09:27     CHINA MER HOLD<00144> - Announcement (2)                            

    Transactions are fair and reasonable and in the interests of the          
    Company and its shareholders as a whole.                                  
                                                                              
    2.                                                                        
    Royalty fees to Hempel                                                    
    Hempel-Hai Hong is a joint venture company owned as to 64% by Hoi         
    Hung HHH and as to 36% by Hempel. Pursuant to the joint venture           
    agreement dated 9 October 1991 (as amended) (the `Joint Venture           
    Agreement') and the Technology and Trademark Licence Agreement dated      
    15 February 1996 (the `Licence Agreement') between Hempel, Hai Hong       
    Industry and Hempel-Hai Hong, Hempel-Hai Hong has paid royalty fees       
    to Hempel and Hai Hong Industry for the use of their technology           
    (comprising specifications, formulation and process technology            
    relating to the manufacturing of paints and coatings), management         
    knowhow and trade marks. Such use of Hai Hong Industry and Hempel's       
    intellectual property enables Hempel-Hai Hong to carry on its             
    business without independently incurring costs and expense in             
    developing such intellectual property.                                    
                                                                              
    Each of Hoi Hung HHH and Hai Hong Industry is an indirect                 
    wholly-owned subsidiary of the Company. As Hempel is a substantial        
    shareholder of Hempel-Hai Hong, which in turn is a subsidiary of the      
    Company, Hempel is a connected person of the Company as defined under     
    the Listing Rules. Hempel is principally engaged in the manufacturing     
    of paints.                                                                
                                                                              
    The royalty fees paid by Hempel-Hai Hong to Hempel pursuant to the        
    Joint Venture Agreement and the Licence Agreement for the years ended     
    31 December 2002, 2003 and 2004 are as follows:                           
                                                                              
    Year                           Amount of royalty fees                     
                                   (HK$)                                      
                                                                              
    2002                           28,915,000                                 
    2003                           36,439,000                                 
    2004                           42,356,000 (based on                       
                                   unaudited management                       
                                   accounts)                                  
                                                                              
                                                                              
                                                                              
    The royalty fees are based on percentages of the net external sales       
    of paints. The royalty fees were negotiated on an arms-length basis       
    and the Directors, including the independent non-executive Directors,     
    are of the view that the Joint Venture Agreement and the Licence          
    Agreement have been entered into on normal commercial terms and in        
    the ordinary and usual course of business of the Company and that the     
    Joint Venture Agreement and Licence Agreement are fair and reasonable     
    and in the interests of the shareholders of the Company as a whole.       
                                                                              
                                                                              
    The Licence Agreement is coterminous with the Joint Venture               
    Agreement which does not have a specified joint venture period. Under     
    Rule 14A.35(1) of the Listing Rules, a continuing connected               
    transaction which is not fully exempted must be governed by an            
    agreement for a fixed period not exceeding three years unless there       
    are special circumstances requiring a longer duration. The Directors,     
    including the independent non-executive Directors, and the                
    Independent Financial Adviser are of the view that special                
    circumstances requiring a longer duration exist in this case and they     
    are:                                                                      
                                                                              
    (i)                                                                       
    Hempel-Hai Hong is engaged in the manufacture, sale, distribution         
    and marketing of marine, heavy industrial and anticorrosive coatings      
    as well as the manufacture, development and marketing of road marking     
    paints, house paints and miscellaneous industrial coatings;               
                                                                              
    (ii)                                                                      
    the purpose of entering into the Licence Agreement is to facilitate       
    the development, production and marketing by Hempel-Hai Hong of such      
    coatings and paints products;                                             
                                                                              
    (iii)                                                                     
    where two parties come together to establish a joint venture on a         
    long term basis relying on the technical knowhow and support of each      
    other as in the case of Hempel-Hai Hong, it is normal business            
    practice for the joint venture partners to commit to provide support      
    to the joint venture entity throughout its term without time              
    limitation; and                                                           
                                                                              
    (iv)                                                                      
    the Licence Agreement is a vital contract to the joint venture. It        
    would be impracticable and not in the interest of shareholders of         
    Hempel-Hai Hong for the Licence Agreement to be of a stipulated           
    duration or negotiated every three years.                                 
                                                                              
    Accordingly, the Directors, including the independent non-executive       
    Directors, and the Independent Financial Adviser confirm that it          
    would be normal business practice in relation to joint ventures for       
    contracts of a similar nature to the Licence Agreement to be entered      
    into on a long-term basis.                                                
                                                                              
    For the purpose of Rule 14A.35(2) of the Listing Rules, the annual