09:58     MENGNIU DAIRY<02319> - Announcement (9)                             

    (E)   Sales of ice cream products amongst Mengniu, Mengniu                
    Maanshan and other Mengniu Subsidiaries for inventory adjustment          
    purposes                                                                  
                                                                              
    (a)   Background                                                          
                                                                              
    As disclosed in page 117 of the Prospectus, an inventory adjustment       
    mechanism exists between those Mengniu Subsidiaries which                 
    manufacture ice cream products whereby they supply each other with        
    finished ice cream products whenever shortages arise in another           
    member. It is intended for Mengniu Maanshan to be a key                   
    manufacturer of ice cream products for the Mengniu Group. Since           
    it is intended to produce the widest variety of ice cream products,       
    it is expected that it may encounter the most frequent fluctuation        
    in its inventory.                                                         
                                                                              
    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 efficiency 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 Ice Cream        
    Products Inventory Adjustment Agreement entered into by Mengniu           
    Maanshan and all the Mengniu Subsidiaries who manufacture ice             
    cream products including Mengniu on 18 May 2005. It is for an             
    initial period commencing on the date of this agreement ending 31         
    December 2007.                                                            
                                                                              
    Under the Ice Cream Products Inventory Adjustment Agreement, the          
    transferee shall make payment on a monthly basis for all orders           
    made that month.                                                          
                                                                              
    (c)   Pricing Standard                                                    
                                                                              
    The ice cream products will be transferred 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 ice cream 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 inventory adjustment          
    arrangement. The general expenses consist of staff wages,                 
    marketing expenses, transport costs, storage costs and                    
    disbursements. As with other inventory adjustment transactions of         
    the Group that are disclosed in the Prospectus, Y is expected to          
    be capped at 3% going forward.                                            
                                                                              
    The ice cream products are transferred and booked at this                 
    intra-group rate for the purposes of the inventory adjustment             
    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 inventory adjustment 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           
    inventory adjustment 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 RMB40,000,000, RMB80,000,000 and            
    RMB96,000,000 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. In respect of the cap for the          
    year ended 31 December 2005, it has been taken into account that          
    Mengniu Maanshan will only be in operation for 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 17 on page 117 to 118 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 account were            
    similar to those as for Mengniu Maanshan.