09:56 MENGNIU DAIRY<02319> - Announcement (5) (c) Pricing Standard The UHT milk and milk beverage products will be sold to Mengniu at an intra-group rate as disclosed in the Prospectus. Such rate is determined by a formula, as follows: Intra-Group Rate = Wholesale price of the UHT milk and milk beverage products x (1 -- Y%*) *Y = a variable percentage calculated based on the expected amount of general expenses to be allocated to those manufacturing companies in the Group participating in the centralised sales arrangement. The general expenses consist of staff wages, marketing expenses, transport costs, storage costs and disbursements. As with other centralised sales transactions of the Group that are disclosed in the Prospectus, Y is expected to be capped at 3% going forward. The UHT milk and milk beverage products are transferred and booked at this intra-group rate for the purposes of the centralised sales arrangement. As these transactions are conducted for overall logistics management, there are no universal standards for comparison. There is therefore no market or comparison price for such centralised sales arrangements in China. (d) Anticipated Annual Figures There is no historical data for this transaction but it is anticipated that they will occur after the entering into of the UHT Milk and Milk Beverage Products Centralised Sales Agreement. It is anticipated that on an annual basis, the maximum aggregate amounts of the centralised sales, the caps for each of the three financial years ending 31 December 2007 will not exceed RMB70,000,000, RMB200,000,000 and RMB240,000,000 respectively. Since Mengniu Maanshan has not yet commenced production, these caps are mainly extrapolated from its planned production capacity and by making reference to factors such as the growth rate of turnover of the Group over the past year, expected increase in market share and expected increase in market demand and production capacity. In respect of the cap for the year ended 31 December 2005, it has been taken into account that Mengniu Maanshan will only commence operation in the second half of 2005. On the contrary, since the majority of the participating subsidiaries in respect of the continuing connected transaction as disclosed under category 11 on page 111 to 112 of the Prospectus have been in operation and that historical transaction data were available, hence, the approved caps were mainly extrapolated from factors such as historical production and sales data and expected growth in production and sales. Other factors taken into consideration were similar to those as for Mengniu Maanshan. Based on the anticipated aggregate maximum amounts, each of the applicable percentage ratios (other than the profits ratio) for the centralised sales transactions is greater than 2.5%. In accordance with Rule 14A.35 of the Listing Rules, the centralised sales transactions are subject to reporting and announcement requirements and will require independent shareholders' approval and must comply with requirements set out in Rules 14A.45 to 14A.48 of the Listing Rules. (B) Transfer of UHT milk and milk beverage products amongst Mengniu, Mengniu Maanshan and other Mengniu Subsidiaries for inventory adjustment purposes (a) Background As disclosed in page 113 of the Prospectus, as part of the centralised sales system, delivery of the UHT milk and milk beverage products to the distributors is made by those Mengniu Subsidiaries that manufacture the UHT milk and milk beverage products. In meeting delivery orders there are occasionally shortfalls in the inventories of particular Mengniu Subsidiaries. Where this occurs the respective Mengniu Subsidiary purchases stock from Mengniu or other members to make up for the shortfalls. These transactions occur as a result of the overall logistics management under the inventory adjustment arrangement which are conducted in the ordinary course of business on normal commercial terms and will benefit the Group as a whole as they represent an efficient use of excess inventory whilst allowing the respective Mengniu Subsidiary to meet delivery orders. (b) Agreement and Terms The inventory adjustment transactions are covered by the UHT Milk and Milk Beverage Products Inventory Adjustment Agreement entered into by Mengniu, Mengniu Maanshan and the Mengniu Subsidiaries which manufacture UHT milk and milk beverage products on 18 May 2005. It is for an initial period commencing on the date of this agreement ending 31 December 2007.