Reverse Acquisition (5237I)

TIDMCWO

RNS Number : 5237I

China Wonder Limited

16 June 2011

Acquisition of Win Yu International Investments Company Limited

Placing of 1,710,526 new Ordinary Shares at 19p per share

Admission of the Enlarged Share Capital to trading on AIM

Notice of General Meeting

and

Change of Name to Qihang Equipment Company Limited

1. Introduction

China Wonder Limited ("China Wonder" or the "Company") is pleased to announce that it has conditionally agreed, subject, inter alia, to Shareholder approval, to acquire the entire issued share capital of Win Yu International Investments Company Limited ("Win Yu")(the "Acquisition"). The aggregate consideration of RMB130,000,000 (approximately GBP12.3 million) for the Acquisition is to be satisfied by a cash payment of RMB 53,000,000 (approximately GBP5 million) and the issue of 38,325,737 new ordinary shares of 2.5 pence each in the Company ("Ordinary Shares") at a price of 19 pence per share (the "Consideration Shares").

The Company also today announced that it proposes to raise GBP325,000 by means of a placing of 1,710,526 new Ordinary Shares at 19p per share (the "Placing"). The proceeds of the Placing will be used to fund the costs of the Acquisition.

By reason of the size and relative value of Win Yu in relation to China Wonder, the Acquisition constitutes a reverse takeover under the AIM Rules for Companies and, therefore, requires the approval of existing shareholders at a general meeting. To complete the Acquisition and implement the Placing it will also be necessary to give the directors of the Company (the "Directors") the required powers and authorities to allot the Consideration Shares and the Placing Shares. If the Acquisition is approved by shareholders, the admission of the existing Ordinary Shares to trading on AIM will be cancelled and the Company will apply for admission of its enlarged share capital to trading on AIM ("Admission"). The new Ordinary Shares to be issued in connection with the Acquisition and Placing will rank pari passu in all respects with the existing Ordinary Shares.

2. Background on China Wonder

China Wonder's principal activity was, until recently, the manufacture of packing machinery and associated spare parts, equipment, mouldings, paper products, packing cartons and boxes in China.

In November 2010, the Company announced the sale of Jinzhou Wonder Machinery Equipment Co., Limited, a manufacturer of bespoke and specialised machinery for a wide range of industries, and Jingzhou Wonder Paper Products Co., Limited, a manufacturer of colour printing and paper products for a cash consideration of RMB 30,000,000 (approximately GBP2.8 million) (the "First Disposal"). In addition, on 4 April 2011, the Company announced the disposal of Wonder Packaging Machinery Co. for a cash consideration of RMB 33,000,000 (approximately GBP3.1 million) (the "Second Disposal").

Following these disposals, together representing the whole of its trading operations, the Company became an investing company for the purposes of the AIM Rules.

Following the completion of the Second Disposal on 14 June 2011, China Wonder had cash balances of RMB 57,532,000 (approximately GBP5.4 million) with no outstanding borrowings. The Directors have been considering opportunities to pursue the Company's investing strategy and the Directors have identified Win Yu as an opportunity to fulfil its key strategic objective of enhancing shareholder value.

3. Information on the Win Yu Group

The Business

The business of Win Yu is conducted through its sole trading subsidiary, Jiangsu Qihang CNC Machine Tool Company Limited ("JSQH"), which was established in the 1960s as a state-owned enterprise under the name of Zhenjiang Machine Tool Factory. It is located in Zhenjiang, Jiangsu Province, within easy reach of Shanghai.

Products

JSQH's business comprises the design, manufacture and sale of lathe and milling machine tools. A lathe is a machine for shaping wood, metal, or other material by means of a rotating drive which turns the piece being worked on against changeable cutting tools. A milling machine is a machine tool used to machine solid materials, usually metal, which are secured to a carriage and shaped by rotating milling cutters. Milling machines can perform a large number of operations, from simple actions (e.g., slot and keyway cutting, planing and drilling) to complex processes (e.g., contouring and diesinking).

JSQH's products are divided into three categories:

Universal: standard manually-operated machine tools which can be used by any customer;

CNC: machine tools digitally controlled by components manufactured by JSQH, such that precision and efficiency is improved and the end-user is able to adjust the parameters from time to time; and

Heavy Duty: large installations which are capable of processing raw materials more than one metre in diameter and sixty tonnes in weight. Only a limited number of competitors have the capability to produce these machines.

The majority of the lathes produced by JSQH are for manual operation but an increasing number of CNC machines are now being produced.

The basic model of machine tool produced by JSQH can be manufactured in different sizes, lengths, and speeds, with the additional option for CNC operation. A number of varying accessories can also be added according to end-user requirements, such that there are over 160 standard models.

In the year ended 31 December 2010, JSQH sold 1,546 machines with an aggregate value of RMB210,000,000 (approximately GBP19.9 million)

Customers and sales

Sales of lathes and milling machines manufactured in the PRC have historically been made in the following sectors of the domestic market:

Automobile industry 45% to 50%

Aerospace and defence 15% to 20%

General manufacturing 30% to 35%

Sales made in 2009 by JSQH in its domestic market are split, broadly, across the following sectors:

Automobile industry 20%

Aerospace and defence 5%

General manufacturing 75%

The majority of JSQH's sales are made through its network of approximately 180 distributors who are based throughout the PRC, the top five of whom typically account for 26 to 30 per cent. of JSQH's annual sales. From there, 90 per cent. of JSQH machines are distributed within China, predominantly within the Jiangsu and Zhejiang Provinces, the balance going to international end-users in 28 countries including the UK, United States, Germany, Russia, Brazil and Malaysia. JSQH has, over the last two years, entered into distribution agreements with distributors in North East China and in Shandong Province, which is where a number of its competitors are located, and these distributors are now selling JSQH products in those areas. In addition, JSQH continues to develop relationships with distributors with both PRC and international customers.

Research and Development

JSQH has been awarded a High Tech Enterprise Award granted by the government of Jiangsu Province and a Famous Trademark certification in respect of its Zhenji brand, awarded by Zhejiang State Administration for Industry and Commerce. In addition, one of its CNC milling machine specifications has been selected for recommendation by the National Torch Project, an initiative established by the PRC central government to support high technology and industrial enterprises.

JSQH's strong research and development department, comprising around 80 staff, has been instrumental in the development of JSQH's patented products. Approximately 60 per cent. of the current range was developed by this team and a further 13 additions to the range are under development.

Expenditure in respect of research and development by JSQH over the last three years amounted to in aggregate RMB 4.3 million.

4. Rationale for the Acquisition and Key Strengths

The Directors believe that the Acquisition fits with the investment strategy of the Company and:

-- JSQH is an existing, profitable business in a sector that is growing and which the Directors and Proposed Directors believe will continue to grow

-- the Company is familiar with machine tool manufacturing and therefore the acquisition of Win Yu fits well with management experience

-- JSQH is located in one of the most prosperous regions in China

-- the Directors are impressed by the sales potential of Win Yu and the opportunity for further expansion

The Directors and Proposed Directors have identified JSQH as having the following key strengths:

-- long established business with a strong reputation for quality and service

-- well-recognised brand in an established market

-- strong research and development capability

-- experienced senior management team

-- extensive product range and capability that sets them apart from competitors

5. Strategy

The strategy of the Enlarged Group in relation to JSQH will be to:

-- expand the product offering by further investment in research and development

-- develop and introduce new series, such as combined cutting and milling lathes and enhanced CNC capability

-- increase sales of higher margin CNC and heavy duty machine tools

-- increase domestic market share in all provinces of China and develop into overseas markets

-- continue to reduce costs and improve production process flow

-- increase/optimize production capacity utilisation at the new factory site

-- pursue appropriate acquisition opportunities to increase scale and profits

-- enhance reputation on a global scale

6. Current trading and prospects

China Wonder

The Company has today published its results for the year ended 31 December 2010 which showed a profit of GBP212,434 from continuing operations compared to a profit for those businesses of GBP270,855 in the year ended 31 December 2009. As noted above, the company sold one of its operations in November 2010 and has since sold the other.

A copy of the audited accounts has been sent to Shareholders today and is available at www.chinawonderlimited.com/PDF/CW-2010.pdf.

Win Yu

The following financial information on Win Yu has been extracted without material adjustment from the audited historical financial information for the years ended 31 December 2008 to 31 December 2010 and from the unaudited management accounts of Win Yu for the three months ended 31 March 2011:

 
                   Three months     Year ended     Year ended     Year ended 
                    ended            31 December    31 December    31 December 
                    31 March 2011    2010           2009(1)        2008 
                   Unaudited        Audited Accounts 
                   RMB'000          RMB'000        RMB'000        RMB'000 
 Revenue           64,638           209,958        125,647        186,235 
 Operating 
  Profit           7,519            15,803         (18,402)       (4,167) 
 Profit before 
  tax              6,079            21,766         2,244          (7,788) 
 Profit after 
  tax              5,107            19,553         895            (7,851) 
 
                   Before Exceptional Items(2) 
                   RMB'000          RMB'000        RMB'000        RMB'000 
 Revenue           64,638           209,958        125,647        186,235 
 Operating 
  Profit           7,519            21,750         2,198          14,047 
 Profit before 
  tax              6,079            27,713         22,844         10,426 
 Profit after 
  tax              5,107            25,500         21,495         10,363 
 

Note 1: From late 2008 to Spring 2009, JSQH undertook the main stages of the relocation of its manufacturing operations to a new site. This inevitably reduced capacity: before the move due to winding down production; throughout the move itself; and after the move whilst facilities were recommissioned and order books rebuilt. The overall effect of this was to significantly reduce production and sales in late 2008 and throughout 2009 and this is reflected in the figures set out above.

Note 2: Excludes specific bad debts written off

At 31 December 2010, being the date of the most recent audited balance sheet, Win Yu had net assets of RMB 86,737,000 (approximately GBP8.2 million), including cash of RMB 32,632,000 (approximately GBP3.1 million)

The first three months of trading in 2011 have shown a significant improvement on the same period last year. The Directors and Proposed Directors believe that the machine tool industry in China presents an opportunity to develop in China and internationally and that the prospects of the Enlarged Group are encouraging.

7. Directors and Proposed Directors

Directors

Mark Chapman, aged 58, Chairman

Mr. Chapman has been involved in investing in the Far East for over 15 years and from 1995 until 1999 he was a Director of Powerhouse Resources Inc. which constructed and commissioned a power station in Guandong Province China. In addition, Mr. Chapman is a director of a number of private and publicly quoted companies. Mr. Chapman was appointed to the Board of China Wonder in 2004 as a non executive director, and became non executive Chairman in 2008.

Qiang Hao, aged 41, Chief Financial Officer

Mr. Hao graduated from Dongbei University of Finance and Economics in July 1992. He is a qualified Senior Accountant and a Certified Tax Accountant, and is a Member of Liaoning Tax Payment Evaluation System Base. Mr. Hao was the financial manager at Jinzhou Kaite Limited from 1992 to 1995 and project manager at Liaoning Xinxin Public Accountant Firm from 1995 to 2003. He was appointed to the Board of China Wonder in June 2009 and is its Chief Financial Officer.

Roberto Sidnei Cunha Lima, aged 53, Non-executive Director

Mr. Lima has experience in the automotive industry having held positions as development technician, sales manager, engineering manager and key account manager in a variety of companies, including TRW Automotive do Brazil SA, Cofap Companhia Fabricadora do Pecas, Duramettalic do Brasil Industria e Comercio, Sachs Automotive Brasil Ltd., Magneti Marelli Cofap and Magneti Marelli Powertrain GmbH. He is currently the General Manager of Scheuermann and Heilig do Brazil, a company operating in the automotive components sector. He was appointed to the Board of China Wonder in January 2010.

Proposed Directors

Yuanqing Li, aged 42, Proposed Chief Operating Officer

Mr. Li graduated from Shenzhen University in July 1987 with a degree in law. Mr. Li has experience as the legal representative of a number of Chinese technology and manufacturing companies, including Shenzhen Hengtaifeng High-Tech Limited, Zhenjiang Zhongyuan Real Estate Limited, and Zhongyuan Industry Company. In February 2004 he joined JSQH as Corporate Executive and Chairman.

Mr Li has entered into a service agreement with the Company pursuant to which he will be employed as Chief Operating Officer from Admission and will receive aggregate remuneration of RMB200,000 (approximately GBP19,000) per annum. Mr Li's service agreement can be terminated by either party giving 12 months' written notice and is subject to certain non-competition arrangements following termination

Meirong Yuan, aged 40, Proposed Director

Mr.Yuan graduated from Lanzhou Business School in June 1992 as a Bachelor of Economics and also has a Ph.D. in management from Southern California University for Professional Study. He joined NASDAQ company Wonder Auto Technologies, Inc (Ticker: WATG) in 2006 and is its CFO and Principal Accounting Officer, and was also a director of that company from 2006 until May 2010.

Mr. Yuan is also Vice President of Jinzhou Wonder Industrial Co., Ltd and was Vice President of Shenzhen Luante Asphalt Advanced Technology Co. Ltd. from July 2002 until June 2005 where he was responsible for accounting and finance.

Mr Yuan has entered into a service agreement with the Company pursuant to which he will be employed as an executive director from Admission and will receive aggregate remuneration of RMB200,000 (approximately GBP19,000) per annum. Mr Li's service agreement can be terminated by either party giving 12 months' written notice and is subject to certain non-competition arrangements following termination

In addition, three of the Company's directors, Zeng Qingdong, Liang Hailin and James Wolfson have today resigned with immediate effect following completion of the Second Disposal.

It is the Company's intention to appoint a further Non-executive Director following Admission.

8. Details of the Placing and use of proceeds

The Company is proposing to raise GBP325,000 by the issue of 1,710,526 new Ordinary Shares (the "Placing Shares") at 19 pence per share (the "Placing Price"). The Placing Shares will represent approximately 3.0 per cent. of the Enlarged Share Capital. The Placing Shares will rank pari passu in all respects with the Existing Ordinary Shares, including the rights to all dividend and other distributions declared, made or paid and following Admission will be issued credited as fully paid. The proceeds of the Placing will be used to fund the costs of the Acquisition.

The Placing is conditional, inter alia, on completion of the Acquisition and Admission occurring by no later than 4 July 2011 (or such later date as Northland and the Company may agree, being no later than 29 July 2011).

9. Controlling Shareholder and Lock-In arrangements

Upon Admission Yuanqing Li, the vendor of Win Yu, will be interested in 38,325,737 Ordinary Shares, representing 66.0 per cent. of the enlarged Share capital of the Company and as such he will be the ultimate controlling Shareholder in the Company.

Mr Li has entered into a lock-in agreement, pursuant to which he will not, and will procure that his connected parties will not, save in certain limited circumstances, during the 12 months immediately following Admission, dispose of (either directly or indirectly), or agree to dispose of, any Ordinary Shares held by him. Further, Mr Li has undertaken that in the following 12 months he will not, and will procure that his connected parties will not, dispose of any Ordinary Shares they or their connected parties hold (or any interest therein) other than following consultation with and with the consent of the Company's nominated adviser, who may withhold consent if they reasonably consider such a disposal would adversely affect the maintenance of an orderly market in such Ordinary Shares. The Lock In does not apply to any Ordinary Shares acquired after Admission.

Shareholders should note that following Admission the Company will not be subject to the rules of the City Code on Takeovers and Mergers ("City Code"), although certain provisions similar in scope to Rule 9 of the City Code requiring a mandatory bid for the Company are begin incorporated in the Company's articles of association from Admission.

10. Admission, settlement and dealings

Application has been made to the London Stock Exchange for all of the existing Ordinary Shares the Placing Shares and the Consideration Shares to be admitted to trading on AIM. It is expected that Admission will become effective and dealings will commence in the enlarged share capital on 4 July 2011. No application has or will be made for the Ordinary Shares to be admitted to trading or to be listed on any other stock exchange.

11. Appointment of Nominated Adviser and Broker

In connection with the Acquisition and Placing the Company is pleased to announce the appointment of Northland Capital Partners Limited as nominated adviser and joint broker with immediate effect. Rivington Street Corporate Finance Limited continue as joint broker to the Company.

12. General Meeting

The Acquisition is classed as a reverse takeover for the purpose of the AIM Rules and is therefore conditional upon the approval of existing Shareholders at a general meeting to be held on 1 July 2011 ("General Meeting"). An AIM admission document containing details of the Acquisition and Placing and a notice convening the General Meeting has been sent to shareholders in the Company.

At the General Meeting, resolutions will be proposed to:

-- approve the Acquisition on the terms set out in the Acquisition Agreement;

-- authorise the Directors to allot shares;

-- disapply pre-emption rights;

-- increase the authorised share capital of the Company;

-- change the company name to Qihang Equipment Company Limited;

-- amend the Articles to include provisions similar to Rule 9 of the City Code and to authorise the annual report to shareholders to use RMB as its reporting currency; and

-- amend Article 19 of the Articles to correct a typographical error.

13. Irrevocable undertakings

The Directors have received irrevocable undertakings to vote in favour of the resolutions to be proposed at the General Meeting from existing shareholders in the Company who, in aggregate, hold 3,380,000 Ordinary Shares, representing approximately 18.8 per cent. of the existing Ordinary Shares.

For further information please contact:

 
 China Wonder Limited 
 Mark Chapman                      Tel             01483 894 627 
 
 Northland Capital Partners Limited (Nominated Adviser and 
  Broker) 
 William Vandyk                    Tel             020 7796 8800 
 Tim Metcalfe 
 

This information is provided by RNS

The company news service from the London Stock Exchange

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