09:59 MENGNIU DAIRY<02319> - Announcement (10) Pursuant to Rule 14A.25 of the Listing Rules and as requested by the Stock Exchange, the current proposed caps in respect of these inventory adjustment transactions as mentioned in this paragraph 2(E) would have to be aggregated with the approved caps in respect of the continuing connected transaction as set out under category 17 on page 117 to 118 of the Prospectus. Such aggregation would result in each of the applicable percentage ratios (other than the profits ratio) for the inventory adjustment transactions being greater than 2.5%. Hence, these transactions constitute continuing connected transactions under Rule 14A.35 of the Listing Rules and 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. (F) Ongoing inventory adjustment of raw materials and packaging materials amongst Mengniu, Mengniu Subsidiaries and Mengniu Maanshan (a) Background As disclosed in page 118 of the Prospectus, as part of an inventory adjustment mechanism, certain raw materials are centrally purchased by Mengniu in order to enjoy the advantage of bulk purchase and then transferred by Mengniu to other Mengniu Subsidiaries and excess raw materials and packaging materials are transferred to other members whenever shortages arise. Mengniu Maanshan will join such inventory adjustment mechanism. This inventory adjustment mechanism is beneficial for all parties involved as it minimises wastage and increases the efficient use of resources. (b) Agreement and Terms The inventory adjustment transactions are covered by the inventory adjustment agreement for raw materials and packaging materials entered into by all the Mengniu Subsidiaries, Mengniu and Mengniu Maanshan on 18 May 2005. It is for an initial period commencing on the date of this agreement ending 31 December 2007. Under the inventory adjustment agreement, the transferee makes payment on a monthly basis for all orders made that month. (c) Pricing Standard Inventory adjustment of such raw materials and packaging materials between the companies is at cost, which is the same as the pricing standard as disclosed in the Prospectus. (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 inventory adjustment caps for each of the three financial years ending 31 December 2007 will not exceed RMB65,000,000, RMB195,000,000 and RMB254,000,000 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. Certain raw materials such as imported milk powder and white sugar are centrally purchased by Mengniu in order to enjoy the advantage of bulk purchase. Since the major products manufactured by Mengniu Maanshan are yogurt products which require the above raw materials, the amount of this transaction is significant. On the contrary, since the majority of the participating subsidiaries in respect of the continuing connected transaction as disclosed under category 18 on page 118 to 119 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.