Richina Expands Its Interests In China

29 September 2004

Richina Significantly Expands Its Interests In China

Statement made by John Walker, Chairman, Richina Pacific Limited

In a ground breaking deal, Richina Pacific Limited has agreed to purchase for RMB 171 million (US$20.7 million) a 90% equity interest in Shanghai Leather Co Ltd (SLC), the joint venture partner with which Richina owns its world class Shanghai leather manufacturing operation, Shanghai Richina Leather Limited (SRL). Richina also has a three-year option to purchase from the vendor, Shanghai Light

Industry Holdings Company Group (LIH) or its successor, the remaining 10% interest in SLC. LIH was once one of Shanghai’s largest state-owned holding companies. Initially, Richina will pay 68% of the purchase price from internal funding. To complete the total transaction within the tight timeframe required by LIH and the Shanghai government, Richina may involve its largest shareholder, Richina Enterprise

Holdings Limited (REHL), as a co-investor. SLC, a Chinese state-owned enterprise, owns 5% of SRL, the land and buildings from which the SRL tannery operates, a majority equity interest in 45 other enterprises, and a minority equity interest in another 8 enterprises, all located in Shanghai. Most of its subsidiaries had or have operations associated with the leather industry. Richina Chairman, John Walker, stated that this acquisition will greatly expand the Chinese operations of Richina Pacific. “The Company is very excited by the prospects and opportunities presented by the SLC acquisition,” he said.

“As a result of this transaction, Richina Pacific will own almost all of the equity of our Shanghai tannery operations and the land and buildings its operations are dependent on, and in addition we will also control a significant number of associated businesses as well as large volumes of real estate holdings in one of the largest and fastest growing metropolises in the world.

“SLC’s real estate interests consist mainly of prime industrial land. Many of these sites may provide future development opportunities. “We were able to secure this significant investment through having an eight-year track record of investing in China and through our ownership of a China Holding Company with Regional Headquarter status in Shanghai.

This allowed Richina to meet the strict qualification requirements associated with the sale of such a significant State-owned enterprise group, a first for Shanghai. “Another major contributing factor was our understanding of the Chinese system and environment and our ability to act within the very tight timeframe the Shanghai government and LIH set for completion of this transaction, as LIH is being dissolved by the Shanghai government.”

The RMB 171 million that Richina is paying for its 90% equity interest in SLC equates to less than the net present value of SRL’s current lease obligations to SLC for the use of the land and buildings on the tannery site over the remaining 22-year lease term. As part of the purchase, Richina will employ close to 5,500 people currently on SLC’s and its subsidiaries’ payrolls and will assume responsibility for these employees’ welfare funds.

On October 18, 2004, Richina Pacific will pay 68% of the purchase price, and the final settlement date for the balance of the purchase price will be December 28, 2004. A final decision on the exact composition of the funding sources to meet the remaining purchase obligation has yet to be made.

Upon payment of 68% of the purchase price, management control of SLC will transfer from LIH to Richina. Richina will exercise its control through the appointment of four directors (including the Chairman) to the new five-person board of SLC. The remaining director will be a representative of LIH (or its successor) as long as it retains a 10% shareholding in SLC.

Head Office and Administration Centre Mr Walker said the opportunity to buy SLC came about when Richina’s strong interest in purchasing the land and buildings associated with its Shanghai tanneries coincided with the Chinese Government’s new policy for the State to become less involved in business and labour activities. “Rather than just sell us the land and buildings, they offered to sell us the entire SLC group as a going concern,” Mr Walker stated.

“This offer could not have come at a better time as Richina Pacific has achieved the financial flexibility to take advantage of the opportunity within the extremely tight timetable. “Initial funding for the acquisition will be largely from cash already held within Richina.

Subject to appropriate shareholder approvals, the remaining funds to complete the total purchase will be sourced from REHL or an independent investor in the form of a special purpose tracking security issued by Richina Pacific. “A tracking security will provide the co-investor with a pro rata economic interest in SLC but no voting rights.” Mr Walker said the acquisition was only possible because it had the overwhelming support of the 5,500 workers involved in the various SLC enterprises located throughout Shanghai.

“As a result, we have obtained Shanghai government support at the highest levels for this precedent-setting transaction and also the very timely approval of the Shanghai State Asset Management Authorities.”

The transaction is not fully unconditional. Final government approval is still to be received from the Shanghai Foreign Trade and Economic Co-operation Commission, which is expected within 60 days. For its part, Richina’s Board has recognized the need to ensure that adequate funding remains available to support Richina Pacific’s other ongoing operations, and this has led to the proposal for funding support from a co-investor, possibly REHL, a related party.

Under New Zealand Exchange (NZX) rules, to increase our interest from the current 68% to the full 90% and the potential use of related party funding will require shareholder approvals. A provisional date of December 8, 2004, has been set for the Special Meeting of shareholders to act on all necessary conditional aspects of the full acquisition. Head Office and Administration Centre

An independent appraisal report will be required, and PricewaterhouseCoopers, at Richina’s request, is seeking NZX approval to be appointed to prepare the report. “This very important transaction is expected to bring considerable benefits to the shareholders of Richina Pacific, as we realize and rationalize the various operational businesses of SLC and develop the potential of the total assets acquired,” Mr Walker stated.

“The transaction has been subjected to detailed scrutiny by all relevant Shanghai authorities as well as by the Board and management of Richina Pacific, the China Holding Company, and professional advisors from Shanghai, Auckland, New York, Hong Kong, and Singapore. This was a real team effort.” said Mr. Walker.

ENDS

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