09:57 MENGNIU DAIRY<02319> - Announcement (7) (b) Agreement and Terms The centralised sales arrangement is covered by the Yogurt Products Centralised Sales Agreement entered into by Mengniu Beijing and Mengniu Maanshan on 18 May 2005. It is for an initial period commencing on the date of the agreement ending 31 December 2007. Under the Yogurt Products Centralised Sales Agreement, Mengniu Beijing will pay Mengniu Maanshan on a monthly basis for all orders made that month. (c) Pricing Standard The yogurt products will be sold to Mengniu Beijing 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 Yogurt 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 yogurt 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 Yogurt Products Centralised Sales Agreement. It is anticipated that the production lines for Mengniu Maanshan shall only commence in the second half of 2005, and on an annual basis, the maximum aggregate amounts of the centralised sales caps for each of the three financial years ending 31 December 2007 will not exceed RMB300,000,000, RMB720,000,000 and RMB1,068,000,000 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, sales and expected increase in market share and expected increase in demand and production capacity. On the contrary, since the majority of the participating subsidiaries in respect of the continuing connected transaction as disclosed under category 14 on page 114 to 115 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. The Directors (including the independent non-executive directors of the Company) are of the view that the terms of the Yogurt Products Centralised Sales Agreement are on normal commercial terms which are fair and reasonable and is in the interest of the Company and its shareholders as a whole. 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%. These transactions constitute continuing connected transactions and 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. (D) Transfer of yogurt products amongst Mengniu, Mengniu Maanshan and other Mengniu Subsidiaries for inventory adjustment purposes (a) Background As disclosed in page 116 of the Prospectus, as part of the centralised sales system, delivery of yogurt products to the distributors is made by those Mengniu Subsidiaries that manufacture the yogurt 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 Mengniu Subsidiaries to make up for the shortfalls.