THIS CIRCULAR IS IMPORTANT AND REQUIRES YOUR IMMEDIATE ATTENTION

If you are in doubt as to any aspect of this circular or as to the action to be taken, you should consult a licensed securities dealer or registered institution in securities, bank manager, solicitor, professional accountant or other professional adviser.

If you have sold or transferred all your shares in China Shengmu Organic Milk Limited, you should at once hand this circular and the accompanying form of proxy to the purchaser(s) or the transferee(s) or to the bank, the licensed securities dealer or registered institution or other agent through whom the sale or transfer was effected for transmission to the purchaser(s) or the transferee(s).

Hong Kong Exchanges and Clearing Limited and The Stock Exchange of Hong Kong Limited take no responsibility for the contents of this circular, make no representation as to its accuracy or completeness and expressly disclaim any liability whatsoever for any loss howsoever arising from or in reliance upon the whole or any part of the contents of this circular.

CHINA SHENGMU ORGANIC MILK LIMITED

中 國 聖 牧 有 機 奶 業 有 限 公 司

(Incorporated in the Cayman Islands with limited liability)

(Stock Code: 1432)

(1) CONTINUING CONNECTED TRANSACTIONS

RAW FRESH MILK SUPPLY FRAMEWORK AGREEMENT AND

FINANCIAL ASSISTANCE FRAMEWORK AGREEMENT

AND

(2) NOTICE OF THE EXTRAORDINARY GENERAL MEETING

Independent Financial Adviser to

the Independent Board Committee and the Independent Shareholders

SOMERLEY CAPITAL LIMITED

Capitalised terms used in this cover page have the same meanings as those defined in this circular.

A letter from the Board is set out on pages 6 to 22 of this circular. A letter from the Independent Board Committee containing its recommendation to the Independent Shareholders is set out on pages 23 to 24 of this circular. A letter from the Independent Financial Adviser, Somerley Capital Limited, containing its advice to the Independent Board Committee and the Independent Shareholders is set out on pages 25 to 43 of this circular.

A notice convening the EGM to be held at 2:00 p.m. on 27 March 2020 at Conference Room, 2/F, Shengmu Building, Shaerqin Industrial Park, Southern District of Ruyi Development New Zone, Tumotezuoqi, Hohhot, Inner Mongolia Autonomous Region, the PRC is set out on pages 52 to 54 in this circular. A form of proxy for use at the EGM is enclosed with this circular. Such form of proxy is also published on the websites of The Stock Exchange of Hong Kong Limited (www.hkexnews.hk) and the Company (http://www.youjimilk.com).

Whether or not you are able to attend the EGM, please complete and sign the enclosed form of proxy in accordance with the instructions printed thereon and return it to the office of the Company's branch share registrar in Hong Kong, Tricor Investor Services Limited, at Level 54, Hopewell Centre, 183 Queen's Road East, Hong Kong as soon as possible and in any event not less than 48 hours before the time appointed for the holding of the EGM or any adjournment thereof. Completion and return of the form of proxy will not preclude Shareholders from attending and voting in person at the EGM or any adjourned meeting thereof if they so wish.

6 March 2020

CONTENTS

Page

DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1

LETTER FROM THE BOARD . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

6

LETTER FROM THE INDEPENDENT BOARD COMMITTEE . . . . . . . . . . . . . . . . . . . .

23

LETTER FROM SOMERLEY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

25

APPENDIX I - GENERAL INFORMATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

44

NOTICE OF THE EGM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

52

− i −

DEFINITIONS

In this circular, the following expressions have the meanings as set out below unless the context requires otherwise:

"Adjustment"

has the meaning given to it under the section headed "Letter

from the Board - (2) Warrant Subscription Agreements -

(iii) Principal Terms of the Warrants" of the circular of the

Company dated 7 January 2019 in relation to, among other

things, the Warrant Subscription Agreement A entered into by

the Company with Start Great

"associate(s)"

has the meaning ascribed thereto under the Listing Rules

"Beijing Zhi Nong"Beijing Zhi Nong Investment Co., Ltd. (北京智農投資有限責 任公司), a company incorporated in the PRC

"Board"

the board of Directors

"China Mengniu"

China Mengniu Dairy Company Limited (中國蒙牛乳業有限

公司), a company incorporated in the Cayman Islands with

limited liability, the shares of which are listed on the Main

Board of the Stock Exchange (stock code: 2319)

"China Mengniu Group"

China Mengniu and its subsidiaries from time to time

"Company"

China Shengmu Organic Milk Limited (中國聖牧有機奶業有

限公司), a company incorporated in the Cayman Islands with

limited liability, the shares of which are listed on the Main

Board of the Stock Exchange (stock code: 1432)

"connected person(s)"

has the meaning ascribed thereto under the Listing Rules

"Consideration Shares"

688,705,234 new Shares to be allotted and issued by the

Company as part of the consideration to the Equity Transfer

Framework Agreement

"controlling shareholder"

has the meaning ascribed thereto under the Listing Rules

"Dabeinong Group"

Beijing Dabeinong Technology Group Co., Ltd. (北京大北農

科技集團股份有限公司), a company incorporated in the PRC

whose shares are listed on the Shenzhen Stock Exchange

(stock code: 002385)

"Director(s)"

the director(s) of the Company

− 1 −

DEFINITIONS

"EGM"

the extraordinary general meeting of the Company to be held

at 2:00 p.m. on 27 March 2020 at Conference Room, 2/F,

Shengmu Building, Shaerqin Industrial Park, Southern

District of Ruyi Development New Zone, Tumotezuoqi,

Hohhot, Inner Mongolia Autonomous Region, the PRC for the

purpose of considering and, if thought fit, approving, among

others, the Framework Agreements and the transactions

contemplated under such agreements

"Equity Transfer Framework

the equity transfer framework agreement dated 21 December

Agreement"

2018 entered into by the Company, Shengmu High-tech, 12

individual shareholders and Shengmu Sand and Grass in

relation to the proposed acquisition of 100% equity interest in

Shengmu Sand and Grass by the Company and Shengmu

High-tech from the 12 individual shareholders by issue of

Consideration Shares and by cash

"Financial Assistance

the financial assistance framework agreement dated 30

Framework Agreement"

December 2019, entered into between Shengmu High-tech

and Inner Mongolia Mengniu, in relation to the provision of

entrusted loans by the China Mengniu Group to the Group for

a three-year term from 1 January 2020 to 31 December 2022

"Framework Agreements"

the Raw Fresh Milk Supply Framework Agreement and the

Financial Assistance Framework Agreement

"Group"

the Company and its subsidiaries from time to time

"Hong Kong"

Hong Kong Special Administrative Region of the PRC

"Huhehaote Dairy"

Huhehaote Mengniu Shengmu High-tech

Dairy

Co., Ltd

(呼和浩特市蒙牛聖牧高科乳品有限公司),

a

company

established in the PRC with limited

liability and

a

wholly-owned subsidiary of Inner Mongolia Mengniu as at

the Latest Practicable Date

"Independent Board

a committee of the Board comprising all the independent

Committee"

non-executive Directors, namely Mr. Fu Wenge, Mr. Wang

Liyan and Mr. Li Xuan

"Independent Financial

Somerley Capital Limited, a corporation licensed by the

Adviser" or "Somerley"

Securities and Futures Commission to carry out Type 1

(dealing in securities) and Type 6 (advising on corporate

finance) regulated activities under the Securities and Futures

Ordinance, and being the independent financial

adviser

to

advise the Independent Board Committee and the Independent Shareholders in respect of the terms of the Framework Agreements and the transactions contemplated under such agreements

− 2 −

DEFINITIONS

"Independent Shareholders" the shareholders of the Company, except Start Great and its associate(s)

"Inner Mongolia Mengniu" Inner Mongolia Mengniu Dairy (Group) Company Limited

(內蒙古蒙牛乳業(集團)股份有限公司), a company established in the PRC with limited liability and a wholly-owned subsidiary of China Mengniu as at the Latest Practicable Date

"Latest Practicable Date"3 March 2020, being the latest practicable date prior to the printing of this circular for ascertaining certain information contained herein

"Listing Rules"

the Rules Governing the Listing of Securities on The Stock

Exchange of Hong Kong Limited (as amended from time to

time)

"Nong You"

Nong You Co., Ltd., a company incorporated in the British

Virgin Islands which holds approximately 20.48% of the total

issued shares of the Company as at the Latest Practicable

Date

"PRC"

the People's Republic of China, and for the purpose of this

circular, excludes Hong Kong Special Administrative Region,

Macau Special Administrative Region and Taiwan

"Raw Fresh Milk Supply

the raw fresh milk supply framework agreement dated 30

Framework Agreement"

December 2019, entered into between Shengmu High-tech

and Inner Mongolia Mengniu, in relation to the purchase of

raw fresh milk by China Mengniu Group from the Group for

a three-year term from 1 January 2020 to 31 December 2022

"RMB"

Renminbi, the lawful currency of the PRC

"Shares"

ordinary share(s) of par value HK$0.00001 each in the issued

share capital of the Company

"Shareholder(s)"

holder(s) of the Shares

"Shengmu High-tech"

Inner Mongolia Shengmu High-tech Farming Co., Ltd (內蒙

古聖牧高科牧業有限公司), a company incorporated in the

PRC and an indirectly wholly-owned subsidiary of the

Company

"Shengmu Holding"

Inner Mongolia Shengmu Holding Co., Ltd (內蒙古聖牧控股

有限公司), a company incorporated in the PRC and a

wholly-owned subsidiary of the Company

− 3 −

DEFINITIONS

"Shengmu Pangu"

Bayannur Shengmu Pangu Farming Co., Ltd. (巴彥淖爾市聖

牧盤古牧業有限責任公司), a company incorporated in the

PRC and a non-wholly-owned subsidiary of the Company

which is a connected person of the Company

"Shengmu Sand and Grass"

Inner Mongolia Shengmu Sand and Grass Industry Co., Ltd.

(內蒙古聖牧沙草業有限公司), a company incorporated in the

PRC and a non-wholly-owned subsidiary of the Company

"Start Great"

Start Great Holdings Limited, a company established in the

British Virgin Islands with its registered office at Vistra

Corporate Services Centre, Wickhams Cay II, Road Town,

Tortola, VG1110, British Virgin Islands, which is a direct

wholly-owned subsidiary of China Mengniu

"Stock Exchange"

The Stock Exchange of Hong Kong Limited

"Subscription Period of

the eighteen-month period commencing from the completion

Warrants A"

date of the respective Warrants A

"Subscription Period of

the eighteen-month period commencing from the completion

Warrants B"

date of the respective Warrants B

"Subscription Price of

HK$0.33 per Warrant Share A, subject to Adjustment of

Warrants A"

Warrants A

"Subscription Price of

HK$0.33 per Warrant Share B, subject to Adjustment of

Warrants B"

Warrants B

"Subscription Rights of

1,197,327,890 unlisted warrants conferring rights to

Warrants A"

subscribe for Warrant Shares A at the Subscription Price of

Warrants A during the Subscription Period of Warrants A

"Subscription Rights of

140,862,105 unlisted warrants conferring rights to subscribe

Warrants B"

for Warrant Shares B at the Subscription Price of Warrants B

during the Subscription Period of Warrants B

"substantial shareholder"

has the meaning ascribed to it under the Listing Rules

"Tranche 1 Warrants A"

tranche 1 of Warrants A in relation to 1,080,248,000 Warrant

Shares A to be issued by the Company upon the exercise of

the Subscription Rights of Warrants A attached to Tranche 1

Warrants A

"Tranche 1 Warrant Shares A"

1,080,248,000 Warrant Shares to be issued by the Company

upon the exercise of the Subscription Rights of Warrants A

attached to Tranche 1 Warrants A

− 4 −

DEFINITIONS

"Tranche 1 Warrant Shares B"

127,088,000 Warrant Shares to be issued by the Company

upon the exercise of the Subscription Rights of Warrants B

attached to Tranche 1 Warrants B

"Tranche 2 Warrant Shares A"

117,079,890 Warrant Shares to be issued by the Company

upon exercise of the Subscription Rights of Warrant A

attached to Tranche 2 Warrants A

"Tranche 2 Warrant Shares B"

13,774,105 Warrant Shares to be issued by the Company upon

exercise of the Subscription Rights of Warrants B attached to

Tranche 2 Warrants B

"Warrant(s) A"

an aggregate of 1,197,327,890 unlisted warrants conferring

rights to subscribe for up to 1,197,327,890 Warrant Shares A

at the Subscription Price of Warrants A (subject to

Adjustment of Warrants A), at any time during the

Subscription Period of Warrants A, in accordance with the

terms of the Warrant Subscription Agreement A

"Warrant(s) B"

an aggregate of 140,862,105 unlisted warrants conferring

rights to subscribe for up to 140,862,105 Warrant Shares B at

the Subscription Price of Warrants B (subject to Adjustment

of Warrants B), at any time during the Subscription Period of

Warrants B

"Warrant Share(s) A"

the new Shares to be issued by the Company upon the

exercise of Subscription Rights of Warrants A

"Warrant Share(s) B"

the new Shares to be issued by the Company upon the

exercise of the Subscription Rights of the Warrants B

"Warrant Subscription

the warrant subscription agreement dated 23 December 2018,

Agreement A"

entered into between the Company and Start Great including

the warrant instrument in relation to the terms of the Warrants

A, pursuant to which Start Great has agreed to subscribe for,

and the Company has agreed to issue, the Warrants A

"%"

per cent

Translated English names of Chinese natural persons, legal persons or other entities for which no official English translation exist are unofficial translation for identification purpose only.

− 5 −

LETTER FROM THE BOARD

CHINA SHENGMU ORGANIC MILK LIMITED

中 國 聖 牧 有 機 奶 業 有 限 公 司

(Incorporated in the Cayman Islands with limited liability)

(Stock Code: 1432)

Executive Directors:

Registered office:

Mr. Yao Tongshan

P.O. Box 309

Mr. Wu Jianye

Ugland House

Mr. Zhang Jiawang (Chief Executive Officer)

Grand Cayman, KY1-1104

Cayman Islands

Non-executive Directors:

Mr. Shao Genhuo (Chairman)

Headquaters and principal place of

Mr. Sun Qian

business in the PRC

Mr. Wen Yongping

Food Industry Park

Deng Kou County

Independent non-executive Directors:

Bayannur City

Mr. Fu Wenge

Inner Mongolia Autonomous Region

Mr. Wang Liyan

PRC

Mr. Li Xuan

Principal place of business in

Hong Kong

Unit 1303, 13/F

Hua Fu Commercial Building

111 Queen's Road West

Hong Kong

6 March 2020

To the Shareholders

Dear Sir or Madam,

CONTINUING CONNECTED TRANSACTIONS

RAW FRESH MILK SUPPLY FRAMEWORK AGREEMENT

AND

FINANCIAL ASSISTANCE FRAMEWORK AGREEMENT

INTRODUCTION

Reference is made to the announcement of the Company dated 30 December 2019 in relation to, among other things, the Raw Fresh Milk Supply Framework Agreement, the Financial Assistance Framework Agreement, the transactions contemplated under such agreements and the proposed annual caps for such transactions for the three years ending 31 December 2020, 2021 and 2022.

− 6 −

LETTER FROM THE BOARD

The purpose of this circular is to provide you with, among other things:

  1. information as is necessary to enable you to make an informed decision on whether to vote for or against the resolutions to be proposed at the EGM relating to each of the Framework Agreements, the transactions contemplated under such agreements and the proposed annual caps for such transactions for the three years ending 31 December 2020, 2021 and 2022;
  2. the letter of recommendation from the Independent Board Committee to the Independent Shareholders relating to each of the Framework Agreements, the transactions contemplated under such agreements and the proposed annual caps for such transactions for the three years ending 31 December 2020, 2021 and 2022;
  3. the letter of advice from Somerley to the Independent Board Committee and the Independent Shareholders relating to each of the Framework Agreements, the transactions contemplated under such agreements and the proposed annual caps for such transactions for the three years ending 31 December 2020, 2021 and 2022;
  4. the notice of the EGM; and
  5. other information as required to be disclosed under the Listing Rules.

The Company announces that, (i) on 30 December 2019, Shengmu High-tech (for itself and on behalf of the Group), an indirect wholly-owned subsidiary of the Company, entered into the Raw Fresh Milk Supply Framework Agreement with Inner Mongolia Mengniu (for itself and on behalf of the China Mengniu Group), in relation to the purchase of raw fresh milk by China Mengniu Group from the Group for a term of three years commencing from 1 January 2020 to 31 December 2022; and

  1. on 30 December 2019, Shengmu High-tech (for itself and on behalf of the Group) entered into the Financial Assistance Framework Agreement with Inner Mongolia Mengniu (for itself and on behalf of the China Mengniu Group) in relation to the provision of entrusted loans by the China Mengniu Group to the Group for a term of three years commencing from 1 January 2020 to 31 December 2022.

THE FRAMEWORK AGREEMENTS

The Raw Fresh Milk Supply Framework Agreement

Principal Terms

The principal terms of the Raw Fresh Milk Supply Framework Agreement are summarised as follows:

Date:

30 December 2019

Parties:

Shengmu High-tech (for itself and on behalf of the Group)

and Inner Mongolia Mengniu (for itself and on behalf of the

China Mengniu Group)

− 7 −

LETTER FROM THE BOARD

Term:

From 1 January 2020 to 31 December 2022

Principal terms:

The Group shall sell raw fresh milk which meets China

Mengniu Group's purchasing standard and quality

requirements to China Mengniu Group on a daily basis in

accordance with the monthly milk supply plan. The specific

volume to be purchased shall be subject to the volume as

confirmed by the Group and China Mengniu Group. The daily

delivery volume is determined by the volume as weighted by

China Mengniu Group.

Purchase price and other

The purchase price of raw fresh milk shall be determined and

terms:

adjusted in accordance with market conditions and seasonal

factors. The final purchase price of raw fresh milk varies in

accordance with the quality grade as agreed between the

Group and China Mengniu Group. Quality of milk supplied

by the Group shall comply with the standards set by the

government and the requirements of China Mengniu Group.

China Mengniu Group shall purchase all raw fresh milk

produced by the Group which meets such standards. The

Group shall ensure that at least 80% of the raw fresh milk it

produces will be sold to the China Mengniu Group. During

the contract period, if the rating of the quality grade of the

raw fresh milk from the Group changes, the purchase price

shall be calculated in accordance with the latest rating. The

Group shall be responsible for delivering raw fresh milk to

the places designated by China Mengniu Group. If the Group

is unable to deliver milk punctually, China Mengniu Group

shall be notified at least 24 hours prior to the scheduled

delivery and the Group shall bear losses suffered by China

Mengniu Group.

Payment terms:

China Mengniu Group shall pay monthly in accordance with

purchase volume of raw fresh milk and payment for raw fresh

milk purchase last month shall be settled by the end of the

current month. The specific payment date shall be before the

30th calendar day of each month (the 28th day for February).

Amendment and termination:

Any amendment to or the termination of the Raw Fresh Milk

Supply Framework Agreement shall be made in writing by the

parties.

− 8 −

LETTER FROM THE BOARD

Pricing Mechanism

The Group adopted two different pricing mechanisms for sale of its organic raw fresh milk and non-organic raw fresh milk respectively.

For organic raw fresh milk, the Group formulates an annual supply plan which is then divided into monthly supply plans by taking into account of the volume required by China Mengniu Group. The organic raw fresh milk supplied according to the monthly supply plans is subject to a higher unit price which is negotiated with reference to the cost of production, average gross margin rate of the dairy farming industry, market cycle and the price of organic raw fresh milk produced by other companies in the nearby region on an annual basis. The Group will sell the organic raw fresh milk it has produced that exceeds the monthly supply plans to other customers, after which the remaining organic raw fresh milk will be sold to China Mengniu Group at a lower unit price compared to those supplied according to the monthly supply plans. Such lower unit price is also calculated on an annual basis with an 8% mark-up over the average price of non-organic raw fresh milk supplied by the Group to China Mengniu Group in the last financial year.

For non-organic raw fresh milk, the unit price is determined on a monthly basis and consists of the base part and the adjustment part. The base part is quoted by China Mengniu Group based on market conditions and seasonal factors and with reference to price of products with similar grades from dairy farms in the nearby region. The adjustment part is calculated based on a number of indicators, including protein, fat, freezing point, micro-organism and somatic cells figures of the non-organic raw fresh milk tested by qualified laboratories each month.

For organic raw fresh milk, the sales department of the Group (the "Sales Department") will review on a monthly basis the actual volume of supply, whether the supply exceeded the Group's monthly supply plan and the calculation of the unit price for the supply that exceeded the Group's monthly plan. For non-organic raw fresh milk, the Sales Department will review on a monthly basis the actual volume of supply and evaluate the fairness of the unit price quoted by China Mengniu Group by examining the test results of the indicators and whether the unit price has correctly reflected the test results. For both organic and non-organic raw fresh milk, the Sales Department will also enquire with at least three other dairy farms in the nearby region which supply raw fresh milk to China Mengniu Group and other major dairy products manufacturers in the nearby region in order to assess the fairness of the unit price quoted by China Mengniu Group. As a result of the foregoing, the Board considers that the pricing methods and procedures for the Raw Fresh Milk Supply Framework Agreement can ensure that the transactions will be conducted on normal commercial terms and will not be prejudicial to the interests of the Company and its minority shareholders.

− 9 −

LETTER FROM THE BOARD

Internal Control Mechanism for Timely Delivery of Raw Fresh Milk

The Group has established an internal control mechanism to ensure the timely delivery of raw fresh milk. The Group maintains a three-month rolling plan for the herd and milk production to ensure that the Group has sufficient milk production capacity to meet the monthly supply plans of organic and non-organic raw fresh milk. The dairy farms of the Group and the dairy products manufacturing facilities of China Mengniu Group are located in the same region. The maximum transportation distance for the supply of raw fresh milk from the dairy farms of the Group to the manufacturing facilities of China Mengniu Group is less than 80 kilometres and the transportation time is approximately one hour. The Group is able to coordinate additional resources to meet the monthly supply plans if there is any emergency situation.

To the best of the Directors' knowledge, information and belief having made all reasonable enquiry, the term in the Raw Fresh Milk Supply Framework Agreement that the Group shall bear the losses suffered by China Mengniu Group if the Group fails to deliver raw fresh milk punctually is a common term in similar agreements between China Mengniu Group and its suppliers of raw fresh milk including the Group. Therefore, the Board considers that such term is of normal commercial terms and in the interest of the Company. As at the Latest Practicable Date, the Group has not incurred any penalty due to late delivery of raw fresh milk to China Mengniu Group historically.

Reasons for and Benefits of Entering into the Raw Fresh Milk Supply Framework Agreement

As disclosed in the circular of the Company dated 7 January 2019 (the "Circular"), the Company entered into a share purchase agreement (the "First Share Purchase Agreement") on 23 December 2018 with, among other parties, Inner Mongolia Mengniu in relation to the disposal of 24.33% interests in Inner Mongolia Shengmu High-tech Dairy Co., Ltd. (內蒙古聖牧高科奶業有限公

司) (the "Target Company") held by a subsidiary of the Company and 26.67% interest in the Target Company held by another subsidiary of the Company, representing in aggregate 51% of the entire share capital of the Target Company to Inner Mongolia Mengniu. Upon completion of the First Share Purchase Agreement in May 2019, the Company indirectly held 49% interests in the Target Company through Shengmu High-tech and the Target Company ceased to be recognised as a subsidiary of the Company and the Group ceased to conduct the downstream dairy product business. Further, as disclosed in the announcement of the Company dated 22 January 2020, Shengmu High-tech, Inner Mongolia Mengniu and the Target Company entered into a share purchase agreement (the "Second Share Purchase Agreement") pursuant to which Shengmu High-tech agreed to dispose of, and Inner Mongolia Mengniu agreed to purchase 49% interests in the Target Company held by Shengmu High-tech, and the Target Company shall split its dairy products sales business whose assets and liabilities shall be injected into a new company which is 51% and 49% held by Inner Mongolia Mengniu and Shengmu High-tech respectively. Upon completion of the disposal under the Second Share Purchase Agreement in January 2020, Inner Mongolia Mengniu held 100% interests in the Target Company. The Target Company ceased to be recognised as an investment in the consolidated financial statements of the Company, and will be recognised as a wholly-owned subsidiary of Inner Mongolia Mengniu in its consolidated financial statements.

− 10 −

LETTER FROM THE BOARD

One of the condition precedents for the completion of the First Share Purchase Agreement is the entering into of the priority supply agreements (the "Priority Supply Agreements") by the Company and the Target Company and Huhehaote Dairy respectively, pursuant to which the Company has agreed that it will, and it will also procure its subsidiaries to, provide raw fresh milk to the Target Company and Huhehaote Dairy with priority under the same conditions. The Company entered into the Priority Supply Agreements with the Target Company and Huhehaote Dairy respectively on 23 December 2018.

As disclosed in the section headed "Reasons for and benefits of the Share Purchase Agreement" of the Circular, considering the economic slowdown and intense competitions in Chinese dairy industry, and in order to achieve a good development of its dairy business, the Group is required to invest in extensive resources. Through its cooperation with China Mengniu Group, the Company can have a coordinated development for its dairy business while effectively supplementing its working capital demand at the same time. The Company can also focus on operating its dairy farming business and raw fresh milk business in the PRC, bringing benefits to the Company's sustainable development in the long term.

As one of the leading dairy product manufacturers in the PRC, China Mengniu Group is equipped with a strong management team and a solid Chinese dairy product distribution network. The Company believes that with China Mengniu Group's core advantages and the favourable dairy policy introduced by the government of the PRC, it can bring values to the Shareholders via maintaining a mutually beneficial partnership with China Mengniu Group. The sale of raw fresh milk under the Raw Fresh Milk Supply Framework Agreement will ensure stable revenue and cash flow for the Group. In light of the growing market demand for organic dairy products, China Mengniu Group created the brand of Milk Deluxe which has been positioned as a high-end organic milk product. The key characteristic of Milk Deluxe is that its ingredient comes from dairy farms in the Ulan Buh Desert at the "Golden Milk Belt" located between 39 and 45 degrees north latitude. The dairy farms of the Group are mainly located in the Ulan Buh Desert, which means the raw fresh milk produced by these dairy farms is suitable for the manufacturing of Milk Deluxe. The dairy farms of the Group and two dairy product manufacturing facilities of China Mengniu Group with a total processing capacity of 1,800 tons per day are located in the same region. The short transportation distance ensures the freshness of raw fresh milk supplied by the Group and also the high quality of milk products manufactured by China Mengniu Group. It also lowers the Group's costs of transportation and preservation, which makes the price of raw fresh milk supplied by the Group and the dairy products of China Mengniu Group more competitive. The Board understands that there is significant competition among dairy product manufacturers for sources of high quality raw fresh milk in the market. Considering the Group's strong production capacity of high quality raw fresh milk, the supply relationship is beneficial to both the Group and China Mengniu Group. Therefore, the Board expects that the likelihood of significant adverse change to the business relationship with China Mengniu Group is relatively low.

The requirement to maintain freshness of raw fresh milk means that dairy farms usually only supply to a limited number of dairy product manufacturers whose manufacturing facilities are located within 300 kilometres from the dairy farms. According to a public research report, dairy farming is a fragmented industry as the aggregated production capacity of the top ten dairy farming companies represents less than 25% of total production capacity of raw fresh milk in China. In contrast, the two largest dairy products manufacturers in China have purchased approximately 45% of raw fresh milk

− 11 −

LETTER FROM THE BOARD

produced in China. This report also observed that large dairy products manufacturers tend to purchase raw fresh milk from dairy farming companies that they hold equity interest in or have entered into long term supply agreements with. Therefore, the Group's commitment to sell a significant portion of raw fresh milk to China Mengniu Group is in line with the industry norm.

Before the completion of the First Share Purchase Agreement, the sale of raw fresh milk from the Group (other than the Target Company) to the Target Company was treated as transactions within the Group. After the completion of the First Share Purchase Agreement, the Target Company ceased to be recognised as a subsidiary of the Company and was then recognised as a subsidiary of Inner Mongolia Mengniu. The sale of raw fresh milk from the Group to the Target Company was then treated as sale to China Mengniu Group instead. As a result, there were significant increases in the amount and percentage of revenue from sale of raw fresh milk to China Mengniu Group compared to the total revenue from sale of raw fresh milk by the Group since May 2019 and it is expected that such percentage will remain at a similar level after entering into of the Raw Fresh Milk Supply Framework Agreement.

Revenue from sale of raw fresh milk

Please see below the historical revenue of the Group generated from sale of raw fresh milk and the percentage of revenue generated from sale to the Target Company and China Mengniu Group for the three years ended 31 December 2016, 2017 and 2018 and the nine months ended 30 September 2019.

Unit: RMB in millions, except for percentages

For the

nine

months

ended 30

For the year ended 31 December

September

2016

2017

2018

2019

Revenue from sale to the Target

Company

1,303

1,223

356

112

Revenue from sale to external customers

1,360

1,279

2,048

1,854

Revenue from sale to China Mengniu

Group

810

827

1,234

1,743

Adjusted revenue from sale to China

Mengniu Group1

2,113

2,050

1,590

1,855

Total revenue

2,663

2,502

2,404

1,966

Percentage of revenue from sale to China

Mengniu Group compared to the total

revenue

30%

33%

51%

89%

Percentage of adjusted revenue1 from

sale to China Mengniu Group

compared to the total revenue

79%

82%

66%2

94%

− 12 −

LETTER FROM THE BOARD

  1. The adjusted revenue is the aggregate of the revenue from sale to China Mengniu Group and the revenue from sale to the Target Company, assuming that the Target Company had been a subsidiary of China Mengniu Group since 2016.
  2. The percentage of adjusted revenue from sale to China Mengniu Group to the total revenue from sale of raw fresh milk by the Group in 2018 was lower than the percentages in 2016 and 2017 and the nine months ended 30 September 2019 because the Group originally planned to manufacture a larger volume of organic dairy products under its owned brand for direct sale to the end consumers. Therefore, the Group expanded its production capacity of raw fresh milk for sale to the Target Company for manufacturing of such organic dairy products. The Group subsequently changed its business plan and sold the excessive volume of raw fresh milk produced to dairy product manufacturers other than China Mengniu Group.

The Company will continue to supply raw fresh milk to the Target Company and Huhehaote Dairy with priority under the same conditions in accordance with the Priority Supply Agreement entered into between the Company and the Target Company and Huhehaote Dairy respectively. The Company will not breach the Priority Supply Agreements because of entering into the Raw Fresh Milk Supply Framework Agreement as the Target Company and Huhehaote Dairy have become wholly-owned subsidiaries of Inner Mongolia Mengniu, and the amount of supply under the Priority Supply Agreements is covered by the proposed annual caps under the Raw Fresh Milk Supply Framework Agreement. According to the Priority Supply Agreements, the unit price of raw fresh milk shall be determined with reference to the prevailing market price of raw fresh milk with similar grades and the priority right under the Priority Supply Agreements only exists when China Mengniu Group offers the price and purchase terms in line with the prevailing market conditions.

Despite the fact that the Company has committed to sell a substantial portion of its raw fresh milk to China Mengniu Group, the Board considers that the Group will be able to effectively mitigate its exposure for the following reasons:

  1. The Board estimates that the raw fresh milk market in China will be in short supply during the term of the Raw Fresh Milk Supply Framework Agreement. From the macro perspective, according to the Operation Report of Chinese Economy for the First Half of 2019 issued by the National Bureau of Statistics of the PRC, the growth rate of raw fresh milk supply in the PRC was 4.6% lower than the growth rate of the manufacturing of liquid milk in the PRC. Such difference shows that there is a relative shortage of supply of raw fresh milk for the manufacturing of dairy products in the PRC. In December 2018, the Ministry of Agriculture and Rural Affairs, the National Development and Reform Commission and other seven government ministries and commissions in the PRC issued Certain Opinions on Further Promoting Prosperous Development of the Dairy Industry, setting an annual production target of 45 million tons of raw fresh milk for the PRC nationwide in 2025 which is 40% higher than the actual production volume in 2018. In September 2019, the General Office of Inner Mongolia Autonomous Region Government also issued the Implementation Opinion on Prosperous Development of the Dairy Industry, setting an annual production target of 10 million tons of raw fresh milk for Inner Mongolia Autonomous Region in 2025. Considering the Group's strong production capacity of high quality raw fresh milk, the supply relationship is beneficial to both the Group and China Mengniu Group.

− 13 −

LETTER FROM THE BOARD

  1. The Group is located in the Inner Mongolia Autonomous Region which is the core region for the dairy industry in China and the dairy product manufacturers have strong demand of high quality raw fresh milk in this region. For example, based on public information, Inner Mongolia Yili Industrial Group Corporation ("Yili Group"), a major dairy products manufacturer based in the Inner Mongolia Autonomous Region, has announced five projects in relation to dairy farming in the Inner Mongolia Autonomous Region since November 2019. In addition, the Group has established business relationship with a number of third party dairy product manufacturers in China, including Yili Group, New Hope Dairy Co., Ltd, Shijiazhuang Junlebao Dairy Co., Ltd, Ningxia Xiajin Dairy Group Corporation and Xi'an Yinqiao Dairy (Group) Co., Limited. As far as the Company is aware, there is no concern raised by third party customers in relation to their business relationship with the Group because of the Priority Supply Agreements or China Mengniu Group's potential substantial interest in the Company. If there is any change to the business relationship between the Group and China Mengniu Group, the Board believes that the raw fresh milk produced by the Group can be sold to other major customers in the region, and such change will not have a material impact on the financial position of the Group.
  2. The Group has been actively expanding its sales team and looking for new customers. The Sales Department regularly visits existing and potential customers, collects information and updates the database in relation to the dairy industry, so the Group can continuously improve its marketing strategy. The Group has prepared a list of twenty-two target customers which are dairy product manufacturers other than China Mengniu Group for 2020. The Group will arrange monthly meetings with these target customers and invite their senior representatives to join the "Shengmu Organic Desert Trip" between July and August 2020 to visit the organic feed plantations and dairy farms of the Group in the Ulan Buh Desert for a deeper understanding of the organic business model of the Group. The Group will also attend industry events, such as the 2020 China Dairy Industry D20 Summit, the 2020 Asia Dairy Expo and the 11th Dairy Conference of China, to meet representatives of leading companies in the dairy industry in China and explore more diversified sales opportunities.
  3. The Group is also diversifying its product portfolio and developing new products based on market needs as part of the Group's effort to enhance its sales and marketing.
  4. The reduction of amount of milkable cows in the PRC generally leads to the higher price of raw fresh milk. The amount of milkable cows had been decreasing for five years until 2019 because certain dairy farms accelerated culling milkable cows for sale as beef and a large number of small size dairy farms with fewer than 300 milkable cows had been closed due to the heightened environmental protection standard.
  5. With the impact of consumption upgrade, urban citizens have a growing demand of high quality organic milk. The Board expects that the Group will benefit from the upward trend of the dairy industry and have a high growth rate.

− 14 −

LETTER FROM THE BOARD

If the resolution to approve the Raw Fresh Milk Supply Framework Agreement, the transactions contemplated under such agreement and the proposed annual caps for such transactions for the three years ending 31 December 2020, 2021 and 2022 is voted down by the Independent Shareholders, and if Start Great exercises the Subscription Rights of Warrants A attached to Tranche 1 Warrants A, Inner Mongolia Mengniu will become a connected person of the Company, and the Group will not be able to sell raw fresh milk to China Mengniu Group to the extent not in compliance with the Listing Rules and therefore the Company may be in breach of the Priority Supply Agreements. However, the Group will sell the raw fresh milk to other customers whose manufacturing facilities have a longer transportation distance from the dairy farms of the Group. The unit price may be lower due to lower freshness and the Group may incur higher transportation cost. The Company will continue to expand its Sales Department and customer base and sell the raw fresh milk produced by the Group to a wider group of customers with the best possible price and sales terms. Moreover, if the Company is in breach of the Priority Supply Agreements under such circumstance, Inner Mongolia Mengniu may demand Shengmu High-tech for early repayment of the entrusted loan under the RMB 1 billion entrusted loan extension agreement entered into between Shengmu High-tech, Inner Mongolia Mengniu and the Helinge'er County Branch of the Agricultural Bank of China Limited on 24 December 2019.

Historical Transaction Amounts

The raw fresh milk sold by the Group to China Mengniu Group for the three years ended 31 December 2016, 2017 and 2018 and the nine months ended 30 September 2019 amounted to RMB809,749,300, RMB827,333,900, RMB1,233,911,700 and RMB 1,742,634,700, respectively.

The percentage of revenue from sale of raw fresh milk by the Group to China Mengniu Group as compared to the total revenue of the Group for the three years ended 31 December 2016, 2017 and 2018 and the nine months ended 30 September 2019, amounted to 21%, 26%, 36% and 69%, respectively.

Proposed Annual Caps

The Directors propose that the total annual sale amount by the Group to China Mengniu Group under the Raw Fresh Milk Supply Framework Agreement shall not exceed RMB3,300 million, RMB3,700 million and RMB4,200 million for the three years ending 31 December 2020, 2021 and 2022, respectively.

In determining such annual caps, the Directors have considered the following factors:

  1. the expected increase in sales volume of raw fresh milk to China Mengniu Group;
  2. the potential increase in price of dairy products in China;
  3. the historical and prevailing purchase price for raw fresh milk paid by China Mengniu Group;

− 15 −

LETTER FROM THE BOARD

  1. the historical transaction amounts of raw fresh milk sold by the Group to China Mengniu Group for the three years ended 31 December 2016, 2017 and 2018 and the nine months ended 30 September 2019 respectively, as mentioned above; and
  2. the expected number of milkable cows of the Group for the three years ending 31 December 2020, 2021 and 2022.

The Financial Assistance Framework Agreement

Principal Terms

The principal terms of the Financial Assistance Framework Agreement are summarised as follows:

Date:

30 December 2019

Parties:

Shengmu High-tech (for itself and on behalf of the Group)

and Inner Mongolia Mengniu (for itself and on behalf of the

China Mengniu Group)

Term:

From 1 January 2020 to 31 December 2022

Provision of entrusted loans:

China Mengniu Group shall provide entrusted loans to the

Group on normal commercial terms based on the requests of

the Group from time to time.

Security:

The Group agrees to provide security to China Mengniu

Group for the entrusted loans and the scope of security may

include biological assets and the equity interests of the joint

venture pasture companies.

Amendment and termination:

Any amendment to or the termination of Financial Assistance

Framework Agreement shall be made in writing by the

parties.

Comparison Mechanism

In order to ensure that the terms of financial assistance provided by China Mengniu Group to the Group will be on normal commercial terms or on terms no less favourable to the Group than those offered by independent third party lenders, the Group will engage a broad range of independent third party lenders and China Mengniu Group to provide loan proposals based on the Group's financial needs. The Group will then compare the proposals received and choose the proposal whose terms including but not limited to principal amount, interest rate, duration, security and collateral, are more favourable to the Group. The responsible officer of the Group will also maintain regular contacts with independent third party lenders to keep abreast of the trends in the financing market in the PRC. The terms of financial assistance provided by China Mengniu Group and the transactions thereunder will also be subject to the regular review of the listing management department of the Group (the "Listing Management Department"). The Board considers that the methods and procedures adopted by the Group can ensure that the transactions under the Financial Assistance Framework Agreement will be conducted on normal commercial terms and not prejudicial to the interests of the Company and its minority shareholders.

− 16 −

LETTER FROM THE BOARD

Reasons for and Benefits of Entering into the Financial Assistance Framework Agreement

China Mengniu Group is an important business partner of the Group and has a strong capital base and financing capabilities. The financial assistance provided by China Mengniu Group to the Group will lower the overall financial risk of the Group.

Historical Transaction Amounts

The financial assistance provided by China Mengniu Group to the Group for the three years ended 31 December 2016, 2017 and 2018 and the nine months ended 30 September 2019 amounted to nil, nil, RMB1,300,000,000 and RMB1,160,000,000, respectively.

Proposed Annual Caps

The Directors propose that the maximum daily balance of entrusted loans provided by the China Mengniu Group to the Group under the Financial Assistance Framework Agreement shall not exceed RMB1,600 million for each of the three years ending 31 December 2020, 2021 and 2022.

In determining such annual caps, the Directors have considered the maximum daily balance of financial assistance provided by the China Mengniu Group to the Group through entrusted loans for the three years ended 31 December 2016, 2017 and 2018 and the nine months ended 30 September 2019 respectively, as mentioned above.

IMPLICATIONS UNDER THE LISTING RULES

As at the Latest Practicable Date, Shengmu High-tech is an indirectly wholly-owned subsidiary of the Group and Inner Mongolia Mengniu is a wholly-owned subsidiary of China Mengniu.

As at the Latest Practicable Date, to the best of the Directors' knowledge, information and belief having made all reasonable enquiry, Start Great (a direct wholly-owned subsidiary of China Mengniu) held 4.25% equity interest in the Company. Upon full exercise of the Subscription Rights of Warrants A attached to Tranche 1 Warrants A, China Mengniu shall hold approximately 18.16% equity interest in the Company through Start Great and shall become a substantial shareholder of the Company. As a result, China Mengniu will be a connected person of the Company and Inner Mongolia Mengniu will therefore be an associate of China Mengniu and also a connected person of the Company. Completion of Tranche 1 Warrants A took place on 29 January 2019 and the Subscription Period of Warrants A is the 18-month period commencing from the completion of Tranche 1 Warrants A. As at the Latest Practicable Date, there has been no Adjustment of Warrants A. The Company cannot control the timing as to when Start Great will exercise the Subscription Rights of Warrants A attached to Tranche 1 Warrants A and as at the Latest Practicable Date, Start Great has not indicated to the Company when it may exercise the Tranche 1 Warrants A during the Subscription Period. As at the Latest Practicable Date, completion of Tranche 2 Warrants A and Tranche 2 Warrants B has not taken place as certain conditions for completion of Tranche 2 Warrants A and Tranche 2 Warrants B have not been fulfilled. The maximum shareholding of Start Great in the Company upon full exercise of Warrants A and Warrants B and issue of Consideration Shares (assuming there are no other changes to the issued share

− 17 −

LETTER FROM THE BOARD

capital of the Company) will be 17.51% of the equity interest in the Company. As at the Latest Practicable Date, to the best of the Directors' knowledge, information and belief having made all reasonable enquiry, there would not be any potential changes to China Mengniu Group's interests in the Company as a result of any other instruments.

Set out below is the shareholding structure of the Company (i) as at the Latest Practicable Date;

  1. immediately after the issue of the Tranche 1 Warrant Shares A (assuming there are no other changes to the issued share capital of the Company and before the issue of the Tranche 1 Warrant Shares B); (iii) immediately after the issue of the Tranche 1 Warrant Shares A and Tranche 1 Warrant Shares B (assuming there are no other changes to the issued share capital of the Company); (iv) immediately after the issue of (a) the Tranche 1 Warrant Shares A and the Tranche 1 Warrant Shares B and (b) the Consideration Shares (assuming there are no other changes to the issued share capital of the Company); (v) immediately after the issue of (a) the Tranche 1 Warrant Shares A and the Tranche 1 Warrant Shares B; (b) the Consideration Shares; and (c) the Tranche 2 Warrant Shares A (assuming there are no other changes to the issued share capital of the Company and before the issue of Tranche 2 Warrant Shares B) and (vi) immediately after the issue of (a) the Tranche 1 Warrant Shares A and the Tranche 1 Warrant Shares B; (b) the Consideration Shares; and (c) the Tranche 2 Warrant Shares A and Tranche 2 Warrant Shares B (assuming there are no other changes to the issued share capital of the Company):

Immediately after

the issue of (a) the

Immediately after

Tranche 1 Warrant

the issue of (a) the

Shares A and the

Immediately after

Tranche 1 Warrant

Tranche 1 Warrant

the issue of (a) the

Shares A and the

Shares B, (b) the

Immediately after

Tranche 1 Warrant

Tranche 1 Warrant

Consideration

the issue of the

Shares A and the

Shares B and (b) the

Shares and (c) the

Immediately after

Tranche 1 Warrant

Tranche 1 Warrant

Consideration

Tranche 2 Warrant

the issue of the

Shares A and

Shares B and (b) the

Shares and (c) the

Shares A and

As at the Latest

Tranche 1 Warrant

Tranche 1 Warrant

Consideration

Tranche 2 Warrant

Tranche 2 Warrant

Shareholders

Practicable Date

Shares A

Shares B

Shares

Shares A

Shares B(1)

Number of

Number of

Number of

Number of

Number of

Number of

Ordinary

Ordinary

Ordinary

Ordinary

Ordinary

Ordinary

Shares

%

Shares

%

Shares

%

Shares

%

Shares

%

Shares

%

Nong You Co.,

Ltd.(2)

1,301,651,000

20.48

1,301,651,000

17.51

1,301,651,000

17.21

1,301,651,000

15.78

1,301,651,000

15.56

1,301,651,000

15.53

Yao Tongshan

409,092,700

6.44

409,092,700

5.50

409,092,700

5.41

409,092,700

4.96

409,092,700

4.89

409,092,700

4.88

Wu Jianye

32,706,261

0.52

32,706,261

0.44

32,706,261

0.43

32,706,261

0.40

32,706,261

0.39

32,706,261

0.39

Warrant A Holders

269,865,600

4.25

1,350,113,600

18.16

1,350,113,600

17.86

1,350,113,600

16.36

1,467,193,490

17.53

1,467,193,490

17.51

Warrant B Holders

395,235,200

6.22

395,235,200

5.32

522,323,200

6.91

522,323,200

6.33

522,323,200

6.24

536,097,305

6.40

Holders of

Consideration

Shares(3)

2,232,000

0.04

2,232,000

0.03

2,232,000

0.03

690,937,234

8.37

690,937,234

8.26

690,937,234

8.24

Other public

Shareholders

3,943,617,239

62.06

3,943,617,239

53.04

3,943,617,239

52.15

3,943,617,239

47.80

3,943,617,239

47.13

3,943,617,239

47.05

Total

6,354,400,000

100.00

7,434,648,000

100.00

7,561,736,000

100.00

8,250,441,234

100.00

8,367,521,124

100.00

8,381,295,229

100.00

Note:

  1. The Tranche 2 Warrant Shares A and the Tranche 2 Warrant Shares B can only be issued after the issuance of the Consideration Shares, which cannot be waived.

− 18 −

LETTER FROM THE BOARD

  1. Mr. SHAO Genhuo (邵根夥) indirectly holds the entire equity interests of Nong You Co., Ltd.. Therefore, Mr. Shao is deemed to be interested in the Shares held by Nong You Co., Ltd..
  2. Pursuant to the Equity Transfer Framework Agreement, the Consideration Shares will be granted as follows: (i) Li
    Yundong: 89,186,509 Shares; (ii) Chen Qingjun: 72,423,688 Shares; (iii) Wang Qiang: 72,423,688 Shares; (iv) Li
    Yongqiang: 57,724,516 Shares; (v) Guo Yongfeng: 62,393,665 Shares; (vi) Yuan Lun: 56,629,283 Shares; (vii) Ren
    Junming: 44,904,531 Shares; (viii) Wang Lixin: 44,247,392 Shares; (ix) Yu Gong: 53,401,230 Shares; (x) Li Ruijun:
    44,028,345 Shares; (xi) Hou Liubin: 44,028,345 Shares; (xii) Chang Zhiba: 47,314,042 Shares. Such holders of the Consideration Shares are all public Shareholders.
  3. The percentages of the Shares are rounded to the nearest two decimal places and the total number of the percentages may not add up to 100% due to rounding.

Assuming Start Great exercises the Subscription Rights of Warrants A attached to Tranche 1 Warrants A and Inner Mongolia Mengniu becomes a connected person of the Company, the entering into of each of the Framework Agreements and the transactions contemplated thereunder will constitute continuing connected transactions of the Company under Chapter 14A of the Listing Rules.

As the applicable percentage ratios under the Listing Rules in respect of the highest proposed annual caps under each of the Framework Agreements exceed 5%, the entering into each of the Framework Agreements and the transactions contemplated thereunder are therefore subject to the reporting, announcement and independent Shareholders' approval requirements under Chapter 14A of the Listing Rules. The Company intends to comply with the requirements under Chapter 14A of the Listing Rules in advance assuming Start Great exercises the Subscription Rights of Warrants A attached to Tranche 1 Warrants A and Inner Mongolia Mengniu becomes a connected person of the Company. Start Great will be required to abstain from voting at the EGM in relation to the Framework Agreements, the transactions contemplated under such agreements and the proposed annual caps for such transactions for the three years ending 31 December 2020, 2021 and 2022. Save as disclosed above, to the best of the Directors' knowledge, information and belief having made all reasonable enquiry, no Shareholder has a material interest in the resolutions in relation to the Framework Agreements, the transactions contemplated under such agreements and the proposed annual caps for such transactions for the three years ending 31 December 2020, 2021 and 2022 and is required to abstain from voting on the resolutions to be proposed at the EGM.

As at the Latest Practicable Date, Mr. Wen Yongping, a non-executive Director, is also a vice president of China Mengniu and the general manager of the low temperature business department of Inner Mongolia Mengniu and therefore considered to have a material interest in the transactions under each of the Framework Agreements. As such, he has abstained from voting on the resolutions of the Board approving each of the Framework Agreements and the transactions contemplated under such agreements. Other than Mr. Wen Yongping, no Director is materially interested in the transactions contemplated under each of the Framework Agreements and is required to abstain from voting on the resolutions of the Directors to approve each of the Framework Agreements and the transactions contemplated under such agreements.

− 19 −

LETTER FROM THE BOARD

The Group has established an internal control mechanism for connected transactions. The Listing Management Department is dedicated for the identification and management of connected persons and connected transactions. The Listing Management Department will review the connected transaction agreements to evaluate the fairness of the terms of the agreements and ensure that the Group takes appropriate actions to comply with the requirements under the Listing Rules. The Listing Management Department will also review the continuing connected transactions that have been entered into on a quarterly basis to ensure that these transactions are conducted in accordance with the relevant agreements and in compliance with the Listing Rules, and are properly disclosed in the interim and annual reports of the Company. The Group also organises at least two training sessions per year in relation to connected transactions to ensure that the staff of all the relevant processes and key positions in the Group have the ability to identify connected persons and connected transactions and maintain the effectiveness of the internal control mechanism of the Group.

In light of the factors mentioned above, the Directors (including the independent non-executive Directors after taking into account the advice of the Independent Financial Adviser as to fairness and reasonableness of the terms of the Framework Agreements, the transactions contemplated under such agreements and the proposed annual caps for such transactions for the three years ending 31 December 2020, 2021 and 2022) are of the view that the continuing connected transactions under each of the Framework Agreements are entered into on normal commercial terms after arm's length negotiations in the ordinary course of business of the Company, are in the interests of the Company and the Shareholders as a whole, and that each of the proposed annual caps and terms of the Framework Agreements are fair and reasonable.

INFORMATION ON THE PARTIES

The Company is an investment holding company. The Group is principally engaged in dairy farming business.

Shengmu High-tech is an indirect wholly-owned subsidiary of the Group. It is principally engaged in dairy farming and the sale of raw fresh milk.

Inner Mongolia Mengniu is principally engaged in the business of manufacturing and sale of dairy products.

China Mengniu Group is one of the leading dairy product manufacturers in the PRC, principally engaged in manufacturing and distribution of quality dairy products including liquid milk, ice-cream, milk formula and other dairy products.

− 20 −

LETTER FROM THE BOARD

INDEPENDENT BOARD COMMITTEE AND THE INDEPENDENT FINANCIAL ADVISER

The Independent Board Committee has been established to advise the Independent Shareholders in respect of each of the Framework Agreements, the transactions contemplated under such agreements and the proposed annual caps for such transactions for the three years ending 31 December 2020, 2021 and 2022. A letter from the Independent Board Committee containing its recommendation to the Independent Shareholders is set out on pages 23 to 24 of this circular.

The Board has appointed Somerley Capital Limited as the Independent Financial Adviser to advise the Independent Board Committee and the Independent Shareholders in respect of each of the Framework Agreements, the transactions contemplated under such agreements and the proposed annual caps for such transactions for the three years ending 31 December 2020, 2021 and 2022. A letter from Somerley Capital Limited containing its advice to the Independent Board Committee and the Independent Shareholders is set out on pages 25 to 43 of this circular.

EGM

A notice convening the EGM to be held at 2:00 p.m. on 27 March 2020 at Conference Room, 2/F, Shengmu Building, Shaerqin Industrial Park, Southern District of Ruyi Development New Zone, Tumotezuoqi, Hohhot, Inner Mongolia Autonomous Region, the PRC is set out on pages 52 to 54 of this circular. At the EGM, ordinary resolutions will be proposed to approve each of the Framework Agreements, the transactions contemplated under such agreements and the proposed annual caps for such transactions for the three years ending 31 December 2020, 2021 and 2022.

A form of proxy for use at the EGM is enclosed herewith. Whether or not you intend to be present at the EGM, you are requested to complete the accompanying form of proxy in accordance with the instructions printed thereon and return the same to the Company's branch share registrar in Hong Kong, Tricor Investor Services Limited, at Level 54, Hopewell Centre, 183 Queen's Road East, Hong Kong no later than 48 hours before the time fixed for holding the EGM or any adjournment thereof. Completion and delivery of the form of proxy will not prevent you from attending, and voting at, the EGM or any adjournment thereof if you so wish.

Pursuant to Rule 13.39(4) of the Listing Rules and the articles of association of the Company, any vote of the Shareholders at a general meeting must be taken by poll. Accordingly, all the proposed resolutions will be put to vote by way of poll at the EGM. An announcement on the poll vote results will be published by the Company after the EGM in the manner prescribed under Rule 13.39(5) of the Listing Rules.

− 21 −

LETTER FROM THE BOARD

RECOMMENDATION

Your attention is drawn to (i) the letter from the Independent Board Committee as set out on pages 23 to 24 of this circular and (ii) the letter from Somerley as set out on pages 25 to 43 of this circular.

Based on the above mentioned reasons and benefits, the Board considers that the Framework Agreements and the transactions contemplated under such agreements are entered into on normal commercial terms after arm's length negotiations in the ordinary course of business of the Company and in the interests of the Company and the Shareholders as whole, the terms of the Framework Agreements and each of its proposed annual caps are fair and reasonable. Accordingly, the Board recommends that the Independent Shareholders to vote in favour of the ordinary resolutions to be proposed at the EGM to approve each of the Framework Agreements, the transactions contemplated under such agreements and the proposed annual caps for such transactions for the three years ending 31 December 2020, 2021 and 2022, as detailed in the EGM notice.

ADDITIONAL INFORMATION

Your attention is drawn to the additional information set out in the appendix I to this circular.

Yours faithfully,

By order of the Board

China Shengmu Organic Milk Limited

Shao Genhuo

Chairman

− 22 −

LETTER FROM THE INDEPENDENT BOARD COMMITTEE

CHINA SHENGMU ORGANIC MILK LIMITED

中 國 聖 牧 有 機 奶 業 有 限 公 司

(Incorporated in the Cayman Islands with limited liability)

(Stock Code: 1432)

6 March 2020

To the Independent Shareholders

Dear Sir or Madam,

CONTINUING CONNECTED TRANSACTIONS

RAW FRESH MILK SUPPLY FRAMEWORK AGREEMENT

AND

FINANCIAL ASSISTANCE FRAMEWORK AGREEMENT

We, the Independent Board Committee of the Company, are advising the Independent Shareholders in connection with the Raw Fresh Milk Supply Framework Agreement, the Financial Assistance Framework Agreement, the transactions contemplated under such agreements and the proposed annual caps for such transactions for the three years ending 31 December 2020, 2021 and 2022, details of which are set out in the Letter from the Board contained in the circular (the

"Circular") of the Company to the Shareholders dated 6 March 2020, of which this letter forms a part. Terms used in this letter shall have the same meanings as those defined in the Circular unless the context otherwise requires.

Under the Listing Rules, if Start Great exercises the Subscription Rights of Warrants A attached to Tranche 1 Warrants A and Inner Monjolia Mengniu becomes a connected person of the Company, the transactions contemplated under each of the Framework Agreements will constitute continuing connected transactions for the reasons set out in the section headed "Implications under the Listing Rules" in the Letter from the Board. Accordingly, each of the Framework Agreements, the transactions contemplated under such agreements and the proposed annual caps for such transactions for the three years ending 31 December 2020, 2021 and 2022 will require the approval of the Independent Shareholders at the EGM.

We wish to draw your attention to the letter from Somerley as set out on pages 25 to 43 of the Circular. We have discussed the letter and the opinion contained therein.

Having considered, inter alia, the factors and reasons considered by, and the opinion of, Somerley, as stated in its aforementioned letter, we consider each of the Framework Agreements and the transactions contemplated under such agreements are entered into on normal commercial terms after arm's length negotiations in the ordinary course of business of the Company and in the interests of the Company and the Shareholders as a whole so far as the Independent Shareholders are concerned, and the terms of the Framework Agreements and each of its proposed annual caps are fair and reasonable.

− 23 −

LETTER FROM THE INDEPENDENT BOARD COMMITTEE

Accordingly, we recommend that the Independent Shareholders vote in favour of the relevant ordinary resolutions in the notice of the EGM to be proposed at the EGM and thereby approve each of the Framework Agreements, the transactions contemplated under such agreements and the proposed annual caps for such transactions for the three years ending 31 December 2020, 2021 and 2022.

Yours faithfully,

For and on behalf of

The Independent Board Committee

Fu Wenge

Li Xuan

Wang Liyan

Independent non-executive

Independent non-executive

Independent non-executive

Director

Director

Director

− 24 −

LETTER FROM SOMERLEY

Set out below is the text of a letter received from Somerley Capital Limited, the Independent Financial Adviser to the Independent Board Committee and the Independent Shareholders in respect of the Raw Fresh Milk Supply Framework Agreement, the Financial Assistance Framework Agreement and the transactions contemplated thereunder for the purpose of inclusion in this circular.

SOMERLEY CAPITAL LIMITED

20th Floor

China Building

29 Queen's Road Central

Hong Kong

6 March 2020

To: The Independent Board Committee and the Independent Shareholders of China Shengmu Organic Milk Limited

Dear Sirs,

CONTINUING CONNECTED TRANSACTIONS

RAW FRESH MILK SUPPLY FRAMEWORK AGREEMENT AND

FINANCIAL ASSISTANCE FRAMEWORK AGREEMENT

INTRODUCTION

We refer to our appointment as the independent financial adviser to advise the Independent Board Committee and the Independent Shareholders in relation to the entering into of the Framework Agreements. Details of the terms of the Framework Agreements are contained in the circular issued by the Company to the Shareholders dated 6 March 2020 (the "Circular"), of which this letter forms part. Unless the context otherwise requires, capitalised terms used in this letter shall have the same meanings as those defined in the Circular.

On 30 December 2019, Shengmu High-tech (for itself and on behalf of the Group) entered into the Raw Fresh Milk Supply Framework Agreement with Inner Mongolia Mengniu (for itself and on behalf of the China Mengniu Group) in relation to the sale of raw fresh milk by the Group to the China Mengniu Group for a term of three years commencing from 1 January 2020 to 31 December 2022. On the same day, Shengmu High-tech (for itself and on behalf of the Group) entered into the Financial Assistance Framework Agreement with Inner Mongolia Mengniu (for itself and on behalf of the China Mengniu Group) in relation to the provision of entrusted loans by the China Mengniu Group to the Group for a term of three years commencing from 1 January 2020 to 31 December 2022.

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LETTER FROM SOMERLEY

As at the Latest Practicable Date, to the best of the Directors' knowledge, information and belief having made all reasonable enquiry, Start Great (a direct wholly-owned subsidiary of China Mengniu) held 4.25% equity interest in the Company. Upon full exercise of the Subscription Rights of Warrants A attached to Tranche 1 Warrants A, China Mengniu shall hold approximately 18.16% equity interest in the Company through Start Great and shall become a substantial shareholder of the Company. As a result, China Mengniu will be a connected person of the Company and Inner Mongolia Mengniu will therefore be an associate of China Mengniu and also a connected person of the Company. As at the Latest Practicable Date, completion of Tranche 1 Warrants A has already taken place, the Company cannot control the timing as to when Start Great will exercise the Subscription Rights of Warrants A attached to Tranche 1 Warrants A.

Assuming Start Great exercises the Subscription Rights of Warrants A attached to Tranche 1 Warrants A and Inner Mongolia Mengniu becomes a connected person of the Company, the entering into of each of the Framework Agreements and the transactions contemplated thereunder will constitute continuing connected transactions of the Company under Chapter 14A of the Listing Rules and are subject to the reporting, announcement, circular and independent Shareholders' approval requirements under Chapter 14A of the Listing Rules.

The Independent Board Committee comprising all the independent non-executive Directors, namely Mr. Fu Wenge, Mr. Wang Liyan and Mr. Li Xuan, has been established to advise the Independent Shareholders in respect of the Framework Agreements and to make recommendations as to voting. We, Somerley Capital Limited, have been appointed to advise the Independent Board Committee and the Independent Shareholders in the same regard.

We are not associated with the Company, Shengmu High-tech, China Mengniu, Inner Mongolia Mengniu, Start Great and their respective associates, close associates or core connected persons (all as defined under the Listing Rules) and accordingly are considered eligible to give independent advice on the above matters. Apart from normal professional fees payable to us in connection with this and similar appointments, no arrangement exists whereby we will receive any fees or benefits from the Company, Shengmu High-tech, China Mengniu, Inner Mongolia Mengniu, Start Great or their respective associates, close associates or core connected persons.

In formulating our opinion and recommendation, we have reviewed, among other things, the Raw Fresh Milk Supply Framework Agreement, the Financial Assistance Framework Agreement, the annual report of the Company for the year ended 31 December 2018, the restated annual results announcement of the Company for the year ended 31 December 2018, the interim report of the Company for the six months ended 30 June 2019 (the "Interim Report") and the information as set out in the Circular. We have also discussed with the management of the Group regarding the business and prospects of the Group.

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LETTER FROM SOMERLEY

We have relied on the information and facts supplied, and the opinions expressed, by the Directors and management of the Group and have assumed that they are true, accurate and complete. We have also sought and received confirmation from the Directors that no material facts have been omitted from the information supplied and opinions expressed to us. We have no reason to believe that any material information has been withheld from us, or to doubt the truth or accuracy of the information provided. We have relied on such information and consider that the information we have received is sufficient for us to reach an informed view. We have not, however, conducted any independent investigation into the business and affairs of the Group.

PRINCIPAL FACTORS AND REASONS CONSIDERED

In arriving at our opinion and recommendation, we have taken into account the following principal factors and reasons:

1. Information on the Group

  1. Business of the Group

The Company was incorporated in the Cayman Islands with limited liability and its issued shares have been listed on the Main Board of the Stock Exchange since July 2014. As set out in the Interim Report, the principal business of the Group is dairy farming business with 11 organic dairy farms and

23 non-organic dairy farms in operation and 47,054 organic dairy cows and 62,556 non-organic dairy cows as at 30 June 2019. In May 2019, the Company completed the disposal of 51% interest in the downstream dairy product business and related assets (the "Downstream Dairy Product Business") to Inner Mongolia Mengniu.

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LETTER FROM SOMERLEY

  1. Financial results of the Group

Set out below is a summary of the financial results of the Group for the years ended 31 December

2017 and 2018 and the six months ended 30 June 2018 and 2019.

For the six months

For the year ended

ended 30 June

31 December

2019

2018

2018

2017

RMB

RMB

RMB

RMB

(million)

(million)

(million)

(million)

(restated)

Revenue

1,200.8

969.4

2,164.4

1,860.7

Cost of sales

(756.2)

(682.5)

(1,468.4)

(792.3)

Gross profit

444.6

286.9

696.0

1,068.4

Loss arising from changes in fair value less

costs to sell of biological assets

(163.5)

(886.1)

(1,321.6)

(595.5)

Selling and distribution expenses

(17.8)

(27.6)

(63.7)

(34.9)

Administrative expenses

(57.3)

(37.1)

(119.3)

(76.2)

Impairment losses on financial and contract

assets

(12.8)

(1.0)

(91.3)

-

Finance costs

(122.9)

(70.7)

(145.0)

(146.0)

Others

(37.9)

12.9

(2.6)

(16.4)

Profit/(Loss) before tax from continuing

operations

32.4

(722.7)

(1,047.5)

199.4

Income tax (expense)/credit

(0.2)

0.5

0.3

(0.1)

Profit/(Loss) for the period/year from

continuing operations

32.2

(722.2)

(1,047.2)

199.3

Loss for the period/year from a discontinued

operation

(53.0)

(556.0)

(1,264.0)

(1,053.1)

Loss for the period/year

(20.8)

(1,278.2)

(2,311.2)

(853.8)

(Loss)/Profit for the period/year

attributable to:

- the Shareholders

(73.5)

(1,158.6)

(2,225.2)

(1,015.3)

- non-controlling interests

52.7

(119.6)

(86.0)

161.5

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LETTER FROM SOMERLEY

The Group derives revenue from the dairy farming business, which breeds dairy cows to produce and distribute raw milk. For the year ended 31 December 2018, the Group's revenue increased by approximately 16.3%, which was mainly attributable to the growths in sales volume of both organic raw milk and premium non-organic raw milk during the year. However, the Group recorded a loss after tax from continuing operations for the year ended 31 December 2018, as compared with a profit in prior year, which was mainly due to (i) the increased loss arising from changes in fair value less costs to sell of biological assets (the "Fair Value of Biological Assets"); and (ii) the impairment losses on financial and contract assets. As the abovementioned loss arising from changes in the Fair Value of Biological Assets and impairment losses on financial and contract assets were non-cash items, the Group still recorded net cash flows from operating activities of approximately RMB972.5 million for the year ended 31 December 2018.

For the six months ended 30 June 2019, the Group recorded an increase in revenue of approximately 23.9%, which was mainly attributable to the increases in sales volume of premium non-organic raw milk and the average selling prices of both organic raw milk and premium non-organic raw milk. The Group recorded a profit after tax from continuing operations for the six months ended 30 June 2019, as compared with a loss after tax from continuing operations for the first half of 2018. Similar to the year ended 31 December 2018, since the loss arising from the changes in the Fair Value of Biological Assets and impairment losses on financial and contract assets were non-cash items, the Group recorded net cash flows from operating activities of approximately RMB711.8 million for the six months ended 30 June 2019.

In December 2018, the Company announced the disposal of the Downstream Dairy Product Business, which was classified as a discontinued operation (the "Disposal Group") in the table above. The disposal of the Downstream Dairy Product Business was completed in May 2019.

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LETTER FROM SOMERLEY

  1. Financial position of the Group

Set out below is a summary of the financial position of the Group as at 30 June 2019 and 31 December 2018.

As at

As at

30 June

31 December

2019

2018

RMB (million)

RMB (million)

Non-current assets

Property, plant and equipment

2,044.9

2,087.0

Biological assets

2,568.6

2,667.4

Other non-current assets

341.6

143.6

4,955.1

4,898.0

Current assets

Inventories

346.5

604.1

Trade and bills receivables

225.9

246.7

Prepayments, other receivables and other assets

769.8

599.1

Cash and bank balances

250.2

74.1

Assets of a disposal group classified as held for sale

-

978.4

Other current assets

50.7

157.9

1,643.1

2,660.3

Current liabilities

Trade and bills payables

989.8

997.1

Interest-bearing bank and other borrowings

1,999.3

2,218.9

Liabilities directly associated with the assets classified as

held for sale

-

790.0

Other current liabilities

664.3

567.4

3,653.4

4,573.4

Net current liabilities

2,010.3

1,913.1

Non-current liabilities

Interest-bearing bank and other borrowings

43.7

49.5

Long-term payables

57.2

56.5

100.9

106.0

Equity

Equity attributable to the Shareholders

2,018.1

2,017.9

Non-controlling interests

825.8

861.0

2,843.9

2,878.9

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LETTER FROM SOMERLEY

The majority of the Group's assets as at 30 June 2019 were (i) biological assets of approximately RMB2,568.6 million consisting of heifers, calves, milkable cows and beef cattle owned by the Group; and (ii) property, plant and equipment primarily comprising buildings and machinery and equipment of approximately RMB2,044.9 million.

Current assets as at 30 June 2019 mainly consisted of (i) inventories of approximately RMB346.5 million and trade and bills receivables of approximately RMB225.9 million; and (ii) prepayments, other receivables and other assets of approximately RMB769.8 million.

The Group's operations were chiefly financed by Shareholders' equity and bank and other borrowings. As at 30 June 2019, the Group had interest-bearing bank and other borrowings of approximately RMB2,043.0 million, of which approximately RMB1,300.0 million was the entrusted loan due to Inner Mongolia Mengniu and the remaining balance was primarily due to banks. The gearing ratio, being the total debt (i.e. total interest-bearing bank and other borrowings) divided by the total equity, was approximately 71.8% as at 30 June 2019.

As the majority of the interest-bearing bank and other borrowings were due within one year, the Group was in net current liability position of approximately RMB2,010.3 million as at 30 June 2019.

2. Information on Inner Mongolia Mengniu and the China Mengniu Group

Inner Mongolia Mengniu is principally engaged in the business of manufacturing and sale of dairy products. Inner Mongolia Mengniu is a wholly-owned subsidiary of China Mengniu.

China Mengniu (stock code: 2319) has listed on the Main Board of the Stock Exchange since 2004. The China Mengniu Group is one of the leading dairy product manufacturers in the PRC, principally engaged in manufacturing and distribution of quality dairy products including liquid milk, ice-cream, milk formula and other dairy products. Based on its latest financial reports, China Mengniu recorded revenue and net profit after tax of approximately RMB69.0 billion and RMB3.2 billion respectively in 2018 and had net asset value and cash and bank balances of approximately RMB31.7 billion and RMB4.7 billion respectively as at 30 June 2019. In addition, China Mengniu had a total market capitalisation of approximately HK$112.0 billion as at the Latest Practicable Date.

3. Reasons for and benefits of entering into the Raw Fresh Milk Supply Framework Agreement

Set out below is a summary of the reasons for and benefits of entering into the Raw Fresh Milk Supply Framework Agreement, further details of which are set out in the letter from the Board contained in the Circular.

  1. Upon completion of the disposal of the Downstream Dairy Product Business (the "First Disposal") in May 2019, the Group ceased to conduct the Downstream Dairy Product Business but it retained 49% interest in the Target Company, which continued to operate the Downstream Dairy Product Business. In January 2020, the Group entered into the Second Share Purchase Agreement to dispose of the remaining 49% interest in the Target Company (the "Second Disposal") and the dairy products sales business originally held by the Target Company will be spun off and to be held as to 49% and 51% indirectly by the

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LETTER FROM SOMERLEY

Company and the China Mengniu Group respectively. Under the First Disposal, the Group agreed to provide raw fresh milk to the Target Company, which has become a subsidiary of the China Mengniu Group, and Huhehaote Dairy with priority under the same conditions upon entering into of the priority supply agreements (the "Priority Supply Agreements"). The Priority Supply Agreements were entered into with the Target Company and Huhehaote Dairy respectively on 23 December 2018.

  1. The Company is of the view that after considering the economic slowdown and intense competitions in Chinese dairy industry, through the Group's cooperation with the China Mengniu Group, the Company can focus on operating its dairy farming business and raw fresh milk business in the PRC and bring values to the Shareholders via maintaining a mutually beneficial partnership with the China Mengniu Group. With the significant competition among dairy product manufacturers for sources of high quality raw fresh milk in the market and the Group's strong production capacity of high quality raw fresh milk, the supply relationship is beneficial to both the Group and the China Mengniu Group. Therefore, the likelihood of a significant adverse change to the business relationship with the China Mengniu Group is relatively low.
  2. The main dairy farms of the Group and two diary products manufacturing facilities of the China Mengniu Group are located in the same region. Therefore the Group has advantages in terms of maintaining freshness and lowering transportation and preservation costs in the sale of raw fresh milk to the China Mengniu Group. The sale of raw fresh milk under the Raw Fresh Milk Supply Framework Agreement will also ensure stable revenue and cash flow for the Group.
  3. While the Company has committed to sell a substantial portion of its raw fresh milk to the China Mengniu Group, the Board considers that the Group will not be overly dependent on the China Mengniu Group given, among other things, the expected short supply of raw fresh milk in China during the term of the Raw Fresh Milk Supply Agreement and the strong demand for high quality raw fresh milk from other customers in the Inner Mongolia Autonomous Region.

In the last two years, the Group continued to refine its business with a focus on the upstream dairy farming business. In late 2018, the Group agreed to acquire minority equity interests not already owned by the Group in 12 farming companies principally engaged in dairy cattle breeding. In May 2019, the Group completed the disposal of the Downstream Dairy Product Business to the China Mengniu Group. The abovementioned acquisition and disposal represent the strategy of the Group to concentrate on the upstream dairy farming business and devote further resources to upstream dairy farming business and raw fresh milk business. The entering into of the Raw Fresh Milk Supply Framework Agreement, which secures the demand for the Group's upstream dairy farming business since the China Mengniu Group agreed to purchase all raw fresh milk produced by the Group, is another step to achieve the Group's strategic goal.

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LETTER FROM SOMERLEY

Furthermore, as the price of raw fresh milk to be sold to the China Mengniu Group is no less favourable than the price offered from independent third party customers and the China Mengniu Group agreed to purchase all raw fresh milk produced by the Group, this will provide a guaranteed revenue to the Group regardless of the environment of the Chinese dairy industry. Such a safety net is considered to be beneficial to the Company.

Having considered the above and the business activities and strategy of the Group as well as the aforesaid benefits to the Company, we are of the view that the entering into of the Raw Fresh Milk Supply Framework Agreement is in line with the Group's stated strategy and in the interest of the Company.

4. Principal terms of the Raw Fresh Milk Supply Framework Agreement

Date

30 December 2019

Parties

  1. Shengmu High-tech (for itself and on behalf of the Group); and
  2. Inner Mongolia Mengniu (for itself and on behalf of the China Mengniu Group)

Term

From 1 January 2020 to 31 December 2022

Principal terms

The Group shall sell raw fresh milk which meets the China Mengniu Group's purchasing standard and quality requirements to the China Mengniu Group on a daily basis in accordance with the monthly milk supply plan. The specific volume to be purchased shall be subject to the volume as confirmed by the Group and the China Mengniu Group. The daily delivery volume is determined by the volume weighted by the China Mengniu Group.

Purchase price

The purchase price of raw fresh milk shall be determined and adjusted in accordance with market conditions and seasonal factors. The final purchase price of raw fresh milk varies in accordance with the quality grade as agreed between the Group and the China Mengniu Group.

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LETTER FROM SOMERLEY

We have obtained and reviewed four recent raw fresh milk long-term supply agreements entered into between the Group as the supplier and the China Mengniu Group (the "Existing China Mengniu Supply Agreement"), two associate companies of the Group and an independent third party as the purchaser. We noted that the purchase price in the Existing China Mengniu Supply Agreement was determined based on the market conditions and seasonal factors. We further noted that the purchase price of the raw milk supply agreements entered into between the Group and the associated companies of the Group was determined based on the purchase price agreed between the Group and the China Mengniu Group. For the raw fresh milk supply agreement entered into with the independent third party, the purchase price was determined in accordance with market conditions and seasonal factors and the higher of (i) the selling price based on an agreed formula with several qualitative variables; or (ii) the market price of raw fresh milk.

The internal control procedures of the Group in determining the purchase price and our analysis thereon are set out in section 5 headed "Internal control procedures in determining the purchase price" in this letter.

Quality of milk

The quality of milk supplied by the Group shall comply with the standards set by the government and the requirements of the China Mengniu Group. We have reviewed the aforesaid recent raw fresh milk supply agreements entered into between the Group and the other parties as mentioned above and noted that similar quality requirements were in place in those raw fresh milk supply agreements.

During the contract period, if the rating of the quality grade of the raw fresh milk from the Group changes, the purchase price shall be calculated in accordance with the latest rating. We noted that the adjustment of the purchase price based on the quality grade of the raw fresh milk from the Group was stipulated in the aforesaid raw fresh milk supply agreement entered into between the Group and an independent third party.

Commitment of purchases and sales

The China Mengniu Group shall purchase all raw fresh milk produced by the Group which meets the aforesaid quality standards. The Group shall ensure that at least 80% of the raw fresh milk it produces will be sold to the China Mengniu Group. In each of the four raw fresh milk supply agreements reviewed, we noted there was a volume of raw fresh milk committed to be supplied by the Group and to be purchased by the purchasers.

Punctual delivery

The Group shall be responsible for delivering raw fresh milk to the places designated by the China Mengniu Group. If the Group is unable to deliver milk punctually, the China Mengniu Group shall be notified at least 24 hours prior to the scheduled delivery and the Group shall bear losses suffered by the China Mengniu Group.

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LETTER FROM SOMERLEY

As stated in the letter from the Board contained in the Circular, the Group has established an internal control mechanism to ensure the timely delivery of raw fresh milk. The Group maintains a three-month rolling plan for the herd and milk production to ensure that the Group has sufficient milk production capacity to meet the monthly supply plans of organic and non-organic raw fresh milk. The dairy farms of the Group and the dairy products manufacturing facilities of the China Mengniu Group are located in the same region. The maximum transportation distance for the supply of raw fresh milk from the dairy farms of the Group to the manufacturing facilities of the China Mengniu Group is less than 80 kilometers and the transportation time is approximately one hour. The Group is able to coordinate additional resources to meet the monthly supply plans if there is an emergency situation.

Moreover, the term in the Raw Fresh Milk Supply Framework Agreement that the Group shall bear the losses suffered by the China Mengniu Group if the Group fails to deliver raw fresh milk punctually is a common term in similar agreements between the China Mengniu Group and its suppliers of raw fresh milk including the Group. Therefore, the Board considers that such a term is on normal commercial terms and in the interest of the Company.

We have obtained and reviewed the Existing China Mengniu Supply Agreement entered into in

2018 and noted that a similar penalty clause was in place and would be triggered in the event that the Group is unable to deliver milk punctually. Having considered the existence of a similar term in the Existing China Mengniu Supply Agreement entered into in 2018, when the China Mengniu Group was then an independent third party to the Group, and the existence of such term in similar agreements entered into between the China Mengniu Group and its other suppliers of raw fresh milk, we concur with the view of the Board that such a term is on normal commercial terms.

Payment terms

The China Mengniu Group shall pay monthly in accordance with the purchase volume of raw fresh milk and payment for raw fresh milk purchased last month shall be settled by the end of the current month. The specific payment date shall be before the 30th calendar day of each month (the 28th day for February).

Based on our review of the aforesaid raw fresh milk supply agreements, we noted that the purchaser shall pay raw fresh milk purchased last month by the end of or a few days before the end of the current month. Accordingly, it is considered that the payment terms of the aforesaid raw fresh milk supply agreements are generally in line with that of the Raw Fresh Milk Supply Framework Agreement.

Amendment and termination

Any amendment to or the termination of the Raw Fresh Milk Supply Framework Agreement shall be made in writing by the parties.

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LETTER FROM SOMERLEY

5. Internal control procedures in determining the purchase price

As set out in the letter from the Board contained in the Circular, the Group adopted two different pricing mechanisms for sale of its organic raw fresh milk and non-organic raw fresh milk.

For organic raw fresh milk, the Group formulates an annual supply plan which is then divided into monthly supply plans by taking into account the volume required by the China Mengniu Group. The organic raw fresh milk supplied according to the monthly supply plans is subject to a higher unit price which is negotiated with reference to the cost of production, average gross margin rate of the dairy farming industry, market cycle and the price of organic raw fresh milk produced by other companies in the nearby region on an annual basis. As advised by the management of the Group, the unit price will be subject to monthly review by the management of the Group and re-negotiated between the Group and the China Mengniu Group if the market price materially deviates from the agreed unit price. The Group will sell the organic raw fresh milk it has produced that exceeds the monthly supply plan to other customers, after which the remaining organic raw fresh milk will be sold to the China Mengniu Group at a lower unit price compared to those supplied according to the monthly supply plans. Such lower unit price is calculated on an annual basis with an 8% mark-up over the average price of non-organic raw fresh milk supplied by the Group to the China Mengniu Group in the last financial year.

We understand from the management of the Group that in the event that the volume of organic raw fresh milk produced by the Group exceeds the monthly supply plan, the Group will first offer the excess organic raw fresh milk to be sold to independent third party purchasers at the unit price with reference to the factors as mentioned above. The remaining excess organic raw fresh milk will then be sold to the China Mengniu Group at a unit price calculated on an annual basis with an 8% mark-up over the average price of non-organic raw fresh milk supplied by the Group to the China Mengniu Group in the last financial year. As advised by the management of the Group, the 8% mark-up mainly represents the additional cost of production of organic raw fresh milk over that of non-organic raw fresh milk of the Group. In the event that the remaining excess organic raw fresh milk is not sold to the China Mengniu Group at the above price, it might have to be sold as non-organic raw fresh milk in the market or to be disposed of entirely. Having taken into account (i) the excess organic raw fresh milk will be firstly offered to independent third party purchasers for sale at market price; (ii) the selling price of the remaining excess organic raw fresh milk to be sold to the China Mengniu Group is higher than that of the alternatives, such as selling of these milk as non-organic raw fresh milk; and

  1. the aforesaid selling price has reflected and compensated for the additional cost of production of organic raw fresh milk, it is considered that the selling price of the remaining excess organic raw fresh milk to be sold to the China Mengniu Group acceptable.

For non-organic raw fresh milk, the unit price is determined on a monthly basis and consists of the base part and the adjustment part. The base part is quoted by the China Mengniu Group based on market conditions and seasonal factors and with reference to the price of products with similar grades from dairy farms in the nearby region. The adjustment part is calculated based on a number of indicators, including protein, fat, freezing point, micro-organism and somatic cells figures of the non-organic raw fresh milk tested by qualified laboratories (the "Adjustment Factors") each month.

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LETTER FROM SOMERLEY

For organic raw fresh milk, the sales department of the Group (the "Sales Department") will review on a monthly basis the actual volume of supply, whether the supply exceeded the Group's monthly supply plan and the calculation of the unit price for the supply that exceeded the Group's monthly plan. For non-organic raw fresh milk, the Sales Department will review on a monthly basis the actual volume of supply and evaluate the fairness of the unit price quoted by the China Mengniu Group by examining the test results of the indicators and whether the unit price has correctly reflected the test results. For both organic and non-organic raw fresh milk, the Sales Department will also enquire with at least three other dairy farms in the nearby region which supply raw fresh milk to the China Mengniu Group and other major dairy products manufacturers in the nearby region in order to assess the fairness of the unit price quoted by the China Mengniu Group.

Based on our discussion with the management of the Group, we noted that the responsible officer of the Group (who is independent to the purchasers and responsible for comparison of the quotations and negotiation with the purchasers) will determine the pricing of the raw fresh milk delivered to the relevant purchasers with long-term supply agreements in that month at the end of each month. The responsible officer of the Group will review all the quotations and negotiate with the various purchasers to ensure the final unit price, before taking into account the Adjustment Factors, is consistent among the purchasers.

Based on the above, we concur with the view of the Board that the aforesaid pricing procedures can result in the transactions contemplated under the Raw Fresh Milk Supply Framework Agreement to be conducted on normal commercial terms.

6. The Supply Annual Caps

The proposed total annual sale amount by the Group to the China Mengniu Group under the Raw Fresh Milk Supply Framework Agreement shall not exceed RMB3,300 million, RMB3,700 million and RMB4,200 million (the "Supply Annual Caps") for the years ending 31 December 2020, 2021 and 2022 (the "Cap Period") respectively.

As stated in the letter from the Board contained in the Circular, the Supply Annual Caps were determined with reference to a number of factors, particularly (i) the expected increase in sales volume of raw fresh milk to the China Mengniu Group; (ii) the potential increase in price of dairy products in China; (iii) the historical and prevailing purchase price of raw fresh milk paid by the China Mengniu Group; (iv) the historical transaction amounts of raw fresh milk sold by the Group to the China Mengniu Group for the years ended 31 December 2016, 2017 and 2018 and the nine months ended 30 September 2019; and (v) the expected number of milkable cows of the Group for the years ending 31 December 2020, 2021 and 2022.

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LETTER FROM SOMERLEY

We have reviewed the following factors to assess the fairness and reasonableness of the Supply Annual Caps:

  1. The expected number of milkable cows and the production of raw milk of the Group

On average in 2019, the Group had 50,486 heads of milkable cows for the production of raw fresh milk. As advised by the management of the Group and for the purpose of determining the Supply Annual Caps, it was anticipated that the total number of milkable cows during the Cap Period would grow by approximately 13% to 18% per annum. We consider such projected growths are reasonable having taken into account the reproduction of milkable cows as well as the acquisition of milkable cows from other parties during the Cap Period to satisfy the anticipated rising demand for raw fresh milk.

Furthermore, for the purpose of determining the Supply Annual Caps, it is estimated that the production of raw fresh milk per day by each milkable cow for the Cap Period will be increased by approximately 6% to 13% from the level in 2019. Based on our discussion with the management of the Group, we understood that there was a portion of low-yield milkable cows in the dairy herd of the Group in 2019 and these milkable cows were phased out by the end of 2019. At the same time, the Group will implement a series of measures in 2020 to gradually improve the yield of the milkable cows of the Group in the Cap Period.

Multiplying the expected number of milkable cows by the expected production of raw milk per day per milkable cow as discussed above, the management of the Group has arrived at the expected production of organic raw fresh milk and non-organic raw fresh milk of the Group for the years ending 31 December 2020, 2021 and 2022.

  1. The potential increase in the price of dairy products in China

Based on the financial reports published by the Company, we noted that the average selling price of the organic raw fresh milk of the Group decreased from approximately RMB5.51 per kg in 2014 to approximately RMB3.66 per kg in 2018 and rebounded to approximately RMB4.69 per kg in the first half of 2019. Based on our discussion with the management of the Group, the aforesaid price further surged in the second half of 2019. The aforesaid price in December 2019 was even above the projected average selling price of the organic raw fresh milk during the Cap Period for the purpose of determining the Supply Annual Caps.

The non-organic raw fresh milk price followed a similar trend as that of organic raw fresh milk. The average selling price dropped from approximately RMB4.75 per kg in 2014 to approximately RMB3.38 per kg in 2017 and bounced back to approximately RMB3.54 per kg in the first half of 2019. Based on our discussion with the management of the Group, the aforesaid price also rose in the second half of 2019. The aforesaid price in December 2019 was almost the same as the projected average selling price of the non-organic raw fresh milk during the Cap Period for the purpose of determining the Supply Annual Caps.

− 38 −

LETTER FROM SOMERLEY

(iii) The historical transaction amounts of raw fresh milk paid by the China Mengniu Group

As set out in the letter from the Board contained in the Circular, the raw fresh milk (including both organic raw fresh milk and non-organic raw fresh milk) sold by the Group to the China Mengniu Group for the years ended 31 December 2016, 2017 and 2018 and the nine months ended 30 September 2019 amounted to approximately RMB809.7 million, RMB827.3 million, RMB1,233.9 million and RMB1,742.6 million respectively, representing approximately 21%, 26%, 36% and 69% of the total revenue of the Group for the corresponding year or period respectively.

Based on our discussion with the management of the Group, the rising trend of the revenue generated from sales to the China Mengniu Group was mainly due to the deepened collaboration between the Group and the China Mengniu Group, in particular after completion of the disposal of the Downstream Dairy Product Business to the China Mengniu Group in May 2019 and the implementation of the transactions contemplated under the Priority Supply Agreements. Accordingly, it was anticipated that the rising trend would continue in the Cap Period.

(iv) The expected increase in sales volume of raw fresh milk to the China Mengniu Group

In determining the Supply Annual Caps, the management of the Group estimated that up to approximately 99.8%, 93.6% and 88.7% of the raw fresh milk to be produced by the Group would be sold to the China Mengniu Group, which would be equivalent to RMB3,300 million, RMB3,700 million and RMB4,200 million, for the years ending 31 December 2020, 2021 and 2022 respectively. Having considered that (a) the increasing percentages of raw fresh milk sold to the China Mengniu Group by the Group in recent years and up to 69% for the nine months ended 30 September 2019 as discussed in paragraph (iii) above; (b) the requirement of at least 80% of the raw fresh milk produced by the Group have to be sold to the China Mengniu Group pursuant to the Raw Fresh Milk Supply Framework Agreement; (c) the estimated demand for raw fresh milk by the China Mengniu Group, as indicated by the China Mengniu Group's commitment to purchase all raw fresh milk produced by the Group up to the amounts as represented by the Supply Annual Caps as stipulated in the Raw Fresh Milk Supply Framework Agreement; and (d) the priority to supply raw fresh milk to the Target Company, now being a subsidiary of China Mengniu, pursuant to the Priority Supply Agreements, we are of the view that it is acceptable to have the aforesaid percentages (i.e. approximately 99.8%, 93.6% and 88.7% ) of the projected production of raw fresh milk to be sold to the China Mengniu Group for the purpose of determining the Supply Annual Caps.

7. Reasons for and benefits of entering into the Financial Assistance Framework Agreement

As stated in the letter from the Board contained in the Circular, the China Mengniu Group is an important business partner of the Group and has a strong capital base and financing capabilities. The financial assistance provided by the China Mengniu Group to the Group will lower the overall financial risk of the Group.

− 39 −

LETTER FROM SOMERLEY

Based on our discussion with the management of the Group, similar to the current entrusted loans borrowed by the Group from the China Mengniu Group, we noted that the entrusted loans to be borrowed by the Group pursuant to the Financial Assistance Framework Agreement would be used for, among other things, working capital and repayment of bank loans of the Group. Therefore, the availability of the entrusted loans pursuant to the Financial Assistance Framework Agreement will be important for the operations of the Group and the refinancing of bank loans and the current entrusted loans due to the China Mengniu Group, which amounted RMB1,300.0 million as at 30 June 2019, when they become mature.

Also, having considered the financial assistance to be provided by the China Mengniu Group pursuant to the Financial Assistance Framework Agreement will provide an additional source of financing to the Group, we concur with the Board's view that the entering into of the Financial Assistance Framework Agreement will reduce the reliance of the Group on bank borrowings and hence will lower the overall financial risk of the Group.

8. Principal terms of the Financial Assistance Framework Agreement

Date

30 December 2019

Parties

  1. Shengmu High-tech (for itself and on behalf of the Group)
  2. Inner Mongolia Mengniu (for itself and on behalf of the China Mengniu Group)

Term

From 1 January 2020 to 31 December 2022

Provision of entrusted loans

The China Mengniu Group shall provide entrusted loans to the Group on normal commercial terms based on the requests of the Group from time to time.

Security

The Group agrees to provide security to the China Mengniu Group for the entrusted loans and the scope of security may include biological assets and the equity interests of the joint venture pasture companies.

Amendment and termination

Any amendment to or the termination of the Financial Assistance Framework Agreement shall be made in writing by the parties.

− 40 −

LETTER FROM SOMERLEY

9. Internal control procedures in assessing terms of borrowings

As stated in the letter from the Board contained in the Circular, in order to ensure that the terms of financial assistance provided by the China Mengniu Group to the Group will be on normal commercial terms or on terms no less favourable to the Group than those offered by independent third party lenders, the Group will engage a broad range of independent third party lenders and the China Mengniu Group to provide loan proposals based on the Group's financial needs. The Group will then compare the proposals received and choose the proposal whose terms including but not limited to the principal amount, interest rate, duration, security and collateral, are more favourable to the Group. The responsible officer of the Group will also maintain regular contacts with independent third party lenders to keep abreast of the trends in the financing market in the PRC. The terms of financial assistance provided by the China Mengniu Group and the transactions thereunder will also be subject to the regular review of the listing management department of the Group (the "Listing Management Department"). The Listing Management Department is dedicated to the identification and management of connected transactions and it will review the connected transaction agreements to evaluate the fairness of the terms of the agreements.

In light of the above, we have obtained and reviewed the Group's internal guideline for obtaining credit facilities, which requires, among other things, (i) set the annual credit budget based on financing needs forecasted by various business units of the Group; (ii) review the annual credit budgets by finance department of the Group; (iii) obtain the proposed credit terms from the potential lenders including banks and the China Mengniu Group; and (iv) assess and compare the proposed credit terms provided by lenders based on the Group's financing needs (the "Offers") ((i) to (iv) together, the "Credit Control"). As advised by the management of the Company, the Company shall draw down the loan facilities in the order from the most to the least favourable terms available to the Company. In the event the Group has additional financing requirement, the Group will conduct an enquiry to the lenders to seek for additional funding and the proposed credit terms and will compare the proposed credit terms against each other (if available) and the terms of the loans most recently offered by independent third party lenders to determine on the fairness and reasonableness of the proposed credit terms. We consider the Credit Control to be fair and reasonable as it enables the Group to compare the Offers, ensuring the proposed credit terms to be offered by the China Mengniu Group are on normal commercial terms.

Furthermore, we have obtained a list of the Group's outstanding borrowings as at 31 December 2019 (the "Outstanding Borrowings List"), which includes not less than 30 loans provided by independent third party lenders and entrusted loans provided by the China Mengniu Group. We noted that the interest rates of the entrusted loans provided by the China Mengniu Group were generally within the range of that provided by other independent third party lenders. Also, we have discussed with the management of the Group and noted that the Company would engage an independent valuer to assess the fair value of the biological assets, if any, to be secured against the loans prior to entering into any loan agreement. In light of this, we have obtained and reviewed certain documents and information in relation to certain outstanding loans of the Group as at 31 December 2019 and noted that independent valuations were conducted for loans secured against biological assets.

− 41 −

LETTER FROM SOMERLEY

10. The Financial Assistance Annual Caps

The historical amounts of the financial assistance provided by the China Mengniu Group to the Group for the years ended 31 December 2016, 2017 and 2018 and for the nine months ended 30 September 2019 and the proposed maximum daily balance of entrusted loans to be provided by the China Mengniu Group to the Group (the "Financial Assistance Annual Caps") under the Financial Assistance Framework Agreement for the years ending 31 December 2020, 2021 and 2022 are set out below:

The

historical

amount for

the nine

months

The Financial Assistance

The historical amounts

ended 30

Annual Caps for the year ending

for the year ended 31 December

September

31 December

2016

2017

2018

2019

2020

2021

2022

(RMB

(RMB

(RMB

(RMB

(RMB

(RMB

(RMB

million)

million)

million)

million)

million)

million)

million)

Nil

Nil

1,300

1,160

1,600

1,600

1,600

As set out in the letter from the Board contained in the Circular, the Financial Assistance Annual Caps were determined with reference to the maximum daily balance of financial assistance provided by the China Mengniu Group to the Group through entrusted loans in the past. The Financial Assistance Annual Caps for the years ending 31 December 2020, 2021 and 2022 of RMB1,600 million represent increases of approximately 23.1% to 37.9% from the historical amounts of prior year or period.

As discussed in section 7 headed "Reasons for and benefits of entering into the Financial Assistance Framework Agreement" in this letter, the entrusted loans to be drawn down under the Financial Assistance Framework Agreement will be used for, among other things, working capital and repayment of bank loans of the Group. Having considered (i) the recent business growth of the Group as seen from the increase in revenue of the Group for the most recent period (i.e. the six months ended 30 June 2019) by approximately 23.9% when compared with that of the corresponding period in 2018; and (ii) the outstanding bank loans of the Group as at 31 December 2019 of approximately RMB763 million, we are of the view that there will be potential growth in working capital requirement and potential repayment of the aforesaid bank loans. Based on the above, we consider the Financial Assistance Annual Caps to be fair and reasonable.

− 42 −

LETTER FROM SOMERLEY

OPINION AND RECOMMENDATION

Having taken into account the above principal factors and reasons, we consider that, the entering into of the Raw Fresh Milk Supply Framework Agreement and the Financial Assistance Framework Agreement are in the ordinary and usual course of business of the Group and in the interests of the Company and the Shareholders as a whole. We are also of view that the terms of the Raw Fresh Milk Supply Framework Agreement (including the Supply Annual Caps) and the Financial Assistance Framework Agreement (including the Financial Assistance Annual Caps) are on normal commercial terms and fair and reasonable so far as the Independent Shareholders are concerned.

We therefore advise the Independent Board Committee to recommend, and we ourselves recommend, the Independent Shareholders to vote in favour of the resolutions in relation to the Raw Fresh Milk Supply Framework Agreement (including the Supply Annual Caps) and the Financial Assistance Framework Agreement (including the Financial Assistance Annual Caps) at the EGM.

Yours faithfully,

for and on behalf of

SOMERLEY CAPITAL LIMITED

Danny Cheng

Director

Mr. Danny Cheng is a licensed person registered with the Securities and Futures Commission and a responsible officer of Somerley Capital Limited, who is licensed under the Securities and Futures Ordinance to carry out Type 1 (dealing in securities) and Type 6 (advising on corporate finance) regulated activities. He has over 15 years of experience in the corporate finance industry.

− 43 −

APPENDIX I

GENERAL INFORMATION

1 RESPONSIBILITY STATEMENT

This circular, for which the Directors collectively and individually accept full responsibility, includes particulars given in compliance with the Listing Rules for the purpose of giving information with regard to the Company. The Directors, having made all reasonable enquiries, confirm that to the best of their knowledge and belief, the information contained in this circular is accurate and complete in all material respects and not misleading or deceptive, and there are no other matters the omission of which would make any statement herein or this circular misleading.

2 DISCLOSURE OF INTERESTS

  1. DIRECTORS' AND CHIEF EXECUTIVES' INTERESTS AND SHORT POSITIONS IN SHARES, UNDERLYNG SHARES AND DEBENTURES

So far as is known to any Director or chief executive of the Company, as of the Latest Practicable Date, the interests or short positions of the Directors and chief executive of the Company in the Shares, underlying Shares and debentures of the Company or its associated corporations (within the meaning of Part XV of the Securities and Futures Ordinance (Chapter 571 of the Laws of Hong Kong) (the "SFO") which were required to be notified to the Company and the Stock Exchange pursuant to Divisions 7 and 8 of Part XV of the SFO (including interests or short positions which they were taken or deemed to have under such provisions of the SFO) or which were required, pursuant to Section 352 of the SFO, to be entered in the register referred to therein, or which were required, pursuant to the Model Code, to be notified to the Company and the Stock Exchange, were as follows:

  1. Long position in the Shares or underlying Shares

Number of

Capacity/Nature of

Shares/underlying

Name

interest

Shares

Percentage

Shao Genhuo (邵根夥)

Interests of a controlled

1,301,651,000(1)

20.48%

corporation(1)

Yao Tongshan (姚同山)

Beneficial Owner

409,092,700

6.44%

Wu Jianye (武建鄴)

Beneficial Owner

32,706,261

0.51%

Zhang Jiawang (張家旺)

Beneficial Owner

138,130,000

2.17%

Notes:

  1. Mr. Shao Genhuo (邵根夥) holds the entire equity interests of Beijing Zhi Nong, which in turn holds the entire equity interests of Nong You. Therefore, Mr. Shao is deemed to be interested in the Shares held by Nong You.

− 44 −

APPENDIX I

GENERAL INFORMATION

  1. Long position in the shares of associated corporations

Percentage

Name

Name of associated corporation

of interest

Yao Tongshan (姚同山)

Bayannur Shengmu High-tech Ecological

1.45%

Forage Co., Ltd. (巴彥淖爾市聖牧高科生態

草業有限公司)

Wu Jianye (武建鄴)

Bayannur Shengmu Pangu Farming Co., Ltd.

45.00%

(巴彥淖爾市聖牧盤古牧業有限責任公司)

Bayannur Shengmu High-tech Ecological

6.83%

Forage Co., Ltd. (巴彥淖爾市聖牧高科生態

草業有限公司)

Save as disclosed above and to the best knowledge of the Directors, as of the Latest Practicable Date, none of the Directors or chief executive of the Company had any interest or short position in the shares or underlying shares or debentures of the Company or any of its associated corporations which were required to be notified to the Company and the Stock Exchange pursuant to Divisions 7 and 8 of Part XV of the SFO (including interests or short positions which they were taken or deemed to have under such provisions of the SFO) or which were required, pursuant to Section 352 of the SFO, to be entered in the register referred to therein, or which were required to be notified to the Company and the Stock Exchange pursuant to the Model Code.

  1. DIRECTORS' SERVICE CONTRACTS

As at the Latest Practicable Date, none of the Directors had any existing or proposed to enter into, a service contract with any member of the Group which does not expire or is not determinable by such member of the Group within one year without payment of compensation, other than the statutory compensation.

(iii) INTERESTS OF THE SUBSTANTIAL SHAREHOLDERS

As of the Latest Practicable Date, according to the register kept by the Company pursuant to Section 336 of the SFO and, so far as was known to the Directors or chief executive of the Company, the persons or entities, other than a Director or chief executive of the Company, who had an interest or a short position in the shares or the underlying shares of the Company which would fall to be disclosed to the Company under the provisions of Divisions 2 and 3 of Part XV of the SFO or which were directly or indirectly, interested in 5% or more of the nominal value of any class of share capital carrying rights to vote in all circumstances at general meetings of the Company or any other company which is a subsidiary of the Company, or in any options in respect of such share capital were as follows:

− 45 −

APPENDIX I

GENERAL INFORMATION

  1. Long positions in the Shares as of the Latest Practicable Date

Number of

Capacity/Nature of

Shares/underlying

Name

interest

Shares

Percentage

Start Great Holdings

Beneficial Owner

1,467,193,490

(L)

23.09%

(L)

Limited

China Mengniu

Interest of a controlled

1,467,193,490

(L)

23.09%

(L)

corporation

Greenbelt Global Limited

Beneficial Owner

536,097,305

(L)

8.44%

(L)

Baring Private Equity

Interest of a controlled

536,097,305

(L)

8.44%

(L)

Asia GP V Limited

corporation

Baring Private Equity

Interest of a controlled

536,097,305

(L)

8.44%

(L)

Asia GP V LP

corporation

The Baring Private

Interest of a controlled

536,097,305

(L)

8.44%

(L)

Equity Fund V LP

corporation

Salata Jean

Interest of a controlled

536,097,305

(L)

8.44%

(L)

corporation

Zhang Junli (張軍力)

Interest of the spouse

409,092,700

(L)

6.44%

(L)

Sequoia Capital 2010

Beneficial Owner

378,320,000

(L)

5.95%

(L)

CGF Holdco, Ltd.

SC China Growth 2010

Interest of a controlled

378,320,000

(L)

5.95%

(L)

Management, L.P.

corporation

SC China Holding

Interest of a controlled

378,320,000

(L)

5.95%

(L)

Limited

corporation

Sequoia Capital China

Investment Manager

378,320,000

(L)

5.95%

(L)

Advisors Limited

Sequoia Capital China

Interest of a controlled

378,320,000

(L)

5.95%

(L)

Growth 2010, L.P.

corporation

SNP China Enterprises

Interest of a controlled

378,320,000

(L)

5.95%

(L)

Limited

corporation

Shen Nanpeng (沈南鵬)

Interest of a controlled

378,320,000

(L)

5.95%

(L)

corporation

The Goldman Sachs

Interest of a controlled

405,551,200

(L)

6.38%

(L)

Group, Inc.

corporation

9,647,000 (S)

0.15% (S)

Nong You

Beneficial Owner

1,301,651,000

(L)

20.48%

(L)

Beijing Zhi Nong

Interest of a controlled

1,301,651,000

(L)

20.48%

(L)

corporation

− 46 −

APPENDIX I

GENERAL INFORMATION

Save as disclosed above, so far as is known to the Directors of the Company, as at the Latest Practicable Date, no other person (other than a Director) had, or was deemed to have, an interest or short position in the Shares or underlying Shares which would fall to be disclosed to the Company under the provisions of Divisions 2 and 3 of Part XV of the SFO.

To the best knowledge of the Directors, as at the Latest Practicable Date, none of the Directors is a director or employee of a company which has an interest or short position in the shares and underlying shares of the Company which would fall to be disclosed to the Company and the Stock Exchange under the provisions of Divisions 2 and 3 of Part XV of the SFO.

3 DIRECTORS' INTEREST IN THE COMPANY AND ITS SUBSIDIARIES' ASSETS OR CONTRACT

As at the Latest Practicable Date, save as disclosed in this circular, (a) none of the Directors was materially interested, directly or indirectly, in any contract or arrangement entered into by any member of the Group subsisting at the Latest Practicable Date and which was significant in relation to the business of the Group; and (b) none of the Directors of the Company had any direct or indirect interest in any assets which have been since 31 December 2018 (being the date to which the latest published audited accounts of the Company were made up), (i) acquired or disposed of by; (ii) leased to; (iii) are proposed to be acquired or disposed of by; or (iv) are proposed to be leased to, any member of the Group:

  1. On 20 March 2018, Shengmu High-tech (for itself and on behalf of the Group) and Dabeinong Group entered into a framework agreement in relation to the purchase of feed by the Group from Dabeinong Group for a term from 20 March 2018 to 31 December 2020 (the "Dabeinong Group Feed Supply Framework Agreement"), details of which are set out in the announcement of the Company dated 20 March 2018. As Mr. Shao Genhuo, a non-executive Director of the Company, holds more than 30% equity interest in Dabeinong Group, Dabeinong Group is a connected person of the Company as defined under the Listing Rules. Accordingly, the transactions contemplated under the Dabeinong Group Feed Supply Framework Agreement constitute continuing connected transactions of the Company. Pursuant to such agreement, the total annual purchase amount by the Group from Dabeinong Group under the Dabeinong Group Feed Supply Framework Agreement shall not exceed RMB60 million for each of the three years ending 31 December 2018, 2019 and 2020, respectively. Reasons for and benefits of the transactions under the Dabeinong Group Feed Supply Framework Agreement are that, as a leading feed provider in the PRC, the products supplied by the Dabeinong Group accord to very high technological, quality and safety assurance levels.
  2. On 23 April 2019, Shengmu Holding (for itself and on behalf of the Group (excluding Shengmu Pangu)) and Shengmu Pangu entered into a framework agreement in relation to the sale and purchase of cows between the Group (excluding Shengmu Pangu) to Shengmu Pangu for a term from 23 April 2019 to 31 December 2021 (the "Framework Agreement for Sale and Purchase of Cows"), details of which are set out in the announcement of the Company dated 23 April 2019 (the "Shengmu Pangu Announcement"). As Shengmu Pangu is a 55% indirectly owned subsidiary of the Company and Mr. Wu Jianye, an executive Director of the Company, holds the remaining 45% equity interest in Shengmu

− 47 −

APPENDIX I

GENERAL INFORMATION

Pangu, Shengmu Pangu is a connected person of the Company as defined under the Listing Rules. Accordingly, the transactions contemplated under the Framework Agreement for Sale and Purchase of Cows constitute continuing connected transactions of the Company. Pursuant to such agreement, (i) the total annual amount of purchases of cows made by the Group (excluding Shengmu Pangu) from Shengmu Pangu shall not exceed RMB16.0 million, RMB13.6 million and RMB14.2 million, for each of the three years ending 31 December 2019, 2020 and 2021, respectively; (ii) the total annual sales of cows made by the Group (excluding Shengmu Pangu) to Shengmu Pangu shall not exceed RMB29.4 million, RMB45.8 million and RMB35.7 million, for each of the three years ending 31 December 2019, 2020 and 2021, respectively. Reasons for and benefits of the transactions under the Framework Agreement for Sale and Purchase of Cows are the fact that the Group manages the dairy farming business on a centralised basis. As a subsidiary of the Group, Shengmu Pangu is also subject to such centralised management.

  1. On 23 April 2019, Shengmu High-tech (for itself and on behalf of the Group (excluding Shengmu Pangu)) and Shengmu Pangu entered into a framework agreement in relation to the provision of financial assistance (in the form of guarantees) by the Group (excluding Shengmu Pangu) to Shengmu Pangu for a term from 23 April 2019 to 31 December 2021 (the "Shengmu Pangu Financial Assistance Framework Agreement"), details of which are set out in the Shengmu Pangu Announcement. As Shengmu Pangu is a 55% indirectly owned subsidiary of the Company and Mr. Wu Jianye, an executive Director of the Company, holds the remaining 45% equity interest in Shengmu Pangu, Shengmu Pangu is a connected person of the Company as defined under the Listing Rules. Accordingly, the transactions contemplated under the Shengmu Pangu Financial Assistance Framework Agreement constitute continuing connected transactions of the Company. Pursuant to such agreement, the Group will provide financial assistance (in the form of guarantees) to Shengmu Pangu on normal commercial terms. The maximum daily balance of financial assistance (in the form of guarantees) to be provided by the Group (excluding Shengmu Pangu) to Shengmu Pangu under the Financial Assistance Framework Agreement shall not exceed RMB60.0 million for each of the three years ending 31 December 2019, 2020 and 2021. Reasons for and benefits of the transactions under the Financial Assistance Framework Agreement are the fact that Shengmu Pangu, as a subsidiary of the Group, has been obtaining commercial loans and borrowings with the guarantees provided by the other more established subsidiaries of the Group, such as Shengmu Holding and Shengmu High-tech. Without such guarantees, it would incur higher financial cost to obtain such commercial loans and borrowings. As such, it is commercially beneficial to the Group to continue to provide financial assistances to Shengmu Pangu, which will also lower the overall financial cost of the Group
  2. On 23 April 2019, Shengmu Holding (for itself and on behalf of the Group (excluding Shengmu Pangu)) and Shengmu Pangu entered into a framework agreement in relation to the purchase of feed by Shengmu Pangu from the Group (excluding Shengmu Pangu) for a three-year term from 23 April 2019 to 31 December 2021 (the "Feed Supply Framework Agreement"), details of which are set out in the Shengmu Pangu Announcement. As Shengmu Pangu is a 55% indirectly owned subsidiary of the Company and Mr. Wu Jianye, an executive Director of the Company, holds the remaining 45% equity interest in Shengmu Pangu, Shengmu Pangu is a connected person of the Company as defined under the Listing

− 48 −

APPENDIX I

GENERAL INFORMATION

Rules. Accordingly, the transactions contemplated under the Feed Supply Framework Agreement constitute continuing connected transactions of the Company. Pursuant to such agreement, the total purchase amount by Shengmu Pangu from the Group (excluding Shengmu Pangu) under the Feed Supply Framework Agreement shall not exceed RMB84.1 million, RMB93.4 million, RMB93.0 million for the three years ending 31 December 2019, 2020 and 2021, respectively. Reasons for and benefits of the transactions under the Feed Supply Framework Agreement are to facilitate the Group in managing the production and use of feed on a centralised basis, that is, all feed is produced by Shengmu Holding and subsequently sold to the cattle farming subsidiaries of the Group (including Shengmu Pangu) at a price referred to the market price.

4 MATERIAL ADVERSE CHANGE

As at the Latest Practicable Date, the Directors confirmed that there has been no material adverse change in the financial or trading position of the Group since 31 December 2018, being the date to which the latest published audited consolidated financial statements of the Group were made up.

5 LITIGATION

As at the Latest Practicable Date, no member of the Group was engaged in any litigation or arbitration or claim of material importance and, so far as the Directors were aware, no litigation or claim of material importance is pending or threatened by or against any member of the Group.

6 COMPETING INTERESTS

As at the Latest Practicable Date, Mr. Wen Yongping, a non-executive Director, is also the vice president and the general manager of the low temperature business department of Inner Mongolia Mengniu, a subsidiary of China Mengniu.

Save as disclosed above, as at the Latest Practicable Date, none of the Directors or, so far as is known to them, any of their respective associates was interested in any business (apart from the Group's business) which competes or is likely to compete either directly or indirectly with the Group's business (as would be required to be disclosed under Rule 8.10 of the Listing Rules if each of them were a controlling shareholder).

7 EXPERT AND CONSENT

The following is the qualification of the expert who has given opinion or advice on 6 March 2020 which is contained in this circular:

Name

Qualification

Somerley Capital Limited

a corporation licensed to carry out Type 1 (dealing in

securities) and Type 6 (advising on corporate finance)

regulated activities under the Securities and Futures

Ordinance

− 49 −

APPENDIX I

GENERAL INFORMATION

As at the Latest Practicable Date, Somerley did not have any shareholding, direct or indirect, in any member of the Group or any right (whether legally enforceable or not) to subscribe for or to nominate persons to subscribe for securities in any member of the Group.

As at the Latest Practicable Date, Somerley did not have any direct or indirect interest in any assets which have been acquired or disposed of by or leased to any member of the Group, or which are proposed to be acquired or disposed of by or leased to any member of the Group since 31 December 2018, being the date to which the latest published audited financial statements of the Group were made up.

As at the Latest Practicable Date, Somerley has not withdrawn its written consent to the issue of this circular with the inclusion in this circular of its letter and reference to its name and opinion in the form and context in which they appear in this circular.

  1. MISCELLANEOUS
    1. The joint company secretaries of the Company are Mr. Wu Jianye and Mr. Au Wai Keung.
    2. The Company's Hong Kong branch share registrar is Tricor Investor Services Limited at Level 54, Hopewell Centre, 183 Queen's Road East, Hong Kong.
    3. The registered address of the Company is P.O. Box 309, Ugland House, Grand Cayman, KY1-1104, Cayman Islands. The principal place of business of the Company in Hong Kong is Unit 1303, 13/F, Hua Fu Commercial Building, 111 Queen's Road West, Hong Kong
  3. DOCUMENTS AVAILABLE FOR INSPECTION

Copies of the following documents will be made available for inspection at the Linklaters, 11/F, Alexandra House, Chater Road, Hong Kong during normal business hours for a period of 14 days from the date of this circular (inclusive):

  1. the Raw Fresh Milk Supply Framework Agreement;
  2. the Financial Assistance Framework Agreement;
  3. the letter from the Independent Board Committee, the text of which is set out in this circular;
  4. the letter from Somerley, being the Independent Financial Adviser, the text of which is set out in this circular;
  5. the written consent letter from Somerley as referred to in paragraph headed "Expert and Consent" in this appendix;
  6. this circular;
  7. the First Share Purchase Agreement;

− 50 −

APPENDIX I

GENERAL INFORMATION

  1. the Second Share Purchase Agreement;
  2. the Dabeinong Group Feed Supply Framework Agreement;
  3. the Framework Agreement for Sale and Purchase of Cows;
  4. the Shengmu Pangu Financial Assistance Framework Agreement; and
  5. the Feed Supply Framework Agreement.

− 51 −

NOTICE OF THE EGM

CHINA SHENGMU ORGANIC MILK LIMITED

中 國 聖 牧 有 機 奶 業 有 限 公 司

(Incorporated in the Cayman Islands with limited liability)

(Stock Code: 1432)

NOTICE IS HEREBY GIVEN THAT the extraordinary general meeting (the "EGM") of China Shengmu Organic Milk Limited (中國聖牧有機奶業有限公司) (the "Company") will be held at 2:00 p.m. on 27 March 2020 at Conference Room, 2/F, Shengmu Building, Shaerqin Industrial Park, Southern District of Ruyi Development New Zone, Tumotezuoqi, Hohhot, Inner Mongolia Autonomous Region, the PRC for the purposes of considering and, if thought fit, passing, with or without modifications, the following resolutions as ordinary resolutions of the Company:

ORDINARY RESOLUTIONS

  1. "THAT
    1. the raw fresh milk supply framework agreement dated 30 December 2019 (the "Raw Fresh Milk Supply Framework Agreement") entered into by Inner Mongolia Shengmu High-tech Farming Co, Ltd (內蒙古聖牧高科牧業有限公司) ("Shengmu High-tech") (for itself and on behalf of the Company and its subsidiaries from time to time (the "Group")) and Inner Mongolia Mengniu Dairy (Group) Company Limited (內蒙古蒙牛乳業(集團)股份有限公司) ("Inner Mongolia Mengniu") (for itself and on behalf of China Mengniu Dairy Company Limited (中國蒙牛乳業有限公司) and its subsidiaries from time to time (the "China Mengniu Group")), in relation to the purchase of raw fresh milk by China Mengniu Group from the Group for a term of three years commencing from 1 January 2020 to 31 December 2022, the transactions contemplated under such agreement and the proposed annual caps for such transactions for the three years ending 31 December 2020, 2021 and 2022 be and are hereby approved, ratified and confirmed; and
    2. any one of the directors of the Company be and is/are hereby authorised to do all such acts or things and sign all documents necessary by him/her to be incidental to, ancillary to or in connection with the Raw Fresh Milk Supply Framework Agreement, the transactions contemplated under such agreement and the proposed annual caps for such transactions for the three years ending 31 December 2020, 2021 and 2022."
  3. "THAT
    1. the financial assistance framework agreement dated 30 December 2019 (the "Financial Assistance Framework Agreement") entered into by Shengmu High-tech (for itself and on behalf of the Group) and Inner Mongolia Mengniu (for itself and on behalf of the China Mengniu Group), in relation to the provision of entrusted loans by the China Mengniu Group to the Group for a term of three years commencing from 1 January 2020 to 31 December 2022, the transactions contemplated under such agreement and the proposed annual caps for such transactions for the three years ending 31 December 2020, 2021 and 2022 be and are hereby approved, ratified and confirmed; and

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NOTICE OF THE EGM

  1. any one of the directors of the Company be and is/are hereby authorised to do all such acts or things and sign all documents necessary by him/her to be incidental to, ancillary to or in connection with the Financial Assistance Framework Agreement, the transactions contemplated under such agreement and the proposed annual caps for such transactions for the three years ending 31 December 2020, 2021 and 2022."

By Order of the Board

China Shengmu Organic Milk Limited

Shao Genhuo

Chairman

Hong Kong, 6 March 2020

As at the date of this notice, the executive directors of the Company are Mr. Yao Tongshan, Mr. Wu Jianye and Mr. Zhang Jiawang; and the non-executive director of the Company are Mr. Wen Yongping, Mr. Sun Qian and Mr. Shao Genhuo; and the independent non-executive directors of the Company are Mr. Fu Wenge, Mr. Wang Liyan and Mr. Li Xuan.

Notes:

  1. Any member of the Company entitled to attend and vote at the EGM shall be entitled to appoint another person as his proxy to attend and vote instead of him. A member who is the holder of two or more Shares may appoint more than one proxy to represent him and vote on his behalf at the EGM. A proxy need not be a member of the Company. On a poll, votes may be given either personally or by proxy.
  2. The instrument appointing a proxy shall be in writing under the hand of the appointer or of his/her attorney duly authorised in writing or, if the appointer is a corporation, either under its seal or under the hand of any officer, attorney or other person authorised to sign the same.
  3. In order to be valid, a form of proxy in the prescribed form together with the power of attorney or other authority (if any) under which it is signed must be deposited at the Company's branch registrar in Tricor Investor Services Limited, at Level 54, Hopewell Centre, 183 Queen's Road East, Hong Kong not less than 48 hours before the time fixed for holding the meeting or any adjournment thereof. Delivery of the form of proxy shall not preclude a member of the Company from attending and voting in person at the EGM and, in such event, the form of proxy shall be deemed to be revoked.
  4. No instrument appointing a proxy shall be valid after expiration of 12 months from the date named in it as the date of its execution, except at an adjourned EGM or on a poll demanded at the EGM or any adjournment thereof in cases where the EGM was originally held within 12 months from such date.
  5. Where there are joint holders of any Shares, any one of such joint holders may vote at the EGM, either in person or by proxy, in respect of such Share as if he/she were solely entitled thereto, but if more than one of such joint holders be present at the EGM, the vote of the senior who tenders a vote, whether in person or by proxy, shall be accepted to the exclusion of the votes of other joint holders, and for this purpose, seniority shall be determined by the order in which the names stand in the registrar of members of the Company in respect of the joint holding.

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NOTICE OF THE EGM

  1. To ascertain shareholders' eligibility to attend and vote at this EGM, the register of members of the Company will be closed from 24 March 2020 to 27 March 2020, both days inclusive, during which period no transfer of shares will be effected. In order to qualify for attending and voting at the EGM, unregistered holders of Shares should ensure that all completed transfer forms accompanied by the relevant share certificates must be lodged with the Hong Kong branch registrar and transfer office of the Company, Tricor Investor Services Limited, at Level 54, Hopewell Centre, 183 Queen's Road East, Hong Kong not later than 4:30 p.m. on 23 March 2020.
  2. A form of proxy for use at the EGM is enclosed.

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China Shengmu Organic Milk Ltd. published this content on 06 March 2020 and is solely responsible for the information contained therein. Distributed by Public, unedited and unaltered, on 06 March 2020 08:37:09 UTC