Honghua : CONTINUING CONNECTED TRANSACTION AND MAJOR TRANSACTION FINANCIAL COOPERATION AGREEMENT

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Honghua Group Limited

宏華集團有限公司

(Incorporated in the Cayman Islands with limited liability)

(Stock Code: 196)

CONTINUING CONNECTED TRANSACTION AND

MAJOR TRANSACTION

FINANCIAL COOPERATION AGREEMENT

As disclosed by the announcement dated 1 June 2018 and the circular dated 5 June 2018 of the Company, the Company and Aerospace Science and Industry Financial Corporation entered into the Existing Financial Cooperation Agreement on 1 June 2018, which will expire on 31 May 2021. On 12 May 2021, the Company and Aerospace Science and Industry Financial Corporation entered into a Financial Cooperation Agreement, pursuant to which, Aerospace Science and Industry Financial Corporation will provide the Company with deposit services, lending and other comprehensive credit facilities services, and settlement services.

IMPLICATIONS UNDER THE LISTING RULES

As at the date of this announcement, CASIC indirectly holds 29.98% of the shares in the Company through its wholly-owned subsidiary Kehua, and therefore is a substantial shareholder and connected person of the Company. CASIC and its subsidiaries together hold a 100% equity interest in Aerospace Science and Industry Financial Corporation, thus Aerospace Science and Industry Financial Corporation is an associate of CASIC and in turn a connected person of the Company. Therefore, the transactions under the Financial Cooperation Agreement constitute connected transactions of the Company under Chapter 14A of the Listing Rules.

In respect of the deposit services under the Financial Cooperation Agreement, as one or more of the applicable percentage ratios of the transaction are higher than 25% but all are less than 100%, the above transactions also constitute major transaction of the Company under Chapter 14 of the Listing Rules. In respect of the lending and other comprehensive credit facilities services under the Financial Cooperation Agreement, one or more of the applicable percentage ratios of the transactions are higher than 5%. Therefore, the deposit services under the Financial Cooperation Agreement are subject to the reporting, announcement, annual review and the Independent Shareholders' approval requirements under Chapters 14 and 14A of the Listing Rules, and the lending and other comprehensive credit facilities services under the Financial Cooperation Agreement are subject to the reporting, announcement, annual review and the Independent Shareholders' approval requirements under Chapters 14A of the Listing Rules.

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The Company has established an Independent Board Committee and has appointed Gram Capital as an independent financial adviser. Independent Shareholders' approval for the Financial Cooperation Agreement will be sought at the AGM. A circular containing, among others, details on the Financial Cooperation Agreement, a letter of recommendation from the Independent Board Committee to the Independent Shareholders, and a letter of advice from Gram Capital to the Independent Board Committee and the Independent Shareholders will be despatched to Shareholders on or before 14 May 2021. As CASIC is deemed to have interest in the Financial Cooperation Agreement and thus CASIC and its associates will abstain from voting on approving the Financial Cooperation Agreement (including the proposed annual caps thereunder) at the AGM.

1. FINANCIAL COOPERATION AGREEMENT
   As disclosed by the Company's announcement dated 1 June 2018 and circular dated 5 June 2018, the Company and Aerospace Science and Industry Financial Corporation entered into the Existing Financial Cooperation Agreement on 1 June 2018, which will expire on 31 May 2021.
   Upon the approval of the Board of the Company, the Company and Aerospace Science and Industry Financial Corporation entered into the Financial Cooperation Agreement on 12 May 2021. A summary of the principal terms of the Financial Cooperation Agreement is set out as follows:
   Parties:
2. 1. the Company; and
   2. Aerospace Science and Industry Financial Corporation

Term:

Three years from 1 June 2021

Provision of Financial Services

According to the Financial Cooperation Agreement, Aerospace Science and Industry Financial Corporation will provide the Group with financial services including:

1. deposit services;
2. lending and other comprehensive credit facilities services; and
3. free settlement services.

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Proposed Annual Caps of Transactions under the Financial Cooperation Agreement

In determining the proposed annual caps under the Financial Cooperation Agreement, the Board has considered the following factors: (i) the historical transaction data between the Group and Aerospace Science and Industry Financial Corporation; (ii) the total cash and cash equivalents of the Group of RMB0.889 billion and RMB0.952 billion as at 31 December 2019 and 31 December 2020 respectively; and (iii) the total cash and cash equivalents of the Group of RMB1.85 billion as at 30 June 2017; and (iv) the maximum balance of the loan of the Group of RMB0.543 billion and RMB0.653 billion due to Aerospace Science and Industry Financial Corporation for the year ended 31 December 2019 and the year ended 31 December 2020 respectively.

In particular, in determining the proposed annual caps of lending and other comprehensive credit facilities services to be provided by Aerospace Science and Industry Financial Corporation to the Group under the Financial Cooperation Agreement, the Board has taken into account the following additional factors: (i) according to the Group's business plan and budget, the Group expects to have relatively large capital needs in several drilling rig projects, offshore wind power projects, and fracturing service businesses; (ii) Aerospace Science and Industry Financial Corporation, which used to provide financial support to the Group and has historical cooperation with the Group, has sufficient capital sources, relatively low capital costs and relatively stable credit policy, and can provide the Group with stable financing support; in comparison, the credit policy of independent-third-party financial institutions, which are affected by various factors such as regulatory policies, the credit scale of the head office, the capital costs and other factors, is relatively uncertain. Therefore, the Group needs the continuous and stable financing support from Aerospace Science and Industry Financial Cooperation.

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In accordance with its management requirements, Aerospace Science and Industry Financial Cooperation conducts a thorough assessment on its borrowers on annual basis based on the borrowers' financial and operating conditions in the previous year, determines the ratings of the borrowers, and in turn determines the amount of credit facilities to be granted to the borrowers in accordance with their respective rating. Due to the impacts of COVID-19 and declined demands in the oil service market, the financial performance of the Group in the year of 2020 recorded a decline as compared with the years of 2018 and 2019, which is not expected to suffice for obtaining 100% unsecured loans and/or credit facilities from Aerospace Science and Industry Financial Corporation in the year of 2021. Furthermore, since the COVID-19 has not been fully controlled, there still exist uncertainties in the oil and gas market, thus the loan policy to be provided by Aerospace Science and Industry Financial Corporation to the Group during the future three years is likely to become increasingly stricter.

According to the credit approval requirements of Aerospace Science and Industry Financial Cooperation, asset security must be provided by the Group for certain proportion of the loans and credit facilities granted as credit enhancement measures, and the proportion of secured loans and credit facilities will be determined according to the Group's annual ratings and other specific conditions. Therefore, there are uncertainties in respect of the amount of secured loan and/or credit facilities during the term of the Financial Cooperation Agreement. In order to facilitate flexible management, an annual cap of RMB650 million for lending and other credit facilities services secured by the Group's assets is proposed for Independent Shareholders' approval for each of the year during the term of the Financial Cooperation Agreement.

Historical Transaction Amounts of Transactions under the Financial Cooperation Agreement

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Annual Caps under the Existing Financial Cooperation Agreement

The Directors monitor the transaction amounts under the Existing Financial Cooperation Agreement on an ongoing basis. As at the date of this announcement, the transaction amounts under the Existing Financial Cooperation Agreement have not exceeded the annual cap for the 5 months ending 31 May 2021.

Pricing Policy

The price of each transaction under the Financial Cooperation Agreement shall be determined in accordance with the following pricing policy:

1. the applicable deposit interest rate of the Group at Aerospace Science and Industry Financial Corporation shall not be lower than the benchmark interest rate stipulated by the PBOC for such type of deposit during the same period, and shall be determined on general commercial terms;
2. the interest rates for the loans granted by Aerospace Science and Industry Financial Corporation to the Group shall be in accordance with the relevant regulations of the PBOC and the relevant loan interest rate policies and regulations of Aerospace Science and Industry Financial Corporation. At the time of entering into each loan contract, both parties shall negotiate with each other based on the market conditions of the time, and the interest rate shall generally not exceed the interest rate of the same kind of loans obtained by the Group from major commercial banks in the PRC during the same period;
3. for various financial services other than deposits and loans provided to the Group, fees charged by Aerospace Science and Industry Financial Corporation shall follow the principle of fairness and reasonableness and shall be charged at a rate no higher than the fair market price or the standard prescribed by the PRC;
4. the settlement expenses incurred by Aerospace Science and Industry Financial Corporation for the provision of settlement services for the Group shall be borne by Aerospace Science and Industry Financial Corporation. The Group shall not bear the relevant settlement expenses.

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