10:05 GUANGZHOU SHIP<00317> - Announcement (4) REASONS FOR THE SUPPLEMENTAL AGREEMENT In respect of material and services provided by the Group to the CSSC Group, the Directors currently expects that the amounts of Transactions will increase substantially in 2005 as compared to those compiled in 2004 at the time of the Framework Agreement. This is primarily due to significant increases in steel and utilities prices as well as increases in the volume of shipbuilding activities of the CSSC Group. For instance, prices for steel plates, which are most commonly used for the shipbuilding, have increased by approximately 22% compared to the financial year before. In addition, unit electricity price, being a major item in utilities, had increased by 100% in 2004. Apart from increases in material and utilities prices, the Group also began to provide more services to companies within the CSSC Group as a result of increases in business volume on terms based on market price or on terms that are no less favorable compared to third parties. Amounts of the Transactions under the above category for 2006 are currently expected to increase by approximately 15% per annum, which are in line with both the Group's and the CSSC Group's planned annual increase in production output for 2006. In respect of material and services provided by the CSSC Group to the Group, the Directors also expects the amount of Transactions will increase substantially in 2005 as compared to those compiled in 2004. This is due principally to the fact that the Group has encountered increasing difficulty in the sourcing of steel plates for its production needs, as more steel plate manufacturers in the PRC currently require purchasers such as the Group to commit larger quantity of purchases. At present, the Group annual production requirement for steel plates is around 100,000 tonnes whereas, at the same time, the CSSC Group has a combined annual usage of around 600,000 tonnes. Given the circumstances, the Group, beginning in 2005, plans to source approximately 30% of its steel plate production requirement from the CSSC Group, which is currently prepared to make centralized bulk purchases for all its subsidiaries and associates, including that of the Group. This is compared to only 0.5% of the Group's steel plate production requirement sourced from the CSSC Group in 2004. The Directors believe that the Group will be able to enjoy a more stable supply of steel material and more favorable terms through participating in the CSSC Group's centralized purchasing scheme in 2005. Amounts of the Transactions under the above category for 2006 are currently expected to increase by approximately 15% per annum, which are in line with both the Group's and the CSSC Group's planned annual increase in production output for 2006. The Transactions are of an operational nature and in the normal and usual course of business of the Group. They allow the Group to leverage the reputation and bargaining power of the CSSC Group, particularly in relation to the sourcing of steel material as the Group will be able to secure a more steady supply from the CSSC Group which makes bulk purchases. Apart from the change in the cap amounts for the Transactions, all other terms governing the Transactions as set out under the Framework Agreement remain unchanged. The Directors believe that the Supplemental Agreement is in the interest of the Group and that the terms are fair and reasonable and in the interests of the Independent Shareholders. As the Transactions under in the Supplemental Agreement constitute "non-exempt continuing connected transactions" and "connected transactions" respectively under rule 14A.35 of the Hong Kong Listing Rules and clause 7.3.12 of the Listing Rules of the Shanghai Stock Exchange, the Supplemental Agreement will, in accordance with rule 14A.18 of the Hong Kong Listing Rules and clause 7.3.1 of the Listing Rules of the Shanghai Stock Exchange, be tabled for approval by the Independent Shareholders by poll at the Company's upcoming annual general meeting, on which resolution CSSC and its associates and related persons will abstain from voting. An independent board committee of the Company will be appointed to consider the terms of the Supplemental Agreement. Watterson Asia Limited has been appointed as the independent financial adviser to the independent board committee and Independent Shareholders in relation to the Supplemental Agreement. A circular containing, among other things, the advice of Watterson Asia Limited and the recommendations of the independent board committee, will be dispatched to the Hong Kong Shareholders and posted on the website www.sse.com.cn as soon as practicable. DEFINITIONS "Company" Guangzhou Shipyard International Company Limited, a joint-stock company established in the PRC, the H-shares of which are listed on the Stock Exchange and the A-Shares of which are listed on the Shanghai Stock Exchange "CSSC" China State Shipbuilding Corporation, an economic entity under