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(a joint stock company incorporated in the People’s Republic of China with limited liability)
(Stock code: 839)
CONTINUING CONNECTED TRANSACTIONS
Independent Financial Adviser to the Independent Board Committee
and the Independent Shareholders of the Company
Since 2011, the Company has been carrying out continuing connected transactions with certain Vallourec group entities in respect of theSales Agreement for the promotion and sale of seamless casing and tubing and/or plain end or green pipe for seamless casing and tubing and/or drill pipe applications, manufactured by the Company, worldwide except in the PRC, pursuant to the Cooperation Agreement. The Sales Agreement was expired on 7 February 2014 and the Company and the relevant Vallourecgroup entities entered into the Extension Agreement on 12 February 2014 which will be expired on 31 December 2014.
The Company intends to continue the sales transactions with Vallourec group entities upon the expiry of the Extension Agreement. As such, the Company and the relevant Vallourecgroup entities entered into the New SalesAgreement on 7November 2014 which will be expired on 31 December 2017.
As at the date of this announcement, Vallourec holds 196,000,000 H Shares of the Company, representing approximately 19.45% of the total issued share capital of the Company. Given that Vallourec is a substantial shareholder and thus a connected person of the Company, the entering into of the New SalesAgreement would therefore constitute continuing connected transactions between the relevant Vallourec group entities (being associates of Vallourec and thus also connected persons of the Company) and the Company.
As the anticipated Annual Cap for the three years ending 31 December 2017 in respect of the transactions contemplated by the New Sales Agreement exceeds HK$10,000,000 and theapplicable percentage ratios under the Listing Rulesare not less than 25%, the transactions contemplated bythe New Sales Agreement are subject to the reporting, announcement, Independent Shareholders’ approval and the annual review requirements under the Listing Rules.
An Independent Board Committee has been established to advise the Independent Shareholders and Gram Capitalhas been appointed to advise the Independent Board Committee and the Independent Shareholders in relation to the New Sales Agreement.
It is expected that a circular containing, among other things, further details of the New Sales Agreement, a letter of advice from the Independent Board Committee to Independent Shareholders, and a letter of advice from Gram Capital to the Independent Board Committee and Independent Shareholders, together with the notice convening the SGM, will be despatched to the Shareholders on or before 28 November 2014, that is within 15 business days after publication of this announcement, in accordance with the Listing Rules.
A. THE BACKGROUND
Since 2011, the Company has been carrying out continuing connected transactions with certain Vallourec group entities in respect of theSales Agreementfor the promotion and sale of seamless casing and tubing and/or plain end or green pipe for seamless casing and tubing and/or drill pipe applications, manufactured by the Company, worldwide except in the PRC, pursuant to the Cooperation Agreement. The Sales Agreement was expired on 7 February 2014, and the Company and the relevant Vallourec group entities entered into theExtension Agreement on 12 February 2014which will be expired on 31 December 2014.
The Company intends to continue the sales transactions with Vallourec group entities upon the expiry of the Extension Agreement. As such, the Company and the relevant Vallourec group entities entered into theNew Sales Agreement on 7November 2014.
B. THE NEW SALESAGREEMENT
The principal terms of the New Sales Agreement are set out as follows:
Date: 7November2014
Parties: (i) The Company
(ii) Vallourec Oil & Gas France (a subsidiary of Vallourec)
(iii) VOG (China) Trading Co., Ltd (a subsidiary of Vallourec)
(iv) Vallourec Asia Pacific Corp Pte., Ltd., (formerly known as Seamless Tubes Asia Pacific Pte. Ltd.) (a subsidiary of Vallourec) and
(v)Vallourec Middle East FZE (a subsidiary of Vallourec)
(Vallourec Oil & Gas France, VOG (China) Trading Co., Ltd.,Vallourec Asia Pacific Corp Pte., Ltd., and Vallourec Middle East FZE,together referred to as the “Distributor(s)”)
Terms:The New Sales Agreement shall be valid for a period commencing on the later of (i) 1 January 2015 and (ii) the date of compliance by the Company of all announcement, disclosure (and to the extent strictly required, Independent Shareholders’ approval) requirements under Chapter 14A of the Listing Rules, and shall remain effective until 31 December 2017.
According to the terms of the New Sales Agreement, the parties shall use their best efforts to renew the arrangement contemplated under the New Sales Agreementfor subsequent term(s) sufficient to ensure that the arrangement shall remain effective as long as the Cooperation Agreement is still in force. It shall terminate upon termination of the Cooperation Agreement.
Nature of Transaction: The Company appoints the Distributors as (i) its exclusive distributor for the promotion and sale of seamless casing and tubing and/or plain end or green pipe for seamless casing and tubing and/or drill pipe applications, manufactured by the Company (“Oil PipeProducts”), worldwide except in the PRC (the “Territory”). The Company shall sell the Oil Pipe Products only to the Distributors for resale in the Territory, and the Company shall not sell the Oil Pipe Products to users in the Territory; (ii) its exclusive distributor of premium products (the “Premium Products”) but limiting to the condition where the Distributors purchase and further process the Premium Products into premium products threaded with premium connection for re-sales worldwide; and (iii) as its non-exclusive distributor for promotion and sales of products other than the Oil Pipe Products and Premium Products (“Other Products”)within the Territory.
The Distributors shall be responsible for the advertising and promotion of the Oil Pipe Productsin the Territory and of the Premium Products worldwide provided that the use by the Distributors of any advertising materials and promotional literature shall be subject to the prior written consent of the Company.
Oil Pipe Products, Premium Products and Other Products are together referred to as the “Products”.
Consideration A monthly price list is determined by the Company’s managing office
and Payment: (made up of the senior management and heads of Finance Department, Sales Department, Purchase Department and Production Department, etc.) in monthly meeting after taking into account the factors including the Products’ production costs, the relative supply and demand of the Products andthe competitiveness in the market. The Company will provide the updated monthly price list to the Distributors for their reference, and it is approved by the Company’s general manager. The Company adopts the pricing policy of the Products with reference to the monthly price list and the ERP management system controls that the actual selling prices of the Productsshould not be lower than the monthly price list. The Distributors shall order the Products from the Company at a discount to the end customer quoted price. Separate contracts will be executed between the Company and the Distributors in relation to the Distributors’ offered price which shall be no less favourable than those productsof the same kind and of comparative quality offered by the Company to independent third parties in the PRC.
If the Distributors’ offered price is below the price listed in the prevailing monthly price list, the Board shall have the discretion to decide whether to accept or reject such orders. It is the Company’s internal control procedures in this respect as follows:
(i)Sales manager shall report to the Board whether acceptance of orders will be conducive to promotion of new products or beneficial for the Company to obtain other orders;
(ii)Finance manager shall report to the Board whether the offered prices of the Products are below the related costs;
(iii)Production department shall report to the Board whether there is spare production capacity of the production line to accept such orders or whether acceptance of such orders can improve production efficiency;
(iv)Provided that (a) all of the above managers or departments give positive opinion to the Board and (b) the offered price shall be no less favourable than those products of the same kind and of comparative quality offered by the Company to independent third parties in the PRC, then the Board will consider and approve for acceptance of such orders with its discretion.
The Distributors shall pay the full amount invoiced to themby the Company in US dollars within 45 days of delivery.
C. HISTORICAL AMOUNTS AND PROPOSED ANNUAL CAP
The Company’s cap amountsunder the ExtensionAgreement for the period ending 31 December 2014wasapproximately RMB1,000,000,000(equivalent to approximately HK$1,260,000,000), and the unaudited aggregate sales amountsearned by the Company under the ExtensionAgreement for the period ended 30 September 2014 was approximately RMB376,290,000 (equivalent to approximately HK$474,125,000).
The Boardproposes that the Annual Caps for thefinancial year ending 31 December 2015, 2016 and 2017 be RMB1,000,000,000 (equivalent to HK$1,260,000,000), RMB1,200,000,000 (approximately HK$1,512,000,000) and RMB1,400,000,000 (approximately HK$1,764,000,000]), respectively.The Annual Capsweredetermined with reference to, among other things: (i) the unaudited sales amounts earned under the ExtensionAgreementfor the period ended 30 September 2014; (ii) the agreed budget of total numbers of Productsexpected to be sold and the internal projection of Products expected to be sold based on discussions between the Company and the Distributors; (iii) potential improvement in sales as a result of the advertising and promotion activities carried out by the Distributors; and (iv) prevailing market prices of Products and the estimated annual growth rate of market prices for the Products. A buffer of 10% has been built in when the Annual Capsweredetermined with a view to taking into account possible further demand for the Products.
The Board is of the view that the said bases for determining the Annual Cap are fair and reasonable.
D. REASONS FOR AND BENEFITS OF THE TRANSACTIONS
Since 2009, the governments of the United States and European Union have imposed anti-dumping measures and countervailing duties on imported Chinese-made oil pipes, accusing the relevant imports as selling below fair market value. Such policies restricted the Company’s abilities to sell the Oil Pipe Products directly in the overseas markets and it imposed adverse effects on the business of the Company. However, in September 2010, the entering into of the Shareholders Agreement symbolized strategic partnership between the Company and Vallourec Group. Making use of the Distributor’s global supply network, the Company maintained its sales of the Oil Pipe Products outside the PRC through the Sales Agreement and the Extension Agreement despite the restrictions in certain key markets overseas. In the past few years under the Sales Agreement and the Extension Agreement, the Company’s Oil Pipe Products had been sold to the global oil field enterprises, such as France’s Total, Kuwait National Petroleum Company, etc.
In addition, currently the Company is able to sell its manufactured Premium Products in form of Premium Products or premium products threaded with premium connections. When sold in latter form, the Company has to engage VAM CZ (a subsidiary of Vallourec) to process the Premium Products into the premium products threaded with premium connections branded with Vallourec pursuant to the Extended Processing Agreement,the Extended Trademark License Agreementand the Extended Technical and Commercial Support Agreement before selling the processed products in Chinaas the Company does not own the relevant patentedtechnology. However, in reality, customers are more willing to accept that Vallourec sells its own brandedpremium productsthreaded with premium connections for ensuring the quality. Therefore the Company believes that the appointment of Distributors to sell the Premium Productsnot only savesthe processing fees, royalty fee for trademark license and the technical support fee, but also is more conducive to market development.
Strategically, the entering into of the New SalesAgreement indicates the willingness and intention of continuingthe existing strategic partnership between the Company and Vallourec group. The New Sales Agreement will help the Groupcontinue to realize its vision of global development strategies and enlarge its customer base.
The Groupshould be able to expand its product offerings in the PRC of new products equipped with more advanced technologies and through the New Sales Agreement, maintain its sales outside of the PRC despite the current restrictions in certain key markets overseas and is conducive to market development for the Premium Products. Such cooperation would accordingly continue to enhance the Group’s competitiveness in line with the long term interest of the Groupand the Board believes that the terms of the New Sales Agreement are fair and reasonable and in the interests of the Shareholders and the Group as a whole.
E. INFORMATION ON THE COMPANY, VALLOUREC AND OTHERS
The principal business activities of the Company are designing, developing, manufacturing and selling seamless steel pipes for oil and natural gas exploration, transmission and refining, seamless steel pipes for boilers and vessels and petrochemical machinery accessories.
Vallourec is a world leader in premium tubular solutions primarily serving the energy markets, as well as other industrial applications. Listed on Euronext in Paris, Vallourec operates with about22,000 employees, integrated manufacturing facilities and advanced research and development, and haspresence in more than 20 countries to offer its customers innovative global solutions to meet the growing energy challenges inthe 21st century.
Vallourec Oil & Gas France, VOG (China) Trading Co., Ltd., and Vallourec Asia Pacific Corp Pte. Ltd.,and Vallourec Middle East FZE are subsidiaries of Vallourec.
F. IMPLICATIONS UNDER THE LISTING RULES
Vallourec holds 196,000,000 H Shares of the Company, representing approximately 19.45% of the total issued share capital of the Company as at the date of this announcement. Given that Vallourec is a substantial shareholder and thus a connected person of the Company, the New Sales Agreement would therefore constitute continuing connected transactions between the relevant Vallourec group entities (being associates of Vallourec and thus also connected persons of the Company)and the Company.
As the anticipated Annual Caps for the three years ending 31 December 2017 in respect of the transactions contemplated by the New Sales Agreement exceeds HK$10,000,000 andthe applicable percentage ratios under the Listing Rulesare not less than 25%, the transactions contemplated bythe New Sales Agreement are subject to the reporting, announcement, Independent Shareholders’ approval and the annual review requirements under the Listing Rules.
If the Annual Caps set out in this announcement for the three years ending 31 December 2017islikely to be exceeded, the Company will ensure re-compliance in accordance with Rule 14A.36 of the Listing Rules. The transactions will continue to be subject to the annual review requirements set out in Chapter 14A of the Listing Rules.
Details of the New Sales Agreement will be disclosed in the Company’s published annual report and accounts for the three financial years ending 31 December 2017 as required under the Rule 14A.45 and Rule 14A.46 of the Listing Rules.
The Directors, including the independent non-executive Directors, are of the opinion that the terms of the New Sales Agreement are made at arm’s length negotiations and represent normal commercial terms which areno less favourable to the Company than terms available to independent third parties and are fair and reasonable and in the interests of the Groupand the Shareholders as a whole.
G. GENERAL
As at the date of this announcement, Mr. Ye Shiqu (being the Chairman and an executive Director of the Company) is interested in (i)20,000,000 H Shares (representing approximately 4.02% of the total issued H Shares and approximately 1.98% of the total number of Shares in issue) held directly by Tiancheng Changyun through his controlled corporation Tianda Holding which in turn controls Anhui Tianda (Group) Company Limited, the holding company of Tiancheng Changyun; and (ii) 29,293,000 H Shares (representing approximately 5.89% of the total issued H Shares and approximately 2.91% of the total number of Shares in issue) held directly by Tianfa through his controlled corporation Tianda Holding which in turn controls Tianda Investment, the holding company of Tianfa. Mr. Ye Shiqu is also interested in 510,000,000 Domestic Shares in aggregate (representing 100% of the total issued Domestic Shares and approximately 50.61% of the total Shares in issue) held directly by Tianda Investment and Tianda Holding, the holding company of Tianda Investment.
To the best of the Directors’ knowledge, information and belief, having made all reasonable enquiries, apart from Tianda Holding, Tianda Investment, Tiancheng Changyun, Mr. Ye Shiqu, Vallourec, Tianfa and their respective associates, no other Shareholder has a material interest in the New Sales Agreement and accordingly, only the aforesaid persons are required to abstain from voting on the resolutions to approve matters in relation to the New Sales Agreement at the SGM.
An Independent Board Committee has been established to advise the Independent Shareholders and Gram Capitalhas been appointed to advise the Independent Board Committee and the Independent Shareholders in relation to the New Sales Agreement.
It is expected that a circular containing, among other things, further details of the New Sales Agreement, a letter of advice from the Independent Board Committee to Independent Shareholders, and a letter of advice from Gram Capital to the Independent Board Committee and Independent Shareholders, together with the notice convening the SGM, will be despatched to the Shareholders on or before 28 November2014, that is within 15 business days after publication of this announcement, in accordance with the Listing Rules.