offer synergy with the current business operation of the Group, through cost saving, technology enhancement or customer base expansion. It is expected the acquisition targets will be music related contents providers and/or mobile application related companies. As at the Latest Practicable Date, the Group had not identified any target for such acquisitions;

approximately HK$27.6 million (equivalent to approximately RMB25.4 million) (approximately 20.8% of the estimated net proceeds of the New Issue) for further developing A8Box;

approximately HK$20.8 million (equivalent to approximately RMB19.2 million) (approximately 15.7% of the estimated net proceeds of the New Issue) for integrating its business with the introduction of 3G mobile technology;

approximately HK$12.6 million (equivalent to approximately RMB11.6 million) (approximately 9.5% of the estimated net proceeds of the New Issue) for upgrading the interactive UGC platform www.a8.com;

approximately HK$11.1 million (equivalent to approximately RMB10.2 million) (approximately 8.4% of the estimated net proceeds of the New Issue) for promoting the UGC platform;

approximately HK$11.1 million (equivalent to approximately RMB10.2 million) (approximately 8.4% of the estimated net proceeds of the New Issue) for promoting the original independently produced music content; and – 225 –


FUTURE PLANS AND USE OF PROCEEDS –

the remaining balance of approximately HK$0.9 million (equivalent approximately RMB0.8 million) as additional working capital for the Group.

to

In the event that the Offer Price is fixed at HK$2.38 per Offer Share, being the highest point of the indicative Offer Price range, the net proceeds will be increased by approximately HK$27.8 million of which approximately HK$15.0 million will be used as additional general working capital and approximately HK$12.8 million will be reserved for potential acquisitions that offer synergy with the current business operation of the Group. In the event that the Offer Price is fixed at HK$1.66 per Offer Share, being the lowest point of the indicative Offer Price range, the net proceeds will be reduced by approximately HK$27.8 million. In such circumstances, the Directors intend to reduce the intended use of proceeds for the above stated purposes on pro-rata basis. In the event that the Over-allotment Option is exercised in full, and assuming an Offer Price of HK$2.38 per Offer Share (being the highest point of the indicative Offer Price range), the Group will receive additional net proceeds of approximately HK$31.3 million, which will be allocated as to approximately HK$28.3 million to fund potential acquisitions of mobile music-related businesses. The remaining balance of approximately HK$3.0 million will be used for additional general working capital. In the event that the Over-allotment Option is exercised in full, and assuming an Offer Price of HK$2.02 per Offer Share (being the mid-point of the indicative Offer Price range between HK$1.66 per Offer Share and HK$2.38 per Offer Share), the Group will receive additional net proceeds of approximately HK$26.6 million which will be allocated as to approximately HK$24.0 million to fund potential acquisitions of mobile music related businesses. The remaining balance of approximately HK$2.6 million will be used for additional general working capital. In the event that the Over-allotment Option is exercised in full, and assuming an Offer Price of HK$1.66 per Offer Share (being the lowest point of the indicative Offer Price range), the Group will receive additional net proceeds of approximately HK$21.9 million which will be allocated as to approximately HK$19.9 million to fund potential acquisitions of mobile music related businesses. The remaining balance of approximately HK$2.0 million will be used for additional general working capital. To the extent that the net proceeds from the Share Offer and the issue of new Shares under the Over-allotment Option are not immediately applied for any of the above purposes, or if the Group is not able to effect any part of its future development plans as intended, it is the present intention of the Directors that such net proceeds be placed on short-term deposits with authorized financial institutions and/or licensed banks in Hong Kong and/or China.

– 226 –


UNDERWRITING PLACING AND PUBLIC OFFER UNDERWRITERS Placing Underwriters SBI E2-Capital Securities Limited CAF Securities Company Limited IBTS Asia (HK) Limited China Everbright Securities (HK) Limited First Shanghai Securities Limited Guoyuan Securities Brokerage (Hong Kong) Limited Public Offer Underwriters SBI E2-Capital Securities Limited CAF Securities Company Limited IBTS Asia (HK) Limited China Everbright Securities (HK) Limited First Shanghai Securities Limited Guoyuan Securities Brokerage (Hong Kong) Limited UNDERWRITING ARRANGEMENTS AND EXPENSES Underwriting agreement Under the Underwriting Agreement, (a) the Company has agreed to offer the Public Offer Shares for subscription on and subject to the terms and conditions of this prospectus and the Application Forms; and (b) the Company and the Selling Shareholder have agreed to offer the Placing Shares for subscription or purchase by institutional, professional and private investors which are anticipated to have a sizeable demand on and subject to the terms and conditions of this prospectus. Pursuant to the Underwriting Agreement, and conditional upon, inter alia, the Listing Committee of the Stock Exchange granting or agreeing to grant (subject to allotment) listings of, and permission to deal in, the Shares in issue and to be issued as mentioned in this prospectus subject to such customary conditions that may be imposed by the Stock Exchange and certain other conditions including the Offer Price being determined by the Company (for itself and on behalf of the Selling Shareholder) and the Lead Manager (on behalf of the Underwriters) by entering into the Price Determination Agreement on or before the Price Determination Date, the Placing Underwriters have severally agreed to subscribe or procure subscribers to subscribe for or purchase or procure purchasers to purchase from the Company or, as the case may be, the Selling Shareholder, on the terms and conditions of this prospectus and the placing documents, the Placing Shares which are not taken up under the Placing and the Public Offer Underwriters have severally agreed to subscribe or procure subscribers to subscribe for, on the terms and conditions of this prospectus and the Application Forms, the Public Offer Shares which are not taken up under the Public Offer. â&#x20AC;&#x201C; 227 â&#x20AC;&#x201C;


UNDERWRITING Grounds for termination The Lead Manager (on behalf of the Underwriters) shall have the absolute right to terminate the Underwriting Agreement by giving notice in writing to the Company (for itself and on behalf of the Selling Shareholder and the Covenantors) at any time prior to 8:00 a.m. (Hong Kong time) on the Listing Date (“Termination Time”) if, at any time before the Termination Time: (a)

there comes to the notice of the Sponsor, the Lead Manager or any of the Underwriters of any matter or event showing any of the representations, warranties or undertakings contained in the Underwriting Agreement to be untrue, inaccurate or misleading in any respect when given or repeated or there has been a breach of any of the warranties or any other obligations imposed on any party to the Underwriting Agreement (other than those undertaken by the Underwriters, the Sponsor and/or the Lead Manager) of the Underwriting Agreement which, in any such cases, is considered, in the sole and absolute opinion of the Lead Manager (on behalf of the Underwriters), to be material in the context of the Share Offer; or

(b)

any statement contained in this prospectus or the Application Forms has become or been discovered to be untrue, incorrect or misleading in any respect; or

(c)

any event, series of events, matters or circumstances occurs or arises on or after the date of the Underwriting Agreement and before the Termination Time, being events, matters or circumstances which, if it had occurred before the date of the Underwriting Agreement would have rendered any of the warranties contained in the Underwriting Agreement untrue, incorrect or misleading in any respect, and comes to the knowledge of the Sponsor, the Lead Manager or any of the Underwriters and which is considered, in the sole and absolute opinion of the Lead Manager (on behalf of the Underwriters), to be material in the context of the Share Offer; or

(d)

any matter which, had it arisen or been discovered immediately before the date of this prospectus and not having been disclosed in this prospectus, would have constituted, in the sole and absolute opinion of the Lead Manager (on behalf of the Underwriters), an omission in the context of the Share Offer; or

(e)

any event, act or omission which gives or is likely to give rise to any material liability of the Company or any of the Selling Shareholder or the Covenantors arising out of or in connection with any representations, warranties or undertakings contained in the Underwriting Agreement; or

(f)

there comes to the notice of any of the Sponsor, the Lead Manager or any of the Underwriters any breach by any party to the Underwriting Agreement (other than the Sponsor, the Lead Manager or the Underwriters) of any provision of the Underwriting Agreement which, in the sole and absolute opinion of the Lead Manager (on behalf of the Underwriters), is material; or – 228 –


UNDERWRITING (g)

there shall have developed, occurred, existed or come into effect any event or series of events, matters or circumstances whether occurring or continuing before, on and/or after the date of the Underwriting Agreement and including an event or change in relation to or a development of an existing state of affairs concerning or relating to any of the following: (i)

any new law or regulation or any change in existing laws or regulations or any change in the interpretation or application thereof by any court or other competent authority in Hong Kong, the Cayman Islands, the BVI, the PRC, any of the jurisdictions in which the Group operates or has or is deemed by any applicable law to have a presence (by whatever name called) or any other jurisdiction relevant to the Group; or

(ii) any change in, or any event or series of events or development resulting or likely to result in any change in Hong Kong, the Cayman Islands, the BVI, the PRC, any of the jurisdictions in which the Group operates or has or is deemed by any applicable law to have a presence (by whatever name called) or other jurisdiction relevant to the Group, the local, national, regional or international financial, currency, political, military, industrial, economic, stock market or other market conditions or prospects; or (iii) any change in the conditions of Hong Kong, the US, the PRC or international equity securities or other financial markets; or (iv) the imposition of any moratorium, suspension or material restriction on trading in securities generally on any of the markets operated by the Stock Exchange due to exceptional financial circumstances or otherwise; or (v)

any change or development involving a prospective change in taxation or exchange control (or the implementation of any exchange control) in Hong Kong, the Cayman Islands, the BVI, the PRC, any of the jurisdictions in which the Group operates or has or is deemed by any applicable law to have a presence (by whatever name called) or other jurisdiction relevant to the Group; or

(vi) any change or prospective change in the business or in the financial or trading position or prospects of any member of the Group; or (vii) the imposition of economic sanction or withdrawal of trading privileges, in whatever form, by the US or by the European Union (or any member thereof) on Hong Kong or the PRC; or (viii) a general moratorium on commercial banking activities in the PRC or Hong Kong declared by the relevant authorities; or â&#x20AC;&#x201C; 229 â&#x20AC;&#x201C;


UNDERWRITING (ix) any event of force majeure including, without limiting the generality thereof, any act of God, war, riot, public disorder, civil commotion, economic sanctions, fire, flood, explosion, epidemic, outbreak of an infectious disease, calamity, crisis, terrorism, strike or lock-out (whether or not covered by insurance); or (x)

any other change whether or not ejusdem generis with any of the foregoing,

which, in the sole and absolute opinion of the Lead Manager (on behalf of the Underwriters): (1)

is or will be or is likely to be adverse, in any material respect, to the business, financial or trading condition or prospects of the Group taken as a whole or, in case of sub-paragraph (v) above, on any present or prospective shareholder in his or its capacity as such shareholder of the Company; or

(2)

has or will have or is likely to have a material adverse effect on the success of the Share Offer as a whole or the level of the Offer Shares being demanded, applied for or accepted or the distribution of the Offer Shares; or

(3)

for any reason makes it impracticable, inadvisable or inexpedient for the Underwriters to proceed with the Share Offer as a whole.

For the above purpose, a change in the system under which the value of the Hong Kong currency is linked to that of the currency of the US or any change of the value of Hong Kong currency under such system shall be taken as an event resulting in a change in currency conditions; and any market fluctuations, whether or not within the normal range therefor, may be considered as a change of market conditions. Undertakings 1.

Each of the Controlling Shareholders has jointly and severally undertaken with the Company, the Sponsor, the Lead Manager and the Underwriters that: (a)

he/it shall not, and shall procure that his/its associates or companies controlled by him/it or nominees or trustees holding in trust for him/it shall not, sell, transfer or otherwise dispose of (including without limitation the creation of any option over or pledge or charge as security) any of the Shares or securities of the Company owned by him/it or the relevant company, nominee or trustee (including any interest on any shares in any company controlled by him/it which is directly or indirectly the beneficial owner of any of the Shares or securities of the Company) immediately following the completion of the Share Offer and the Capitalization Issue (“Relevant Securities”) within the period commencing on the date by reference to which disclosure of the shareholding of such persons is made in this prospectus and ending on the date which is six months from the Listing Date (“First Lock-up Period”) save in pursuance of the Stock Borrowing Agreement; – 230 –


UNDERWRITING (b)

2.

he/it shall not, and shall procure that none of his/its associates or companies controlled by him/it or nominees or trustees holding in trust for him/it shall, within the further period of six months immediately after the expiry of the First Lock-up Period (“Second Lock-up Period”) sell, transfer or otherwise, dispose of (including without limitation the creation of any option over or pledge or charge as security) any of the Relevant Securities, if immediately following such sale, transfer or disposal, the Controlling Shareholders collectively would cease to be a controlling shareholder (within the meaning of the Listing Rules) of the Company, and that in the event of any such sale, transfer or disposal, all reasonable steps shall be taken to ensure that such sale, transfer or disposal shall be effected in such a manner so as not to create a disorderly or false market for the Shares during the progress of such sale, transfer or disposal or after the completion thereof.

Without prejudice to the aforesaid, each of the Controlling Shareholders jointly and severally undertakes to the Company, the Sponsor, the Lead Manager (on behalf of the Underwriters) that, within the period commencing from the date of this prospectus and ending on the date which is twelve months from the Listing Date, he/it will: (a)

when he/it pledges or charges any securities or interests in the Relevant Securities, immediately inform the Company, the Sponsor and the Lead Manager (on behalf of the Underwriters) in writing details of such pledges or charges together with the number of securities of the Company so pledged or charged prior to entering into such arrangement; or

(b)

when he/it receives indications, either verbal or written, from any pledgee or chargee that any of the pledged or charged securities or interests in the securities of the Company will be sold, transferred or disposed of, immediately inform the Company, the Sponsor and the Lead Manager (on behalf of the Underwriters) in writing of such indications.

The Company undertakes to the Sponsor and the Lead Manager (on behalf of the Underwriters) to inform them as soon as it has received information relating to the pledge or charge. 3.

The Company has undertaken to and covenanted with the Sponsor, the Lead Manager and the Underwriters that, and each of the Covenantors have jointly and severally undertaken and covenanted with the Sponsor, the Lead Manager and the Underwriters to procure that, without the prior written consent of the Lead Manager (on behalf of the Underwriters), and subject always to the requirements of the Stock Exchange, save for the Offer Shares, the Remuneration Shares, the Over-allotment Shares upon the exercise of the Overallotment Option by the Lead Manager, the Shares to be issued pursuant to the Capitalization Issue, the grant of any options under the Pre-IPO Share Option Scheme and the Share Option Scheme, and any Shares which may fall to be issued pursuant to the exercise of any option which were granted under the Pre-IPO Share Option Scheme and

– 231 –


UNDERWRITING options which may be granted under the Share Option Scheme, or by way of scrip dividend schemes or similar arrangements in accordance with the Articles of Association, neither the Company nor any of its subsidiaries from time to time shall: (a)

allot and issue or agree to allot and issue any shares in the Company or any subsidiary of the Company from time to time or agree to grant any options, warrants or other rights carrying any rights to subscribe for or otherwise acquire any securities of the Company or any subsidiary of the Company from time to time during the First Lock-up Period; or

(b)

allot and issue or agree to allot and issue any of the shares or other interests referred to in (a) above during the Second Lock-up Period if, immediately following such allotment and issue, the Controlling Shareholders, either individually or taken together with the others of them, would cease to be a controlling shareholder (as defined in the Listing Rules) of the Company or the single largest shareholder of the Company.

Commission and expenses The Underwriters will receive a commission of 3.5% of the aggregate Offer Price payable for the Offer Shares, out of which they will pay any sub-underwriting commissions. In addition, the Sponsor will receive a sponsorship and documentation fee and Remuneration Shares in relation to the Share Offer. Assuming the Over-allotment Option is not exercised at all and based on the Offer Price of HK$2.02 (being the mid-point of the Offer Price), the underwriting commission, sponsorship and documentation fee, Stock Exchange listing fees, legal and other professional fees together with printing and other expenses relating to the Share Offer are estimated to amount to approximately HK$29.0 million in total. The Selling Shareholder will pay the underwriting commission in proportion to the number of Sale Shares against the total number of the Offer Shares. Underwriters’ interest in the Company Save for the obligations and the interests under the Underwriting Agreement as disclosed above and in the paragraph headed “Sponsor’s interest in the Company” below, none of the Underwriters is interested legally or beneficially in any shares in any member of the Group or has any right (whether legally enforceable or not) or option to subscribe for or to nominate persons to subscribe for any shares in any member of the Group.

– 232 –


UNDERWRITING Sponsorâ&#x20AC;&#x2122;s interest in the Company SB Investments Nominees Limited, a fellow subsidiary of the Sponsor nominated by it, will, upon completion of the Share Offer, be allotted the Remuneration Shares, being not less than 420,000 Shares and not more than 604,000 Shares immediately after the completion of the Share Offer and the Capitalization Issue. It will not be granted any right for board representation. The Sponsor or, as the case may be, its associates: 1.

will upon completion of the Share Offer be allotted and issued, credited as fully paid, the Remuneration Shares as part of the remuneration for the service as the Sponsor;

2.

has not assumed any material obligations and rights under the Underwriting Agreement save as those disclosed above; and

3.

may provide brokerage, advisory and other services to the Group (whether related to the Share Offer or not) in its normal course of business for which they may receive service or other fees.

The Sponsor confirms that, save as disclosed above: (1)

neither the Sponsor nor its associates has or may, as a result of the Share Offer, have any interest in securities of the Company, or any other company within the Group (including options or rights to subscribe such securities);

(2)

no director of the Sponsor who is involved in providing advice to the Company has or may, as a result of the Share Offer, has any interest in any securities of the Company or any other company within the Group (including options or rights to subscribe such securities);

(3)

neither the Sponsor nor its associates has accrued nor is expected to accrue any material benefit as a result of the successful outcome of the Share Offer, including the repayment of material outstanding indebtedness and payment of any underwriting commission or success fees;

(4)

no director or employee of the Sponsor has a directorship in the Company or any other company within the Group.

â&#x20AC;&#x201C; 233 â&#x20AC;&#x201C;


STRUCTURE AND CONDITIONS OF THE SHARE OFFER THE SHARE OFFER The Share Offer comprises the Placing and the Public Offer. A total of 91,000,000 Shares will initially be made available under the Share Offer, of which 81,900,000 Shares (being 70,900,000 New Shares offered for subscription by the Company and 11,000,000 Sale Shares offered for sale by the Selling Shareholder), representing 90% of the total number of Shares initially being offered under the Share Offer, will be conditionally placed with institutional, professional and private investors at the Offer Price under the Placing. The remaining 9,100,000 Shares, representing 10% of the total number of Shares initially being offered under the Share Offer, will be offered to the public in Hong Kong for subscription at the Offer Price under the Public Offer. The number of Shares offered for subscription or purchase under the Placing and the Public Offer will be subject to re-allocation on the basis described below and the number of Shares offered for subscription under the Placing will be subject to the exercise of the Over-allotment Option below. The Public Offer is open to the public as well as to institutional, professional and private investors in Hong Kong. The Placing involves selective marketing of the Placing Shares by the Placing Underwriters to institutional, professional and private investors. The Offer Shares are not available for subscription by the Directors, chief executive of the Company, existing beneficial owners of the Shares or their respective associates. Investors may apply for the Offer Shares under the Public Offer or indicate an interest for Offer Shares under the Placing, but may not do both. Investors may only receive an allocation of Shares under the Placing or the Public Offer but not both. PRICE PAYABLE ON APPLICATION Each applicant under the Public Offer will also be required to give an undertaking and confirmation in the Application Form submitted by him to the effect that he and any person(s) for whose benefit he is making the application has not applied for or taken up, or indicated an interest for, and will not apply for or take up, or indicate an interest for, any Offer Shares under the Placing, and such applicant’s application is liable to be rejected if the said undertaking and/or confirmation is breached and/or untrue (as the case may be) or it has been or will be placed or allocated Offer Shares under the Placing. The Offer Price will not be more than HK$2.38 per Offer Share and is expected to be not less than HK$1.66 per Offer Share. Applicants under the Public Offer should pay, on application, the maximum Offer Price of HK$2.38 per Offer Share, being the upper limit of the stated range of the Offer Price, plus 1% brokerage, 0.005% Stock Exchange trading fee and 0.004% SFC transaction levy, amounting to a total of HK$4,808.03 per board lot of 2,000 Shares. Each Application Form includes a table showing the exact amount payable for certain multiples of Offer Shares. If the Offer Price, as finally determined in the manner described in the paragraph headed “Determining the Offer Price” below, is less than the maximum price of HK$2.38 per Offer Share, appropriate refund payments (including the brokerage, the SFC transaction levy and the – 234 –


STRUCTURE AND CONDITIONS OF THE SHARE OFFER Stock Exchange trading fee attributable to the surplus application monies) will be made to successful applicants, without interest. Further details are set out in the section headed “How to apply for the Public Offer Shares” in this prospectus. DETERMINING THE OFFER PRICE The Placing Underwriters would solicit from prospective investors indications of interest in acquiring the Placing Shares. Prospective investors will be required to specify the number of Placing Shares they would be prepared to acquire either at different prices or at a particular price. This process, known as “book-building”, is expected to continue up to, and to cease on or around, the last day for lodging applications under the Public Offer. The Offer Price will be fixed by agreement between the Company (for itself and on behalf of the Selling Shareholder) and the Lead Manager (on behalf of the Underwriters) on or before the Price Determination Date, which is currently scheduled on Wednesday, 4 June 2008 and in any event no later than 12:00 noon (Hong Kong time) on Thursday, 5 June 2008. If the Lead Manager (on behalf of the Underwriters) and the Company (for itself and on behalf of the Selling Shareholder) are unable to reach an agreement on the Offer Price by 12:00 noon (Hong Kong time) on Thursday, 5 June 2008, the Share Offer will not become unconditional and will lapse. The Offer Price will not be more than HK$2.38 per Share and is currently expected to be not less than HK$1.66 per Share unless otherwise announced, as further explained below, not later than the morning of the last day for lodging applications under the Public Offer. Prospective investors should be aware that the Offer Price to be determined on the Price Determination Date may be, but is not expected to be, lower than the indicative Offer Price range stated in this prospectus. If, based on the level of interest expressed by prospective investors during the book-building process, the Lead Manager (on behalf of the Underwriters), and with the consent of the Company (for itself and on behalf of the Selling Shareholder), thinks it appropriate (for instance, if the level of interest expressed by prospective investors is below the indicative Offer Price range stated in this prospectus), the indicative Offer Price range may be reduced below that stated in this prospectus at any time prior to the morning of the last day for lodging applications under the Public Offer. In such case, the Company will, as soon as practicable following the decision to make such reduction, and in any event not later than the morning of the day which is the last day for lodging applications under the Public Offer, cause to be published in South China Morning Post (in English) and in Hong Kong Economic Times (in Chinese) notice of the reduction of the indicative Offer Price range below that stated in this prospectus. Upon issue of such a notice, the revised Offer Price range will be final and conclusive and the Offer Price, if agreed upon by the Lead Manager (on behalf of the Underwriters) and the Company (for itself and on behalf of the Selling Shareholder), will be fixed within such revised Offer Price range. Such notice will also include confirmation or revision, as appropriate, of the working capital statement, the offer statistics as currently set out in the section headed “Summary” of this prospectus and any other financial information which may change materially as a result of any such reduction. Applicants under the Public – 235 –


STRUCTURE AND CONDITIONS OF THE SHARE OFFER Offer should note that, even if the indicative Offer Price range is so reduced, in no circumstances can applications be withdrawn once submitted. In the absence of any such notice so published, the Offer Price, if agreed upon with the Company (for itself and on behalf of the Selling Shareholder) and the Lead Manager (on behalf of the Underwriters), will under no circumstances be set outside the Offer Price range as stated in this prospectus. The final Offer Price, level of indications of interest in the Placing, basis of allotment of Offer Shares available under the Public Offer are expected to be published in South China Morning Post (in English) and in Hong Kong Economic Times (in Chinese) on Tuesday, 10 June 2008. CONDITIONS OF THE SHARE OFFER Acceptance of all applications for the Public Offer Shares will be conditional on, among other things: (a)

the Listing Committee granting the approval for the listing of, and permission to deal in, all the Shares in issue and to be issued pursuant to the Share Offer (including any additional Shares which may fall to be allotted and issued upon the exercise of the Over-allotment Option), the Capitalization Issue, the issue of the Remuneration Shares and the exercise of any options that are granted under the Pre-IPO Share Option Scheme and that may be granted under the Share Option Scheme, and such listing and permission not subsequently being revoked prior to the commencement of dealings in the Shares on the Stock Exchange;

(b)

the Offer Price having been duly determined on or before the Price Determination Date; and

(c)

the obligations of the Underwriters under the Underwriting Agreement becoming unconditional (including, if relevant, as a result of the waiver of any conditions given by the Lead Manager (on behalf of the Underwriters)) and such obligations not being terminated in accordance with its terms or otherwise.

If the above conditions are not fulfilled on or before the time and date specified in the Underwriting Agreement or such later date/time as the Sponsor (for itself and acting on behalf of the Lead Manager and all the Underwriters) may in its absolute discretion determine which shall not be later than the 30th day after the date of this prospectus, the Share Offer will lapse and the Stock Exchange will be notified immediately. Notice of the lapse of the Share Offer will be published by the Company in South China Morning Post (in English) and Hong Kong Economic Times (in Chinese) on the day after such lapse. In the above situation, all application monies will be returned to you, without interest, on the terms set out in the paragraph headed “Refund of your application monies” in the relevant Application Forms and the paragraph headed “Refund of your application monies” in the section headed “How to apply for the Public Offer Shares” in this prospectus. In the meantime, all application monies will be held in one or more separate bank accounts with the receiving banker or other bank(s) licensed under the Banking Ordinance (Chapter 155 of the Laws of Hong Kong). – 236 –


STRUCTURE AND CONDITIONS OF THE SHARE OFFER PUBLIC OFFER The Company is initially offering, at the Offer Price, 9,100,000 Public Offer Shares (subject to re-allocation as mentioned in the paragraph headed “Re-allocation of Offer Shares between the Public Offer and the Placing” below), representing 10% of the total number of Offer Shares being initially offered under the Share Offer (before any exercise of the Over-allotment Option), for subscription by way of public offer in Hong Kong. The Public Offer is fully underwritten by the Public Offer Underwriters subject to the terms and conditions of the Underwriting Agreement. The total number of the Offer Shares available under the Public Offer is to be divided equally into two pools (pool A and pool B) for allocation purpose only: •

Pool A: the Public Offer Shares in Pool A will be allocated on an equitable basis to applicants who have applied for the Public Offer Shares with an aggregate subscription price of HK$5 million (excluding brokerage, SFC transaction levy and Stock Exchange trading fee payable thereon) or less; and

Pool B: the Public Offer Shares in Pool B will be allocated on an equitable basis to applicants who have applied for the Public Offer Shares with an aggregate subscription price of more than HK$5 million (excluding brokerage, SFC transaction levy and Stock Exchange trading fee payable thereon) and up to the value of Pool B.

Investors should be aware that the allocation ratios for applications in the two pools, as well as allocation ratios for applications in the same pool, may be different. Where one (but not both) of the pools is undersubscribed, the surplus Public Offer Shares should be transferred to satisfy demand in the other pool and be allocated accordingly. Applicants can only receive an allocation of Public Offer Shares from any one pool but not from both pools and can only make applications to either pool A or pool B. No applications should be accepted from applicants applying for more than the total number of shares originally allocated to each pool. Multiple applications or suspected multiple applications within either pool or between pools will be rejected. Allocation of the Public Offer Shares to investors under the Public Offer will be based solely on the level of valid applications received under the Public Offer. The basis of allocation may vary, depending on the number of the Public Offer Shares validly applied for by each applicant. When there is over subscription under the Public Offer, allocation of the Public Offer Shares may involve balloting, which would mean that some applicants may be allotted more Public Offer Shares than others who have applied for the same number of the Public Offer Shares, and those applicants who are not successful in the ballot may not receive any Public Offer Shares. Applications under the Public Offer from investors receiving the Placing Shares under the Placing will be identified and rejected and investors receiving the Public Offer Shares under the Public Offer will not be offered the Placing Shares under the Placing. Investors who have not received Public Offer Shares under the Public Offer may receive Placing Shares under the – 237 –


STRUCTURE AND CONDITIONS OF THE SHARE OFFER Placing. The Lead Manager (on behalf of the Underwriters) may require any investor who has been offered Offer Shares under the Placing, and who has made an application under the Public Offer, to provide sufficient information to the Lead Manager so as to allow them to identify the relevant applications under the Public Offer and to ensure that such investor is excluded from any application of Offer Shares under the Public Offer. THE PLACING The Company and the Selling Shareholder are initially offering, at the Offer Price, 81,900,000 Offer Shares comprising 70,900,000 New Shares and 11,000,000 Sale Shares (subject to re-allocation as mentioned in the paragraph headed “Re-allocation of Offer Shares between the Public Offer and the Placing” below), representing 90% of the total number of Offer Shares being initially offered under the Share Offer (before any exercise of the Over-allotment Option), for subscription by way of Placing. The Placing is managed by the Lead Manager and fully underwritten by the Placing Underwriters subject to the terms and conditions of the Underwriting Agreement. Pursuant to the Placing, it is expected that the Placing Underwriters or selling agents nominated by any of them will, on behalf of the Company and the Selling Shareholder, conditionally place the Placing Shares at the Offer Price with selected institutional, professional and private investors. Professional and institutional investors generally include brokers, dealers, companies and fund managers, whose ordinary businesses involve dealing in shares and other securities and corporate entities which regularly invest in shares and other securities. Allocation of the Placing Shares to institutional, professional and private investors pursuant to the Placing will be based on a number of factors, including the level and timing of demand, total size of the relevant investor’s invested assets or equity assets in the relevant sector and whether or not it is expected that the investor is likely to purchase further Shares, or hold or sell the Shares placed, after the Listing. Such allocation is intended to result in a distribution of the Placing Shares on a basis which would lead to the establishment of a solid and broad shareholder base to the benefit of the Company and its shareholders taken as a whole. Investors who have been allocated any of the Placing Shares under the Placing will not be allocated any Public Offer Shares under the Public Offer. Similarly, investors who have been allocated any Public Offer Shares under the Public Offer will not be allocated any Placing Shares under the Placing. OVER-ALLOTMENT OPTION The Company has granted the Over-allotment Option, exercisable by the Lead Manager at any time from the Listing Date to 2 July 2008, being the 30th day from the last day for lodging applications under the Public Offer, subject to the terms of the Underwriting Agreement, to require the Company to allot and issue up to an aggregate of 13,650,000 additional Shares, representing 15% of the Offer Shares initially being offered under the Share Offer, on the same terms as those applicable to the Placing, to cover over-allocations in the Placing (if any) and/or to satisfy the Lead Manager’s obligation to return Shares borrowed under the Stock Borrowing Agreement. The Lead Manager may also, at its option, cover any – 238 –


STRUCTURE AND CONDITIONS OF THE SHARE OFFER over-allocations under the Placing through stock borrowing arrangements or by purchasing Shares in the secondary market or by exercising the Over-allotment Option or by a combination of these means or otherwise as may be permitted under applicable laws. Any purchases of Shares in the market to cover the over-allocations will be made at prices not exceeding the Offer Price. The number of Shares that may be over-allocated may not be greater than the number of Shares that may be allotted and issued under the Over-allotment Option. If the Over-allotment Option is exercised in full and assuming that 496,000 Remuneration Shares (assuming the Offer Price is the mid-point of the price range i.e., HK$2.02) will be issued, the Offer Shares (including the Shares allotted and issued pursuant to the exercise of the Over-allotment Option) will represent approximately 23.04% of the enlarged issued share capital of the Company immediately after completion of the Share Offer, the issue of the Remuneration Shares, the Capitalization Issue and the exercise of the Over-allotment Option in full. In the event that the Over-allotment Option is exercised, an announcement will be made. In order to facilitate settlement of over-allocations (if any) in connection with the Placing, the Stock Borrowing Agreement has been entered into between Ever Novel and the Lead Manager whereby Ever Novel has agreed with the Lead Manager that, if requested by the Lead Manager, Ever Novel will, subject to the terms of the Stock Borrowing Agreement, make available to the Lead Manager up to 13,650,000 Shares held by it, by way of stock lending, in order to cover over-allocations in connection with the Placing, if any. The stock borrowing arrangements pursuant to the Stock Borrowing Agreement shall not be subject to the restrictions under Rule 10.07(1)(a) of the Listing Rules and are on the following terms in compliance with Rule 10.07(3) of the Listing Rules: (a)

such stock borrowing arrangements will only be effected for the sole purpose of covering any short position prior to the exercise of the Over-allotment Option;

(b)

the maximum number of Shares which may be borrowed from Ever Novel will be limited to the maximum number of Shares which may be issued upon exercise of the Over-allotment Option in full (i.e. 13,650,000 Shares);

(c)

the same number of Shares so borrowed must be returned to Ever Novel or its nominees on or before the third Business Day following the earlier of (i) the last day on which the Over-allotment Option may be exercised; or (ii) the day on which the Over-allotment Option is exercised in full;

(d)

the stock borrowing arrangements pursuant to the Stock Borrowing Agreement will be effected in compliance with all applicable laws, rules and regulatory requirements; and

(e)

no payment will be made to Ever Novel by the Lead Manager in relation to such stock borrowing arrangements. â&#x20AC;&#x201C; 239 â&#x20AC;&#x201C;


STRUCTURE AND CONDITIONS OF THE SHARE OFFER STABILIZATION Stabilization is a practice used by underwriters in some markets to facilitate the distribution of securities. To stabilize, the underwriters may bid for, agree to purchase or actually purchase, the newly issued securities in the secondary market, during a specified period of time, to retard and, if possible, to prevent a decline in the market prices of the securities below the offer price. In Hong Kong, the price at which stabilization is effected is not permitted to exceed the offer price. In connection with the Share Offer, the Lead Manager, as stabilizing manager, or any person acting for it, on behalf of the Underwriters, may over-allocate Shares or effect transactions with a view to stabilizing or maintaining the market price of the Shares at a level higher than that which might otherwise prevail for a limited period after the issue date. Such transactions may be effected in all jurisdictions where it is permissible to do so, in each case in compliance with all applicable laws and regulatory requirements. However, there is no obligation on the Lead Manager, its affiliates or any person acting for it to do this. Such stabilization action, if commenced, will be conducted at the absolute discretion of the Lead Manager, its affiliates or any person acting for it and may be discontinued at any time, and must be brought to an end after a limited period. The number of Shares that may be over-allocated will not be greater than the maximum number of Shares which may be issued upon exercise of the Over-allotment Option, being 13,650,000 Shares, which is 15% of the Shares initially available under the Share Offer. Stabilization cannot be used to support the price of the Shares for longer than the stabilizing period which begins on the Listing Date and ends on the 30th day after the last day for lodging applications under the Public Offer (“Stabilization Period”). The Stabilization Period is expected to expire on 2 July 2008, after which an announcement will be made pursuant to section 9 and schedule 3 of the Securities and Futures (Price Stabilizing) Rules. After this date, when no further stabilizing action may be taken, demand for the Shares, and therefore the price, could fall. The Lead Manager, its affiliates or any person acting for it may take all or any of the following stabilizing actions in Hong Kong during the Stabilization Period: (i)

purchase, or agree to purchase, any of the Shares or offer or attempt to do so for the sole purpose of preventing or minimizing any reduction in the market price of the Shares;

(ii) in connection with any action described in paragraph (i) above; (A) (1) (2)

over-allocate the Shares; or sell or agree to sell the Shares so as to establish a short position in them,

for the sole purpose of preventing or minimizing any reduction in the market price of the Shares; – 240 –


STRUCTURE AND CONDITIONS OF THE SHARE OFFER (B) exercise the Over-allotment Option and purchase or subscribe for or agree to purchase or subscribe for the Shares in order to close out any position established under paragraph (A) above; (C) sell or agree to sell any of the Shares acquired by it in the course of the stabilizing action referred to in paragraph (i) above in order to liquidate any position that has been established by such action; or (D) offer or attempt to do anything as described in paragraphs (ii)(A)(2), (ii)(B) or (ii)(C) above. The Lead Manager, its affiliates or any person acting for it, may, in connection with the stabilizing action, maintain a long position in the Shares, and there is no certainty as to the extent to which and the time period for which it will maintain such a position. Investors should be warned of the possible impact of any liquidation of the long position by the Lead Manager, its affiliates or any person acting for it, which may include a decline in the market price of the Shares. The Lead Manager may, in connection with the stabilizing action, maintain a long position in the Shares. The size of the long position, and the time period for which the Lead Manager will maintain such a position during the Stabilization Period, are at the sole discretion of the Lead Manager and is uncertain. In the event that the Lead Manager liquidates this long position by making sales in the open market, this may lead to a decline in the market price of the Shares. Any stabilizing action taken by the Lead Manager, its affiliates or any person acting for it, may not necessarily result in the market price of the Shares staying at or above the Offer Price either during or after the Stabilization Period. Stabilizing bids or market purchases effected in the course of the stabilization action may be made at any price at or below the Offer Price and can therefore be done at a price below the price the investor has paid in acquiring the Shares. RE-ALLOCATION OF OFFER SHARES BETWEEN THE PUBLIC OFFER AND THE PLACING The allocation of Offer Shares between the Placing and the Public Offer is subject to re-allocation in the event of over-subscription under the Public Offer. If the number of Public Offer Shares validly applied for in the Public Offer: (a)

represents 15 times or more but less than 50 times of the number of Public Offer Shares initially available for subscription under the Public Offer, then 18,200,000 Shares will be re-allocated to the Public Offer from the Placing, so that an aggregate of 27,300,000 Public Offer Shares will be available under the Public Offer, representing approximately 30% of the Offer Shares initially available under the Share Offer; â&#x20AC;&#x201C; 241 â&#x20AC;&#x201C;


STRUCTURE AND CONDITIONS OF THE SHARE OFFER (b)

represents 50 times or more but less than 100 times of the number of Public Offer Shares initially available for subscription under the Public Offer, then 27,300,000 Shares will be re-allocated to the Public Offer from the Placing, so that an aggregate of 36,400,000 Public Offer Shares will be available under the Public Offer, representing approximately 40% of the Offer Shares initially available under the Share Offer;

(c)

represents 100 times or more of the number of Public Offer Shares initially available for subscription under the Public Offer, then 36,400,000 Shares will be re-allocated to the Public Offer from the Placing, so that an aggregate of 45,500,000 Public Offer Shares will be available under the Public Offer, representing 50% of the Offer Shares initially available under the Share Offer; and

(d)

in each of the above cases, the additional Offer Shares reallocated to the Public Offer will be correspondingly increased and allocated equally between pool A and pool B and the number of Offer Shares allocated to the Placing will be correspondingly reduced, subject to the exercise of the Over-allotment Option.

If the Public Offer is not fully subscribed, the Lead Manager (on behalf of the Underwriters) has the absolute discretion to re-allocate all or any of the unsubscribed Public Offer Shares to the Placing in such proportions as it deems appropriate to satisfy the demand under the Placing. If the Placing is not fully subscribed, the Lead Manager (on behalf of the Underwriters) has the authority to re-allocate all or any unsubscribed Placing Shares to the Public Offer, in such proportions as it deems appropriate provided that there is sufficient demand under the Public Offer to take up such unsubscribed Placing Shares. Details of any re-allocation of Offer Shares between the Public Offer and the Placing will be disclosed in the results announcement. DEALING Assuming that the Public Offer becomes unconditional at or before 8:00 a.m. in Hong Kong on Thursday, 12 June 2008, it is expected that dealings in the Shares on Stock Exchange will commence at 9:30 a.m. on Thursday, 12 June 2008.

â&#x20AC;&#x201C; 242 â&#x20AC;&#x201C;


HOW TO APPLY FOR THE PUBLIC OFFER SHARES There are three ways to make an application for the Public Offer Shares. You may either (i) use white or yellow Application Form; or (ii) apply online through the designated website of the White Form eIPO service provider, referred to herein as the “White Form eIPO” service (www.eipo.com.hk); or (iii) electronically instruct HKSCC to cause HKSCC Nominees to apply for the Public Offer Shares. Except where you are a nominee and provide the required information in your application, you or your joint applicant(s) may not make more than one application (whether individually or jointly) by applying on a WHITE and YELLOW Application Forms or applying online through White Form eIPO service or by giving electronic application instructions to HKSCC. WHO CAN APPLY FOR PUBLIC OFFER SHARES You can apply for the Public Offer Shares available for subscription by the public on a WHITE or YELLOW Application Form, or if you or any person(s) for whose benefit you are applying, are an individual, and: 1.

are 18 years of age or older;

2.

have a Hong Kong address;

3.

are outside the United States;

4.

are not a United States Person (as defined in Regulation S of the US Securities Act 1933, as amended); and

5.

are not a legal or natural person of the PRC.

If you wish to apply for Public Offer Shares online through the White Form eIPO service (www.eipo.com.hk), you must also: •

have a valid Hong Kong identity card number; and

be willing to provide a valid e-mail address and a contact telephone number.

You may only apply by means of the White Form eIPO service if you are an individual applicant. Corporations or joint applicants may not apply by means of White Form eIPO. If the applicant is a firm, the application must be in the names of the individual members, not the firm’s name. If the applicant is a body corporate, the Application Form must be signed by a duly authorized officer, who must state his or her representative capacity. – 243 –


HOW TO APPLY FOR THE PUBLIC OFFER SHARES If an application is made by a person duly authorized under a valid power of attorney, the Company, the Sponsor and the Lead Manager (or their respective agents or nominees) (each in its capacity as agent of the Company) may accept it at their discretion, and subject to any conditions they think fit, including production of evidence of the authority of the attorney. The number of joint applicants may not exceed four. The Company, the Sponsor and the Lead Manager (or their respective agents or nominees) (each in its capacity as agent of the Company) have full discretion to reject or accept any application, in full or in part, without assigning any reason. The Public Offer Shares are not available to existing beneficial owners of Shares, or Directors or chief executives of the Company or any of its subsidiaries, or their respective Associates; or connected persons (as defined in the Listing Rules) of the Company or persons who will become connected persons (as defined in the Listing Rules) immediately upon completion of the Share Offer. You may apply for Public Offer Shares under the Public Offer or indicate an interest for Placing Shares under the Placing, but may not do both. HOW TO APPLY BY USING A WHITE OR YELLOW APPLICATION FORM Which Application Form to Use 1.

WHITE Application Form

Use a WHITE Application Form if you want the Public Offer Shares to be issued in your own name. Instead of using a WHITE Application Form, you may apply for the Public Offer Shares by means of White Form eIPO by submitting applications online through the designated website at www.eipo.com.hk. Use White Form eIPO if you want the Shares issued in your own name. 2.

YELLOW Application Form

Use a YELLOW Application Form if you want the Public Offer Shares to be issued in the name of HKSCC Nominees Limited and deposited directly into CCASS for credit to your CCASS Investor Participant stock account or the stock account of your designated CCASS Participant. Instead of using a YELLOW Application Form, you may electronically instruct HKSCC via CCASS to cause HKSCC Nominees to apply for the Public Offer Shares on your behalf. Any Public Offer Shares allocated to you will be registered in the name of HKSCC Nominees and deposited directly into CCASS for credit to your CCASS Investor Participants stock account or your designated CCASS Participant’s stock account. You may not apply on a WHITE or YELLOW Application Form, give electronic application instruction to HKSCC and apply online through White Form eIPO service at the same time. – 244 –


HOW TO APPLY FOR THE PUBLIC OFFER SHARES Where to Collect the Application Forms 1.

You can collect a WHITE Application Form and a prospectus during normal business hours from 9:00 a.m. on Wednesday, 28 May 2008 until 12:00 noon on Monday, 2 June 2008 from: SBI E2-Capital Securities Limited 43/F, Jardine House One Connaught Place Central Hong Kong or CAF Securities Company Limited 13/F, Fairmont House 8 Cotton Tree Drive Central, Hong Kong or IBTS Asia (HK) Limited 1308B-10, Tower One, Lippo Centre 89 Queensway Hong Kong or China Everbright Securities (HK) Limited 36/F, Far East Finance Centre 16 Harcourt Road Hong Kong or First Shanghai Securities Limited 19/F, Wing On House 71 Des Voeux Road Central Hong Kong or Guoyuan Securities Brokerage (Hong Kong) Limited 18/F, Li Po Chun Chambers 189 Des Voeux Road Central Hong Kong

– 245 –


HOW TO APPLY FOR THE PUBLIC OFFER SHARES or any of the following branches of Standard Chartered Bank (Hong Kong) Limited:

Hong Kong Island

Branch Name

Address

Des Voeux Road Branch

Standard Chartered Bank Building, 4-4A, Des Voeux Road Central, Central G/F, Yee Wah Mansion, 38-40A Yee Wo Street, Causeway Bay North Point Centre, 284 King’s Road, North Point Shop B, G/F, 1/F & 2/F, 617-623 Nathan Road, Mongkok Basement, Shop B1, G/F Golden Crown Court, 66-70 Nathan Road, Tsimshatsui Shop G37-40, G/F, Hau Tak Shopping Centre East Wing, Hau Tak Estate, Tseung Kwan O

Causeway Bay Branch

North Point Centre Branch Kowloon

Mongkok Branch 68 Nathan Road Branch

New Territories

Tseung Kwan O Branch

or any of the following branches of Industrial and Commercial Bank of China (Asia) Limited:

Hong Kong Island

Kowloon

Branch Name

Address

Queen’s Road Central Branch Wanchai Branch Hung Hom Branch

122-126 Queen’s Road Central, Central 117-123 Hennessy Road, Wanchai Shop 2A, G/F, Hung Hom Shopping Mall, 2-34E Tak Man Street, Hung Hom Shop 1C & 1D, G/F., Austin Plaza, 83 Austin Road, Jordan Shop 4, G/F., Chung On Building, 297-313 Sha Tsui Road, Tsuen Wan Shop 22J, Level 3, Shatin Centre

Jordan Branch New Territories

Sha Tsui Road Branch

Shatin Branch

2.

You can collect a YELLOW Application Form and a prospectus during normal business hours from 9:00 a.m. on Wednesday, 28 May 2008 until 12:00 noon on Monday, 2 June 2008 from the Depository Counter of HKSCC at 2nd Floor, Vicwood Plaza, 199 Des Voeux Road Central, Hong Kong.

3.

Your stockbroker may have YELLOW Application Form and this prospectus available.

– 246 –


HOW TO APPLY FOR THE PUBLIC OFFER SHARES How to Complete the Applications Forms There are detailed instructions on each Application Form. You should read those instructions carefully. If you do not follow the instructions, your application may be rejected and returned by ordinary post together with the accompanying cheque(s) or banker’s cashier order(s) to you (or the first-named applicant in the case of joint applicants) at your own risk to the address stated in the Application Form. You should note that by signing the Application Form, you (and if you are joint applicants, each of you jointly and severally), for yourself or as agent or nominee and on behalf of each person for whom you act as agent or nominee, among other things: (i)

agree with the Company and each of the Shareholders to observe and comply with the Companies Ordinance, the Companies Law and the memorandum and articles of association of the Company;

(ii) agree with the Company and each of the Shareholders that the Shares are freely transferable by the holder thereof; (iii) confirm that you have received a copy of this prospectus, and have only relied on the information and representations in this prospectus and the Application Form in making your application and will not rely on any other information and/or representations or representation concerning the Company save as set out in any supplement to this prospectus and you agree that neither the Company, the Sponsor, the Lead Manager, the Underwriters, any other parties involved in the Share Offer nor any of their respective directors, officers, employees, partners, agents or advisors will have any liability for any such other information or representations; (iv) agree that the processing of your application, including the despatch of refund cheques (where applicable), may be done by the Company’s receiving banker and is not restricted to the bank at which your Application Form was lodged; (v)

agree (without prejudice to any other rights you may have) that once your application has been accepted, you may not rescind it because of any innocent misrepresentation and you may not revoke it, other than as provided for in this prospectus;

(vi) (if the application is made for your own benefit) warrant that the application is the only application which will be made, whether by yourself, by your agent or by any other person, for your benefit on a WHITE or YELLOW Application Form or by applying online through White Form eIPO service or by way of giving electronic application instructions to HKSCC via CCASS; (vii) undertake and confirm that you (if the application is made for your benefit), or the person(s) for whose benefit you have made the application, have not applied for or taken up, or indicated an interest for and will not apply for or take up or indicate an interest for, any of the Placing Shares and have not received or been placed or allocated and will not receive or be placed or allocated (including conditionally and/or provisionally) any Placing Shares under the Placing or otherwise participate in the Placing; – 247 –


HOW TO APPLY FOR THE PUBLIC OFFER SHARES (viii) (if the application is made by an agent on your behalf) warrant that you have validly and irrevocably conferred on your agent all necessary power and authority to make the application; (ix) (if you are an agent for another person) warrant that reasonable enquiries have been made of that other person that the application is the only application which will be made for the benefit of that other person on a WHITE or YELLOW Application Form or by applying online through White Form eIPO service or by way of giving electronic application instructions to HKSCC via CCASS, and that you are duly authorized to sign the Application Form as that other person’s agent; (x)

warrant the truth and accuracy of the information contained in your application;

(xi) agree to disclose to the Company, the Sponsor, the Lead Manager, the Underwriters, the registrars, the receiving bankers, and/or their respective advisors, agents or nominees, personal data and any information which they require about you or the person(s) for whose benefit you have made the application; (xii) confirm that you have read the terms and conditions and application procedures set out in this prospectus and the Application Forms and agree to be bound by them, and are aware of the restrictions of the Public Offer described in this prospectus; (xiii) instruct and authorize the Company, the Sponsor, the Lead Manager and the Underwriters (or their respective agents or nominees) each acting as an agent of the Company to do on your behalf all other things necessary to effect registration of any Public Offer Shares allotted to you in your name(s) or in the name of HKSCC Nominees, as the case may be, and otherwise to give effect to the arrangements described in this prospectus and the relevant Application Form; (xiv) undertake to sign all documents and to do all things necessary to enable you or HKSCC Nominees, as the case may be, to be registered as the holder of the Public Offer Shares allotted to you, and as required by the memorandum and articles of association of the Company; (xv) represent, warrant and undertake that you are not restricted by any applicable laws of Hong Kong or elsewhere from making this application, paying any application monies for, or being allotted or taking up any Public Offer Shares; and you understand that the Shares have not been and will not be registered under the US Securities Act 1933, as amended and you are not a US person (as defined in Regulation S of the US Securities Act 1933, as amended) or a person to or by whom the allotment of or application for the Public Offer Shares is made would require the Company to comply with any requirement under any law or regulation (whether or not having the force of law) of any territory outside Hong Kong;

– 248 –


HOW TO APPLY FOR THE PUBLIC OFFER SHARES (xvi) agree that your application, any acceptance of it and the resulting contract will be governed by and construed in accordance with the laws of Hong Kong; (xvii) undertake and agree to accept the Public Offer Shares applied for, or any lesser number allocated to you under the application; (xviii) authorize the Company to place your name(s) or HKSCC Nominees, as the case may be, on the register of members of the Company as the holders(s) of any Public Offer Shares allocated to you, and the Company and/or its agents to send any shares certificate(s) (where applicable) and/or any refund cheque (where applicable) to you or (in case of joint applicants) the first-named applicant in the Application Form by ordinary post at your own risk to the address stated on your Application Form (except that if you have applied for 1,000,000 Public Offer Shares or more and have indicated in your Application Form that you will collect your share certificates and refund cheques (if any) in person, you can collect your share certificate(s) and/or refund cheque (where applicable) in person from the Company’s Hong Kong branch share registrar, Computershare Hong Kong Investor Services Limited at Shops 1712-1716, 17th Floor, Hopewell Centre, 183 Queen’s Road East, Wanchai, Hong Kong between 9:00 a.m. and 1:00 p.m. on the date notified by the Company in the newspaper as the date of despatch of share certificate(s) and refund cheque. The date of despatch is expected to be on Tuesday, 10 June 2008; (xix) represent, warrant and undertake that the allotment of or application for the Public Offer Shares to you or by you or for whose benefit the application is made would not require the Company to comply with any requirements under any law or regulation (whether or not having the force of law) of any territory outside Hong Kong; (xx) understand that these declarations and representations will be relied upon by the Company, the Sponsor and the Lead Manager in deciding whether or not to allocate any Public Offer Shares in response to your application and that you may be prosecuted for making a false declaration; (xxi) if the laws of any place outside Hong Kong are applicable to your application, agree and warrant that you have complied with all such laws and none of the Company, the Sponsor, the Lead Manager, the Underwriters, the other parties involved in the Share Offer nor any of their respective directors, employees, partners, agents, officers or advisors will infringe any laws outside Hong Kong as a result of the acceptance of your offer to purchase, or any action arising from your rights and obligations under the terms and conditions contained in this prospectus; and (xxii) authorize the Company to enter into a contract on your behalf with each of the Directors and officers of the Company whereby each such Director and officer undertakes to observe and comply with his or her obligations to Shareholders as stipulated in the memorandum and the articles of association of the Company.

– 249 –


HOW TO APPLY FOR THE PUBLIC OFFER SHARES In order for the YELLOW Application Forms to be valid, you, as an applicant(s), must complete the Application Form as indicated below and sign on the first page of the Application Form. Only written signatures will be accepted: •

If you are applying through a designated CCASS Participant (other than a CCASS Investor Participant): •

the designated CCASS Participant must endorse the form with its company chop (bearing its company name) and insert its participant I.D. in the appropriate box in the Application Form.

If you are applying as an individual CCASS Investor Participant: •

the Application Form must contain your NAME and Hong Kong identity card number;

your participant I.D. must be inserted in the appropriate box in the Application Form.

If you are applying as a joint individual CCASS Investor Participant: •

the Application Form must contain all joint investor participants’ NAMES and the Hong Kong identity card numbers of all joint investor participants;

your participant I.D. must be inserted in the appropriate box in the Application Form.

If you applying as a corporate CCASS Investor Participant: •

the Application Form must contain your company name and Hong Kong business registration certificate number;

your participant I.D. and your company chop (bearing your company name) must be inserted in the appropriate box.

Incorrect or omission of details of the CCASS Participant (including Participant I.D. and/or company chop bearing its company name) or other similar matters may render the application invalid.

Nominees who wish to submit separate applications in their names on behalf of different beneficial owners are requested to designate on each Application Form in the box marked “For nominees” account numbers or other identification code for each beneficial owner or, in the case of joint beneficial owners, for each such beneficial owner. – 250 –


HOW TO APPLY FOR THE PUBLIC OFFER SHARES If you apply for the Public Offer Shares using a YELLOW application form, in addition to the confirmations and agreements referred to above, you (and if you are join applicants, each of you jointly and severally) are deemed to do the following: (i)

agree that any Public Offer Shares allotted to you shall be issued in the name of HKSCC Nominees and deposited directly into CCASS operated by HKSCC for credit to your CCASS Investor Participant’s stock account or the stock account of your designated CCASS Participant, in accordance with your election on the Application Form;

(ii) agree that each of HKSCC and HKSCC Nominees reserves the right at its absolute discretion (a) not to accept any or part of the Public Offer Shares allotted to you to be issued in the name of HKSCC Nominees or not to accept such Public Offer Shares for deposit into CCASS; (b) to cause such Public Offer Shares to be withdrawn from CCASS and transferred into your name (or, if you are joint applicant, to the name of the first-named applicant) at your own risk and costs; (c) to cause such allotted Public Offer Shares to be issued in your name (or, if you are a joint applicant, in the name of the first-named applicant) and in such a case, to post the share certificates for such allotted Public Offer Shares at your own risk to the address on the Application Form by ordinary post or to make available the same for your collection; (iii) agree that each of HKSCC and HKSCC Nominees may adjust the number of Public Offer Shares allocated to you and issued in the name of HKSCC Nominees; (iv) agree that neither HKSCC nor HKSCC Nominees shall have any liability for the information and representations not so contained in this prospectus and the Application Form; and (v)

agree that neither HKSCC nor HKSCC Nominees shall be liable to you in any way.

HOW TO APPLY BY USING WHITE FORM eIPO (a)

If you are an individual and meet the criteria set out above in “WHO CAN APPLY FOR PUBLIC OFFER SHARES”, you may apply through White Form eIPO by submitting an application through designated website at www.eipo.com.hk. If you apply through White Form eIPO the Shares will be issued in your own name.

(b)

Detailed instructions for application through the White Form eIPO service are set out on the designated website at www.eipo.com.hk. You should read these instructions carefully. If you do not know the instructions, your application may be rejected by the designated White Form eIPO Service Provider and may not be submitted to the Company.

– 251 –


HOW TO APPLY FOR THE PUBLIC OFFER SHARES (c)

In addition to the terms and conditions set out in this Prospectus, the designated White Form eIPO Service Provider may impose additional terms and conditions upon you for the use of the White Form eIPO service. Such terms and conditions are set out on the designated website at www.eipo.com.hk. You will be required to read, understand and agree to such terms and conditions in full prior to making any application.

(d)

By submitting an application to the designated White Form eIPO Service Provider through the White Form eIPO service (www.eipo.com.hk), you are deemed to have authorized the designated White Form eIPO Service Provider to transfer the details of your application to, among others, the Company and the Hong Kong branch share registrar and transfer office.

(e)

You may submit an application through the White Form eIPO service in respect of a minimum of 2,000 Public Offer Shares. Each electronic application instruction in respect of more than 2,000 Public Offer Shares must be in one of the numbers set out in the table in the Application Forms, or as otherwise specified on the designated website at www.eipo.com.hk.

(f)

You may submit your application to the designated White Form eIPO Service Provider through the designated website at www.eipo.com.hk from 9:00 a.m. on Wednesday, 28 May 2008 until 11:30 a.m. on Monday, 2 June 2008 or such later time as described under the sub-paragraph headed “Effect of Bad Weather on the Last Application Day” below (24 hours daily, except on the last application day). The latest time for completing full payment of application monies in respect of such applications will be 12:00 noon on Monday, 2 June 2008, the last application day, or, if the application lists are not open on that day, then by the time and date stated in the sub-paragraph headed “Effect of Bad Weather on the Last Application Day” below.

(g)

You will not be permitted to submit your application to the designated White Form eIPO Service Provider through the designated website at www.eipo.com.hk after 11:30 a.m. on the last day for submitting applications. If you have already submitted your application and obtained an application reference number from the website prior to 11:30 a.m., you will be permitted to continue the application process (by completing payment of application monies) until 12:00 noon on the last day for submitting applications, when the application lists close. If you do not make complete payment of the application monies (including any related fees) on or before 12:00 noon on Monday, 2 June 2008, or such later time as described under the section headed “Effect of Bad Weather on the Last Application Day”, the designated White Form eIPO Service Provider will reject your application and your application monies will be returned to you in the manner described in the designated website at www.eipo.com.hk.

– 252 –


HOW TO APPLY FOR THE PUBLIC OFFER SHARES Effect of Bad Weather on the Last Application Day The latest time for submitting an application to the designated White Form eIPO Service Provider through the White Form eIPO service will be 11:30 a.m., and the latest time for completing full payment of application monies in respect of such applications will be 12:00 noon on Monday, 2 June 2008, the last application day. If: •

a tropical cyclone warning signal number 8 or above; or

a “black” rainstorm warning

is in force in Hong Kong at any time between 9:00 a.m. and 12:00 noon on Monday, 2 June 2008, the last application day will be postponed to the next Business Day which does not have either of those warning signals in force in Hong Kong at any time between 9:00 a.m. and 12:00 noon on such day. (h)

Warning: The application for Public Offer Shares through the White Form eIPO service (www.eipo.com.hk) is only a facility provided by the designated White Form eIPO Service Provider to public investors. The Company, its Directors, the Sponsor, the Lead Manager and the Underwriters take no responsibility for such applications, and provide no assurance that applications through the White Form eIPO service (www.eipo.com.hk) will be submitted to the Company or that you will be allotted any Public Offer Shares.

Please note that Internet services may have capacity limitations and/or be subject to service interruptions from time to time. To ensure that you can submit your applications through the White Form eIPO service (www.eipo.com.hk), you are advised not to wait until the last day for submitting applications in the Public Offer to submit your electronic application instructions. In the event that you have problems connecting to the designated website for the White Form eIPO service (www.eipo.com.hk), you should submit a white Application Form. However, once you have submitted electronic application instructions and completed payment in full using the application reference number provided to you on the designated website, you will be deemed to have made an actual application and should not submit a white Application Form. See “How many applications you may make by means of White Form eIPO” below. Additional information For the purposes of allocating Public Offer Shares, each applicant giving electronic application instructions through White Form eIPO service to the White Form eIPO Service Provider through the designated website at www.eipo.com.hk will be treated as an applicant.

– 253 –


HOW TO APPLY FOR THE PUBLIC OFFER SHARES If your payment of application monies is insufficient, or in excess of the required amount, having regard to the number of Public Offer Shares for which you have applied, or if your application is otherwise rejected by the designated White Form eIPO service provider, the designated White Form eIPO Service Provider may adopt alternative arrangements for the refund of monies to you. Please refer to the additional information provided by the designated White Form eIPO service provider on the designated website at www.eipo.com.hk. Otherwise, any monies payable to you due to a refund for any of the reasons set out below in the paragraph entitled “Refund of Your Application Monies”. How many applications you may make by means of White Form eIPO If you apply by means of White Form eIPO, once you complete payment in respect of any electronic application instruction given by you or for your benefit to the designated White Form eIPO Service Provider to make an application for Public Offer Shares, an actual application shall be deemed to have been made. For the avoidance of doubt, giving an electronic application instruction under White Form eIPO more than once and obtaining different application reference numbers without effecting full payment in respect of a particular reference number will not constitute an actual application. If you are suspected of submitting more than one application through the White Form eIPO service by giving electronic application instructions through the designated website at www.eipo.com.hk and completing payment in respect of such electronic application instructions, or of submitting one application through the White Form eIPO service and one or more applications by any other means, all of your applications are liable to be rejected. HOW TO APPLY BY GIVING ELECTRONIC APPLICATION INSTRUCTIONS TO HKSCC VIA CCASS General CCASS Participants may give electronic application instructions to HKSCC to apply for the Public Offer Shares and to arrange payment of the monies due on application and payment of refunds. This will be in accordance with their participant agreements with HKSCC and the General Rules of CCASS and the CCASS Operational Procedures. If you are a CCASS Investor Participant, you may give electronic application instructions through the CCASS Phone System by calling 2979-7888 or through the CCASS Internet System (https://ip.ccass.com) (using the procedures contained in HKSCC’s “An Operating Guide for Investor Participants” in effect from time to time).

– 254 –


HOW TO APPLY FOR THE PUBLIC OFFER SHARES HKSCC can also input electronic application instructions for you if you go to: Hong Kong Securities Clearing Company Limited Customer Service Center 2/F, Vicwood Plaza 199 Des Voeux Road Central Hong Kong and complete an input request form. Copies of prospectus are available for collection from the above address. If you are not a CCASS Investor Participant, you may instruct your broker or custodian who is a CCASS Clearing Participant or a CCASS Custodian Participant, respectively to give electronic application instructions via CCASS terminals to apply for the Public Offer Shares on your behalf. You are deemed to have authorized HKSCC and/or HKSCC Nominees to transfer the details of your application, whether submitted by you or through your broker or custodian, to the Company and Hong Kong branch share registrar and transfer office. The subscription of the Public Offer Shares by giving electronic application instructions is only a facility provided to CCASS Participants. The Company, the Sponsor, the Lead Manager and the Underwriters take no responsibility for the application and provide no assurance that any CCASS Participants will be allotted any Public Offer Shares. To ensure that CCASS Investor Participants can give their electronic application instructions to HKSCC through the CCASS Phone System or CCASS Internet System, CCASS Investor Participants are advised not to wait until the last moment to input instructions. In the event that CCASS Investor Participants have problems in connecting to the CCASS Phone System or CCASS Internet System for submission of electronic application instructions, they should either (i) submit the WHITE or YELLOW Application Form or (ii) go to HKSCC’s Customer Service Centre to complete an application instruction input request form before 12:00 on Monday, 2 June 2008. Giving Electronic Application Instructions to HKSCC to Apply for the Public Offer Shares by HKSCC Nominees On Your Behalf Where a WHITE Application Form is signed by HKSCC Nominees on behalf of persons who have given electronic application instructions to apply for the Public Offer Shares: (i)

HKSCC Nominees is only acting as a nominee for those persons and shall not be liable for any breach of the terms and conditions of the WHITE Application Form or this prospectus; – 255 –


HOW TO APPLY FOR THE PUBLIC OFFER SHARES (ii) HKSCC Nominees does the following things on behalf of each such person: –

agrees that the Public Offer Shares to be allotted shall be issued in the name of HKSCC Nominees and deposited directly into CCASS for the credit of the stock account of the CCASS Participant who has inputted electronic application instructions on that person’s behalf or that person’s CCASS Investor Participant stock account;

undertakes and agrees to accept the Public Offer Shares in respect of which that person has given electronic application instructions or any lesser number;

undertakes and confirms that that person has not applied for or taken up any Shares under the Placing nor otherwise participated in the Placing;

if the electronic application instructions are given for that person’s own benefit declares that only one set of electronic application instructions has been given for that person’s benefit;

if that person is an agent for another person, declares that that person has only given one set of electronic application instructions for the benefit of that other person and that that person is duly authorized to give those instructions as that other person’s agent;

understands that the above declaration will be relied upon by the Company, the Directors, the Sponsor, and the Lead Manager (on behalf of the Underwriters) in deciding whether or not to make any allotment of the Public Offer Shares in respect of the electronic application instructions given by that person and that person may be prosecuted if he makes a false declaration;

authorizes the Company to place the name of HKSCC Nominees on the register of members as the holder of the Public Offer Shares allotted in respect of that person’s electronic application instructions and to send share certificate(s) and/or refund monies (where applicable) in accordance with the arrangements separately agreed between the Company and HKSCC;

confirms that that person has read the terms and conditions and application procedures set out in this prospectus and agrees to be bound by them;

confirms that that person has only relied on the information and representations in this prospectus in giving that person’s electronic application instructions or instructing that person’s broker or custodian to give electronic application instructions on that person’s behalf save as set out in any supplement to this prospectus; – 256 –


HOW TO APPLY FOR THE PUBLIC OFFER SHARES –

agrees that the Company, the Sponsor, the Lead Manager (on behalf of the Underwriters), the respective directors, officers, employees, partners, agents, advisors and any other parties involved in the Placing and Public Offer are not liable for the information and representations not contained in this prospectus;

agrees to disclose that person’s personal data to the Company, the Sponsor, the Lead Manager (on behalf of the Underwriters) and/or its respective agents and any information which they may require about that person;

agrees (without prejudice to any other rights which that person may have) that once the application of HKSCC Nominees has been accepted, the application cannot be rescinded for innocent misrepresentation;

agrees that any application made by HKSCC Nominees on behalf of that person pursuant to electronic application instructions given by that person is irrevocable before the fifth day after the time of the opening of the application lists (excluding for this purpose any day which is a Saturday, Sunday or public holiday in Hong Kong), such agreement to take effect as a collateral contract with us and to become binding when that person gives the instructions and such collateral contract to be in consideration of the Company agreeing that it will not offer any Public Offer Shares to any person before the fifth day after the time of the opening of the application lists (excluding for this purpose any day which is a Saturday, Sunday or public holiday in Hong Kong), except by means of one of the procedures referred to in this prospectus. However, HKSCC Nominees may revoke the application before the fifth day after the time of the opening of the application lists (excluding for this purpose any day which is a Saturday, Sunday or public holiday in Hong Kong) if a person responsible for this prospectus under Section 40 of the Hong Kong Companies Ordinance gives a public notice under that section which excludes or limits the responsibility of that person for this prospectus;

agrees that once the application of HKSCC Nominees is accepted, neither that application nor that person’s electronic application instructions can be revoked, and that acceptance of that application will be evidenced by the announcement of the results of the Public Offer published by the Company;

agrees to the arrangements, undertakings and warranties specified in the participant agreement between that person and HKSCC, read with the General Rules of CCASS and the CCASS Operational Procedures, in respect of the giving of electronic application instructions relating to the Public Offer Shares;

– 257 –


HOW TO APPLY FOR THE PUBLIC OFFER SHARES –

agrees with the Company, for itself and for the benefit of each of its Shareholders (and so that the Company will be deemed by the acceptance in whole or in part of the application by HKSCC Nominees to have agreed, for itself and on behalf of each of its Shareholders, with each CCASS Participant giving electronic application instructions) to observe and comply with the Companies Law, the Companies Ordinance and the memorandum and articles of association of the Company; and

agrees that that person’s application, any acceptance of it and the resulting contract will be governed by and construed in accordance with the laws of Hong Kong.

Effect of Giving Electronic Application Instructions to HKSCC via CCASS By giving electronic application instructions to HKSCC or instructing your broker or custodian who is a CCASS Clearing Participant or a CCASS Custodian Participant to give such instructions to HKSCC, you (and, if you are joint applicants, each of you jointly and severally) are deemed to have done the following things. Neither HKSCC nor HKSCC Nominees shall be liable to the Company or any other person in respect of the things mentioned below: –

instruct and authorize HKSCC to cause HKSCC Nominees (acting as nominee for the relevant CCASS Participants) to apply for the Public Offer Shares on your behalf;

instruct and authorize HKSCC to arrange payment of the maximum indicative Offer Price, brokerage, SFC transaction levy and the Stock Exchange trading fee by debiting your designated bank account and, in the case of a wholly or partially unsuccessful application and/or if the Offer Price is less than the maximum indicative Offer Price, refund of the application monies, in each case including brokerage, SFC transaction levy and the Stock Exchange trading fee, by crediting your designated bank account; and

instruct and authorize HKSCC to cause HKSCC Nominees to do on your behalf all the things which it is stated to do on your behalf in the WHITE Application Form.

Multiple Applications If you are suspected of having made multiple applications or if more than one application is made for your benefit, the number of the Public Offer Shares applied for by HKSCC Nominees will be automatically reduced by the number of the Public Offer Shares in respect of which you have given such instructions and/or in respect of which such instructions have been given for your benefit. Any electronic application instructions to make an application for the Public Offer Shares given by you or for your benefit to HKSCC shall be deemed to be an actual application for the purposes of considering whether multiple applications have been made. – 258 –


HOW TO APPLY FOR THE PUBLIC OFFER SHARES Minimum Subscription Amount and Permitted Multiples You may give or cause your broker or custodian who is a CCASS Clearing Participant or a CCASS Custodian Participant to give electronic application instructions in respect of a minimum of 2,000 Public Offer Shares. Such instructions in respect of more than 2,000 Public Offer Shares must be in one of the numbers set out in the table in the WHITE and YELLOW Application Forms. No application for any other number of Public Offer Shares will be considered and any such application is liable to be rejected. Time for Inputting Electronic Application Instructions CCASS Clearing/Custodian Participants can input electronic application instructions at the following times on the following dates: Wednesday, 28 May Thursday, 29 May Friday, 30 May Saturday, 31 May Monday, 2 June

2008 2008 2008 2008 2008

– – – – –

9:00 8:00 8:00 8:00 8:00

a.m. to 8:30 p.m.1 a.m. to 8:30 p.m.1 a.m. to 8:30 p.m.1 a.m. to 1:00 p.m.1 a.m.1 to 12:00 noon

Note: 1.

These times are subject to change as HKSCC may determine from time to time with prior notification to CCASS Clearing/Custodian Participants.

CCASS Investor Participants can input electronic application instructions from 9:00 a.m. on Wednesday, 28 May 2008 until 12:00 noon on Monday, 2 June 2008 (24 hours daily, except the last application day). Effect of Bad Weather on the Opening of the Application Lists The latest time for inputting your electronic application instructions will be 12:00 noon on Monday, 2 June 2008, the last application day. If: –

a tropical cyclone warning signal number 8 or above; or

a “black” rainstorm warning signal

is in force in Hong Kong at any time between 9:00 a.m. and 12:00 noon on Monday, 2 June 2008, the last application day will be postponed to the next Business Day which does not have either of those warning signals in force in Hong Kong at any time between 9:00 a.m. and 12:00 noon on such day.

– 259 –


HOW TO APPLY FOR THE PUBLIC OFFER SHARES Section 40 of the Hong Kong Companies Ordinance For the avoidance of doubt, the Company and all other parties involved in the preparation of this prospectus acknowledge that each CCASS Participant who gives or causes to give electronic application instructions is a person who may be entitled to compensation under Section 40 of the Hong Kong Companies Ordinance. Personal Data The section of the Application Form entitled “Personal Data” applies to any personal data held by us and our share registrar about you in the same way as it applies to personal data about applicants other than HKSCC Nominees. Warning The subscription of the Public Offer Shares by giving electronic application instructions to HKSCC is only a facility provided to CCASS Participants. The Company, the Directors, the Sponsor and the Lead Manager (on behalf of the Underwriters) take no responsibility for the application and provide no assurance that any CCASS Participant will be allotted any Public Offer Shares. To ensure that CCASS Investor Participants can give their electronic application instructions to HKSCC through the CCASS Phone System or the CCASS Internet System, CCASS Investor Participants are advised not to wait until the last minute to input their electronic application instructions to the systems. In the event that CCASS Investor Participants have problems connecting to the CCASS Phone System or the CCASS Internet System to submit their electronic application instructions, they should either: (i) submit a WHITE or YELLOW Application Form; or (ii) go to HKSCC’s Customer Service Center to complete an input request form for electronic application instructions before 12:00 noon on 2 June 2008. HOW MANY APPLICATIONS MAY YOU MAKE There is only one situation where you may make more than one application for the Public Offer Shares: If you are a nominee, in which case you may give electronic application instructions to HKSCC (if you are a CCASS Participant) and lodge more than one WHITE and YELLOW Application Form in your own name if each application is made on behalf of different beneficial owners. In the box on the Application Form marked “For nominees” you must include: •

an account number; or

some other identification code, – 260 –


HOW TO APPLY FOR THE PUBLIC OFFER SHARES for each beneficial owner or, in the case of joint beneficial owners, for each such beneficial owner. If you do not include this information, the application will be treated as being for your benefit. Otherwise, multiple applications are not allowed. It will be a term and condition of all applications that by completing and delivering an Application Form, you: •

(if the application is made for your own benefit) warrant that this is the only application which has been or will be made for your benefit on a WHITE or YELLOW Application Form or by giving electronic application instructions to HKSCC via CCASS or to the designated White Form eIPO Service Provider through White Form eIPO service (www.eipo.com.hk); or

(if you are an agent for another person) warrant that reasonable enquiries have been made of that other person that this is the only application which has been or will be made for the benefit of that other person on a WHITE or YELLOW Application Form or by giving electronic application instructions to HKSCC via CCASS or to the designated White Form eIPO Service Provider through White Form eIPO service (www.eipo.com.hk) and that you are duly authorized to sign the Application Form as that other person’s agent.

Except where you are a nominee and provide the information required to be provided in your application, all of your applications will be rejected as multiple applications if you, or you and your joint applicant(s) together: •

make more than one application (whether individually or jointly) on a WHITE or YELLOW Application Form or by giving electronic application instructions to HKSCC or to the designated White Form eIPO Service Provider through White Form eIPO service (www.eipo.com.hk); or

apply both (whether individually or jointly) on one WHITE Application Form and one YELLOW Application Form or on one WHITE or YELLOW Application Form and give electronic application instructions to HKSCC or to the designated White Form eIPO Service Provider through White Form eIPO service (www.eipo.com.hk); or

apply (whether individually or jointly) on one WHITE or YELLOW Application Form or by giving electronic application instructions to HKSCC or to the designated White Form eIPO Service Provider through White Form eIPO service (www.eipo.com.hk) for more than 4,550,000 Shares, being 50% of the Shares initially being offered for public subscription under the Public Offer, as more particularly described in the section entitled “Structure and conditions of the Share Offer – Public Offer”; or – 261 –


HOW TO APPLY FOR THE PUBLIC OFFER SHARES •

have applied for or taken up, or indicated an interest for, or have been or will be placed or allocated (including conditionally and/or provisionally) Offer Shares under the Placing or otherwise participate in the Placing.

All of your applications will also be rejected as multiple applications if more than one application on a WHITE or YELLOW Application Form or by giving electronic application instructions to HKSCC or to the designated White Form eIPO Service Provider through White Form eIPO service (www.eipo.com.hk) is made for your benefit (including the part of the application made by HKSCC Nominees acting on electronic application instructions). If an application is made by an unlisted company and: •

the principal business of that company is dealing in securities; and

you exercise statutory control over that company,

then the application will be treated as being for your benefit or for the benefit of all joint applicants. Unlisted company means a company with no equity securities listed on the Stock Exchange. Statutory control in relation to a company means you: •

control the composition of the board of directors of that company; or

control more than half of the voting power of that company; or

hold more than half of the issued share capital of that company (not counting any part of it which carries no right to participate beyond a specified amount in a distribution of either profits or capital).

HOW MUCH ARE THE PUBLIC OFFER SHARES The Offer Price of the Public Offer Shares will not be more than HK$2.38 and is expected to be not less than HK$1.66 per Public Offer Share. Based on the maximum Offer Price of HK$2.38 per Public Offer Share, plus 1% brokerage fee, 0.004% SFC transaction levy and 0.005% Stock Exchange trading fee, one board lot of 2,000 Public Offer Shares will amount to a total of HK$4,808.03. The Application Forms have tables showing the exact amount payable for multiples of the Public Offer Shares. The Offer Price is expected to be determined by the Company (for itself and on behalf of the Selling Shareholder) and the Lead Manager (on behalf of the Underwriters) on or before the Price Determination Date. – 262 –


HOW TO APPLY FOR THE PUBLIC OFFER SHARES You must pay the maximum Offer Price, the brokerage, the SFC transaction levy and the Stock Exchange trading fee in full when you apply for the Public Offer Shares. Your payment must be by cheque or banker’s cashier order and must comply with the terms of the Application Forms. Your cheque or banker’s cashier order will not be presented for payment before 12:00 noon on Monday, 2 June 2008. If your application is successful, brokerage will be paid to participants of the Stock Exchange, the transaction levy and the Stock Exchange trading fee will be paid to the Stock Exchange (in the case of the SFC transaction levy, collected by the Stock Exchange on behalf of the SFC). If the Offer Price as finally determined is less than HK$2.38 per Offer Share, appropriate refund payments (including brokerage, the SFC transaction levy and the Stock Exchange trading fee attributable to the surplus application monies) will be made to successful applicants, without interest. REFUND OF YOUR APPLICATION MONIES If you do not receive any Public Offer Shares for any of, but not limited to, the reason set out in the paragraph below headed “Circumstances in which you will not be allocated Public Offer Shares”, the Company will refund your application monies, including brokerage of 1%, SFC transaction levy of 0.004% and the Stock Exchange trading fee of 0.005%. No interest will be paid thereon. All interest accrued on such monies prior to the date of despatch of refund cheques will be retained for the benefit of the Company. If your application is accepted only in part, the Company will refund the appropriate portion of your application monies, including the related brokerage of 1%, SFC transaction levy of 0.004% and the Stock Exchange trading fee of 0.005%, without interest. All interest accrued on such monies prior to the date of despatch of refund cheques will be retained for the benefit of the Company. If the Offer Price as finally determined is less than HK$2.38 per Offer Share, appropriate refund payments, including the brokerage of 1%, SFC transaction levy of 0.004% and the Stock Exchange trading fee of 0.005% attributable to the surplus application monies will be made to successful applicants, without interest. All interest accrued on such monies prior to the date of despatch of refund cheques will be retained for the benefit of the Company. Details of the procedure for refund are set out below in the paragraph headed “Collection/Posting of Share Certificates/Refund Cheques and Deposit of Share Certificates into CCASS”. All refunds will be made by cheque(s) crossed “Account Payee Only”, made out to you, or, if you are joint applicants, to the first-named applicant on your Application Form. Part of your Hong Kong identity card number/passport number or, if you are joint applicants, part of the Hong Kong identity card number/passport number of the first-named applicant, provided by you may be printed on your refund cheque(s), if any. Such data would also be transferred to a third party for refund purpose. Your banker may require verification of your Hong Kong identity card number/passport number before encashment of your refund cheque(s), if any. Inaccurate completion of your Hong Kong identity card number/passport number in the Application Form may lead to delay in encashment of or may invalidate your refund cheque(s), if any. – 263 –


HOW TO APPLY FOR THE PUBLIC OFFER SHARES In a contingency situation involving a substantial over-subscription, at the discretion of the Company and the Lead Manager, cheques for applications for certain small denominations of Public Offer Shares on Application Forms (apart from successful applications) may not be cleared. Refund of your application monies (if any) will be made on Tuesday, 10 June 2008 in accordance with the various arrangements as described in this section. MEMBERS OF THE PUBLIC – TIME FOR APPLYING FOR PUBLIC OFFER SHARES 1.

WHITE or YELLOW Application Forms

Completed WHITE or YELLOW Application Forms, with payment attached, must be lodged by 12:00 noon on Monday, 2 June 2008, or, if the application lists are not open on that day, then by 12:00 noon on the day on which the lists are open. Your completed Application Form, with payment attached, should be deposited in the special collection boxes provided at any of the branches of Standard Chartered Bank (Hong Kong) Limited or Industrial and Commercial Bank of China (Asia) Limited listed under the paragraph headed “Where to collect the Application Forms” of this section at the following times: Wednesday, 28 May Thursday, 29 May Friday, 30 May Saturday, 31 May Monday, 2 June 2.

2008 2008 2008 2008 2008

– – – – –

9:00 9:00 9:00 9:00 9:00

a.m. a.m. a.m. a.m. a.m.

to to to to to

5:00 p.m. 5:00 p.m. 5:00 p.m. 1:00 p.m. 12:00 noon

Application lists

The application lists will open from 11:45 a.m. to 12:00 noon on Monday, 2 June 2008, except as provided in the paragraph headed “Effect of bad weather on the opening of the application lists” below. No proceedings will be taken on applications for the Public Offer Shares and no allotment of any such Shares will be made until after the closing of the application lists. EFFECT OF BAD WEATHER ON THE OPENING OF THE APPLICATION LISTS The application lists will not open if there is: •

a tropical cyclone warning signal number 8 or above; or

a “black” rainstorm warning signal – 264 –


HOW TO APPLY FOR THE PUBLIC OFFER SHARES in force in Hong Kong at any time between 9:00 a.m. and 12:00 noon on Monday, 2 June 2008. Instead they will open between 11:45 a.m. and 12:00 noon on the next Business Day which does not have either of those warnings in force at any time between 9:00 a.m. and 12:00 noon in Hong Kong. PUBLICATION OF RESULTS The Company expects to release the level of indication of interests in the Placing, basis of allotment and results of applications of the Public Offer on Tuesday, 10 June 2008 in South China Morning Post (in English) and Hong Kong Economic Times (in Chinese) and the website of the Stock Exchange at www.hkex.com.hk. The results of allocations and the Hong Kong identity card/passport/Hong Kong business registration certificate numbers of successful applicants under the Public Offer will be available at the times and date and in the manner specified below: •

Results of allocations for the Public Offer can be found in the announcement to be posted on the website of the Stock Exchange at www.hkex.com.hk by no later than 8:00 a.m. on Tuesday, 10 June 2008;

Results of allocations for the Public Offer will be available from the Company’s designated results of allocations website at www.iporesults.com.hk on a 24-hour basis from 8:00 a.m. on Tuesday, 10 June 2008 to 12:00 midnight on Monday, 16 June 2008. Search by ID function will be available on Public Offer results of allocations website at www.iporesults.com.hk. The user will be required to key in the Hong Kong identity card/passport/Hong Kong business registration certificate number provided in his/her/its application form to search for his/her/its own allocation result;

Results of allocations will be available from the Public Offer allocation results telephone enquiry line. Applicants may find out whether or not their applications have been successful and the number of Public Offer Shares allocated to them, if any, by calling 2862 8669 between 9:00 a.m. and 10:00 p.m. from Tuesday, 10 June 2008 to Friday, 13 June 2008;

Special allocation results booklets setting out the results of allocations will be available for inspection during opening hours of individual branches and subbranches from Tuesday, 10 June 2008 to Thursday, 12 June 2008 at all the receiving bank branches and sub-branches at the addresses set out in the section headed “How to Apply for the Public Offer Shares – Where to Collect the Application Forms”.

– 265 –


HOW TO APPLY FOR THE PUBLIC OFFER SHARES CIRCUMSTANCES IN WHICH YOU WILL NOT BE ALLOCATED PUBLIC OFFER SHARES Full details of the circumstances in which you will not be allocated the Public Offer Shares are set out in the notes attached to the relevant Application Forms (whether you are making your application by an Application Form or electronically instructing HKSCC to cause HKSCC Nominees to apply on your behalf), and you should read them carefully. You should note in particular the following situations in which Shares will not be allocated to you: 1.

If your application is revoked:

By completing and submitting an Application Form or giving an electronic application instruction to HKSCC, you agree that you cannot revoke your application or the application made by HKSCC Nominees on your behalf before the end of the fifth day after the time of the opening of the application lists (excluding for this purpose any day which is a Saturday, Sunday, or public holiday in Hong Kong) unless a person responsible for this prospectus under section 40 of the Companies Ordinance (as applied by section 342E of the Companies Ordinance) gives a public notice under that section which excludes or limits the responsibility of that person for this prospectus. This agreement will take effect as a collateral contract with the Company, and will become binding when you lodge your Application Form or giving an electronic application instruction to HKSCC and an application has been made by HKSCC Nominees on your behalf accordingly. This collateral contract will be in consideration of the Company agreeing that it will not offer any Public Offer Shares to any person before the end of the fifth business day after the time of opening of the application lists except by means of one of the procedures referred to in this prospectus. If any supplement to the Prospectus is issued, applicant(s) who has/have already submitted application(s) may or may not (depending on the information contained in the supplement) be notified that he/she/they can withdraw his/her/their application(s). If applicant(s) has/have not been so notified, or if applicant(s) has/have been notified but has/have not withdrawn his/her/their application(s) in accordance with the procedure to be notified, all applications that have been submitted will remain valid and may be accepted. Subject to the above, an application once made is irrevocable and applicant(s) shall be deemed to have applied on the basis of the Prospectus as supplemented. If your application or the application made by HKSCC Nominees on your behalf has been accepted, it cannot be revoked. Acceptance of application which are not rejected will be constituted by notification in the announcement of the results of allocation and, where such basis of allocation is subject to certain conditions or provides for allocation by ballot, such acceptance will be subject to satisfaction of such conditions or the results of such ballot, respectively.

â&#x20AC;&#x201C; 266 â&#x20AC;&#x201C;


HOW TO APPLY FOR THE PUBLIC OFFER SHARES 2.

If the allotment of Public Offer Shares is void:

The allotment of Public Offer Shares to you or to HKSCC Nominees (if you give electronic application instructions or apply by a YELLOW Application Form) will be void if the Listing Committee of the Stock Exchange does not grant permission to list the Shares either:

3.

within three weeks from the closing of the application lists; or

within a longer period of up to six weeks if the Listing Committee of the Stock Exchange notifies the Company of that longer period within three weeks of the closing date of the application lists.

At the discretion of the Company or its agents:

The Company, the Sponsor, the Lead Manager (on behalf of the Underwriters) or their respective agents and nominees (as the Company’s agents) have full discretion to reject or accept any application, or to accept only part of any application, without having to give any reasons for any rejection or acceptance. 4.

You will not receive any allotment if: •

you make multiple or suspected multiple applications. In particular by filling in any of the Application Forms, you agree not to apply for the Placing Shares. Reasonable steps will be taken to identify and reject applications under the Public Offer from investors who have received the Placing Shares, and to identify and reject indications of interest in the Placing from investors who have received the Public Offer Shares;

your Application Form has not been completed correctly;

your payment is not made correctly or you pay by cheque or banker’s cashier order and the cheque or banker’s cashier order is dishonoured on its first presentation;

you or the person(s) for whose benefit you are applying have applied for or been allotted Placing Shares;

you apply on an Application Form for more than 4,550,000 Public Offer Shares;

the Company, the Sponsor, the Lead Manager (on behalf of the Underwriters) or their respective agents or nominees believe that acceptance of your application would violate the applicable securities or other laws, rules or regulations of the jurisdiction in which the application is completed and/or signed. – 267 –


HOW TO APPLY FOR THE PUBLIC OFFER SHARES 5.

If your application is not accepted as a result of any of the following events: •

the Underwriting Agreement does not become unconditional or it is terminated in accordance with the terms thereof; or

if, for any reason, the final Offer Price is not agreed between the Company (for itself and on behalf of the Selling Shareholder) and the Lead Manager (on behalf of the Underwriters) on or before the Price Determination Date.

COLLECTION/POSTING OF SHARE CERTIFICATES/REFUND CHEQUES AND DEPOSIT OF SHARE CERTIFICATES INTO CCASS 1.

WHITE Application Form:

If you have applied for 1,000,000 Public Offer Shares or above and have indicated on your Application Form that you will collect your Share certificate(s) and/or refund cheque(s) (if any) personally, you may collect them in person from: Computershare Hong Kong Investor Services Limited Shops 1712-1716, 17th Floor Hopewell Centre 183 Queen’s Road East Wanchai Hong Kong between 9:00 a.m. and 1:00 p.m. on the date notified by the Company in the newspapers as the date of despatch of Share certificates. This is expected to be on Tuesday, 10 June 2008. You must show your identification document to collect your Share certificate(s) and/or refund cheque(s) (if any). Applicants being individuals who opt for personal collection must not authorize any other person to make collection on their behalf. Applicants being corporations who opt for personal collection must attend by their authorized representatives bearing a letter of authorization from their corporations stamped with the corporations’ chops. Both individuals and authorized representatives (if applicable) must produce, at the time of collection, evidence of identity acceptable to Computershare Hong Kong Investor Services Limited. If you do not collect your share certificate(s) and/or refund cheque(s) (if any) within the time specified for this collection, they will be sent to the address on your Application Form shortly after the date of despatch, by ordinary post and at your own risk. If you have applied for 1,000,000 Public Offer Shares or more and have not indicated on your Application Form that you will collect your Share certificate(s) and/or refund cheque(s) (if any) in person, or if you have applied for less than 1,000,000 Public Offer Shares, then your Share certificate(s) and/or refund cheque(s) (if any) will be sent to the address on your Application Form on the date of despatch, by ordinary post and at your own risk. – 268 –


HOW TO APPLY FOR THE PUBLIC OFFER SHARES 2.

YELLOW Application Form:

Your Share certificate(s) will be issued in the name of HKSCC Nominees Limited and deposited into CCASS for credit to your CCASS Investor Participant stock account or the stock account of your designated CCASS Participant as instructed by you at the close of business on Tuesday, 10 June 2008, or any other date as shall be determined by HKSCC or HKSCC Nominees Limited. If you are applying through a designated CCASS Participant (other than a CCASS Investor Participant): •

for Public Offer Shares credited to the stock account of your designated CCASS Participant (other than a CCASS Investor Participant), you can check the number of Public Offer Shares allotted to you with that CCASS Participant.

If you are applying as a CCASS Investor Participant: •

the Company expects to publish the application results of CCASS Participants’ applications together with the results of the Public Offer on Tuesday, 10 June 2008, in the manner as described in the section headed “How to apply for the Public Offer Shares – Publication of Results” in the prospectus. You should check the announcement published by the Company and report any discrepancies to HKSCC before 5:00 p.m. on Tuesday, 10 June 2008 or such other date as shall be determined by HKSCC or HKSCC Nominees Limited. Immediately after the credit of the Public Offer Shares to your stock account, you can check your new account balance via the CCASS Phone System and CCASS Internet System (under the procedures contained in HKSCC’s “An Operating Guide for Investor Participants” in effect from time to time). HKSCC will also make available to you an activity statement showing the number of Public Offer Shares credited to your stock account.

If you have applied for 1,000,000 Public Offer Shares or above and have indicated on your Application Form that you will collect your refund cheque(s) (if any), please follow the instructions as detailed under the sub-paragraph headed “1. WHITE Application Form” above. If you have applied for less than 1,000,000 Public Offer Shares or if you have applied for 1,000,000 Public Offer Shares or more but you have not marked on your Application Form that you will collect your refund cheque(s) (if any) in person, refund cheque(s) (if any) will be sent to the address on your Application Form on Tuesday, 10 June 2008, by ordinary post and at your own risk.

– 269 –


HOW TO APPLY FOR THE PUBLIC OFFER SHARES 3.

WHITE FORM eIPO:

If you apply for 1,000,000 Public Offer Shares or more through the White Form eIPO service by submitting an electronic application to the designated White Form eIPO Service Provider through the designated website www.eipo.com.hk and your application is wholly or partially successful, you may collect your Share certificate(s) and/or refund cheque(s) (where applicable) in person from Computershare Hong Kong Investor Services Limited at Shops 1712-1716, 17th Floor, Hopewell Center, 183 Queen’s Road East, Wanchai, Hong Kong, from 9:00 a.m. to 1:00 p.m. on Tuesday, 10 June 2008, or such other date as notified by the Company in the newspapers as the date of despatch/collection of Share certificates/refund cheques. If you do not collect your Share certificate(s) and/or refund cheque(s) personally within the time specified for collection, they will be sent to the address specified in your application instructions to the designated White Form eIPO Service Provider promptly thereafter by ordinary post and at your own risk. If you apply for less than 1,000,000 Public Offer Shares, your Share certificate(s) and/or refund cheque(s) (where applicable) will be sent to the address specified in your application instructions to the designated White Form eIPO Service Provider through the designated website www.eipo.com.hk on Tuesday, 10 June 2008 by ordinary post and at your own risk. Please also note the additional information relating to refund of application monies overpaid, application money underpaid or applications rejected by the designated White Form eIPO Service Provider set out above in “Additional Information” under “How To Apply Using White Form eIPO”. 4.

Giving electronic application instructions to HKSCC

Allocation of Public Offer Shares For the purposes of allocating Public Offer Shares, HKSCC Nominees will not be treated as an applicant. Instead, each CCASS Participant who gives electronic application instructions or each person for whose benefit each such instructions is given will be treated as an applicant. Deposit of Share Certificates into CCASS and Refund of application monies •

No temporary document of title will be issued. No receipt will be issued for application monies received.

– 270 –


HOW TO APPLY FOR THE PUBLIC OFFER SHARES •

If your application is wholly or partially successful, your share certificate(s) will be issued in the name of HKSCC Nominees and deposited into CCASS for the credit of the stock account of the CCASS Participant which you have instructed to give electronic application instructions on your behalf or your CCASS Investor Participant stock account at the close of business on Tuesday, 10 June 2008, or, in the event of a contingency, on any other date as shall be determined by HKSCC or HKSCC Nominees.

The Company expects to publish the application results of CCASS Participants’ applications together with the results of the Public Offer on Tuesday, 10 June 2008, in the manner as described in the section headed “How to apply for the Public Offer Shares – Publication of Results” in the prospectus. You should check the announcement and the list of successful applicants published by our Company and report any discrepancies to HKSCC before 5:00 p.m. on Tuesday, 10 June 2008 or such other date as shall be determined by HKSCC or HKSCC Nominees.

If you have instructed your broker or custodian to give electronic application instructions on your behalf, you can also check the number of Public Offer Shares allotted to you and the amount of refund monies (if any) payable to you with that broker or custodian.

If you have applied as a CCASS Investor Participant, you can also check the number of Public Offer Shares allotted to you and the amount of refund monies (if any) payable to you via the CCASS Phone System and the CCASS Internet System (under the procedures contained in HKSCC’s “An Operating Guide for Investor Participants” in effect from time to time) on Tuesday, 10 June 2008. Immediately after the credit of the Public Offer Shares to your CCASS Investor Participant stock account and the credit of refund monies to your designated bank account, HKSCC will also make available to you an activity statement showing the number of Public Offer Shares credited to your CCASS Investor Participant stock account and the amount of refund monies (if any) credited to your designated bank account.

Refund of your application monies (if any) in respect of wholly and partially unsuccessful applications and/or difference between the Offer Price and the offer price per Share initially paid on application, in each case including brokerage of 1%, SFC transaction levy of 0.004% and the Stock Exchange trading fee of 0.005%, will be credited to your designated bank account or the designated bank account of your broker or custodian on Tuesday, 10 June 2008. No interest will be paid thereon.

Part of your Hong Kong identity card number/passport number, or, if you are joint applicants, part of the Hong Kong identity card number/passport number of the first-named applicant, provided by you may be printed on your refund cheque (if any). Such data will be used for checking the validity of Application Forms and such data would also be transferred to a third party for such purpose and refund purpose. Your banker may require verification of your Hong Kong identity card number/passport number before encashment of your refund cheque. Inaccurate completion of your Hong Kong identity card number/passport number may lead to delay in encashment of or may invalidate your refund cheque. – 271 –


HOW TO APPLY FOR THE PUBLIC OFFER SHARES 5.

General

Share certificates for the Offer Shares will only become valid certificates of title provided that (i) the Share Offer has become unconditional in all respects; and (ii) the Underwriting Agreement has not been terminated in accordance with its terms, which is expected to be at 8:00 a.m. on the Listing Date, as further described in the section headed “Underwriting” in this prospectus. No receipt will be issued for application monies paid. The Company will not issue temporary documents of title. COMMENCEMENT OF DEALINGS IN THE SHARES Dealings in the Shares on the Stock Exchange is expected to commence on Thursday, 12 June 2008. Shares will be traded in board lots of 2,000 Shares each. SHARES WILL BE ELIGIBLE FOR ADMISSION INTO CCASS If the Stock Exchange grants the approval for the listing of, and permission to deal in, the Shares and the Company complies with the stock admission requirements of HKSCC, the Shares will be accepted as eligible securities by HKSCC for deposit, clearance and settlement in CCASS with effect from the date of commencement of dealings in the Shares on the Stock Exchange or on any other date HKSCC chooses. Settlement of transactions between participants of the Stock Exchange is required to take place in CCASS on the second business day after any trading day. All activities under CCASS are subject to the General Rules of CCASS and CCASS Operational Procedures in effect from time to time. All necessary arrangements have been made for the Shares to be admitted into CCASS.

– 272 –


APPENDIX I

ACCOUNTANTS’ REPORT

The following is the text of a report, prepared for the purpose of incorporation in this prospectus, received from the Company’s reporting accountants, Ernst & Young, Certified Public Accountants, Hong Kong: 18th Floor Two International Finance Centre 8 Finance Street Central Hong Kong 28 May 2008 The Directors A8 Digital Music Holdings Limited SBI E2-Capital (HK) Limited Dear Sirs, We set out below our report on the financial information of A8 Digital Music Holdings Limited (the “Company”) and its subsidiaries and jointly-controlled entities, prepared on the basis set out in note 2.1 of Section II below, for each of the three years ended 31 December 2005, 2006 and 2007 (the “Relevant Periods”) for inclusion in the prospectus of the Company dated 28 May 2008 (the “Prospectus”) in connection with the initial listing of the shares of the Company on the Main Board of The Stock Exchange of Hong Kong Limited (the “Stock Exchange”). The Company and its subsidiaries are hereinafter collectively referred to as the “Group”. The Company was incorporated as A8 Music International Limited in the Cayman Islands on 2 October 2007 as an exempted company with limited liability under the Companies Law, Cap 22 of the Cayman Islands. Pursuant to a special resolution dated 7 November 2007 and approved by the Registrar of Companies of the Cayman Islands, the name of the Company was changed to A8 Digital Music Holdings Limited. Pursuant to a group reorganisation (the “Reorganisation”) as detailed in note 1 of Section II, the Company became the holding company of the subsidiaries set out in note 1 of Section II. The Reorganisation became effective on 26 May 2008. All companies now comprising the Group and the Group’s jointly-controlled entities have adopted 31 December as their financial year end date. No audited financial statements have been prepared for the Company since the date of its incorporation as there is no statutory requirement for the Company to prepare audited financial statements. The statutory audited financial statements or management accounts of the subsidiaries and jointly-controlled entities established in the People’s Republic of China (the “PRC” or “Mainland China”) were prepared in accordance with the generally accepted accounting principles and the relevant financial regulations of the PRC. The directors of the Company have prepared the combined – I-1 –


APPENDIX I

ACCOUNTANTS’ REPORT

financial statements of the companies now comprising the Group for the Relevant Periods (the “IFRS Financial Statements”) in accordance with International Financial Reporting Standards (“IFRSs”) issued by the International Accounting Standards Board, which were audited by us in accordance with International Standards on Auditing. The financial information as set out in Sections I to V below (the “Financial Information”) has been prepared from the IFRS Financial Statements and in accordance with the basis set out in note 2.1 of Section II. For the purpose of this report, we have carried out an independent audit on the Financial Information in accordance with International Standards on Auditing and have carried out such additional procedures as we considered necessary in accordance with Auditing Guideline 3.340 “Prospectuses and the Reporting Accountant” issued by the Hong Kong Institute of Certified Public Accountants (the “HKICPA”). No adjustments were considered necessary to adjust the IFRS Financial Statements in preparing this accountants’ report for inclusion in the Prospectus. The directors of the Company are responsible for the preparation of the Financial Information which gives, for the purpose of this report, a true and fair view, and the contents of the Prospectus in which this report is included. In preparing the Financial Information, it is fundamental that appropriate accounting policies are selected and applied consistently, that judgements and estimates made are prudent and reasonable, and that the reasons for any significant departure from applicable accounting standards are stated. It is our responsibility to form, based on our examination, an independent opinion on the Financial Information and to report our opinion to you. In our opinion, the Financial Information gives, for the purpose of this report, a true and fair view of the combined results and cash flows of the Group for each of the Relevant Periods and of the state of affairs of the Company as at 31 December 2007 and of the Group as at 31 December 2005, 2006 and 2007.

– I-2 –


APPENDIX I I.

FINANCIAL INFORMATION

(a)

Combined income statements

ACCOUNTANTS’ REPORT

Notes

Revenue Business tax Net revenue Cost of services provided

6

Gross profit Other income and gains, net Gain arising from disposal of an equity interest in a jointly-controlled entity Selling and marketing expenses Administrative expenses Other expenses Finance costs Share of profits and losses of jointly-controlled entities

6

233,233 (6,361)

268,438 (8,348)

285,964 (7,860)

226,872 (101,912)

260,090 (127,815)

278,104 (149,375)

124,960

132,275

128,729

926

9,699

20,180

– (67,821) (22,383) (2,757) (4,965)

5,694 (67,073) (21,715) (70) (4,913)

7

– (69,285) (14,123) (138) (310)

16

(59)

8 10

41,971 (974)

44,602 (5,314)

60,485 (5,248)

PROFIT FOR THE YEAR

40,997

39,288

55,237

Attributable to: Equity holders of the Company Minority interests

41,842 (845)

39,863 (575)

55,274 (37)

40,997

39,288

55,237

N/A

N/A

N/A

PROFIT BEFORE TAX Tax

Earnings per share

16

Year ended 31 December 2005 2006 2007 RMB’000 RMB’000 RMB’000

12

– I-3 –

554

(347)


APPENDIX I (b)

ACCOUNTANTS’ REPORT

Combined balance sheets

Notes NON-CURRENT ASSETS Property, plant and equipment Goodwill Intangible assets Interests in jointly-controlled entities

13 14 15

11,121 – 397

9,577 7,466 470

6,832 – 360

16

5,881

12,066

17,399

29,579

7,192

17 31(b)

42,858 3,770

37,553 22,911

64,809 59,708

18

20,055

17,058

21,552

19

– – 93,899

– – 123,359

5,711 900 131,315

160,582

200,881

283,995

21 22 31(c)

9,541 13,040 –

12,431 17,396 –

18,049 18,753 3,558

31(d)

272

31(e)

264 1,030 4,002

– 3,263 3,067

– – –

27,877

36,429

40,360

132,705

164,452

243,635

Total non-current assets CURRENT ASSETS Accounts receivable Amounts due from related parties Prepayments, deposits and other receivables Equity investments at fair value through profit or loss Tax recoverable Cash and cash equivalents

20

Total current assets CURRENT LIABILITIES Accounts payable Other payables and accruals Amount due to a related party Amount due to a minority shareholder Amount due to a jointlycontrolled entity Tax payable Derivative financial instruments

As at 31 December 2005 2006 2007 RMB’000 RMB’000 RMB’000

23

Total current liabilities NET CURRENT ASSETS

– I-4 –


APPENDIX I

ACCOUNTANTS’ REPORT

Notes TOTAL ASSETS LESS CURRENT LIABILITIES

As at 31 December 2005 2006 2007 RMB’000 RMB’000 RMB’000

150,104

194,031

250,827

24

813

813

813

23

64,719

69,547

68,510

Total non-current liabilities

65,532

70,360

69,323

Net assets

84,572

123,671

181,504

512 83,239

512 123,102

512 180,972

Minority interests

83,751 821

123,614 57

181,484 20

Total equity

84,572

123,671

181,504

NON-CURRENT LIABILITIES Deferred tax liabilities Convertible redeemable preferred shares

EQUITY Equity attributable to equity holders of the Company Issued capital Reserves

26 26

– I-5 –


APPENDIX I (c)

ACCOUNTANTS’ REPORT

Combined statements of changes in equity Attributable to equity holders of the Company

Issued capital RMB’000 (note 26(a)) At 1 January 2005 Profit for the year and total income and expense for the year

Merger Surplus reserve contributions RMB’000 RMB’000 (note 26(b)) (note 26(c))

Exchange fluctuation reserve RMB’000

Capital reserve RMB’000

Statutory reserve funds RMB’000 (note 26(d))

Reserve fund RMB’000 (note 26(d))

Retained profits RMB’000

Total RMB’000

Minority interests RMB’000

Total equity RMB’000

28,680

11,063

800

3,299

2,038

23,876

69,756

66

69,822

(845)

40,997

41,842

41,842

Capital contribution from minority shareholders

Acquisition of minority interests

541

(29)

(27,818)

29

2,384

(2,413)

512

28,680

10,522

800

3,328

4,422

512

28,680

10,522

– –

– –

Capitalisation issue of shares Repurchase of ordinary shares at deemed fair value (notes 23 and 29) Transfer from retained profits

At 31 December 2005 and 1 January 2006 Profit for the year and total income and expense for the year Acquisition of minority interests Transfer from retained profits

At 31 December 2006 and 1 January 2007 Exchange realignment and total income recognised directly in equity Profit for the year

Total income and expense for the year Transfer from retained profits

At 31 December 2007

(541)

(27,847)

2,250 (650) –

2,250 (650) –

(27,847)

35,487

83,751

821

84,572

39,863

39,863

(575)

39,288

(189)

118

800

3,446

4,422

– –

2,596 –

– –

– –

2,596

512

28,680

10,522

2,596

75,232

123,614

57

123,671

– –

– 55,274

2,596 55,274

– (37)

2,596 55,237

55,274

57,870

(37)

57,833

3,383

(3,383)

800

6,829

4,422

– I-6 –

(118)

(189)

127,123

181,484

20

181,504


APPENDIX I (d)

ACCOUNTANTS’ REPORT

Combined cash flow statements

Notes

Year ended 31 December 2005 2006 RMB’000 RMB’000

2007 RMB’000

CASH FLOWS FROM OPERATING ACTIVITIES Profit before tax Adjustments for: Finance costs Depreciation Amortisation of intangible assets Impairment of accounts receivable Impairment of other receivables Loss/(gain) on disposal of items of property, plant and equipment Gain on disposal of investments at fair value through profit or loss Fair value gain on derivative financial instruments Fair value gain on investments at fair value through profit or loss Realisation of an unrealised gain arising from a transfer of assets from Huadong Feitian to a jointly-controlled entity Interest income Dividend income from investments at fair value through profit or loss Gain on disposal of subsidiaries Excess over the cost of acquisition of minority interests Gain arising from disposal of an equity interest in a jointly-controlled entity Share of profits and losses of jointly-controlled entities

7 8 8 8 8

41,971

44,602

60,485

310 3,036 79 138 −

4,965 3,180 99 1,118 1,387

4,913 3,500 110 – −

8

(2)

6

6 6

6 6

(294) –

(241) (124)

(6) (1,119)

(3,083)

(935)

(3,067)

(241) (1,415)

6 6,28

– –

– –

6

(89)

16

16

59

Decrease/(increase) in accounts receivable Increase in prepayments, deposits and other receivables Increase in accounts payable Increase in other payables and accruals Increase/(decrease) in an amount due to a minority shareholder Decrease in an amount due to a jointlycontrolled entity

4

(554)

(2,885)

(1,450) (1,138) (153) (152) – (5,694) 347

44,932

50,992

51,737

(18,672)

4,187

(27,256)

(16,471) 4,365 6,768

(10,740) 2,890 2,057

(4,637) 5,618 1,442

272

(272)

(3,939)

(264)

Cash generated from operations Interest paid Tax paid

16,983 (1) (367)

49,394 (21) (3,081)

26,632 – (9,411)

Net cash inflow from operating activities

16,615

46,292

17,221

– I-7 –


APPENDIX I

ACCOUNTANTS’ REPORT

Notes

CASH FLOWS FROM INVESTING ACTIVITIES Disposal of subsidiaries, net of cash received Purchases of items of property, plant and equipment Proceeds from disposal of items of property, plant and equipment Acquisition of minority interests Acquisition of a subsidiary, net Purchases of intangible assets Proceeds from disposal of an interest in a jointly-controlled entity Decrease/(increase) in amounts due from related parties Increase in an amount due to a related company Purchase of investments at fair value through profit or loss Proceeds from sale of investments at fair value through profit or loss Dividend income from investments at fair value through profit or loss Interest received

28

2007 RMB’000

(1,016)

13

(6,191)

(3,373)

(919)

27 15

51 (650) – (250)

397 (100) 1,495 (166)

25 – – –

– 6,512 –

Net cash outflow from investing activities CASH FLOWS FROM FINANCING ACTIVITIES Capital contribution from minority shareholders Expenses on issue of convertible redeemable preferred shares Proceeds from issue of convertible redeemable preferred shares

Year ended 31 December 2005 2006 RMB’000 RMB’000

3,558 (4,691)

3,944

4,948

– 124

– 1,415

153 1,138

(404)

(16,716)

(5,911)

45,864

43,109

NET INCREASE IN CASH AND CASH EQUIVALENTS Cash and cash equivalents at beginning of year Effect of foreign exchange rate changes, net

(22,331)

(2,825)

(5,005)

Net cash inflow/(outflow) from financing activities

(17,503)

13,224

2,250

29

– (116) –

(116)

– – –

59,320

29,460

11,310

34,579

93,899

123,359

CASH AND CASH EQUIVALENTS AT END OF YEAR

93,899

123,359

131,315

ANALYSIS OF BALANCES OF CASH AND CASH EQUIVALENTS Cash and bank balances Short term deposits

56,491 37,408

123,179 180

130,199 1,116

93,899

123,359

131,315

– I-8 –

(3,354)