Sandmartin International : RESULTS OF INTERNAL CONTROL REVIEW

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(Incorporated in Bermuda with limited liability)

(Stock Code: 482)

RESULTS OF INTERNAL CONTROL REVIEW

Reference is made to the Company's announcements dated 9 February 2021 and 23 March 2021 (the "Announcements") in relation to the appointment of the Internal Control Adviser as directed by the Listing Committee of the Stock Exchange in the News Release and the time extension for submission of the written report of the Internal Control Adviser. Unless otherwise defined herein, capitalised terms used herein shall have the same meanings as those defined in the Announcements.

INTERNAL CONTROL REVIEW REPORT

The Review conducted by the Internal Control Adviser covered the information and communications and corporate governance of the Company during the period from 1 January 2020 to 31 December 2020 (the "Review Period"). During the Review Period, there was neither notifiable transactions, nor connected transactions identified. On 12 April 2021, the Company provided the Listing Division of the Stock Exchange with a written report of the Internal Control Adviser containing recommendations to improve the Company's internal controls and to ensure compliance with Chapters 14 and 14A of the Listing Rules.

The findings of the Internal Control Adviser in the Review and their recommendations for improvement of the Company's internal controls and ensuring compliance with Chapters 14 and 14A of the Listing Rules are summarised as follows:

1. Policies and Procedures in Compliance with Chapter 14, Chapter 14A and Appendix 14 of the Listing Rules

Findings:

The Company has currently established the following written policies and procedures:

• "Inside Information Policy" outlines the requirements of directors of the Company (the "Directors") and relevant employees to consider the duty of confidentiality before the inside information defined under Securities and Futures Ordinance ("SFO") is disclosed under the requirements of Rule 14.37(3) of the Listing Rules. The policy was reviewed and approved by the board of Directors (the "Board") on 31 August 2017; and

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• "Investment and Acquisition Policy" outlines Directors' duties before and after proposed investments and acquisitions, it was reviewed and approved by the Board on 20 August 2020.

During the Review, the Company did not establish written policies in the following aspects:

• in terms of frequency in monthly financial reporting from the management of the Company to the Board or the monthly reporting of financial highlights from the group companies to the
  Company under Code Provision ("CP") C.1.2 of Appendix 14 of the Listing Rules (Note: Although monthly reporting of financial highlights from the subsidiaries to the Company were available for review, no written policies were established for the procedures.);
• the monitoring procedures of the actual action date/time; and any necessary action performed for revising the timelines if the proposed transaction/action had to be delayed;
• the compliance with Chapter 14 and Chapter 14A, in particular, compliance of Rules 14.34 and 14A.35 of the Listing Rules;
• in the "Inside Information Policy", the contact person-in-charge is not updated with the Company's senior company secretarial officer; and
• definition of "substantial shareholders" and procedures of identifying substantial shareholders under Chapter 1 of the Listing Rules.

In the absence of formal policies and procedures regarding the abovementioned areas, the senior management of the Company and its subsidiaries (collectively, the "Group") (the "Management") could not ensure that the internal control procedures in the respective areas are operating as expected for compliance with various requirements of the Listing Rules, in particular, Chapters 14 and 14A of the Listing Rules.

Recommendations:

The Management is recommended to perform the following rectification measures:

• establish and maintain written policies and procedures regarding monthly financial reporting procedures of the Group, including frequency, timeline, methods and sources of information in compliance with CP C.1.2 of Appendix 14;
• senior project manager is recommended to establish and maintain the actual and planned timeline of each of proposed transaction in accordance with the Listing Rules, in particular with reference to Rules 14.34 and 14A.35 of the Listing Rules, and make the required announcement:
• 1. as soon as possible after the terms of a share transaction, discloseable transaction, major transaction, very substantial disposal, very substantial acquisition, extreme transaction or reverse takeover have been finalised; and
  2. as soon as practicable for connected transactions after its terms have been agreed.

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• establish and maintain the policies and procedures which should include but not limited to the requirements as set out in Chapter 14 and Chapter 14A of the Listing Rules and should be approved by the Board before circulating to the responsible staff;
• update the "Inside Information Policy" with the right contact person-in-charge;
• include definition of "substantial shareholders" in accordance with Chapter 1 of the Listing Rules and establish procedures of identifying substantial shareholders of the Company in the policies; and
• prepare the policy and procedures for the above process and distribute it to the relevant personnel after approval by the Management or the Board.

2. Connected Parties Identification and Downward Communication

Findings:

All directors and substantial shareholders of the Group are required to sign a "Connected Parties Declaration Form" to declare their respective connected parties. After the first circulation and receipt of "Connected Parties Declaration Form", senior company secretarial officer then updated the register of connected parties. For subsequent months, the Company's senior company secretarial officer emailed monthly to all directors of the Group to confirm if there is any update on the Group's connected parties.

When a proposed transaction arises, the authorized representatives of subsidiaries will report to the Company's senior company secretarial officer of any identified transactions for checking, including identification of connected parties in the proposed transactions. Senior project manager will use the "Register of Connected Parties" to determine if a proposed transaction falls within the definition of connected party transactions under Chapter 14A of the Listing Rules.

During the Review, the following are noted:

• after the "Register of Connected Parties" is updated, there is neither standard procedures nor distribution list for the Company's senior company secretarial officer to circulate the updated
  "Register of Connected Parties" to responsible personnel in the Group (e.g. responsible officers in each subsidiaries of the Company);
• after the "Register of Connected Parties" is updated by the Company's senior company secretarial officer, there is no designated person to review the completeness and accuracy of information of such register;
• the Company did not send the "Connected Parties Declaration Form" to all directors of the subsidiaries of the Group (i.e. for subsidiaries which does not fall within the exemption as "insignificant subsidiaries" under Rule 14A.09 of the Listing Rules) during the Review Period; and
• the definition of "connected subsidiaries" and "deemed connected person" in accordance with
  Rules 14A.07, 14A.16, 14A.20(2), 14A.21(2) of the Listing Rules were not included in the declaration forms regarding connected parties.

In view of the above findings, comprehensive information of connected parties and connected party transactions may not be timely identified, communicated to and reported accurately by the relevant parties of the Group.

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Recommendations:

The Management is recommended to perform the following:

1. establish written procedures to circulate (i) the latest "Register of Connected Parties"; and (ii) a "Connected Transactions Reporting Templates Form" to all designated responsible personnel
   (e.g. heads of finance departments, finance controllers, finance managers) of each of the Group's subsidiaries for their regular reporting of connected party transactions and reporting during the submission of monthly management accounts package for financial consolidation to the Company;
2. assign a designated person to review and sign on the "Register of Connected Parties" after updating to ensure its accuracy;
3. establish written procedures to ensure that the "Connected Parties Declaration Form" is circulated to all directors, chief executives and substantial shareholders of the Company, its subsidiaries and connected subsidiaries as defined under Chapter 14A of the Listing Rules, in particular Rules 14A.07 and 14A.16 of the Listing Rules respectively, except those exempted under Rule 14A.09 of the Listing Rules (i.e. insignificant subsidiary) and missing declaration forms should be chased on a timely basis;
4. assign a designated personnel to keep track of the receipt of the completed "Connected Parties Declaration Form" to ensure all connected parties of the Group falling within the definition of connected parties under Chapter 14A of the Listing Rules are identified and have reported their declaration forms; and
5. include the definition of "connected subsidiaries" and "deemed connected person" in accordance with the relevant requirements under Chapter 14A of the Listing Rules and include remark and reference in the declaration forms to ensure that all connected parties (including the above and "associates") falling within the definition of Chapter 14A of the Listing Rule are aware of those requirements and fully declare their connected persons to the Group.

3. Identification and Approval of Notifiable and Connected Party Transactions

Findings:

When a proposed transaction arises, the Company's or subsidiaries' authorized representative would approach the Company's senior project manager for a preliminary calculation on size using the percentage ratios defined under Rule 14.07 of the Listing Rules. There is no established written procedures for such vetting process.

Apart from performing these percentage ratios tests, the senior project manager would also check the "Register of Connected Parties" to identify if the proposed transaction falls within the scope of connected transactions as described in Chapter 14A of the Listing Rules.

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However, during the Review, the following was noted:

• the Group relies on the reporting of potential deals from the authorized representatives of the Company or each subsidiary. There is no regular (say monthly or more frequent) written confirmations from all management teams and authorized representatives of each of the group companies to confirm that proposed notifiable or connected party transactions and the terms of transactions are reported to the Company;
• there is no approval record on the "Register of Connected Parties", "Register of Connected Transactions" and "Register of Notifiable Transactions"; and
• no written record is available to demonstrate consideration of aggregation of proposed transactions when performing size test calculation for all transactions that are completed within a 12-month period or are otherwise related taking into account a list of factors according to Rules 14.22 and 14.23 of the Listing Rules.

Without written policy and procedures for reporting and vetting connected parties, connected transactions and notifiable transactions, there are risks of missed or unreported notifiable or connected transactions.

Recommendations:

The Management is recommended to perform the following rectification or enhancement measures:

1. in respect of establishing written policies and procedures to ensure compliance with the requirements under Chapters 14 and 14A of the Listing Rules, covering in particular, the procedures listed below. Further, the Management is also recommended to set out the thresholds for reporting notifiable transactions (based on the percentage ratio according to Chapter 14 of the Listing Rules) and communicating them to the authorized representatives and relevant staff of each subsidiaries of the Company for reporting transactions in accordance with the Listing Rules;
2. prepare a standardised form to facilitate the reporting in step (a) above on a regular basis (e.g. monthly or more frequent) or as incurred;
3. maintain a written documentation on the final vetting procedure to confirm the relevant percentage ratio test under Rule 14.07 of the Listing Rules is still applicable for the proposed transaction just before making an announcement;
4. maintain and update the "Register of Notifiable Transactions", "Register of Connected Transactions" and "Register of Connected Parties" timely with proper review records;
5. maintain records of the regular reporting/declaration of connected parties (e.g. annual) and monthly and annual reporting of connected party transactions; and
6. prepare a register of all proposed transaction for at least the past 12 months, recording the transaction types and counter-parties and retain the written record for performing the required procedures for compliance with Rules 14.22 and 14.23 of the Listing Rules (i.e. aggregation of transactions) where applicable.

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1. Monitoring on the Timeliness of Execution Status of the Proposed Notifiable and Connected Transactions
   Findings:
   When a preliminary draft agreement for a proposed transaction is ready, the Company's senior project manager will prepare the project timeline and work with appointed external lawyers to monitor the anticipated time of the necessary announcement(s) for notifiable and connected transactions and execute the plan strictly according to the anticipated timeline.
   Senior project manager monitors the actual implementation of the transaction and the anticipated time for announcement to avoid any delay.
   However, the Internal Control Adviser noted that previously executed transaction (prior to the Review Period) did not establish and maintain any written approval record on the timetable of proposed notifiable and connected transactions.
   Without maintaining written and approval record of actual execution date/time of the proposed transaction, this may not minimise the risk of non-compliance of relevant Listing Rules in respect of disclosure and delivery of information and disclosure.
   Recommendations:
   Upon preparation of a timetable and recording of the actual execution status, the Company's senior company secretarial officer and senior project manager should sign on the timetable or revised timetable as an evidence of the review and monitoring of record.
2. Directors' Confirmation of Blackout Period
   Findings:
   Prior to the announcement of interim or annual report, the Company's senior company secretarial officer is responsible to remind the Directors about the requirements under Appendix 10 of the Listing Rules "Model Code for Securities Transactions by Directors of Listed Issuers". The Company's senior company secretarial officer sent a notice of blackout period and a confirmation of securities dealing to the Directors. Directors then signed on the confirmation to confirm their compliance to the above model code during the reporting period of the interim or annual report.
   The Directors were not asked to confirm their compliance with the relevant blackout period up to the announcement date of the interim results or annual results. The confirmation of compliance covers only the reporting period (e.g. from 1 January to 31 December of a financial year) but not the blackout period, which is 30-60 days before the interim results or annual results announcement.
   In the absence of such confirmation, the Company could not ensure the Directors' compliance of the relevant requirement according to Appendix 10 of the Listing Rules.

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Recommendations:

The Management is recommended to include the following terms in the Directors' confirmation regarding the "Model Code for Securities Transactions by Directors of Listed Issuers":

1. a director must not deal in any securities of the listed issuer on any day on which its financial results are published and during the period of 60 days immediately preceding the publication date of the annual results or, if shorter, the period from the end of the relevant financial year up to the publication date of the results;
2. during the period of 30 days immediately preceding the publication date of the quarterly results (if any) and half-year results or, if shorter, the period from the end of the relevant quarterly or half-year period up to the publication date of the results; and
3. report of any non-compliance with the "Model Code for Securities Transaction by Directors of Listed Issuers" subsequently after each of the blackout period.

6. Annual Declaration of Interest

Findings:

There is no procedures established by the Company to require relevant employees and the management to confirm any conflict of interest annually.

Recommendations:

The Management is recommended to:

- include definition of "relevant employees" in the Company's written policies and procedures;

- establish and prepare the annual declaration of interest template to relevant employees and directors of the Group; and

• require all relevant employees and directors of the Group to submit annual confirmation on conflict of interest.

Response of the Board

After considering the findings and recommendations in the written report of the Internal Control Adviser, the Board agrees with the recommendations and the Company will implement the same accordingly to improve the Company's internal controls and to ensure compliance with Chapter 14 and Chapter 14A of the Listing Rules.

The Company will furnish the Listing Division of the Stock Exchange with the Internal Control Adviser's written report on the Company's full implementation of the recommendations by 12 June 2021.

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By order of the board

Sandmartin International Holdings Limited

Lau Yau Cheung

Chairman

Hong Kong, 21 April 2021

As at the date of this announcement, the directors of the Company are:

Executive Directors

Mr. Hung Tsung Chin and Mr. Chen Wei Chun

Non-Executive Director

Mr. Kuo Jen Hao

Independent Non-Executive Directors

Mr. Lau Yau Cheung (Chairman), Mr. Li Chak Hung and Mr. Wu Chia Ming

* For identification purpose only

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