10:04 SHANDONG XINHUA<00719> - Announcement (3) adversely affect the operation of the Company. 3. the Trademark is crucial to the Company and no other trademarks can perfectly substitute it especially given that the Trademark has been used by the Company to produce and market its product (as the case may be) for more than 10 years. Accordingly, the Company does not have strong bargaining power to renegotiate for better terms in a new three year licence agreement even if SXPGC is prepared to terminate the Trademark Licence Agreement. 4. the Trademark Licence Agreement is not a new contract to be entered into by the Company after Rule 14A.35 becoming effective on 31 March, 2004. The contracts in question have been binding and their terms have not been varied since 1996. Accordingly, the Directors (excluding the independent non-executive directors who will give their view after considering the advice from the independent financial adviser mentioned below) consider that it is not in the interest of the shareholders of the Company as a whole to terminate the Trademark Licence Agreement and re-enter into another licence agreement with duration not exceeding 3 years. For the purpose of Rule14A.35(1), the Company will retain an independent financial adviser to explain why a longer period is required and to confirm that it is normal business practice for contracts of this type to be of such duration. Such independent financial adviser will also give recommendations to the Independent Shareholders as to the non-exempt continuing connected transactions as more particularly described herein. The Company will also re-comply with the Listing Rules in respect of the Trademark Licence Agreement after 31st December, 2006. 3. REASONS FOR AND BENEFITS OF THE ONGOING CONNECTED TRANSACTIONS The Directors (including the independent non-executive directors) consider that the entering of the Ongoing Connected Transactions is in the best interests of the Company and its shareholders as a whole, on normal commercial terms and in the ordinary and usual course of business. By virtue of the Trademark Licence Agreement, the Company will be able to continue the use of the Trademark on marketing and the current and future production of its products in and outside the PRC which is essential for the continued running of the Company. By virtue of the 2002 Agreement, the Company can continue to generate revenue from selling the respective products to SXPGC and to secure a steady supply of raw materials and/or sundry products from such parties without incurring extra costs from purchasing them through other parties. 4. APPROVAL BY INDEPNDENT SHAREHOLDERS (1) Annual Cap for the Ongoing Connected Transactions The Company proposes that the maximum amounts ("New Annual Cap") of the Ongoing Connected Transactions for each of the two years ended 31st December, 2006 will be RMB128,120,000 and RMB144,440,000 respectively. The New Annul Cap was determined by reference to historical value of the Ongoing Connected Transactions and consolidated turnover of the Group. For each of the three years ended on 31st December, 2004, the aggregate value of the Ongoing Connected Transactions amounted to approximately RMB112,419,000, RMB100,676,000 and RMB97,576,000 respectively, representing 9.58%, 7.50% and 6.40% of the Group's consolidated turnover of the relevant financial year. The breakdown of the transaction value is as follows: Year 2002 Year 2003 Year 2004 Year 2005 Year 2006 RMB'000 RMB'000 RMB'000 RMB'000 RMB'000 1. Sale of and raw materials and supply of water, electricity and steam 24,337 30,769 28,716 31,650 33,520 2. Purchase of raw materials 75,726 62,807 66,403 96,270 110,720 3. Payment of labour and other services 12,156 6,900 2,257 0 0 4. Trademark Licence Fee 200 200 200 200 200 Total 112,419 100,676 97,576 128,120 144,440 SXPGC has waived a larger part of the trademark licence fees under the Trademark Licence Agreement during the past three financial years ended 31 December, 2004. The Board expects that during the two years ended 31st December, 2006, similar percentage level of the transaction values of the Ongoing Connected Transactions to the Group's consolidated turnover will be maintained and that the Group's