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The Rupp Report: Possible New Major Shareholder For Fong's Group

Jürg Rupp, Executive Editor

Listed on the Hong Kong Stock Exchange since 1990, Fong's Industries Co. Ltd., with its headquarters in Hong Kong, is one of the world's leaders in the design, manufacture and sale of dyeing and finishing machinery, and together with its other major subsidiaries engages in stainless-steel trading and the manufacturing of stainless-steel casting products. The rumor about Fong's started last week at Heimtextil in Frankfurt: Some people said "off the record" they had heard that Fong's had been sold and that even the shares had been taken off the Hong Kong Stock Exchange. Now, based on information provided by Fong's Industries, here is the true story, which possibly will have major implications for the global textile machinery industry.

China Hengtian

On Jan. 14, 2011, China Hengtian Group Co. Ltd. and Fong's Industries Co. Ltd. announced that China Hengtian is to make a possible acquisition, subject to certain conditions for completion, for a majority interest in Fong's Industries. According to a sale and purchase agreement between China Hengtian and Fong Sou Lam — the controlling shareholder, chairman and director of Fong's Industries — China Hengtian has agreed to acquire 207,895,250 shares in the Fong's Group, or approximately 37.7 percent the company's issued share capital, from Fong Sou Lam for a cash consideration of HK$1,039,476,250 at HK$5.00 per share, by valuing the company at HK$2,757,231,425.

China Hengtian is a major state-owned enterprise whose principal business activities include textile machinery, cargo trucks, textile production and trade, as well as other strategic investments. The textile machinery business is one of its core business sectors. China Hengtian says that it holds an important position in the global textile machinery industry, and the company and its subsidiaries operate large-scale manufacturing bases in many locations in China.

Government Approval Required
In order to complete the acquisition, China Hengtian must obtain all necessary pertinent authorizations, approvals and consents from Chinese governmental and regulatory agencies. "Such authorizations, approvals and consents remain in full force and effect pursuant to the provisions of any laws or regulations in the PRC. The condition cannot be waived," the announcement states.The condition must be fulfilled on or before the long-stop date, May 7, 2011, or the agreement will be terminated automatically with no obligation on the part of either China Hengtian or Fong Sou Lam to complete the acquisition.

More Shares To Acquire
Because the acquisition would surpass the threshold specified by the Hong Kong Code on Takeover and Mergers, it is agreed that upon completion of the acquisition, Citigroup Global Markets Asia Ltd., on behalf of China Hengtian, will make an unconditional mandatory cash offer for all outstanding Fong's shares except those shares China Hengtian or other relevant parties other than Fong Sou Lam already own or have agreed to acquire at HK$5.00 per share.

The Target Is 55 Percent
China Hengtian has no previous or current interest in Fong's Industries. Once the acquisition is completed, Fong Sou Lam's 59.8-percent interest in Fong's Industries will drop to approximately 22.1 percent. Furthermore, in the event China Hengtian fails to acquire 55 percent or more shares of the company through the offer, Fong Sou Lam has committed to help China Hengtian build up its holding in Fong's Industries to 55 percent by accepting the offer for the number of shares of Fong's Industries that will result in China Hengtian reaching a 55-percent interest in the company upon completion of the offer.

In addition, if Fong's fails to meet the minimum public float requirement of 25 percent under the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Ltd. upon completion of the offer, Fong Sou Lam and China Hengtian have each committed to dispose of equal number of shares of Fong's Industries to the public in order to restore the minimum public float requirement.

China Hengtian has a controlling interest in other listed companies, such as Jinwei Textile Machinery Co. Ltd.

A Step Toward The Future
According to information provided, China Hengtian intends to continue Fong's Industries' existing businesses essentially as they are currently operating. It also intends to maintain Fong's listing status. Fong Sou Lam will continue to hold a substantial stake in the company. "The introduction of China Hengtian as Fong's Industries' major shareholder will enable us to further enhance our market position and brand effect in the long term," Fong said. "China Hengtian will offer strong support to us for our future development, facilitating us to achieve better economies of scale and to further strengthen our competitiveness in the field of dyeing and finishing machinery both in China and abroad."

January 18, 2011