INDUSTRY OVERVIEW SOURCE OF INFORMATION

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1 The information that appears in this Industry Overview has been prepared by China Insights Consultancy Limited and reflects estimates of market conditions based publicly available sources and trade opinion surveys, and is prepared primarily as a market research tool. References to China Insights Consultancy Limited should not be considered as the opinion of China Insights Consultancy Limited as to the value of any security or the advisability of investing in the Company. Our Directors believe that the sources of information contained in this section are appropriate sources for such information and have taken reasonable care in extracting and reproducing such information. Our Directors have no reason to believe that such information is false or misleading or that any material fact has been omitted that would render such information false or misleading. The information prepared by China Insights Consultancy Limited and set out in this section has not been independently verified by us, the Sole Sponsor, the [REDACTED], the [REDACTED], the [REDACTED] or any other party involved in the [REDACTED] and no representation is given as to its accuracy or correctness and accordingly it should not be relied upon in making, or refraining from making, any investment decision. SOURCE OF INFORMATION We commissioned CIC, an independent market research and consulting company, to prepare the industry report on the global toy market and China s toy export market. This document contains information extracted from the CIC Report in sections such as Summary, Industry Overview, Business and Financial Information. A commission fee of RMB71, was paid to CIC pursuant to a service agreement reached by arm s length negotiation. Our Directors are of the view that the information set forth in this section is reliable and not misleading as the information was extracted from the CIC Report and CIC is an independent professional market research company with extensive experience in their profession. BACKGROUND OF CIC CIC is an investment and financing consultancy founded in Hong Kong, it provides professional industry consulting services across various industries, and its services include industry consulting service, commercial due diligence, strategic consulting, etc. CIC also has offices in Beijing and Shanghai. CIC Report In preparing for the report, CIC conducted both primary and secondary research through various resources. Primary research involves interviewing key industry experts and leading industry participants. Secondary research involves analysing data from various publicly available data sources, such as National Bureau of Statistics of China, The World Bank, International Monetary Fund, Organization for Economic Co-operation and Development, UN Comtrade, China Customs, Toys Industry Association, etc. The information and data collected by CIC have been analysed, assessed and validated using CIC s in-house analysis models and techniques. The methodology used by CIC is based on information gathered from multiple levels and allows such information to be cross-referenced for reliability and accuracy. On such basis we consider the data and statistics to be reliable. The CIC report contains a variety of market projections which were produced with the following key assumptions: (i) U.S. and EU s economy and industry development is likely to maintain a steady growth in the next decade; and (ii) related industry key drivers are likely to drive the growth of the toy manufacturing market of China, exporting and retailing market of the U.S. and EU during the forecast period, such as increasing number of children in the U.S, economic development in developing countries, elevated mature degree of the market and production technology development; (iii) there is no extreme force majeure or industry regulation by which the market may be affected dramatically or fundamentally. 56

2 Our Directors confirm that, to the best of their knowledge, after taking reasonable care, there is no material adverse change in the market information since the date of the relevant data contained in the CIC Report which may qualify, contradict or have an impact on the information in this section. OVERVIEW OF THE MACROECONOMIC INDICATORS IN THE U.S. AND EU Gross Domestic Product According to CIC Report, the GDP of the U.S. increased from USD16.2 trillion in 212 to USD18.6 trillion in 216, while the major debt crisis took place in the Eurozone has heavily damaged the economic development of the EU, the GDP of the EU has decreased from USD17.3 trillion in 212 to USD16.5 trillion in 216. As the environment in the U.S. is still improving and the crisis in the EU has basically been eased, the GDP of the U.S. and the EU is expected to reach USD22.8 trillion and USD19.6 trillion by 221, respectively. Per capita disposable income Despite the unfavorable economic environment of the U.S., the per capita disposable income of the U.S. has grown steadily, increasing from USD43.6 thousand to USD47.8 thousand with a CAGR of 2.3% between 212 and 216. As the macroeconomic environment will be further optimized for the U.S., in the foreseeable future, the per capita disposable income of the U.S. is expected to further increase with an accelerated speed and reach USD54.8 thousand by 221. Between the U.S. and EU, people in the U.S. enjoy higher per capita disposable income. The chart below shows the annual average per capita disposable income for the U.S. and EU from Per capita disposable income of the U.S. and EU, E U.S. EU USD thousand E 218E 219E 22E 221E CAGR E U.S. 2.3% 2.8% EU 2.1% 2.1% Source: Organization for Economic Co-operation and Development, CIC OVERVIEW OF THE TOY MARKET IN THE U.S. AND EU Market demand for toys correlates to the number of children as well as the general economic conditions, which directly affects the per child annual expenditure on toys. According to the CIC Report, between 212 and 216, the total number of children between and 14 years old in the U.S. remained barely unchanged and those in the EU decreased slightly. According to the CIC Report, the total number of children in the U.S. between and 4 years old is expected to increase at a more rapid speed from 216 to 221 while the total number of children in the EU may reduce further. Between the U.S. and EU, parents in the U.S. spend more money on toys for their kids on average. Since the disposable income of people in the U.S. is expected to increase at an accelerated speed between 216 and 221, parents would become more willing to purchase toys for their children. Comparatively, the per child annual expenditure on toys in the EU is lower than that of the U.S., due to 57

3 the lower level of disposable income. Between 212 and 216, despite the economic fluctuation of the EU countries, the per child annual expenditure on toys still managed to maintain a steady growth as parents are willing to and capable of purchasing more toys for their children. Per child annual expenditure on toys in the U.S. and EU, E U.S. EU USD E 218E 219E 22E 221E CAGR E U.S. 4.% 3.6% EU 3.8% % Source: United Nations Department of Economic and Social Affairs, CIC Market size and forecast of the toy market in the U.S. According to the CIC Report, the toy market of the U.S. expanded at a moderate speed from 212 to 216, and it is expected to experience an accelerated growth in the foreseeable future. Within the toy market of the U.S., outdoor-and-sports toy products take the largest share. The market expansion of infant-and-preschool toy products was not ideal between 212 and 216 primarily because of the limited number of new born kids. CIC predicts that since the number of children between and 4 years old is expected to increase between 216 and 221, this market segment is also expected to be boosted during this period. Market size and forecast of the toy market by retail sales revenue, U.S., E Games and Puzzles Infant and pre-school toys Construction Toys Dolls and Accessories Outdoor and Sports Other USD Billion E Source: Toy Industry Association, CIC E 218E 219E 22E 221E Category CAGR E Total 3.7% 3.8% Games and Puzzles 7.9% 2.8% Infant and pre-school toys 1.% 2.5% Construction Toys 5.3% 9.% Dolls and Accessories 7.5% 2.5% Outdoor and Sports 5.8% 5.4% Other.6% 2.4% According to the CIC Report, the segment growth of the outdoor-and-sports toy products was rapid between 212 and 216 due to the increasing awareness of the parents in the U.S. about the prevalence of obesity and they have taken initiative to encourage their children to play with outdoor-and-sports toy products. Further, since parents of the U.S. have started to pay more attention to the cultivation of the creative and manipulative capabilities of their children, construction toys have experienced the most rapid growth between 212 and 216, and this trend is expected to be maintained. According to the CIC Report, the number of children between and 4 years old is expected to increase between 216 and 221 and as a result this market segment is also expected to be boosted during this period. 58

4 Market size and forecast of the toy market in the EU The toy market of EU countries has experienced moderate growth between 212 and 216 which was mainly caused by both the unfavourable economic condition and the reducing number of children during this period. CIC predicts that, accompanied with the recovery of the economic condition, the toy market of EU between 216 and 221 is predicated to experience further growth, despite the decreasing number of children between and 4 years old. Market size and forecast of the toy market by retail sales revenue, EU, E Games and Puzzles Infant and pre-school toys Construction Toys Dolls and Accessories Outdoor and Sports Other USD Billion Category Total Games and Puzzles Infant and pre-school toys Construction Toys Dolls and Accessories CAGR E 3.7% 2.5% % 1.5% 4.6% 3.2% 8.1% 4.6% 2.1% 1.5% Outdoor and Sports 4.7% 4.2% E 218E 219E 22E 221E Other % 1.8% Source: CIC Compared with the toy market of the U.S., the shares of each market segment of EU countries are more evenly distributed. Categories of toys such as games and puzzles, infant-and-preschool toy products, as well as construction toys have taken the largest shares in this market, and such market structure is not expected to vary significantly during the forthcoming years. The market segments of construction toys, as well as outdoor-and-sports toy products have experienced the most rapid expansion between 212 and 216. Furthermore, since EU parents would continue to encourage their children to play with these two kinds of toys, these two market segments is expected to grow rapidly between 216 and 221. Import value of toys of the U.S. and EU According to the CIC Report, imported toys have taken a considerable share in the U.S. and EU toy markets. The market structure is not expected to change significantly, as major toy manufacturers would still continue to produce high value added toys domestically. The import value of toys highly depends on the prosperity of the local toy market. Since the development of the toy market of the U.S. was fairly limited between 212 and 213, the import value of toys basically remained unchanged. Accompanied with the revival of the toy market of the U.S., the import value of toys has also indicated obvious growth from 214 to 216. However the import value of toys of EU countries has reduced significantly in 212 due to the unfavourable circumstance of the economy as well as the toy market. A minor growth trend can still be expected in the forthcoming years, as the toy market of EU is estimated to further develop with a moderate speed. Major distribution channels of toys in the U.S. and EU There are four major distribution channels in the toy market of the U.S. and EU. After decades of development, specialty chain stores have become one of the most important distribution channels of toys, especially in the U.S.. Meanwhile, the emergence of online retailers also have a major impact upon the toy market internationally. 59

5 Distribution channels Specialty chain stores Department stores and shopping malls Hypermarkets Online retailers Other retailing channels Description Specialty chain stores are dedicated retailing channels of toys. In most cases, specialty chain stores will be divided into several themes according to the characteristics of their target customers of their products. Although most stores are selling toys with different brands, there are also certain stores exclusively sell toys with only one brand or one theme, such as stores authorized by LEGO or Disney. Department stores and shopping malls form a traditional distribution channel of toys. In most cases, toys are sold in a designated area with other children related products such as children apparels and strollers, etc. Hypermarkets such as Wal-Mart and Carrefour are also important distribution channels for toys. Comparatively, toys sold in hypermarkets are generally cheaper, as most parents are not planned to purchase certain toys when they come to hypermarkets. Furthermore, the variety of toys in hypermarkets is also relatively limited. However, since hypermarkets are more accessible for children, they have contributed considerable revenue for the toy market internationally. Online retailers are only developed in recent years, but they have swiftly become one of the most important retailing channels internationally. Since it is unnecessary for online retailers to choose a desirable location or hire purchasing guides, considerable cost can be saved. Therefore, the same toy sold by online retailers could be cheaper. Other retailing channels include traditional toy and game stores, souvenir stores in museums and parks, street markets, etc. Currently, traditional toy and game stores still take a fairly large share in the toys market of EU, but its share is quite limited in the U.S.. Market drivers The main drivers of the toy market in the U.S. include (i) the steady growth of the disposable income of people where parents have become more willing to spend more money to purchase toys for their children whereby annual expenditure range on child of a middle-income married-couple family in the U.S. increased from $8,99 to $1,23 in 211 to $12,35 to $13,9 in 215, on average; (ii) the increasing desire of parents for developing a creative lifestyle for their children in which the market segments of construction toys as well as outdoor-and-sports toy products are expected to experience rapid growth in the forthcoming years; and (iii) the fairly developed IP content related industry which has been a critical driving force for the business of licensed toy manufacturers once a new cartoon or animated movie is launched by Disney or DreamWorks Studio. In the EU, according to the CIC Report, since the macroeconomic situation of the EU is gradually recovering, the toy market of the EU has witnessed further growth from USD23.5 billion in 214 to USD25.7 billion in 216. Accompanied with the elevation of disposable income with a CAGR of 2.1% between 212 and 216, parents of EU countries are expected to become more willing to purchase toys for their children, so the development of the toy market of EU would be further boosted. Stronger emphasis on health and body development of children due to an increasing numberofchildrenineu countries have been affected by obesity and the emergence of digitized features of toys are also drivers for the EU toy market. In China, the annual expenditure on children per China family increased from RMB5,818.3 in 212 to RMB9,21. in 216, registering a CAGR of 12.1%. Currently Chinese parents are mostly millennial generations (individuals born between 198 and 2) who are from only-child family and have different consumption practices and stronger purchasing power, they are more willing to invest on cultivating their children. Therefore, rigid demands of toys have been constantly growing during the past years. Meanwhile, baby boomer in past years and opening of two-child policy also lead to large consumer base, which will impulse sustainable growth of toy market in China. 6

6 Future trends More innovative toys can be expected to emerge from the U.S. as it has an overwhelmingly technological advantage over the rest of the world. Consequently more toys incorporated with advanced technological elements can be expected to be designed by U.S. based toy manufacturers and popularity of outdoor-and-sports toy products will be further elevated. Also given that a large amount of children have been attracted by TV programs or video games, their parents are increasingly getting worried and they have started to spend more money to purchase attractive outdoor-and-sports toy products, in order to attract their children away from TV cartoons and video games. In the EU, since the birth rate of EU countries is fairly low and very limited growth has been witnessed in recent years, plenty of parents have startedtopaymoreattentiontothe social skills of their children. As a result, toys which are suitable to be played by multiple players together would gain more popularity in the toy market of the EU. Although localized toy producers have a relatively strong position in the toy market of EU, they are generally not authorized to produce toys associated with popular animated figures. Therefore, licensed toys would become more popular in the toy market in EU. OVERVIEW OF GLOBAL TOY MANUFACTURING INDUSTRY Globally, toy manufacturers are primarily concentrated in the U.S., EU and China, and China is the largest toy manufacturing country in the world. The majority of toys produced in China are sold to overseas market mainly include the U.S., EU, and South American countries. Since the value added level of Chinese toys is expected to be further elevated, the position of China would be further lifted in the global toy manufacturing industry. Although the U.S. and EU countries are the largest toy importers in the world, they are also major toy producers for the following reasons: (a) (b) (c) nearly all world leading toy manufacturers are based in the U.S. and EU countries. Although they may have part of their products to be manufactured in developing countries, they ordinarily keep certain products, which have the highest value added level, to be manufactured domestically; although the cost of certain toys could be lower if they are produced in developing countries, they may generate a high transportation cost, as they are either too heavy or too large; and the automatic level of manufacturing plants in the U.S. and EU countries are generally higher than OEM factories in developing countries. Therefore, if the structure of toys is too complicated, the manufacturing cost could be lower if they choose to produce those toys domestically. Market share of the major toy export provinces and cities in China in 216 Anhui Others Shanghai 5.5% 1.9% Jiangsu 1.1% 11.7% Zhejiang 12.4% 54.4% Guangdong 13.% Shandong Note: This share is calculated based on the export value of broader category of toys of each provinces and cities. Source: China Customs 61

7 According to the CIC report, the total export value of toys from China was USD18.4 billion during 216 where the export value of toys of Guangdong, Shandong, Zhejiang, Jiangsu and Shanghai have taken almost 95% of the share in the total export value of toys. From the product aspects, the manufacturing and exporting industry of toys indicates a strong regional characteristic. Electrical and plastic toys are primarily manufactured and exported from Guangdong province; wooden toys are primarily manufactured and exported from Zhejiang; electronic toys are primarily manufactured and exported from Shandong; plush toys are primarily manufactured and exported from Jiangsu and Shanghai. Although China is a major toy manufacturing country, the Chinese toy manufacturing industry is fairly fragmented and the technological and automatic level of most toy manufacturers is still fairly low. Therefore, the Chinese toy manufacturing industry is facing a great opportunity of optimisation and integration. Total export value of toys from China The export value of toys from China to the rest of the world was increased at a moderate speed between 212 and 216 due to the unfavourable economic situation in the U.S. and EU. During this period, the Chinese toy export market is primarily driven by the growing demand in developing countries such as Southeast Asian countries and South American countries. Export value of toys from China, USD Billion Export value Source: UN Comtrade database, Guangdong Toy Association, CIC Export values of toys from China to the U.S. and EU, Export to the U.S. USD Billion 6 U.S. CAGR ( ): 9.5% EU, CAGR ( ): 8.7% Export to EU Source: UN Comtrade database, CIC As the largest exporter of toys, the export values of toys from China to the U.S. and EU basically align with the fluctuation trends of the total import values of those countries. Although the market situation was not so ideal during previous years, both the export values of toys from China to the U.S. and EU have started to revive since 214 and a moderate speed of growth can be expected in the future, despite minor fluctuations. According to the CIC Report, China is the largest toy manufacturing country globally; Guangdong province in particular is one of leading toy producing clusters and largest export province in China with manufacturing activities centered around cities of Shenzhen, Dongguan, Guangzhou, Shantou s Chenghai and Foshan, contributing approximately 6% of total toys export value. 62

8 Drivers and future trends of the Chinese toy export market According to the CIC Report, China has become the largest toy exporter for a fairly long time with approximately 4% in terms of export value of toys worldwide made in China in 216. The total export value of toys from China increased from USD11.4 billion in 212 to USD18.4 billion in 216, registering a CAGR of 1%, and the primary exporting destinations are the U.S., EU, Southeast Asian countries and South American countries. Furthermore, due to the industrial transformation and upgrading, both production innovation and technology of China s toy manufacturers hold leading position worldwide and is estimated to maintain this competitive advantage in the forthcoming years and the total export value of China is estimated to grow at a CAGR of 8.5% from 216 to 221. In addition, with the recovery growth of economy in US and EU from debt crisis and increasing popularity of toys, especially in licensed toy segment, the domestic market size of US and EU is forecast to grow at CAGRs of 3.8% and 2.5% from 216 to 221, respectively, creating steady import demands of toys manufactured in China. Currently, manufacturing sectors of different types of toys are concentrated in Guangdong, Zhejiang, Jiangsu, Shandong, Fujian and Shanghai, they enjoy a high level of geographical advantage. Under this circumstance, most toy manufacturers do not need to invest too many resources to build up their value chain, so they would be more motivated to compete with each other in terms of the designs and quality of their products. Factors that drive the growth of Chinese toy export market also include China s long track record of toy export with stable and high quality as well as competitive price. According to the CIC Report, the PRC government has in recent years updated a series of standards and regulations to elevate the quality standards of toys. Since the domestic quality stands of toys are gradually becoming more consistent with the standards of the U.S. and EU countries, the products of more domestic toy manufacturers would become qualified to be exported internationally. In the future, the CIC Report predicts that since the profit margin of Chinese toy manufacturers is fairly low, more OEM factories will start to establish their own brands. Chinese toy manufacturers are gradually facing pressure from the elevated production cost due to lifted labour cost by the rapid economic development in recent years. Furthermore, since the complexity of toy production has also been elevated, manual laborers are no longer competent enough for complicated manufacturing processes. Therefore, an increasing number of Chinese toy manufacturers will start to adopt more advanced automatic manufacturing facilities in order to reduce the labour cost and enhance the value added level of their products. Currently, certain Chinese toy manufacturers have already started to put more investment on the research and development of toys, more toys with innovative features can be expected to be developed by domestic toy manufacturers. Also, Chinese toy manufacturers will continuously optimise their production lines and strengthen their supervisory mechanisms in order to face the challenges brought by the elevation of quality standards of toys in overseas markets, especially in the U.S. and EU. As a result, the quality of Chinese made toys will be further improved. Entry barriers of the Chinese toy export market. Brand strength it is a gradual process to establish a well-known brand demanding accumulation of experience and to gain brand recognition from customers, which restricts newcomers from finding their feet within short time;. Research, development and innovation capacity toy manufacturers are required to possess a strong capacity of innovation in response to varying prevalent trends. An experienced designer team with professional equipment and mature innovation system are required to establish research and development capacity;. Sufficient capital in order to cover wide range of toys, manufacturers need to have a heavy capital investment in the setting up and operating the production plants such as large injection molding machine, mold making and other production equipment; 63

9 . Safety standard toys must comply with safety and environmental regulations in order to protect children s health and safety. Around the world, the U.S. imposed Toy Safety Certification Program and the EU introduced directs such as RoHS, WEEE, REACH, etc. to ensure the quality of toys meet the safety standard. These large number of safety certification standards become one of barriers for new enterprises. Price analysis of major raw materials Plastics including Polypropylene ( PP ) and Polyvinyl Chloride ( PVC ), etc. are one of the most important raw materials to produce toys. PVC is the most widely used plastic resin in toy products of which approximately 25% are made of PVC. The prices of imported PVC and PP have declined from RMB7,121.1 per tonne and RMB9,351.4 per tonne respectively in 212 to RMB6,17. per tonne and RMB7,511.4 per tonne in 216 despite some small fluctuations. The price trends of domestically produced PVC and PP are quite similar, with the prices of PVC and PP dropping from around RMB6,917. per tonne and RMB11,23. per tonne in 212 to around RMB6,6.3 per tonne and RMB8,211.4 per tonne in 216. According to the CIC Report, as crude oil price has dropped sharply, it is unlikely that the prices of PVC and PP will bounce back in the short term. Importing prices of major raw materials (PP, PVC), RMB per tonne 12, 9, , 8, 7, , 9, ,217.4 Imported PP 9, ,369.9 Imported PVC 8,94.9 6, , ,17. 4, 2, Source: UN, China Customs, Chemcp.com, CIC Domestic prices of major raw materials (PP, PVC), RMB per tonne 12, 11,23. Imported PP 11, ,73. Imported PVC 1, 8, 6, 6,917. 6, , , , , ,6.3 4, 2, Source: UN, China Customs, Chemcp.com, CIC COMPETITIVE LANDSCAPE Competitors According to the CIC Report, our Company is one of the top ten leading outdoor-and-sports toy products exporters in China, contributing 1.8% of China s outdoor-and-sports toy products export value and 7.6% of Guangdong province s outdoor-and-sports toy products export value in 216. We ranked seventh in China and ranked second in Guangdong province in terms of outdoor-and-sports toy products export value in

10 The following table sets forth some of the outdoor-and-sports toy products exporters that our Group competes with. Rank Companies Share of China outdoor-and-sports toy products export value, 216 Manufacturer location Main export products 1 Competitor A 5.3% Kunshan Scooters, Tricycles Competitor B Competitor C Competitor D Competitor E Competitor F 4.6% 3.8% 2.3% 2.1% 2.% Kunshan Pinghu Ningbo Shenzhen Jinhua Electrical ride-on cars, Tricycles Ride-on cars Scooters, Tricycles, Ride-on cars Ride-on cars, Scooters Electrical ride-on cars 7 8 Our Group Competitor G 1.8% 1.3% Dongguan Pinghu Ride-on cars, Tricycles, Scooters Scooters, Skateboards 9 1 Competitor H Competitor I 1.2% 1.1% Hangzhou Lishui Tricycles, Ride-on cars Scooters Source: Note: CIC The export value is segmented to different categories based on China Customs data as well as primary interviews of leading players. The transformation of different classification systems might leads to proper numerical difference compared with the real export data. The toy manufacturing industry in Guangdong province initiated in the 198s when the global toy production center transferred from Hong Kong and Taiwan to mainland China and other Asian regions. The outdoor-and-sports toy products export market is highly fragmented with approximately 8 players engaging in outdoor-and-sports toy products manufacturing in China. We are ranked as No. 7 in terms of export value and among the top 1 outdoor-and-sports toy products exporters in China. We are ranked as top three among players who have ride-ons cars as focus products. According to the CIC Report, Guangdong province has played an important role in China s outdoor toy export market. There are approximately more than 2 outdoor-and-sports toy products manufacturers and exporters in Guangdong province and we are ranked second by its export value in 216. Top 5 outdoor-and-sports toy products exporters in terms of export value, Guangdong, % 7.6% 28.1% 4.8% 3.6% 3.4% Rank Companies Share of Guangdong outdoor & sport toy export value, 216 Manfacturer location Main export products 71.8% 1 Competitor E 8.8% Shenzhen Electrical scooters, Ride-on cars, Scooters 2 Our Group 7.6% Dongguan Ride-on cars, Tricycles, Scooters 71.9% Competitor E Competitor K 3 Competitor J 4.8% Foshan Ride-on cars Our Group Competitor J Competitor L Other companies 4 Competitor K 3.6% Dongguan Tricycles, Ride-on cars Guangdong outdoor toys export value 5 Competitor L 3.4% Foshan Ride-on cars 216 Other province outdoor toys export value Source: CIC 65