09:59 MENGNIU DAIRY<02319> - Announcement (12) Prior to 2004, the amount of the UHT Milk and Milk Beverage Products transferred between Mengniu Subsidiaries for inventory adjustment purposes was not significant. This was mainly due to the limited varieties of core products manufactured by Mengniu and Mengniu Subsidiaries at that time. During 2005, the Group has strategically expanded its product portfolio, focusing on the high value-added UHT milk and milk beverage products and will continue to develop new products. From January to March 2005, 26 new UHT milk and milk beverage products were introduced, and most of these were manufactured by Mengniu. The existing UHT milk and milk beverage products continued to be manufactured by the other Mengniu Subsidiaries. Accordingly, the demand for transferring UHT milk and milk beverages between Mengniu and the Mengniu Subsidiaries increased rapidly. During this period, the amount being transferred between Mengniu and the Mengniu Subsidiaries grew almost five times compared to the corresponding period last year. (b) Anticipated annual figures For the period from January to March in 2004, the amount transferred was approximately RMB840,000 and for the same period in 2005, the amount was approximately RMB4,595,000. Based on this rate of growth, it is therefore estimated that the amount for this category of transaction will grow at least five times in 2005 on average as compared to 2004 in aggregate. The aggregate annual amount for this category of transaction was RMB4,000,000 in 2004 and the projected figures in 2005 will be RMB28,800,000. The Company expects that this category of transaction will achieve continuous growth in 2006 and the projected figure in 2006 will be RMB51,840,000 . The Directors (including the independent non-executive directors of the Company) are of the view that the terms of the UHT milk and milk beverage products between Mengniu and certain Mengniu Subsidiaries for inventory adjustment purposes and the restated caps are on normal commercial terms which are fair and reasonable and is in the interest of the Company and its shareholders as a whole. Pursuant to Rule 14A.25 of the Listing Rules and as requested by the Stock Exchange, the proposed restated caps in respect of these inventory adjustment transactions as mentioned in this paragraph 4(A) would have to be aggregated with the proposed caps in respect of the inventory adjustment transactions as set out under paragraph 2(B) to this announcement. Such aggregation would result in each of the applicable percentage ratios (other than the profits ratio) for the inventory adjustment transactions being less than 2.5%. In accordance with Rule 14A.34 of the Listing Rules, the inventory adjustment transactions are subject to reporting and announcement requirements set out in Rules 14A.45 to 14A.47 of the Listing Rules. (B) Transfer of yogurt products amongst Mengniu, Mengniu Beijing and certain Mengniu Subsidiaries for inventory adjustment purposes (a) Background As disclosed under category 16 on page 116 in the Prospectus, the estimated cap amount of this category of transaction for the year 2005 and 2006 was capped at RMB6,000,000 and RMB8,000,000 respectively. The Company confirms that the cap, as disclosed in the Prospectus, for the year 2004 had been complied with. The Company further confirms that the approved cap for the year 2005 will not be exceeded prior to obtaining the approval of the independent shareholders in relation to the revised caps for the particular connected transaction which will be sought at the upcoming AGM. Based on the current forecast, the above maximum aggregate amount for the year 2005 and 2006 will be RMB20,000,000 and RMB48,000,000 respectively. These caps are extrapolated, based on the estimated expansion in the sales network of the Group, adjustment in product portfolio and introduction of new products in the coming two years. Prior to 2004, the amount of yogurt products transferred between Mengniu Subsidiaries for inventory adjustment purposes was not significant. This was mainly due to limited varieties of yogurt products manufactured by Mengniu and Mengniu Subsidiaries, which required insignificant inventory adjustments. In 2005, the Group strategically expanded its product portfolio, focusing on the high value-added yogurt products and will continue to develop new products. From January to March 2005, the Company introduced 23 new yogurt products which are mainly manufactured by Mengniu Beijing while other Mengniu Subsidiaries will be focusing on the production of existing yogurt products.