Beijing Enterprises Water Group Limited - Proxy Solicitation & Information Statement 2009

THIS CIRCULAR IS IMPORTANT AND REQUIRES YOUR IMMEDIATE ATTENTION

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

If you have sold or transferred all your shares in Beijing Enterprises Water Group Limited (the “ Company ”), you should at once hand this circular to the purchaser or the transferee or to the bank, licensed securities dealer, registered institution in securities or other agent through whom the sales or transfer was effected for transmission to the purchaser or the transferee.

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.

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(Incorporated in Bermuda with limited liability) (Stock code: 371)

CONNECTED TRANSACTION: EQUITY INTERESTS CHANGE OF A NON-WHOLLY OWNED SUBSIDIARY;

MAJOR & CONNECTED TRANSACTION: PROVISION OF FACILITIES AND SERVICES TO A CONNECTED PARTY

Independent Financial Adviser to the Independent Board Committee and the Independent Shareholders

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A letter from the board of the Company is set out from pages 4 to 13 of this circular. A letter from the independent board committee of the Company is set out on page 14 of this circular. A letter from the independent financial adviser containing its advice and recommendation to the independent board committee and the independent shareholders of the Company is set out from pages 15 to 25 of this circular.

A notice convening the special general meeting of the Company to be held at Room 4302, 43/F., Central Plaza, 18 Harbour Road, Wanchai, Hong Kong on Thursday, 24 September 2009 at 3:00 p.m. is set out from pages 130 to 131 of this circular. A form of proxy is enclosed with this circular. Whether or not you are able to attend the meeting in person, you are requested to complete and return the accompanying form of proxy to the Company’s share registrar in Hong Kong, Tricor Tengis Limited at 26th Floor, Tesbury Centre, 28 Queen’s Road East, Wanchai, Hong Kong as soon as possible and in any event not less than 48 hours before the time for holding the special general meeting or adjourned meeting (as the case may be). Completion and return of the form of proxy shall not preclude you from attending and voting in person at the special general meeting should you so wish.

This circular and the form of proxy are also available on the website of the Stock Exchange at http://www.hkexnews.hk and the website of the Company at http://www.bewg.com.hk.

18 August 2009

	Page
Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	1
Letter from the Board . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	4
Letter from the Independent Board Committee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	14
Letter from Guangdong Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	15
Appendix I — Financial information of the Group . . . . . . . . . . . . . . . . . . . . . . . . . .	26
Appendix II — Other information of the Group . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	108
Appendix III — General information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	122
Notice of SGM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	130

— i —

DEFINITIONS

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

“Announcement”

the announcement of the Company dated 30 June 2009 in relation to the Equity Interests Change and the provision of the Services and Facilities

“associate(s)” shall have the meaning as ascribed to it under the Listing Rules

“BEHL”

Beijing Enterprises Holdings Limited (Stock code: 392)

“Bei Kong ZKC Environmental Group”

Bei Kong ZKC Environmental Group Co., Ltd. (北控中科成環保集團有限公司), formerly known as ZKC Environmental Group Co., Ltd. (中科成環保集團有限公司), is a sino-foreign joint venture established in the PRC with limited liability and a non-wholly owned subsidiary of the Company

“Board”

the board of Directors

“Company” or “Seller”

Beijing Enterprises Water Group Limited, a company incorporated in Bermuda and the shares of which are listed on the main board of the Stock Exchange

“connected person(s)”

has the meaning ascribed thereto under the Listing Rules and the word “connected” shall be construed accordingly

“Consideration”

the consideration of RMB83,557,400 payable by the Purchaser to the Seller pursuant to the Services and Facilities Agreement

“Director(s)” director(s) of the Company

“Equity Interests Change” Hong Qiao’s decrease of its capital contribution to RMB33,091,950.41 and Bei Kong ZKC Environmental Group’s increase of its capital contribution by RMB86,908,049.59 to RMB266,908,049.59 in the registered capital of Shenzhen Bei Kong. The shareholding of Bei Kong ZKC Environmental Group and Hong Qiao in Shenzhen Bei Kong will be in proportion of 88.97% and 11.03% respectively

“Equity Interests Change Agreement”

the conditional equity interests change agreement in relation to the Equity Interests Change entered into among Bei Kong ZKC Environmental Group, Hong Qiao and Shenzhen Bei Kong on 30 June 2009

“Group”

the Company and its subsidiaries

— 1 —

DEFINITIONS

“HK$”

Hong Kong dollar, the lawful currency of Hong Kong the Hong Kong Special Administrative Region of the PRC

“Hong Kong” the Hong Kong Special Administrative Region of the PRC “Hong Qiao” Hong Qiao Investment Company Limited* (鴻橋投資有限公司)

“Independent Board Committee”

a committee of the Board comprising three independent non-executive Directors, namely Mr. Shea Chun Lok Quadrant, Mr. Zhang Gaobo and Mr. Guo Rui, established to advise the Independent Shareholders (as the case may be) in relation to the Equity Interests Change Agreement, the Services and Facilities Agreement and the respective transactions contemplated thereunder

“Independent Financial Adviser” or “Guangdong Securities”
Guangdong Securities Limited, a licensed corporation for type 1 (dealing in securities), type 4 (advising on securities), type 6 (advising on corporate finance) and type 9 (asset management) regulated activities under the SFO and the independent financial adviser to the Independent Board Committee and the Independent Shareholders in respect of the Equity Interests Change Agreement, the Services and Facilities Agreement and the respective transactions contemplated thereunder
“Independent Shareholders”
Shareholders who do not have material interest in the Equity Interests Change Agreement and the Services and Facilities Agreement (as the case may be )
“Latest Practicable Date”
14 August 2009, being the latest practicable date prior to the printing of this circular for ascertaining certain information herein
“Listing Rules” the Rules Governing the Listing of Securities on the Stock Exchange
“PRC” the People’s Republic of China
“Purchaser”
Beijing Enterprises Holdings Environment Technology Co., Ltd.* (北京北控環保工程技術有限公司), an indirect wholly-owned subsidiary of BEHL
“RMB” Renminbi, the lawful currency of the PRC
“Services and Facilities” being the water treatment related machineries and facilities, and services for installation, setting and testing of those water treatment related machineries and facilities to be provided by the Seller to the Purchaser pursuant to the Services and Facilities Agreement

— 2 —

DEFINITIONS

“Services and Facilities	the conditional services and facilities agreement in relation to
Agreement”	the provision of the Services and Facilities entered into
	between the Purchaser and the Seller on 30 June 2009
“SFC”	the Securities and Futures Commission of Hong Kong
“SFO”	the Securities and Futures Ordinance (Chapter 571 of the
	Laws of Hong Kong)
“SGM”	a special general meeting of the Company to be convened on
	24 September 2009 to consider and, if thought fit, approve the
	Equity Interests Change Agreement, the Services and
	Facilities Agreement and the respective transactions
	contemplated thereunder by the Independent Shareholders
“Share(s)”	ordinary share(s) of HK$0.10 each in the share capital of the
	Company
“Shareholder(s)”	holder(s) of the Shares
“Shenzhen Bei Kong”	Shenzhen Bei Kong Chuang Xin Investment Company
	Limited* (深圳北控創新投資有限公司), formerly known as
	Shenzhen Hua Qiang Chuang Xin Investment Company
	Limited* (深圳華強創新投資有限公司), a company which
	was owned as to 60% and 40% by Bei Kong ZKC
	Environmental Group and Hong Qiao respectively as at the
	Latest Practicable Date
“Stock Exchange”	The Stock Exchange of Hong Kong Limited
“substantial shareholder(s)”	has the meaning ascribed to it under the Listing Rules
“Takeovers Code”	The Codes on Takeovers and Mergers and Share Repurchases
	of the SFC
“%”	per cent.

For the purpose of this circular, unless otherwise indicated, all amounts denominated in RMB have been translated (for information only) into HK$ using the exchange rate of RMB1.00: HK$ 1.1358. No representation is made that any amounts in RMB or HK$ can be or could have been converted at the relevant dates at the above rates or any other rates at all.

If there is any discrepancy or inconsistency between the Chinese names of the PRC entitles mentioned in this circular and their English translations, the Chinese versions shall prevail.

For identification purpose only

— 3 —

LETTER FROM THE BOARD

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(Incorporated in Bermuda with limited liability)

(Stock code: 371)

Executive Directors:

Mr. Zhang Honghai ( Chairman ) Mr. Liu Kai Mr. E Meng Mr. Jiang Xinhao Mr. Hu Xiaoyong (CEO) Mr. Wang Taoguang Mr. Zhou Min Mr. Li Haifeng Ms. Qi Xiaohong Mr. Ju Yadong Mr. Zhang Tiefu

Registered office: Canon’s Court 22 Victoria Street Hamilton HM 12 Bermuda

Head office and principal place of business in Hong Kong: Room 4301, 43/F. Central Plaza 18 Harbour Road Wanchai Hong Kong

Independent non-executive Directors:

Mr. Shea Chun Lok Quadrant Mr. Zhang Gaobo Mr. Guo Rui Ms. Hang Shijun Mr. Wang Kaijun

18 August 2009

To the Shareholders

Dear Sir or Madam,

CONNECTED TRANSACTION: EQUITY INTERESTS CHANGE OF A NON-WHOLLY OWNED SUBSIDIARY;

MAJOR & CONNECTED TRANSACTION: PROVISION OF FACILITIES AND SERVICES TO A CONNECTED PARTY

INTRODUCTION

Reference is made to the Announcement regarding the Equity Interests Change and the provision of Services and Facilities.

— 4 —

LETTER FROM THE BOARD

The purpose of this circular is to, among other things, (i) provide you with further details of the Equity Interests Change and the provision of Services and Facilities; (ii) set out the recommendation of the Independent Board Committee to the Independent Shareholders in respect of the Equity Interests Change Agreement, the Services and Facilities Agreement and the respective transactions contemplated thereunder; (iii) set out the letter from Guangdong Securities containing its advice and recommendation to the Independent Board Committee and the Independent Shareholders in respect of the Equity Interests Change Agreement, the Services and Facilities Agreement and the respective transactions contemplated thereunder; and (iv) set out a notice of the SGM.

(I) THE EQUITY INTERESTS CHANGE AGREEMENT

Pursuant to Assignment of Equity Interest Agreement dated 8th September 2008, Bei Kong ZKC Environmental Group assigned 40% equity interest of Shenzhen Bei Kong to Hong Qiao in a consideration of RMB156,908,049.52, the amount of RMB70,000,000 was paid and the balance of RMB86,908,049.59 has been settled by reducing Hong Qiao’s capital contribution in Shenzhen Bei Kong.

On 30 June 2009, Bei Kong ZKC Environmental Group and Hong Qiao, the two existing shareholders of Shenzhen Bei Kong, entered into the Equity Interests Change Agreement with Shenzhen Bei Kong, pursuant to which Hong Qiao will decrease its capital contribution by the amount of RMB86,908,049.59 to RMB33,091,950.41 whereas Bei Kong ZKC Environmental Group will increase its capital contribution by RMB86,908,049.59 to RMB266,908,049.59 to maintain the registered capital of Shenzhen Bei Kong at RMB300,000,000. Upon completion of Equity Interests Change Agreement, the shareholding of Bei Kong ZKC Environmental Group and Hong Qiao in Shenzhen Bei Kong will be in proportion of 88.97% and 11.03% respectively.

Set out below are the principal terms of the Equity Interests Change Agreement:

Principal terms of the Equity Interests Change Agreement

Date:		30 June 2009
Parties	involved:	Bei Kong ZKC Environmental Group, an indirect non-wholly owned
		subsidiary of the Company. Bei Kong ZKC Environmental Group and its
		subsidiaries are principally engaged in the water treatment business.
		Hong Qiao, an investment holding company.
		Shenzhen Bei Kong, an indirect non-wholly owned subsidiary of the
		Company. Shenzhen Bei Kong and its subsidiaries (the “Shenzhen Bei
		Kong Group”) are principally engaged in the water treatment business.
		As at the Latest Practicable Date, Bei Kong ZKC Environmental Group
		and Hong Qiao held 60% and 40% equity interests in Shenzhen Bei Kong
		respectively.

— 5 —

LETTER FROM THE BOARD

Synopsis:

Pursuant to the Equity Interests Change Agreement, Hong Qiao will decrease its capital contribution to RMB33,091,950.41 whereas Bei Kong ZKC Environmental Group will increase its capital contribution by RMB86,908,049.59 to RMB266,908,049.59 to maintain the registered capital of Shenzhen Bei Kong at RMB300,000,000. Upon completion of Equity Interests Change Agreement, the shareholding of Bei Kong ZKC Environmental Group and Hong Qiao in Shenzhen Bei Kong will be in proportion of 88.97% and 11.03% respectively.

In the event that Shenzhen Bei Kong is being liquidated (the “ Liquidation ”), the remaining assets of Shenzhen Bei Kong shall be distributed to Bei Kong ZKC Environmental Group and Hong Qiao in the proportion of approximately 88.97% and 11.03% (i.e. the respective equity interests of these two entities in Shenzhen Bei Kong upon completion of the Equity Interests Change Agreement) respectively. As for other rights and obligations in Shenzhen Bei Kong, namely (i) profit sharing; (ii) the priority right to subscribe for additional capital of Shenzhen Bei Kong; (iii) the voting power at the shareholders meeting of Shenzhen Bei Kong; and (iv) rights to nominate candidates for directors of Shenzhen Bei Kong, they will be distributed between Bei Kong ZKC Environmental Group and Hong Qiao on a 60% to 40% basis.

The Board considered that the aforementioned arrangement is justifiable as Hong Qiao was regarded as an important strategic partner of the Group in terms of its extensive experience and expertise in the water supply and sewage treatment services in the PRC. In addition, Hong Qiao will continue to monitor and provide valuable advice on business operations to Shenzhen Bei Kong after completion of the Equity Interests Change Agreement. Thus, the Directors expect that the contribution from Hong Qiao will persistently benefit Shenzhen Bei Kong in the future.

The original cost of acquisition of the 40% equity interest in Shenzhen Bei Kong by Hong Qiao in September 2008 was approximately RMB156,908,049.59, the details of which were set out in the circular of the Company dated 6 October 2008.

The capital contribution and profit sharing ratio of Hong Qiao and Bei Kong ZKC Environmental Group were determined based on the expected benefit from the synergy effect through the co-operation with Hong Qiao, an expert in the PRC’s water market. Hong Qiao shall provide advisory services on project review, due diligence analysis and shall explore future opportunities for the Company’s development in the PRC. Though the Company’s share on certain rights on Shenzhen Bei Kong (e.g. (i) profit sharing; (ii) the priority right to subscribe for additional capital of Shenzhen Bei Kong; (iii) the voting power at the shareholders meeting of Shenzhen Bei Kong; and (iv) rights to nominate candidates for directors of Shenzhen Bei Kong) is based on 60% which is lower than the equity interest of 88.97%, the Directors considered that the benefits from persistent contribution from Hong Qiao should outweigh such negative effect. As such, the Directors confirmed that the amount of capital contribution and profit sharing ratio were arrived at after arm’s length negotiations between the parties to the Equity Interests Change Agreement and are fair and reasonable.

— 6 —

LETTER FROM THE BOARD

Shareholding of Shenzhen Bei Kong

The following table shows the changes in the registered capital of Shenzhen Bei Kong before and after the Equity Interests Change:

	Existing registered	Existing registered	Registered capital
	capital of Shenzhen		after the Equity
Shareholders	Bei Kong		Interests Change
	RMB’000	%	RMB’000 %
Bei Kong ZKC Environmental Group	180,000	60.00	266,908 88.97
Hong Qiao	120,000	40.00	33,092 11.03
Total	300,000	100	300,000 100

As shown by the above table and mentioned previously, upon completion of the Equity Interests Change Agreement, Bei Kong ZKC Environmental Group will be interested in approximately 88.97% of the equity interest in Shenzhen Bei Kong.

Conditions precedent

The Equity Interests Change Agreement shall become effective upon obtaining the approval of the Independent Shareholders at the SGM.

Reasons for the entering into of the Equity Interests Change Agreement

The Company is incorporated in Bermuda with limited liability and whose shares are listed on the main board of the Stock Exchange. The Group has been focusing on the construction of sewage and water treatment plants, sewage treatment, water treatment and distribution, the provision of technical services and licensing of technical know-how that are related to sewage treatment in the PRC, and is gradually reducing the developments in its existing business of trading of computers and related products.

Hong Qiao was regarded as an important strategic partner of the Group in terms of its extensive experience and expertise in the water supply and sewage treatment services in the PRC. Furthermore, the Directors expect that the expertise and experience of Hong Qiao will continue to be essential to the business operations of the Group in the future. Bei Kong ZKC Environmental Group and Hong Qiao therefore mutually agreed that, besides the Liquidation, other rights and responsibilities associated with Shenzhen Hua Qiao as outlined under the section headed “Principal terms of the Equity Interests Change Agreement”, will be distributed between Bei Kong ZKC Environmental Group and Hong Qiao on a 60% to 40% basis. Such arrangement is considered to be an inducement for Hong Qiao’s persistent participation in the business activities of the Group.

— 7 —

LETTER FROM THE BOARD

In view of all the above, the Board considered that the Equity Interests Change Agreement is on normal commercial terms, fair and reasonable so far as the Independent Shareholders are concerned, and is in the interests of the Company and Shareholders as a whole.

POSSIBLE FINANCIAL EFFECTS OF THE EQUITY INTERESTS CHANGE

At present, Shenzhen Bei Kong is treated as a 60% equity interest subsidiary of the Group. After the completion of the Equity Interests Change Agreement, it will become an 88.97% equity interest subsidiary of the Group.

In addition, the capital contribution of RMB86,908,049.59 will be treated as an additional investment cost in the books of Bei Kong ZKC Environmental Group, while on a consolidation level, it will be treated as an increase in share of net assets and a decrease in minority interests. There shall be no effect on the total liabilities of the Group. There shall be no effect on the consolidated income statement of the Group. For profit sharing, the Group shall share 60% of Shenzhen Bei Kong’s profit in the income statement.

Information on Shenzhen Bei Kong

The Shenzhen Bei Kong Group is principally engaged in the water supply and sewage treatment services in the PRC.

Set out below is a summary of the audited financial information of the Shenzhen Bei Kong Group for the two years ended 31 December 2008, which are prepared in accordance with the PRC accounting standard:

	For	the year ended	For	the year ended
Income Statement	31 December 2008		31 December 2007
		(audited)		(audited)
		RMB’000		RMB’000
Turnover		90,046		—
Profit before taxation		17,436		12,805
Profit after taxation		15,920		12,583
		As at		As at
Balance Sheet	31 December 2008		31 December 2007
		(audited)		(audited)
		RMB’000		RMB’000
Net asset value		315,266		304,411

— 8 —

LETTER FROM THE BOARD

Listing Rules implications

As at the Latest Practicable Date, Bei Kong ZKC Environmental Group and Hong Qiao held 60% and 40% equity interests in Shenzhen Bei Kong respectively. Hong Qiao is regarded as a connected person of the Company under the Listing Rules and therefore the entering into of the Equity Interests Change Agreement constitutes a connected transaction for the Company under Chapter 14A of the Listing Rules. As the applicable percentage ratios of the Equity Interests Change exceed 5% but are below 25%, the Equity Interests Change also constitutes a discloseable transaction for the Company under Chapter 14 of the Listing Rules. As such, the Equity Interests Change Agreement is subject to the reporting, announcement, circular and independent shareholders’ approval requirements under the Listing Rules.

In this regard, Hong Qiao together with its associates (if applicable) are required to abstain from voting in respect of the relevant resolution(s) on the Equity Interests Change Agreement at the SGM.

(II) THE SERVICES AND FACILITIES AGREEMENT

On 30 June 2009, the Company, as the Seller, entered into the Services and Facilities Agreement with the Purchaser, pursuant to which the Purchaser has conditionally agreed to purchase the Services and Facilities at the Consideration of RMB83,557,400 (equivalent to approximately HK$94,904,000) from the Seller.

Set out below are the principal terms of the Services and Facilities Agreement:

Principal terms of the Services and Facilities Agreement

Date: 30 June 2009 Parties involved: Purchaser: 北京北控環保工程技術有限公司 (Beijing Enterprises Holdings Environment Technology Co., Ltd.*), an indirect wholly-owned subsidiary of BEHL. The Purchaser is principally engaged in operations including investments, constructions and operations of environmental projects such as waste water treatment, industrial sewage treatment and municipal water supply as well as urban waste disposal and disposal of hazardous solid waste. Seller: The Company Subject matters: the Services and Facilities, being the water treatment related machineries and facilities sourced by the Company, and services for installation, setting and testing of those water treatment related machineries and facilities

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LETTER FROM THE BOARD

Conditions precedent:

the Services and Facilities Agreement shall become effective upon compliance of relevant rules and regulations of the relevant authorities

Deadline of delivery and the delivery and inspection of all the Services and Facilities are expected inspection: to be completed on or before 30 September 2009

Consideration

The Consideration of RMB83,557,400 (equivalent to approximately HK$94,904,000) will be payable by cash by the Purchaser to the Seller in the following manner:

(i) RMB8 million (equivalent to approximately HK$9 million) upon signing of the Services and Facilities Agreement;
(ii) up to 80% of the Consideration will be settled by the Purchaser upon receipt of the Services and Facilities;
(iii) up to 85% of the Consideration will be settled by the Purchaser upon completion of certain testing to be conducted by the Purchaser on the Services and Facilities;
(iv) up to 95% of the Consideration will be settled by the Purchaser upon completion of all relevant testing to be conducted by the Purchaser on the Services and Facilities; and
(v) the remaining Consideration will be settled by the Purchaser upon completion of the maintenance period for the Services and Facilities.

The Consideration was determined after arm’s length negotiations between the Purchaser and the Seller based on the cost of sourcing/providing the Services and Facilities by the Company plus a mark-up of profit margin acceptable to the Company. The mark-up is referenced from the prevailing profit margin in the market and based on the Company’s past experience on sourcing related products with external parties.

The Board considered that the Consideration is fair and reasonable and is in the interests of the Company and the Shareholders as a whole.

Other major terms of the Services and Facilities Agreement:

The Purchaser has the rights to inspect and check whether the water treatment related machineries and facilities to be provided by the Seller are in good condition without any additional costs. In the event that the Purchaser is not satisfied with any of the water treatment related machineries and facilities to be provided by the Seller, the Purchaser could refuse to accept those water treatment related machineries and facilities or the Seller shall provide the relevant reparation and maintenance services to the Purchaser free of charge.

Pursuant to the Services and Facilities Agreement, the Seller shall ensure that all the water treatment related machineries and facilities will be delivered to their designated location before the set deadline.

— 10 —

LETTER FROM THE BOARD

Reasons for the Services and Facilities Agreement

The Group has been focusing on the construction of sewage and water treatment plants, sewage treatment, water treatment and distribution, the provision of technical services and licensing of technical know-how that are related to sewage treatment in the PRC, and is gradually reducing the developments in its existing business of trading of computers and related products.

The Purchaser is currently engaging in a water treatment expansion project in Hai Kou City, the PRC (海口市) (the “ Project ”), which requires the Services and Facilities. As the Company has extensive experience in sourcing of water treatment related machineries, facilities and services, the Purchaser requested assistance from the Company to provide the Services and Facilities to ensure that the Project can be carried out smoothly. In addition, the Company also possesses relatively stronger bargaining power when dealing with the vendors of the relevant water treatment machineries and facilities as a result of bulk purchases. Given that the Company is specialised in the water treatment business, the Company is comparatively more familiar with the water treatment industry as compared with other members of the BEHL group and hence it is commercially sensible to utilise the business network of the Company in purchasing water treatment related facilities and services.

Based on all of the foregoing, the Board considered that the Services and Facilities Agreement is on normal commercial terms, fair and reasonable so far as the Independent Shareholders are concerned, and is in the interests of the Company and the Shareholders as a whole.

POSSIBLE FINANCIAL EFFECTS OF THE SERVICES AND FACILITIES AGREEMENT

The provision of the Services and Facilities shall contribute to the Group’s earnings. As such, the total assets of the Group will be increased. There will be no effect on the liabilities of the Group.

FINANCIAL AND TRADING PROSPECT OF THE GROUP

Under an array of economic stimulus policies introduced by the Chinese Government, the RMB4 trillion spending package committed by the Chinese Government will cover water and garbage treatment, prevention and control of water pollution as well as protection of forest resources. Among the investment projects, those projects that are in compliance with energy conservation and emission reduction standards will be financed. Under the present excellent situation where national policies are inclined towards the environmental protection industry, we expect that water treatment as a major project in the environmental protection program will obtain great support.

At present, the policy led by the Chinese Government for expanding domestic demand has provided impetus to government’s investments in water industry-related facilities. This has clearly demonstrated a situation in the whole urban water sector where “the government proceeds with investment while companies pull back” such that government-backed water enterprises will become active players in the market and the global financial crisis will result in an early “reshuffle” of the water industry. The Group will take advantage of this unique opportunity for a take-off. In view of the rapid expansion of its scale of operation and the increasing number of its subsidiaries, the Company will further strengthen its the management and risk-control capabilities so as to bring our strategy “to become a leading integrated water system solution provider” to a full play.

— 11 —

LETTER FROM THE BOARD

To the best of the Directors’ knowledge, information and belief, there are no special trade factors or risks which are not mentioned elsewhere in this circular and which are unlikely to be known or anticipated by the general public, and could materially affect the profits of the Group.

Listing Rules implications

As at the Latest Practicable Date, the Purchaser was an indirect wholly-owned subsidiary of BEHL, which was interested in 1,997,000,000 Shares, representing approximately 57.62% of the issued share capital of the Company. The Purchaser is regarded as a connected person of the Company under the Listing Rules and therefore the entering into of the Services and Facilities Agreement constitutes a connected transaction for the Company under Chapter 14A of the Listing Rules. As one of the applicable percentage ratios of the Services and Facilities Agreement exceeds 25% but is below 100%, the provision of the Services and Facilities also constitutes a major transaction for the Company under Chapter 14 of the Listing Rules. As such, the Services and Facilities Agreement and the transaction contemplated thereunder are subject to the reporting, announcement, circular and independent shareholders’ approval requirements under the Listing Rules.

In this regard, the Purchaser together with its associates (including BEHL, which was interested in 1,997,000,000 Shares as at the Latest Practicable Date), are required to abstain from voting in respect of the relevant resolution(s) on the Services and Facilities Agreement at the SGM.

GENERAL

An Independent Board Committee comprising Mr. Shea Chun Lok Quadrant, Mr. Zhang Gaobo, and Mr. Guo Rui (all being independent non-executive Directors) has been established to (i) advise the Independent Shareholders as to whether the terms of the Equity Interests Change Agreement and the Services and Facilities Agreement are fair and reasonable so far as the Independent Shareholders are concerned and whether the Equity Interests Change and the provision of the Services and Facilities are in the interests of the Company and the Shareholders as a whole; and (ii) advise the Independent Shareholders on how to vote in respect of the Equity Interests Change Agreement and the Services and Facilities Agreement after taking into account the recommendation of Guangdong Securities.

The SGM will be held to consider and, if thought fit, approve the ordinary resolutions in respect of the Equity Interests Change Agreement, the Services and Facilities Agreement and the respective transactions contemplated thereunder.

SGM

A notice convening the SGM to be held at Room 4302, 43/F., Central Plaza, 18 Harbour Road, Wanchai, Hong Kong on Thursday, 24 September 2009 at 3:00 p.m. or any adjournment is set out from pages 130 to 131 of this circular.

A form of proxy for use at the SGM is enclosed. Whether or not you are able to attend the meeting in person, you are requested to complete and return the accompanying form of proxy to the Company’s share registrar in Hong Kong, Tricor Tengis Limited at 26th Floor, Tesbury Centre, 28

— 12 —

LETTER FROM THE BOARD

Queen’s Road East, Wanchai, Hong Kong as soon as possible and in any event not less than 48 hours before the time for holding the SGM or adjourned meeting (as the case may be). Completion and return of the form of proxy shall not preclude you from attending and voting in person at the SGM should you so wish.

RECOMMENDATION

Your attention is drawn to the letter from the Independent Board Committee set out on page 14 of this circular which contains its recommendation to the Independent Shareholders in relation to the Equity Interests Change Agreement, the Services and Facilities Agreement and the respective transactions contemplated thereunder. Your attention is also drawn to the letter of advice from Guangdong Securities set out from pages 15 to 25 of this circular which contains its advice and recommendation to the Independent Board Committee and the Independent Shareholders in relation to the Equity Interests Change Agreement, the Services and Facilities Agreement and the respective transactions contemplated thereunder.

The Board considers that the terms of the Equity Interests Change Agreement and the Services and Facilities Agreement are on normal commercial terms, fair and reasonable and are in the interests of the Company and the Shareholders as a whole. Accordingly, the Board recommends the Independent Shareholders to vote in favour of the ordinary resolution in respect of the Equity Interests Change Agreement and the Services and Facilities Agreement to be proposed at the SGM.

ADDITIONAL INFORMAITON

Your attention is drawn to the additional information set out in the appendices of this circular.

By order of the Board Beijing Enterprises Water Group Limited Zhang Honghai Chairman

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LETTER FROM THE INDEPENDENT BOARD COMMITTEE

==> picture [266 x 67] intentionally omitted <==

(Incorporated in Bermuda with limited liability)

(Stock code: 371)

18 August 2009

To the Independent Shareholders,

Dear Sir or Madam,

CONNECTED TRANSACTION: EQUITY INTERESTS CHANGE OF A NON-WHOLLY OWNED SUBSIDIARY;

MAJOR & CONNECTED TRANSACTION: PROVISION OF FACILITIES AND SERVICES TO A CONNECTED PARTY

We refer to the circular dated 18 August 2009 of the Company (the “ Circular ”), of which this letter forms part. Terms defined in the Circular shall have the same meanings herein unless the context otherwise requires.

We have been appointed to advise the Independent Shareholders in respect of the terms of the Equity Interests Change Agreement and the Services and Facilities Agreement, details of which are set out in the “Letter from the Board” in the Circular.

Having taken into account the advice of Guangdong Securities, we consider that the terms of the Equity Interests Change Agreement and the Services and Facilities Agreement are fair and reasonable so far as the Independent Shareholders are concerned and the transactions contemplated under the Equity Interests Change Agreement and the Services and Facilities Agreement are in the interests of the Company and the Shareholders as a whole. Accordingly, we recommend the Independent Shareholders to vote in favour of the ordinary resolutions to be proposed at the SGM to approve the Equity Interests Change Agreement and the Services and Facilities Agreement.

Mr. Shea Chun

Yours faithfully, Independent Board Committee: Mr. Zhang Gaobo Mr. Guo Rui

Lok Quadrant

Independent Non-Executive Directors

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LETTER FROM GUANGDONG SECURITIES

Set out below is the text of a letter received from Guangdong Securities, the Independent Financial Adviser to the Independent Board Committee and the Independent Shareholders regarding the Equity Interests Change and the provision of the Services and Facilities for the purpose of inclusion in this circular.

==> picture [192 x 31] intentionally omitted <==

Units 2505-06, 25/F. Low Block of Grand Millennium Plaza 181 Queen’s Road Central Hong Kong

18 August 2009

To: The independent board committee and the independent shareholders of Beijing Enterprises Water Group Limited

Dear Sirs,

1. CONNECTED TRANSACTION: EQUITY INTEREST CHANGE OF A NON-WHOLLY OWNED SUBSIDIARY 2. MAJOR & CONNECTED TRANSACTION: PROVISION OF FACILITIES AND SERVICES TO A CONNECTED PARTY

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 Equity Interests Change and the provision of the Services and Facilities, details of which are set out in the letter from the Board (the “ Board Letter ”) contained in the circular dated 18 August 2009 issued by the Company to the Shareholders (the “ Circular ”), of which this letter forms part. Terms used in this letter shall have the same meanings as defined in the Circular unless the context requires otherwise.

The Equity Interests Change Agreement

On 30 June 2009, Bei Kong ZKC Environmental Group and Hong Qiao, the two existing shareholders of Shenzhen Bei Kong, entered into the Equity Interests Change Agreement with Shenzhen Bei Kong, pursuant to which Hong Qiao will reduce its capital contribution to RMB33,091,950.41; whereas Bei Kong ZKC Environmental Group will enlarge its capital contribution by RMB86,908,049.59 to RMB266,908,049.59 to maintain the registered capital of Shenzhen Bei Kong at RMB300,000,000. Upon completion of Equity Interests Change Agreement, the shareholding of Bei Kong ZKC Environmental Group and Hong Qiao in Shenzhen Bei Kong will be in the proportion of approximately 88.97% and 11.03% respectively.

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LETTER FROM GUANGDONG SECURITIES

As at the date of the Equity Interests Change Agreement, Bei Kong ZKC Environmental Group and Hong Qiao held 60% and 40% equity interests in Shenzhen Bei Kong respectively. Hong Qiao is regarded as a connected person of the Company under the Listing Rules and therefore the entering into of the Equity Interests Change Agreement constitutes a connected transaction for the Company under Chapter 14A of the Listing Rules and requires approval of the Independent Shareholders by way of poll at the SGM. Hong Qiao together with its associates (if applicable) shall be required to abstain from voting in respect of the relevant resolution(s) on the Equity Interests Change Agreement at the SGM.

The Services and Facilities Agreement

The Purchaser is an indirect wholly-owned subsidiary of Beijing Enterprises Holdings Limited, which was interested in 1,997,000,000 Shares, representing approximately 57.62% of the issued share capital of the Company as at the Latest Practicable Date. The Purchaser is regarded as a connected person of the Company under the Listing Rules and therefore the entering into of the Services and Facilities Agreement constitutes a connected transaction for the Company under Chapter 14A of the Listing Rules. As one of the applicable percentage ratios of the Services and Facilities Agreement exceeds 25% but is below 100%, the provision of the Services and Facilities also constitutes a major transaction for the Company under Chapter 14 of the Listing Rules. As such, the Services and Facilities Agreement and the transactions contemplated thereunder are subject to the reporting, announcement, circular and independent shareholders’ approval requirements under the Listing Rules. The Purchaser together with its associates (including Beijing Enterprises Holdings Limited) shall be required to abstain from voting in respect of the relevant resolution(s) on the Services and Facilities Agreement at the SGM.

An Independent Board Committee, comprising Mr. Shea Chun Lok Quadrant, Mr. Zhang Gaobo and Mr. Guo Rui (all being independent non-executive Directors), has been established to advise the Independent Shareholders on (i) whether the terms of each of the Equity Interests Change Agreement and the Services and Facilities Agreement are on normal commercial terms and are fair and reasonable so far as the Independent Shareholders are concerned; (ii) whether the Equity Interests Change and the provision of the Services and Facilities are in the interests of the Company and the Shareholders as a whole; and (iii) how the Independent Shareholders should vote in respect of the relevant resolutions to approve the Equity Interests Change Agreement, the Services and Facilities Agreement and the respective transactions contemplated thereunder at the SGM. We, Guangdong Securities Limited, have been appointed as the Independent Financial Adviser to advise the Independent Board Committee and the Independent Shareholders in this respect.

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LETTER FROM GUANGDONG SECURITIES

BASIS OF OUR OPINION

In formulating our opinion to the Independent Board Committee and the Independent Shareholders, we have relied on the statements, information, opinions and representations contained or referred to in the Circular and the information and representations as provided to us by the Directors. We have assumed that all information and representations that have been provided by the Directors, for which they are solely and wholly responsible, are true and accurate at the time when they were made and continue to be so as at the Latest Practicable Date. We have also assumed that all statements of belief, opinion, expectation and intention made by the Directors in the Circular were reasonably made after due enquiry and careful consideration. We have no reason to suspect that any material facts or information have been withheld or to doubt the truth, accuracy and completeness of the information and facts contained in the Circular, or the reasonableness of the opinions expressed by the Company, its advisers and/or the Directors, which have been provided to us. We consider that we have taken sufficient and necessary steps on which to form a reasonable basis and an informed view for our opinion in compliance with Rule 13.80 of the Listing Rules.

The Directors have collectively and individually accepted full responsibility for the accuracy of the information contained in the Circular and have confirmed, having made all reasonable enquiries, which to the best of their knowledge and belief, there are no other facts the omission of which would make any statement in the Circular misleading.

We consider that we have been provided with sufficient information to reach an informed view and to provide a reasonable basis for our opinion. We have not, however, conducted any independent in-depth investigation into the business and affairs of the Company, Bei Kong ZKC Environmental Group (formerly known as ZKC Environmental Group Co., Ltd.), Hong Qiao, Shenzhen Bei Kong and the Purchaser or their respective subsidiaries or associates, nor have we considered the taxation implication on the Group or the Shareholders as a result of the Equity Interests Change and the provision of the Services and Facilities. In addition, we have no obligation to update this opinion to take into account events occurring after the issue of this letter. Nothing contained in this letter should be construed as a recommendation to hold, sell or buy any Shares or any other securities of the Company.

Lastly, where information in this letter has been extracted from published or otherwise publicly available sources, the sole responsibility of Guangdong Securities is to ensure that such information has been correctly extracted from the relevant sources.

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LETTER FROM GUANGDONG SECURITIES

I. THE EQUITY INTERESTS CHANGE AGREEMENT

PRINCIPAL FACTORS AND REASONS CONSIDERED

In arriving at our opinion in respect of the Equity Interests Change, we have taken into consideration the following principal factors and reasons:

(1) Background of the Equity Interests Change

Information on the Group

As extracted from the Board Letter, the Group has been focusing on the construction of sewage and water treatment plants, sewage treatment, water treatment and distribution, the provision of technical services and licensing of technical know-how which are related to sewage treatment in the PRC (the “ Sewage and Water Treatment Business ”), and is gradually reducing the developments in its existing business of trading of computers and related products.

In August 2008, the Group acquired for Bei Kong ZKC Environmental Group, being an operator in the water market of the PRC. From the annual report of the Company for the period from 1 July 2007 to 31 December 2008 (the “ Annual Report ”), we noted that the Group’s financial performance improved significantly after commencement of the Sewage and Water Treatment Business. For the period from 1 July 2007 to 31 December 2008, the Group recorded total turnover of approximately HK$337.68 million, representing a substantial rise as compared to the prior financial year. In addition, the Group was able to turn around its loss making position and recorded profits attributable to equity holders of the Company of approximately HK$30.98 million for the period from 1 July 2007 to 31 December 2008, as compared to losses of approximately HK$2.57 million for the financial year ended 30 June 2007.

In light of the satisfactory financial performance of Bei Kong ZKC Environmental Group, the Directors believe that the Acquisition has laid a strong foundation for its business growth and prosperity in future years. With reference to the Annual Report and as further confirmed by the Directors, the Group will progressively reduce its reliance on trading of computers and related products and will focus on the Sewage and Water Treatment Business through actively identifying and seeking water treatment and environmental projects with sound potential growth.

Information on Shenzhen Bei Kong

As referred to in the Board Letter, the Shenzhen Bei Kong Group is principally engaged in the water supply and sewage treatment services in the PRC. Shenzhen Bei Kong is incorporated in the PRC on 25 February 2002.

The Shenzhen Bei Kong Group started to generate revenue since the financial year ended 31 December 2008. For the same said financial year, the Shenzhen Bei Kong Group’s total audited profit after taxation was approximately RMB15.92 million, representing an increase of approximately 26.52%. As further advised by the Directors, under the current national policies of the PRC government to support water and garbage treatment, prevention and control of water pollution, the

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LETTER FROM GUANGDONG SECURITIES

Directors expected that the business of the Shenzhen Bei Kong Group would probably be more prosperous in the coming future. We have searched over the internet (including but not limited to the official and governmental web-sites of the PRC) regarding the said policies and based on our findings, we concur with the Directors that the current favourable national policies of the PRC government to support water garbage treatment, prevention and control of water pollution would probably have a positive impact on the business of the Shenzhen Bei Kong Group.

As at the Latest Practicable Date, Shenzhen Bei Kong was owned as to 60% and 40% by Bei Kong ZKC Environmental Group and Hong Qiao respectively.

(2) Reasons for the entering into of the Equity Interests Change Agreement

As mentioned in the foregoing, the Group has been focusing on the Sewage and Water Treatment Business, and is gradually reducing the developments in its existing business of trading of computers and related products; whereas the Shenzhen Bei Kong Group is principally engaged in the water supply and sewage treatment services in the PRC. According to the Directors, Hong Qiao was regarded as an important strategic partner of the Group in terms of its extensive experience and expertise in the water supply and sewage treatment services in the PRC. Furthermore, the Directors expected that the expertise and experience of Hong Qiao will continue to be essential to the business operations and advancement of the Group in the future. Bei Kong ZKC Environmental Group and Hong Qiao therefore mutually agreed that they should share the rights and responsibilities associated with Shenzhen Bei Kong as outlined under the section headed “Principal terms of the Equity Interests Change Agreement” of the Board Letter, other than in the case of the Liquidation, on a 60% to 40% basis even after the Equity Interests Change. As represented by the Directors, such arrangement is considered to be an inducement for Hong Qiao’s persistent participation in the business operation of the Group.

(3) Terms of the Equity Interests Change Agreement

The Equity Interests Change

Pursuant to the Equity Interests Change Agreement, Hong Qiao will decrease its capital contribution to RMB33,091,950.41 whereas Bei Kong ZKC Environmental Group will increase its capital contribution by RMB86,908,049.59 to RMB266,908,049.59 to maintain the registered capital of Shenzhen Bei Kong at RMB300,000,000. Upon completion of the Equity Interests Change Agreement, the shareholding of Bei Kong ZKC Environmental Group and Hong Qiao in Shenzhen Bei Kong will be in proportion of approximately 88.97% and 11.03% respectively. In other words, Bei Kong ZKC Environmental Group’s shareholding in Shenzhen Bei Kong will increase by approximately 28.97 percent point (i.e. from 60% to approximately 88.97%).

We have performed a trading multiples analysis to assess the fairness and reasonableness of the Equity Interests Change. In this respect, we understand that the trading multiples analysis usually includes the price to book ratio (“ PBR ”) and the price to earnings ratio (“ PER ”). Based on that (i) in the event that Shenzhen Bei Kong is being liquidated, the remaining assets of Shenzhen Bei Kong shall be distributed to Bei Kong ZKC Environmental Group and Hong Qiao in the proportion of approximately 88.97% and 11.03% (i.e. the respective equity interests of these two entities in Shenzhen Bei Kong upon completion of the Equity Interests Change) respectively (details will be

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LETTER FROM GUANGDONG SECURITIES

outlined in the latter section of this letter); and (ii) the equity interests of the Bei Kong ZKC Environmental Group in Shenzhen Bei Kong will as a matter of fact be increased by 28.97 percent point to approximately 88.97% upon completion of the Equity Interests Change, we are of the view that the analysis of PBR is applicable in this case. However, since the profit sharing ratio of Bei Kong ZKC Environmental Group in Shenzhen Bei Kong will be the same after the Equity Interests Change (details will be outlined in the latter section of this letter), we are of the view that the PER is inapplicable.

We have searched for companies listed on the Stock Exchange which have similar lines of business as Shenzhen Bei Kong, i.e. the water supply and sewage treatment services in the PRC (the “ Comparables ”), as at the date of the Equity Interests Change Agreement. To the best of our knowledge and as far as we are aware of, we found four companies which met the said criteria. Set out below are the PBRs of the Comparables using the closing prices of their shares as at the date of the Equity Interests Change Agreement, and their latest published financial information:

Company name (Stock code)	Principal business	Year end date	PBR
Interchina Holdings	Development of environmental	31/3/2009	0.63
Company Limited (202)	protection and water treatment
	operation, city development
	and investment operation,
	property investment, securities
	and financial operation.
China Water Affairs	Provision of water supply and	31/3/2009	0.89
Group Limited (855)	sewage treatment; development
	of properties for sale and
	investment in properties;
	construction of road and other
	municipal works; manufacture
	and sale of concrete products.
Tianjin Capital Environmental	Sewage water processing, tap	31/12/2008	0.78
Protection Group	water supply, production of
Company Limited (1065)	recycled water and construction
	materials and operation of toll
	roads.
China Water Industry	Trading of watches and	31/12/2008	1.14
Group Limited (1129)	accessories and provision of
	water supply and sewage
	treatment business in PRC.
Maximum			1.14
Minimum			0.63
Average			0.86
The Equity Interests Change			0.95

Source: the Stock Exchange web-site (www.hkex.com.hk)

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LETTER FROM GUANGDONG SECURITIES

From the above table, we notice that the average PBR as represented by the Comparables was approximately 0.86 times with a range from approximately 0.63 times to 1.14 times.

Given that the audited consolidated net asset value of the Shenzhen Bei Kong Group as at 31 December 2008 was approximately RMB315.27 million and the capital contribution from Bei Kong ZKC Environmental Group under the Equity Interests Change is approximately RMB86.91 million, the implied PBR of the Equity Interests Change is approximately 0.95 times “28.97% of the audited consolidated NAV of the Shenzhen Bei Kong Group as at 31 December 2008”, which is higher than the average PBR and falls within the PBR range of the Comparables.

Shenzhen Bei Kong had not declared any dividends to its shareholders during the year ended 31 December 2008. Consequently, there is no basis to assess the Equity Interests Change based on the historical dividend yield of Shenzhen Bei Kong. Thus, the price to dividend analysis would also be inapplicable.

Having considered the results of the trading multiples analysis, we are of the view that the Equity Interests Change is fair and reasonable so far as the Independent Shareholders are concerned.

Rights and obligations

Pursuant to the terms of the Equity Interests Change Agreement, in the event that Shenzhen Bei Kong is being liquidated, the remaining assets of Shenzhen Bei Kong shall be distributed to Bei Kong ZKC Environmental Group and Hong Qiao in the proportion of approximately 88.97% and 11.03% (i.e. the respective equity interests of Bei Kong ZKC Environmental Group and Hong Qiao in Shenzhen Bei Kong upon completion of the Equity Interests Change) respectively. As for other rights and obligations in Shenzhen Bei Kong, namely (i) profit sharing; (ii) the priority right to subscribe for additional capital of Shenzhen Bei Kong; (iii) the voting power at the shareholders meeting of Shenzhen Bei Kong; and (iv) rights to nominate candidates for directors of Shenzhen Bei Kong (the “ Other Rights ”), they will be distributed between Bei Kong ZKC Environmental Group and Hong Qiao on a 60% to 40% basis.

The Directors considered the aforesaid arrangement to be justifiable as Hong Qiao was regarded as an important strategic partner of the Group in terms of its extensive experience and expertise in the water supply and sewage treatment services in the PRC. In addition, Hong Qiao will continue to monitor and provide valuable advice on business operations to Shenzhen Bei Kong after completion of the Equity Interests Change. Thus, the Directors expected that the contribution from Hong Qiao will persistently benefit Shenzhen Bei Kong in the future.

We have further enquired into the Directors regarding Hong Qiao’s possible contribution to the Group and the experience and expertise of Hong Qiao which may contribute to the Group for its business advancement. In this respect, the Directors explained to us that Hong Qiao, being an expert in the PRC’s water treatment industry, shall provide advisory services on project review and due diligence analysis to the Group and shall actively explore future business opportunities for the Group in the water market of the PRC. Although the Company’s (through Bei Kong ZKC Environmental Group) share on the Other Rights is comparatively inferior to Hong Qiao, the Directors considered that the benefits from the persistent participation of Hong Qiao in the arena as just mentioned shall

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LETTER FROM GUANGDONG SECURITIES

outweigh the Company’s comparative shortfall on the Other Rights. Therefore, the Directors consider that the terms of the Equity Interests Change Agreement are fair and reasonable so far as the Independent Shareholders are concerned. Based on the Directors’ representation and explanation during our course of our discussion with them that the benefits from the persistent participation of Hong Qiao (as also supported by information regarding the past experience and management expertise of Hong Qiao in the PRC’s water treatment industry, as provided to us by the Company) shall outweigh the Company’s comparative shortfall on the Other Rights, we are of the view that the distribution of the Other Rights under the Equity Interests Change Agreement is justifiable.

Other terms of the Equity Interests Change Agreement

Lastly, we have also reviewed the other major terms of the Equity Interests Change Agreement and are not aware of any terms which are uncommon. Consequently, we consider that the terms of the Equity Interests Change Agreement are on normal commercial terms and are fair and reasonable so far as the Independent Shareholders are concerned.

(4) Possible financial effects of the Equity Interests Change

Effect on net asset value (“ NAV ”)

With reference to the Annual Report, the audited consolidated NAV of the Group was approximately HK$1,997.96 million as at 31 December 2008. As confirmed by the Directors, the consolidated NAV of the Group would decrease upon completion of the Equity Interests Change.

Effect on earnings

At present, Shenzhen Bei Kong is treated as a 60% equity interest subsidiary of the Group. After completion of the Equity Interests Change, it will become an 88.97% equity interest subsidiary of the Group. Nevertheless, since the profit sharing ratio of 60% to Bei Kong ZKC Environmental Group would not change (i.e. the profits of Bei Kong ZKC Environmental Group being attributable to the Group would not be affected) upon completion of the Equity Interests Change, the Directors expected that the Equity Interests Change would not have material impact on the future earnings of the Group as compared to the present condition.

Effect on gearing and working capital

As at 31 December 2008, the Group’s gearing level (being calculated as total borrowings, net of cash and cash equivalents, divided by the total equity) was approximately 0.52 times. As confirmed by the Directors, the Group’s gearing level would be increased upon completion of the Equity Interests Change while its total working capital would be reduced afterwards.

It should be noted that the aforementioned analyses are for illustrative purpose only and does not purport to represent how the financial position of the Group will be upon completion of the Equity Interests Change.

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LETTER FROM GUANGDONG SECURITIES

RECOMMENDATION ON THE EQUITY INTERESTS CHANGE AGREEMENT

Having considered the above factors and reasons, we are of the opinion that (i) the terms of the Equity Interests Change Agreement are on normal commercial terms and are fair and reasonable so far as the Independent Shareholders are concerned; and (ii) the Equity Interests Change is in the interests of the Company and the Shareholders as a whole. Accordingly, we recommend the Independent Board Committee to advise the Independent Shareholders to vote in favour of the relevant resolution(s) to be proposed at the SGM to approve the Equity Interests Change Agreement and the transactions contemplated thereunder and we recommend the Independent Shareholders to vote in favour of the resolution(s) in this regard.

II. THE SERVICES AND FACILITIES AGREEMENT

PRINCIPAL FACTORS AND REASONS CONSIDERED

In arriving at our opinion in respect of the Services and Facilities Agreement and the transactions contemplated thereunder, we have taken into consideration the following principal factors and reasons:

(1) Background of the provision of the Services and Facilities

Information on the Purchaser

As referred to in the Board Letter, the Purchaser is an indirect wholly-owned subsidiary of Beijing Enterprises Holdings Limited, a controlling Shareholder. The Purchaser is principally engaged in operations including investments, constructions and operations of environmental projects such as waste water treatment, industrial sewage treatment and municipal water supply as well as urban waste disposal and disposal of hazardous solid waste.

(2) Reasons for the entering into of the Services and Facilities Agreement

As extracted from the Board Letter, the Purchaser is currently engaging in a water treatment expansion project in Hai Kou City (海口市), the PRC, which requires the Services and Facilities. Since the Company has extensive experience in the sourcing of water treatment related machineries, facilities and services, the Purchaser requested assistance from the Company to provide the Services and Facilities to ensure that the Project can be carried out smoothly. Furthermore, the Company also possesses relatively stronger bargaining power when dealing with the vendors of the relevant water treatment machineries and facilities as a result of bulk purchases. Given that the Company is

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LETTER FROM GUANGDONG SECURITIES

specialised in the water treatment business, the Company is comparatively more familiar with the water treatment industry as compared with other members of the Beijing Enterprises Holdings Limited group and hence it is commercially sensible to utilise the business network of the Company in purchasing water treatment related facilities and services.

From the Company’s perspective, we noted that the Consideration of RMB83,557,400 (equivalent to approximately HK$94,904,000) represents approximately 28.10% of the Group’s audited total turnover of approximately HK$337.68 million for the period from 1 July 2007 to 31 December 2008. Accordingly, we concur with the Directors that the provision of the Services and Facilities under the Services and Facilities Agreement would enhance the Group’s turnover in the coming future.

In light of the aforesaid reasons for the entering into of the Services and Facilities Agreement, in our opinion, the provision of the Services and Facilities is in the interests of the Company and the Shareholders as a whole.

(3) Principal terms of the Services and Facilities Agreement

The Consideration

The Board Letter stated that the Consideration was determined after arm’s length negotiations between the Purchaser and the Seller based on the costs of sourcing/ providing the Services and Facilities by the Company plus a mark-up of profit margin acceptable to the Company.

Upon our further enquiry, the Directors advised us that the said cost-plus basis for determination of the Consideration is commonly used in the water treatment industry whereby the exact profit margin is set on a transaction by transaction basis based on arm’s length negotiations between the supplier and the customer in each transaction.

Moreover, we also understand from the Directors that the Consideration was set based on detailed budgeting of the Services and Facilities and allows the Group to charge a mark-up over the total costs of the provision of the Services and Facilities. In other words, the determination of the Consideration has taken into account the total costs of the provision of the Services and Facilities with a profit margin. Given the foregoing and after requesting for, understanding and discussing the assumptions of the cost structure of the provision of the Services and Facilities as provided by the Company, we concur with the Directors that the cost-plus basis used by the Group for the determination of the Consideration is fair and reasonable so far as the Independent Shareholders are concerned. In view of also that the Consideration represents approximately 28.10% of the Group’s audited total turnover for the period from 1 July 2007 to 31 December 2008, being a significant portion of the said turnover, we are of the view that the Consideration would be beneficial to the Group based on the statistics as just mentioned.

Payment terms

Pursuant to the Services and Facilities Agreement, the Consideration will be payable by cash by the Purchaser to the Seller in the following manner: (i) RMB8 million (equivalent to approximately

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LETTER FROM GUANGDONG SECURITIES

HK$9 million) upon signing of the Services and Facilities Agreement; (ii) up to 80% of the Consideration will be settled by the Purchaser upon receipt of the Services and Facilities; (iii) up to 85% of the Consideration will be settled by the Purchaser upon completion of certain testing to be conducted by the Purchaser on the Services and Facilities; (iv) up to 95% of the Consideration will be settled by the Purchaser upon completion of all relevant testing to be conducted by the Purchaser on the Services and Facilities; and (v) the remaining Consideration will be settled by the Purchaser upon completion of the maintenance period for the Services and Facilities.

We have discussed with the Company regarding the aforementioned terms of payment and were advised by the Directors that such payment terms are in line with the Company’s usual practice in the water treatment business. We have also obtained from the Company copies of similar contracts the Company entered into with other third parties having similar payment terms. Besides that, in view of that such payment terms, as explained by the Directors, were negotiated on arm’s length basis after taking into account the funding requirements for providing the Services and Facilities at each stage during the contractual period, we are of the view that the payment terms of the Services and Facilities Agreement are fair and reasonable so far as the Independent Shareholders are concerned.

Other terms of the Services and Facilities Agreement

We have also reviewed the other terms of the Services and Facilities Agreement and we are not aware of any terms which are uncommon. Consequently, we consider that the terms of the Services and Facilities Agreement are on normal commercial terms and are fair and reasonable so far as the Independent Shareholders are concerned.

RECOMMENDATION ON THE SERVICES AND FACILITIES AGREEMENT

Having considered the above factors and reasons, we are of the opinion that (i) the terms of the Services and Facilities Agreement are on normal commercial terms and are fair and reasonable so far as the Independent Shareholders are concerned; and (ii) the provision of the Services and Facilities is in the interests of the Company and the Shareholders as a whole. Accordingly, we recommend the Independent Board Committee to advise the Independent Shareholders to vote in favour of the relevant resolution(s) to be proposed at the SGM to approve the Services and Facilities Agreement and the transactions contemplated thereunder and we recommend the Independent Shareholders to vote in favour of the resolution(s) in this regard.

Yours faithfully, For and on behalf of

Guangdong Securities Limited Graham Lam Managing Director

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FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

A. SUMMARY OF FINANCIAL STATEMENTS FOR LAST THREE FINANCIAL YEARS

Set out below is a summary of the audited financial results and assets and liabilities of the Group as extracted from the annual reports of the Company for the period from 1 July 2007 to 31 December 2008 and each of the two years ended 30 June 2007:

Consolidated Income Statement

For the period from 1 July 2007 to 31 December 2008 and the two years ended 30 June 2007:

Period from 1 July 2007 to 31 December 2008 HK$’000 REVENUE 337,681 Cost of sales (182,878) Gross profit 154,803 Other income and gains, net 11,388 Administrative expenses (42,294) Distribution costs — Other operating expenses, net (7,677) PROFIT/(LOSS) FROM OPERATING ACTIVITIES 116,220 Finance costs (60,273) Share of loss of an associate (811) PROFIT/(LOSS) BEFORE TAX 55,136 Tax (12,234) PROFIT/(LOSS) FOR THE PERIOD/YEAR 42,902 Attributable to: Shareholders of the Company 30,984 Minority interests 11,918 42,902 EARNINGS/(LOSS) PER SHARE ATTRIBUTABLE TO SHAREHOLDERS OF THE COMPANY Basic HK3.82 cents Diluted HK3.72 cents	Year ended 30 June 2007 HK$’000 19,899 (19,695) 204 1,362 (4,186) — — (2,620) — — (2,620) 53 (2,567) (2,567) — (2,567) (HK3.08 cents) N/A	Year ended 30 June 2006 HK$’000 35,786 (34,911) 875 863 (4,867) (73) — (3,202) — — (3,202) 14 (3,188) (3,188) — (3,188) (HK3.93 cents) N/A

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FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

Consolidated Balance Sheet

As at 31 December 2008, 30 June 2007 and 2006:

	31 December	30 June	30 June
	2008	2007	2006
	HK$’000	HK$’000	HK$’000
ASSETS
Non-current assets:
Equipment	13,414	71	97
Goodwill	1,466,915	—	—
Operating concessions	429,589	—	—
Other intangible assets	1,656	—	—
Interest in an associate	25,313	—	—
Available-for-sale investment	454	—	—
Trade receivables	1,238,309	—	—
Prepayments, deposits and other receivables	119,324	—	—
Deferred tax assets	27,112	—	—
Total non-current assets	3,322,086	71	97
Current assets:
Inventories	4,133	—	—
Amounts due from contract customers	200,462	—	—
Trade receivables	144,376	2,104	14
Prepayments, deposits and other receivables	302,099	147	140
Financial assets at fair value through profit
or loss	—	431	1,682
Restricted cash and pledged deposits	8,066	75	75
Cash and cash equivalents	834,936	29,287	32,088
Total current assets	1,494,072	32,044	33,999
TOTAL ASSETS	4,816,158	32,115	34,096

— 27 —

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

31 EQUITY AND LIABILITIES Equity attributable to shareholders of the Company: Issued capital Reserves Minority interests TOTAL EQUITY Non-current liabilities: Other payables and accruals Bank and other borrowings Convertible bonds Finance lease payable Provision for major overhauls Deferred income Deferred tax liabilities Total non-current liabilities Current liabilities: Trade payables Other payables and accruals Income tax payable Bank and other borrowings Finance lease payable Total current liabilities TOTAL LIABILITIES TOTAL EQUITY AND LIABILITIES	December 2008 30 June 2007 30 June 2006 HK$’000 HK$’000 HK$’000 240,507 8,328 8,328 1,517,794 23,108 25,024 1,758,301 31,436 33,352 239,656 — — 1,997,957 31,436 33,352 69,328 — — 986,868 — — 669,275 — — 10,559 — — 69,006 — — 1,178 — — 59,707 — — 1,865,921 — — 85,195 313 1 632,205 366 743 17,328 — — 212,241 — — 5,311 — — 952,280 679 744 2,818,201 679 744 4,816,158 32,115 34,096	December 2008 30 June 2007 30 June 2006 HK$’000 HK$’000 HK$’000 240,507 8,328 8,328 1,517,794 23,108 25,024 1,758,301 31,436 33,352 239,656 — — 1,997,957 31,436 33,352 69,328 — — 986,868 — — 669,275 — — 10,559 — — 69,006 — — 1,178 — — 59,707 — — 1,865,921 — — 85,195 313 1 632,205 366 743 17,328 — — 212,241 — — 5,311 — — 952,280 679 744 2,818,201 679 744 4,816,158 32,115 34,096
		33,352 —
		33,352
		— — — — — — —
		—
		1 743 — — —
		744
		744
		34,096

Note: No qualified opinion has been issued by the Company’s auditors in respect of the financial statements of the Company for the period from 1 July 2007 to 31 December 2008 and the two years ended 30 June 2007.

— 28 —

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

B. ANNUAL RESULTS FOR THE PERIOD FROM 1 JULY 2007 TO 31 DECEMBER 2008

Set out below are the audited financial statements of the Company together with the accompanying notes as extracted from the annual report of the Company for the period from 1 July 2007 to 31 December 2008:

“CONSOLIDATED INCOME STATEMENT

Period from 1 July 2007 to 31 December 2008

Period from
1 July 2007 to
31 December
2008
HK$’000
REVENUE
337,681
Cost of sales
(182,878)
Gross profit
154,803
Other income and gains, net
11,388
Administrative expenses
(42,294)
Other operating expenses, net
(7,677)
PROFIT/(LOSS) FROM OPERATING ACTIVITIES
116,220
Finance costs
(60,273)
Share of loss of an associate
(811)
PROFIT/(LOSS) BEFORE TAX
55,136
Tax
(12,234)
PROFIT/(LOSS) FOR THE PERIOD/YEAR
42,902
Attributable to:
Shareholders of the Company
30,984
Minority interests
11,918
42,902
EARNINGS/(LOSS) PER SHARE ATTRIBUTABLE TO
SHAREHOLDERS
OF THE COMPANY
Basic
HK3.82 cents
Diluted
HK3.72 cents

Year ended
30 June
2007
HK$’000
19,899
(19,695)
204
1,362
(4,186)
—
(2,620)
—
—
(2,620)
53
(2,567)
(2,567)
—
(2,567)
(HK3.08 cents)
N/A

— 29 —

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

CONSOLIDATED BALANCE SHEET

31 December 2008

		31 December	30 June
	Notes	2008	2007
		HK$’000	HK$’000
ASSETS
Non-current assets:
Equipment	15	13,414	71
Goodwill	16	1,466,915	—
Operating concessions	17	429,589	—
Other intangible assets	18	1,656	—
Interest in an associate	20	25,313	—
Available-for-sale investment	21	454	—
Trade receivables	24	1,238,309	—
Prepayments, deposits and other receivables	25	119,324	—
Deferred tax assets	36	27,112	—
Total non-current assets		3,322,086	71
Current assets:
Inventories	22	4,133	—
Amounts due from contract customers	23	200,462	—
Trade receivables	24	144,376	2,104
Prepayments, deposits and other receivables	25	302,099	147
Financial assets at fair value through
profit or loss	27	—	431
Restricted cash and pledged deposits	28	8,066	75
Cash and cash equivalents	28	834,936	29,287
Total current assets		1,494,072	32,044
TOTAL ASSETS		4,816,158	32,115

— 30 —

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

31 Notes EQUITY AND LIABILITIES Equity attributable to shareholders of the Company: Issued capital 29 Reserves 30(a)(i) Minority interests TOTAL EQUITY Non-current liabilities: Other payables and accruals 38 Bank and other borrowings 31 Convertible bonds 32 Finance lease payable 33 Provision for major overhauls 34 Deferred income 35 Deferred tax liabilities 36 Total non-current liabilities Current liabilities: Trade payables 37 Other payables and accruals 38 Income tax payable Bank and other borrowings 31 Finance lease payable 33 Total current liabilities TOTAL LIABILITIES TOTAL EQUITY AND LIABILITIES	December 30 June 2008 2007 HK$’000 HK$’000 240,507 8,328 1,517,794 23,108 1,758,301 31,436 239,656 — 1,997,957 31,436 69,328 — 986,868 — 669,275 — 10,559 — 69,006 — 1,178 — 59,707 — 1,865,921 — 85,195 313 632,205 366 17,328 — 212,241 — 5,311 — 952,280 679 2,818,201 679 4,816,158 32,115	December 30 June 2008 2007 HK$’000 HK$’000 240,507 8,328 1,517,794 23,108 1,758,301 31,436 239,656 — 1,997,957 31,436 69,328 — 986,868 — 669,275 — 10,559 — 69,006 — 1,178 — 59,707 — 1,865,921 — 85,195 313 632,205 366 17,328 — 212,241 — 5,311 — 952,280 679 2,818,201 679 4,816,158 32,115
		31,436 —
		31,436
		— — — — — — —
		—
		313 366 — — —
		679
		679
		32,115

— 31 —

APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

Period from 1 July 2007 to 31 December 2008

Attributable to shareholders of the Company

				Convertible	Convertible
			Share		bond	Exchange	PRC
		Issued	premium	Contributed	equity	fluctuation	reserve	Retained		Minority	Total
		capital	account	surplus	reserve	reserve	funds	profits	Total	interests	equity
	Notes	HK$’000	HK$’000	HK$’000	HK$’000	HK$’000	HK$’000	HK$’000	HK$’000	HK$’000	HK$’000
				(note			(note
				30(a)(ii))	(note 32)		30(a)(iii))
At 1 July 2006		8,328	—	(400)	—	323	—	25,101	33,352	—	33,352
Exchange realignment
and total income
and expense for
the year
recognised directly
in equity		—	—	—	—	651	—	—	651	—	651
Loss for the year		—	—	—	—	—	—	(2,567)	(2,567)	—	(2,567)
Total income and
expense for the
year		—	—	—	—	651	—	(2,567)	(1,916)	—	(1,916)
At 30 June 2007 and
1 July 2007		8,328	—*	(400)*	—*	974*	—*	22,534*	31,436	—	31,436
Share issue expenses	29(b)	—	(2,968)	—	—	—	—	—	(2,968)	—	(2,968)
Exchange realignment		—	—	—	—	(3,635)	—	—	(3,635)	(362)	(3,997)
Total income and
expense for the
period recognised
directly in equity		—	(2,968)	—	—	(3,635)	—	—	(6,603)	(362)	(6,965)
Profit for the period		—	—	—	—	—	—	30,984	30,984	11,918	42,902
Total income and
expense for
the period		—	(2,968)	—	—	(3,635)	—	30,984	24,381	11,556	35,937
Issue of new shares	29(b)	80,679	768,237	—	—	—	—	—	848,916	—	848,916
Issue of convertible
bonds		—	—	—	364,524	—	—	—	364,524	—	364,524
Conversion of
convertible bonds	29(b)	151,500	460,211	—	(120,780)	—	—	—	490,931	—	490,931
Acquisition of
subsidiaries	40	—	—	—	—	—	—	—	—	228,327	228,327
Disposal of
subsidiaries	41	—	—	—	—	(1,887)	—	—	(1,887)	—	(1,887)
Dividend paid to
a minority
shareholder		—	—	—	—	—	—	—	—	(227)	(227)
Transfer to reserves		—	—	—	—	—	17,902	(17,902)	—	—	—
At 31 December 2008		240,507	1,225,480*	(400)*	243,744*	(4,548)*	17,902*	35,616*	1,758,301	239,656	1,997,957

* These reserve accounts comprise the consolidated reserves of HK$1,517,794,000 (30 June 2007: HK$23,108,000) in the consolidated balance sheet as at 31 December 2008.

— 32 —

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

CONSOLIDATED CASH FLOW STATEMENT

Period from 1 July 2007 to 31 December 2008

		Period from
		1 July 2007 to	Year ended
		31 December	30 June
	Notes	2008	2007
		HK$’000	HK$’000
CASH FLOWS FROM OPERATING ACTIVITIES
Profit/(loss) before tax		55,136	(2,620)
Adjustments for:
Bank interest income	7	(9,193)	(1,067)
Dividend income from financial assets at fair value
through profit or loss	7	(137)	—
Gain on disposal of financial assets at fair value
through profit or loss, net	7	(718)	(25)
Gain on disposal of subsidiaries	7	(760)	—
Depreciation	8	1,230	40
Amortisation of operating concessions	8	5,799	—
Amortisation of other intangible assets	8	78	—
Impairment of trade receivables, net	8	1,679	—
Impairment of other receivables, net	8	205	—
Loss on disposal of items of equipment, net	8	17	13
Provision for major overhauls	34	7,285	—
Finance costs	9	65,524	—
Share of loss of an associate		811	—
Operating profit before working capital changes		126,956	(3,659)
Increase in inventories		(1,247)	—
Increase in amounts due from contract customers		(90,893)	—
Increase in trade receivables		(23,775)	—
Increase in prepayments, deposits and other receivables		(341,204)	(2,044)
Decrease in trade payables		(20,197)	(65)
Decrease in other payables and accruals		(63,768)	—
Exchange adjustments		(1,204)	—
Cash used in operations		(415,332)	(5,768)
Mainland China income tax paid		(2,351)	—
Net cash outflow from operating activities		(417,683)	(5,768)

— 33 —

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

		Period from
		1 July 2007 to	Year ended
		31 December	30 June
	Notes	2008	2007
		HK$’000	HK$’000
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of items of equipment		(4,591)	(27)
Purchase of other intangible assets		(522)	—
Acquisition of subsidiaries	40	18,274	—
Disposal of subsidiaries	41	9,748	—
Purchase of financial assets at fair value
through profit or loss		(48,642)	—
Proceeds from disposal of financial assets
at fair value through profit or loss		49,791	1,276
Increase in restricted cash and pledged deposits		(7,991)	—
Interest received	7	9,193	1,067
Dividend received from financial assets
at fair value through profit or loss	7	137	—
Net cash inflow from investing activities		25,397	2,316
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issue of new ordinary shares	29(b)(i)	98,800	—
Share issue expenses	29(b)	(2,968)	—
Issue of convertible bonds	32	900,000	—
New loans		504,384	—
Repayment of loans		(272,251)	—
Capital element of finance lease rental payments		(714)	—
Interest paid		(28,860)	—
Interest element of finance lease rental payments		(643)	—
Dividend paid to a minority shareholder		(227)	—
Net cash inflow from financing activities		1,197,521	—
NET INCREASE/(DECREASE) IN CASH AND
CASH EQUIVALENTS		805,235	(3,452)
Cash and cash equivalents at beginning of period/year		29,287	32,088
Effect of foreign exchange rate changes, net		414	651
CASH AND CASH EQUIVALENTS AT
END OF PERIOD/YEAR	28	834,936	29,287

— 34 —

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

BALANCE SHEET

31 December 2008

Notes 31 ASSETS Non-current assets: Equipment 15 Interests in subsidiaries 19 Total non-current assets Current assets: Prepayments, deposits and other receivables 25 Cash and cash equivalents 28 Total current assets TOTAL ASSETS EQUITY AND LIABILITIES Equity: Issued capital 29 Reserves 30(b) TOTAL EQUITY Non-current liabilities: Convertible bonds 32 Current liabilities: Other payables and accruals 38 TOTAL LIABILITIES TOTAL EQUITY AND LIABILITIES	December 2008 30 June 2007 HK$’000 HK$’000 466 — 2,885,694 29,199 2,886,160 29,199 200 — 15,376 2,307 15,576 2,307 2,901,736 31,506 240,507 8,328 1,445,226 23,170 1,685,733 31,498 669,275 — 546,728 8 1,216,003 8 2,901,736 31,506	December 2008 30 June 2007 HK$’000 HK$’000 466 — 2,885,694 29,199 2,886,160 29,199 200 — 15,376 2,307 15,576 2,307 2,901,736 31,506 240,507 8,328 1,445,226 23,170 1,685,733 31,498 669,275 — 546,728 8 1,216,003 8 2,901,736 31,506
		29,199
		— 2,307
		2,307
		31,506
		8,328 23,170
		31,498
		—
		8
		8
		31,506

— 35 —

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

NOTES TO FINANCIAL STATEMENTS

31 December 2008

1. CORPORATE INFORMATION

Beijing Enterprises Water Group Limited (the “Company”, formerly known as Shang Hua Holdings Limited) is a limited liability company incorporated in Bermuda. Pursuant to a special resolution of the Company’s shareholders passed on 4 March 2008 and as approved by the Registrars of Companies of Bermuda and Hong Kong, the English name of the Company was changed from “Shang Hua Holdings Limited” to “Beijing Enterprises Water Group Limited” and the Chinese translation of the Company name for identification purposes was changed from “上華控股有限公司” to “北控水務集團有限公司”.

During the period from 1 July 2007 to 31 December 2008, the Company and its subsidiaries (collectively the “Group”) were involved in the following principal activities:

construction of sewage and water treatment plants, sewage treatment, water treatment and distribution, the provision of technical services and licensing of technical know-how that are related to sewage treatment in Mainland China, the People’s Republic of China (the “PRC”).
trading of computer and related products in Hong Kong and Mainland China.

As at 31 December 2008 and the date of approval of these financial statements, the immediate holding company of the Company is Beijing Enterprises Environmental Construction Limited (“BE Environmental”, formerly known as Lucky Crown Management Limited), which is incorporated in the British Virgin Islands, and in the opinion of the directors, the ultimate holding company is 北京控股集團有限公司 (“Beijing Enterprises Group”), which is a state-owned enterprise established in the PRC and is wholly owned by The State-owned Assets Supervision and Administration Commission of the People’s Government of Beijing Municipality.

2. CHANGE OF FINANCIAL YEAR END DATE

Pursuant to an ordinary resolution passed at the Company’s special general meeting held on 4 March 2008, the Company changed its financial year end date from 30 June to 31 December with effect from 4 March 2008 to align the financial year end date with that of Beijing Enterprises Holdings Limited (“BEHL”), an intermediate holding company whose shares are listed on The Stock Exchange of Hong Kong Limited (the “Stock Exchange”).

Owing to the change of the financial year end date in current period, the current period’s financial statements cover a period of eighteen months from 1 July 2007 to 31 December 2008. Accordingly, the comparative amounts presented for the consolidated income statement, the consolidated statement of changes in equity, the consolidated cash flow statement and the related notes, which were prepared for the year ended 30 June 2007, are not comparable.

— 36 —

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

3.1 BASIS OF PREPARATION

These financial statements have been prepared in accordance with Hong Kong Financial Reporting Standards (“HKFRSs”) (which include all Hong Kong Financial Reporting Standards, Hong Kong Accounting Standards (“HKASs”) and Interpretations) issued by the Hong Kong Institute of Certified Public Accountants (the “HKICPA”), accounting principles generally accepted in Hong Kong and the disclosure requirements of the Hong Kong Companies Ordinance. They have been prepared under the historical cost convention, except for financial assets at fair value through profit or loss, which had been measured at fair value. These financial statements are presented in Hong Kong dollars (“HK$”) and all values are rounded to the nearest thousand except when otherwise indicated.

Basis of consolidation

The consolidated financial statements include the financial statements of the Company and its subsidiaries for the period from 1 July 2007 to 31 December 2008. Adjustments are made to bring into line any dissimilar accounting policies that may exist. The results of subsidiaries are consolidated from the date of acquisition, being the date on which the Group obtains control, and continue to be consolidated until the date that such control ceases. All income, expenses and unrealised gains and losses resulting from intercompany transactions and intercompany balances within the Group are eliminated on consolidation in full.

The acquisition of subsidiaries during the period has been accounted for using the purchase method of accounting. This method involves allocating the cost of the business combinations to the fair value of the identifiable assets acquired, and liabilities and contingent liabilities assumed at the date of acquisition. The cost of the acquisition is measured at the aggregate of the fair value of the assets given, equity instruments issued and liabilities incurred or assumed at the date of exchange, plus costs directly attributable to the acquisition.

Minority interests represent the interests of outside shareholders not held by the Group in the results and net assets of the Company’s subsidiaries. An acquisition of minority interests is accounted for using the parent entity extension method whereby the difference between the consideration and the book value of the share of the net assets acquired is recognised in the consolidated balance sheet as goodwill or in the income statement as an excess over cost of acquisition, where appropriate.

3.2 IMPACT OF NEW AND REVISED HONG KONG FINANCIAL REPORTING STANDARDS

The Group has adopted the following new interpretations and amendments to HKFRSs for the first time for the current period’s financial statements:

HKAS 1 Amendment Capital Disclosures HKFRS 7 Financial Instruments: Disclosures HKAS 39 and HKFRS 7 Amendments to HKAS 39 Financial Instruments: Recognition and Amendments Measurement and HKFRS 7 Financial Instruments: Disclosures — Reclassification of Financial Assets HK(IFRIC)-Int 10 Interim Financial Reporting and Impairment HK(IFRIC)-Int 11 HKFRS 2 — Group and Treasury Share Transactions HK(IFRIC)-Int 12 Service Concession Arrangements HK(IFRIC)-Int 14 HKAS 19 — The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction

— 37 —

APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

Except for HK(IFRIC)-Int 12 giving rise to new and revised accounting policies and additional disclosures as further described below, the adoption of the other new standard, interpretations and amendments has had no significant financial effect on these financial statements.

HK(IFRIC)-Int 12 requires an operator under public-to-private service concession arrangements to recognise the consideration received or receivable in exchange for the construction services as a financial asset and/or an intangible asset, based on the terms of the contractual arrangements. HK(IFRIC)-Int 12 also addresses how an operator shall apply existing HKFRSs to account for the obligations and the rights arising from service concession arrangements by which a government or a public sector entity grants a contract for the construction of infrastructure used to provide public services and/or for the supply of public services.

HK(IFRIC)-Int 12 has been applied by the Group since the acquisition during the period ended 31 December 2008 of subsidiaries which are engaged in sewage and water treatment operations under service concession arrangements.

3.3 IMPACT OF ISSUED BUT NOT YET EFFECTIVE HONG KONG FINANCIAL REPORTING STANDARDS

The Group has not applied the following new and revised HKFRSs, that have been issued but are not yet effective, in these financial statements:

First-time Adoption of Hong Kong Financial Reporting Standards[[1]]

HKFRS 1 (Revised) First-time Adoption of Hong Kong Financial Reporting Standards[[1]] HKFRS 1 and HKAS 27 Amendments to HKFRS 1 First-time Adoption of HKFRSs and HKAS 27 Amendments Consolidated and Separate Financial Statements — Cost of an Investment in a Subsidiary, Jointly Controlled Entity or Associate[2] HKFRS 2 Amendments Amendments to HKFRS 2 Share-based Payment — Vesting Conditions and Cancellations[2] HKFRS 3 (Revised) Business Combinations[1] HKFRS 7 Amendments Amendments to HKFRS 7 Financial Instruments: Disclosures — Improving Disclosures about Financial Instruments[2] HKFRS 8 Operating Segments[2] HKAS 1 (Revised) Presentation of Financial Statements[2] HKAS 23 (Revised) Borrowing Costs[2] HKAS 27 (Revised) Consolidated and Separate Financial Statements[1] HKAS 32 and HKAS 1 Amendments Amendments to HKAS 32 Financial Instruments: Presentation and HKAS 1 Presentation of Financial Statements — Puttable Financial Instruments and Obligations Arising on Liquidation[2] HKAS 39 Amendment Amendment to HKAS 39 Financial Instruments: Recognition and Measurement — Eligible Hedged Items[1] HK(IFRIC)-Int 9 and HKAS 39 Amendments to HK(IFRIC)-Int 9 Reassessment of Embeddeds Derivatives and Amendments HKAS 39 Financial Instruments: Recognition and Measurement — Embedded Derivatives[3] HK(IFRIC)-Int 13 Customer Loyalty Programmes[3] HK(IFRIC)-Int 15 Agreements for the Construction of Real Estate[2] HK(IFRIC)-Int 16 Hedges of a Net Investment in a Foreign Operation[4] HK(IFRIC)-Int 17 Distribution of Non-cash Assets to Owners[1] HK(IFRIC)-Int 18 Transfers of Assets from Customers[5]

— 38 —

APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

1 Effective for annual periods beginning on or after 1 July 2009
2 Effective for annual periods beginning on or after 1 January 2009
3 Effective for annual periods beginning on or after 1 July 2008
4 Effective for annual periods beginning on or after 1 October 2008
5 Effective for transfers of assets from customers received on or after 1 July 2009

Further information about those changes that are relevant to the Group and are expected to significantly affect the Group is as follows:

The HKAS 27 Amendment requires all dividends from subsidiaries, jointly-controlled entities or associates to be recognised in the income statement in the separate financial statements. The amendment is applied prospectively only. The Group expects to adopt the HKAS 27 Amendment from 1 January 2009. The amendment has no impact on the consolidated financial statements.

HKFRS 3 (Revised) introduces a number of changes in the accounting for business combinations that will impact the amount of goodwill recognised, the reported results in the period that an acquisition occurs, and future reported results. HKAS 27 (Revised) requires that a change in the ownership interest of a subsidiary without loss of control is accounted for as an equity transaction. Therefore, such a change will have no impact on goodwill, nor will it give rise to a gain or loss. Furthermore, the revised HKAS 27 changes the accounting for losses incurred by the subsidiary as well as the loss of control of a subsidiary. Other consequential amendments were made to HKAS 7 Statement of Cash Flows , HKAS 12 Income Taxes , HKAS 21 The Effects of Changes in Foreign Exchange Rates , HKAS 28 Investments in Associates and HKAS 31 Interests in Joint Ventures . The Group expects to adopt HKFRS 3 (Revised) and HKAS 27 (Revised) from 1 January 2010. The changes introduced by these revised standards must be applied prospectively and will affect future acquisitions, loss of control and transactions with minority interests.

The amendments to HKFRS 7 are made to enhance disclosures about fair value measurement and liquidity risk, and do not have any financial impact on the Group.

HKFRS 8, which will replace HKAS 14 Segment Reporting , specifies how an entity should report information about its operating segments, based on information about the components of the entity that is available to the chief operating decision maker for the purposes of allocating resources to the segments and assessing their performance. The standard also requires the disclosure of information about the products and services provided by the segments, the geographical areas in which the Group operates, and revenue from the Group’s major customers. The Group expects to adopt HKFRS 8 from 1 January 2009.

HKAS 1 (Revised) introduces changes in the presentation and disclosures of financial statements. The revised standard separates owner and non-owner changes in equity. The statement of changes in equity will include only details of transactions with owners, with all non-owner changes in equity presented as a single line. In addition, this standard introduces the statement of comprehensive income, with all items of income and expense recognised in the income statement, together with all other items of recognised income and expense recognised directly in equity, either in one single statement, or in two linked statements. The Group expects to adopt HKAS 1 (Revised) from 1 January 2009.

HK(IFRIC)-Int 17 standardises practice in the accounting for non-reciprocal distributions of non-cash assets to owners. The Group expects to apply the interpretation from 1 January 2010 prospectively. The interpretation clarifies that (i) a dividend payable should be recognised when the dividend is appropriately authorised and is no longer at the discretion of the entity; (ii) an entity should measure the dividend payable at the fair value of the net assets to be distributed; and (iii) an entity should recognise the difference between the dividend paid and the carrying amount of the net assets distributed in the income statement. Other consequential amendments were made to HKAS 10 Events after the Balance Sheet Date and HKFRS 5 Non-current Assets Held for Sale and Discontinued Operations . While the adoption of the interpretation may result in changes in certain accounting policies, the interpretation is unlikely to have any material financial impact on the Group.

— 39 —

APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

Apart from the above, in October 2008, the HKICPA has also issued its first Improvements to HKFRSs * which sets out amendments to a number of HKFRSs primarily with a view to removing inconsistencies and clarifying wording. Except for the amendment to HKFRS 5 which is effective for annual periods on or after 1 July 2009, the amendments are effective for annual periods beginning on or after 1 January 2009 although there are separate transitional provisions for each standard.

Improvements to HKFRSs contains amendments to HKFRS 5, HKFRS 7, HKAS 1, HKAS 8, HKAS 10, HKAS 16, HKAS 18, HKAS 19, HKAS 20, HKAS 23, HKAS 27, HKAS 28, HKAS 29, HKAS 31, HKAS 34, HKAS 36, HKAS 38, HKAS 39, HKAS 40 and HKAS 41.

Those amendments that are expected to have a significant impact on the Group are as follows:

(a) HKFRS 7 Financial Instruments: Disclosures : Removes the reference to “total interest income” as a component of finance costs.
(b) HKAS 1 Presentation of Financial Statements : Clarifies that assets and liabilities which are classified as held for trading in accordance with HKAS 39 are not automatically classified as current in the balance sheet.
(c) HKAS 16 Property, Plant and Equipment : Replaces the term “net selling price” with “fair value less costs to sell” and the recoverable amount of property, plant and equipment is calculated as the higher of an asset’s fair value less costs to sell and its value in use.

In addition, items held for rental that are routinely sold in the ordinary course of business after rental, are transferred to inventories when rental ceases and they are held for sale.

(d) HKAS 20 Accounting for Government Grants and Disclosure of Government Assistance : Requires government loans granted in the future with no or at a below-market rate of interest to be recognised and measured in accordance with HKAS 39 and the benefit of the reduced interest to be accounted for as a government grant.
(e) HKAS 28 Investments in Associates : Clarifies that an investment in an associate is a single asset for the purpose of conducting the impairment test and that no impairment is separately allocated to goodwill included in the investment balance.
(f) HKAS 36 Impairment of Assets : When discounted cash flows are used to estimate “fair value less costs to sell”, additional disclosure is required about the discount rate, consistent with the disclosures required when the discounted cash flows are used to estimate “value in use”.
(g) HKAS 38 Intangible Assets : Expenditure on advertising and promotional activities is recognised as an expense when the Group either has the right to access the goods or has received the service.

The reference to there being rarely, if ever, persuasive evidence to support an amortisation method of intangible assets other than a straight-line method has been removed.

3.4 SUMMARY OF SIGNICIANT ACCOUNTING POLICIES

Subsidiaries

A subsidiary is an entity whose financial and operating policies the Company controls, directly or indirectly, so as to obtain benefits from its activities.

The results of subsidiaries are included in the Company’s income statement to the extent of dividends received and receivable. The Company’s interests in subsidiaries are stated at cost less any accumulated impairment losses.

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FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

Joint ventures

A joint venture is an entity set up by contractual arrangement, whereby the Group and other parties undertake an economic activity. The joint venture operates as a separate entity in which the Group and the other parties have an interest.

The joint venture agreement between the venturers stipulates the capital contributions of the joint venture parties, the duration of the joint venture and the basis on which the assets are to be realised upon its dissolution. The profits and losses from the joint venture’s operations and any distributions of surplus assets are shared by the venturers, either in proportion to their respective capital contributions, or in accordance with the terms of the joint venture agreement.

A joint venture is treated as:

(a) a subsidiary, if the Group has unilateral control, directly or indirectly, over the joint venture;
(b) a jointly-controlled entity, if the Group does not have unilateral control, but has joint control, directly or indirectly, over the joint venture;
(c) an associate, if the Group does not have unilateral or joint control, but holds, directly or indirectly, generally not less than 20% of the joint venture’s registered capital and is in a position to exercise significant influence over the joint venture; or
(d) an equity investment accounted for in accordance with HKAS 39, if the Group holds, directly or indirectly, less than 20% of the joint venture’s registered capital and has neither joint control of, nor is in a position to exercise significant influence over, the joint venture.

Associate

An associate is an entity, not being a subsidiary or a jointly-controlled entity, in which the Group has a long term interest of generally not less than 20% of the equity voting rights and over which it is in a position to exercise significant influence.

The Group’s interest in an associate is stated in the consolidated balance sheet at the Group’s share of net assets under the equity method of accounting, less any accumulated impairment losses. The Group’s share of the post-acquisition results and reserves of the associate is included in the consolidated income statement and consolidated reserves, respectively. Unrealised gains and losses resulting from transactions between the Group and its associate are eliminated to the extent of the Group’s interest in the associate, except where unrealised losses provide evidence of an impairment of the asset transferred. Adjustments are made to bring into line any dissimilar accounting policies that may exist.

Related parties

A party is considered to be related to the Group if:

(a) the party, directly or indirectly through one or more intermediaries, (i) controls, is controlled by, or is under common control with, the Group; (ii) has an interest in the Group that gives it significant influence over the Group; or (iii) has joint control over the Group;
(b) the party is an associate;
(c) the party is a member of the key management personnel of the Group or its holding companies;

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APPENDIX I

(d) the party is a close member of the family of any individual referred to in (a) or (c); or
(e) the party is an entity that is controlled, jointly controlled or significantly influenced by or for which significant voting power in such entity resides with, directly or indirectly, any individual referred to in (c) or (d).

Goodwill

Goodwill arising on the acquisition of subsidiaries represents the excess of the cost of the business combination over the Group’s interest in the net fair value of the acquirees’ identifiable assets acquired, and liabilities and contingent liabilities assumed as at the date of acquisition.

Goodwill arising on acquisition is recognised in the consolidated balance sheet as an asset, initially measured at cost and subsequently at cost less any accumulated impairment losses.

The carrying amount of goodwill is reviewed for impairment annually or more frequently if events or changes in circumstances indicate that the carrying value may be impaired. The Group performs its annual impairment test of goodwill as at 31 December. For the purpose of impairment testing, goodwill acquired in a business combination is, from the acquisition date, allocated to each of the Group’s cash-generating units, or groups of cash-generating units, that are expected to benefit from the synergies of the combination, irrespective of whether other assets or liabilities of the Group are assigned to those units or groups of units.

Impairment is determined by assessing the recoverable amount of the cash-generating unit (group of cashgenerating units) to which the goodwill relates. Where the recoverable amount of the cash-generating unit (group of cash-generating units) is less than the carrying amount, an impairment loss is recognised. An impairment loss recognised for goodwill is not reversed in a subsequent period.

Where goodwill forms part of a cash-generating unit (group of cash-generating units) and part of the operation within that unit is disposed of, the goodwill associated with the operation disposed of is included in the carrying amount of the operation when determining the gain or loss on disposal of the operation. Goodwill disposed of in this circumstance is measured based on the relative values of the operation disposed of and the portion of the cash-generating unit retained.

Equipment and depreciation

Equipment is stated at cost less accumulated depreciation and any accumulated impairment losses.

The cost of an item of equipment comprises its purchase price and any directly attributable costs of bringing the asset to its working condition and location for its intended use. Expenditure incurred after items of equipment have been put into operation, such as repairs and maintenance, is normally charged to the income statement in the period in which it is incurred. In situations where it can be clearly demonstrated that the expenditure has resulted in an increase in the future economic benefits expected to be obtained from the use of an item of equipment, and where the cost of the item can be measured reliably, the expenditure is capitalised as an additional cost of that asset or as a replacement.

Depreciation is calculated on the straight-line basis to write off the cost of each item of equipment to its estimated residual value over its estimated useful life. The estimated useful lives of different categories of equipment are as follows:

Office equipment 5 years Motor vehicles 3 to 6 years Leasehold improvements Over the lease terms or 5 years, whichever is shorter

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FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

Where parts of an item of equipment have different useful lives, the cost of that item is allocated on a reasonable basis among the parts and each part is depreciated separately.

Residual values, useful lives and the depreciation method are reviewed, and adjusted if appropriate, at least at each balance sheet date.

An item of equipment is derecognised upon disposal or when no future economic benefits are expected from its use or disposal. Any gain or loss on disposal or retirement recognised in the income statement in the period the asset is derecognised is the difference between the net sales proceeds and the carrying amount of the relevant asset.

Operating leases

Leases where substantially all the rewards and risks of ownership of assets remain with the lessor are accounted for as operating leases. Where the Group is the lessor, rentals receivable under the operating leases are credited to the income statement on the straight-line basis over the lease terms. Where the Group is the lessee, rentals payable under the operating leases are charged to the income statement on the straight-line basis over the lease terms.

Service concession arrangements

Consideration given by the grantor

A financial asset (loan and receivable) is recognised to the extent that (a) the Group has an unconditional right to receive cash or another financial asset from or at the direction of the grantor for the construction services rendered and/or the consideration paid and payable by the Group for the right to charge users of the public service; and (b) the grantor has little, if any, discretion to avoid payment, usually because the agreement is enforceable by law. The Group has an unconditional right to receive cash if the grantor contractually guarantees to pay the Group (a) specified or determinable amounts or (b) the shortfall, if any, between amount received from users of the public services and specified or determinable amounts, even if the payment is contingent on the Group ensuring that the infrastructure to be constructed meets specified quality of efficiency requirements. The financial asset (loan and receivable) is accounted for in accordance with the policy set out for “Investments and other financial assets” below.

An intangible asset (operating concession) is recognised to the extent that the Group receives a right to charge users of the public service, which is not an unconditional right to receive cash because the amounts are contingent on the extent that the public uses the service. The intangible asset (operating concession) is accounted for in accordance with the policy set out for “Intangible assets (other than goodwill)” below.

If the Group is paid partly by a financial asset and partly by an intangible asset, in which case, each component of the consideration is accounted for separately and the consideration received or receivable for both components shall be recognised initially at the fair value of the consideration received or receivable.

Construction or upgrade services

Revenue and costs relating to construction or upgrade services are accounted for in accordance with the policy set out for “Construction contracts” below.

Operating services

Revenue and costs relating to operating services are accounted for in accordance with the policy for “Revenue recognition” below.

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FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

Contractual obligations to restore the infrastructure to a specified level of serviceability

The Group has contractual obligations which it must fulfill as a condition of its licence, that is (a) to maintain the sewage and water treatment plants it operates to a specified level of serviceability and/or (b) to restore the plants to a specified condition before they are handed over to the grantor at the end of the service concession arrangement. These contractual obligations to maintain or restore the sewage and water treatment plants, except for upgrade element, are recognised and measured in accordance with the policy set out for “Provisions” below.

Intangible assets (other than goodwill)

The useful lives of intangible assets are assessed to be either finite or indefinite. Intangible assets with finite lives are amortised over the useful economic life and assessed for impairment whenever there is an indication that the intangible asset may be impaired. The amortisation period and the amortisation method for an intangible asset with a finite useful life are reviewed at least at each balance sheet date.

Intangible assets with indefinite useful lives are tested for impairment annually either individually or at the cash-generating unit level. Such intangible assets are not amortised. The useful life of an intangible asset with an indefinite life is reviewed annually to determine whether indefinite life assessment continues to be supportable. If not, the change in the useful life assessment from indefinite to finite is accounted for on a prospective basis.

An intangible asset is derecognised on disposal or when no future economic benefits are expected from its use or disposal. Any gain or loss on disposal or retirement recognised in the income statement in the period the intangible asset is derecognised is the difference between the net sales proceeds and the carrying amount of the relevant intangible asset.

Operating concessions

Operating concessions represent the rights to operate sewage and water treatment plants and are stated at cost less accumulated amortisation and any accumulated impairment losses. Amortisation is provided on the straight-line basis over the respective periods of the operating concessions granted to the Group of 20 to 40 years.

Patents

Purchased patents are stated at cost less accumulated amortisation and any accumulated impairment losses. Amortisation is provided on the straight-line basis over their estimated useful lives of 10 years.

Computer software

Computer software is stated at cost less accumulated amortisation and any accumulated impairment losses. Amortisation is provided on the straight-line basis over the estimated useful life of 5 years.

Research and development costs

All research costs are charged to the income statement as incurred.

Expenditure incurred on projects to develop new products is capitalised and deferred only when the Group can demonstrate the technical feasibility of completing the intangible asset so that it will be available for use or sale, its intention to complete and its ability to use or sell the asset, how the asset will generate future economic benefits, the availability of resources to complete the project and the ability to measure reliably the expenditure during the development. Product development expenditure which does not meet these criteria is expensed when incurred.

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FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

Impairment of non-financial assets other than goodwill

Where an indication of impairment exists, or when annual impairment testing for an asset is required (other than goodwill and financial assets), the asset’s recoverable amount is estimated. An asset’s recoverable amount is the higher of the asset’s or cash-generating unit’s value in use and its fair value less costs to sell, and is determined for an individual asset, unless the asset does not generate cash inflows that are largely independent of those from other assets or groups of assets, in which case the recoverable amount is determined for the cash-generating unit to which the asset belongs.

An impairment loss is recognised only if the carrying amount of an asset exceeds its recoverable amount. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. An impairment loss is charged to the income statement in the period in which it arises.

An assessment is made at each reporting date as to whether there is any indication that previously recognised impairment losses may no longer exist or may have decreased. If such an indication exists, the recoverable amount is estimated. A previously recognised impairment loss of a non-financial asset other than goodwill is reversed only if there has been a change in the estimates used to determine the recoverable amount of that asset, but not to an amount higher than the carrying amount that would have been determined (net of any depreciation/amortisation) had no impairment loss been recognised for the asset in prior periods. A reversal of such an impairment loss is credited to the income statement in the period in which it arises.

Investments and other financial assets

Financial assets in the scope of HKAS 39 are classified as financial assets at fair value through profit or loss, loans and receivables and an available-for-sale investment, as appropriate. When financial assets are recognised initially, they are measured at fair value, plus, in the case of investments not at fair value through profit or loss, directly attributable transaction costs. The Group determines the classification of its financial assets after initial recognition and, where allowed and appropriate, re-evaluates this designation at the balance sheet date.

All regular way purchases and sales of financial assets are recognised on the trade date, that is, the date that the Group commits to purchase or sell the asset. Regular way purchases or sales are purchases or sales of financial assets that require delivery of assets within the period generally established by regulation or convention in the marketplace.

Financial assets at fair value through profit or loss

Financial assets at fair value through profit or loss are financial assets held for trading. Financial assets are classified as held for trading if they are acquired for the purpose of sale in the near term. Gains or losses on investments held for trading are recognised in the income statement. The net fair value gain or loss recognised in the income statement does not include any dividends on these financial assets, which are recognised in accordance with the policy set out for “Revenue recognition” below.

Loans and receivables

Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. Such assets are subsequently carried at amortised cost using the effective interest method less any allowance for impairment. Amortised cost is calculated taking into account any discount or premium on acquisition and includes fees that are an integral part of the effective interest rate and transaction costs. Gains and losses are recognised in the income statement when the loans and receivables are derecognised or impaired, as well as through the amortisation process.

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FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

Available-for-sale investment

Available-for-sale investment is a non-derivative financial asset in an unlisted entity that is designated as available for sale. After initial recognition, the available-for-sale investment is stated at cost less any accumulated impairment losses as the fair value of the equity interest in the unlisted entity cannot be reliably measured, which is because (a) the variability in the range of reasonable fair value estimates is significant for that investment or (b) the probabilities of the various estimates within the range cannot be reasonably assessed and used in estimating fair value.

Fair value

The fair value of investments that are actively traded in organised financial markets is determined by reference to quoted market bid prices at the close of business at the balance sheet date.

Impairment of financial assets

The Group assesses at each balance sheet date whether there is any objective evidence that a financial asset or a group of financial assets is impaired.

Assets carried at amortised cost

If there is objective evidence that an impairment loss on loans and receivables carried at amortised cost has been incurred, the amount of the loss is measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows (excluding future credit losses that have not been incurred) discounted at the financial asset’s original effective interest rate (i.e., the effective interest rate computed at initial recognition). The carrying amount of the asset is reduced either directly or through the use of an allowance account. The amount of the impairment loss is recognised in the income statement. Loans and receivables together with any associated allowance are written off when there is no realistic prospect of future recovery and all collateral has been realised or has been transferred to the Group.

If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognised, the previously recognised impairment loss is reversed by adjusting the allowance account. Any subsequent reversal of an impairment loss is recognised in the income statement, to the extent that the carrying value of the asset does not exceed its amortised cost at the reversal date.

In relation to trade receivables and other receivables, a provision for impairment is made when there is objective evidence (such as the probability of insolvency or significant financial difficulties of the debtor and significant changes in the technological, market, economic or legal environment that have an adverse effect on the debtor) that the Group will not be able to collect all of the amounts due. The carrying amount of the receivables is reduced through the use of an allowance account. Impaired debts are derecognised when they are assessed as uncollectible.

Available-for-sale investment carried at cost

If there is objective evidence that an impairment loss has been incurred on an unquoted equity investment that is not carried at fair value because its fair value cannot be reliably measured, the amount of the loss is measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows discounted at the current market rate of return for a similar financial asset. Impairment losses on this asset are not reversed.

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FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

Derecognition of financial assets

A financial asset (or, where applicable, a part of a financial asset or part of a group of similar financial assets) is derecognised where:

the rights to receive cash flows from the asset have expired;
the Group retains the rights to receive cash flows from the asset, but has assumed an obligation to pay them in full without material delay to a third party under a “pass-through” arrangement; or
the Group has transferred its rights to receive cash flows from the asset and either (a) has transferred substantially all the risks and rewards of the asset, or (b) has neither transferred nor retained substantially all the risks and rewards of the asset, but has transferred control of the asset.

Where the Group has transferred its rights to receive cash flows from an asset and has neither transferred nor retained substantially all the risks and rewards of the asset nor transferred control of the asset, the asset is recognised to the extent of the Group’s continuing involvement in the asset. Continuing involvement that takes the form of a guarantee over the transferred asset is measured at the lower of the original carrying amount of the asset and the maximum amount of consideration that the Group could be required to repay.

Where continuing involvement takes the form of a written and/or purchased option (including a cash-settled option or similar provision) on the transferred asset, the extent of the Group’s continuing involvement is the amount of the transferred asset that the Group may repurchase, except in the case of a written put option (including a cash-settled option or similar provision) on an asset measured at fair value, where the extent of the Group’s continuing involvement is limited to the lower of the fair value of the transferred asset and the option exercise price.

Financial liabilities at amortised cost

Financial liabilities including trade payables, other payables and accruals, bank and other borrowings and a finance lease payable are initially stated at fair value less directly attributable transaction costs and are subsequently measured at amortised cost, using the effective interest method unless the effect of discounting would be immaterial, in which case they are stated at cost. The related interest expense is recognised within “Finance costs” in the income statement.

Gains and losses are recognised in the income statement when the liabilities are derecognised as well as through the amortisation process.

Financial guarantee contracts

Financial guarantee contracts in the scope of HKAS 39 are accounted for as financial liabilities. A financial guarantee contract is recognised initially at its fair value less transaction costs that are directly attributable to the acquisition or issue of the financial guarantee contract, except when such contract is recognised at fair value through profit or loss. Subsequent to initial recognition, the Group measures the financial guarantee contract at the higher of (i) the amount of best estimate of the expenditure required to settle the present obligation at the balance sheet date and (ii) the amount initially recognised less, when appropriate, cumulative amortisation recognised in accordance with HKAS 18 Revenue .

Convertible bonds

The component of convertible bonds that exhibits characteristics of a liability is recognised as a liability in the balance sheet, net of transaction costs. On issuance of convertible bonds, the fair value of the liability component is

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FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

determined using a market rate for an equivalent non-convertible bond; and this amount is carried as a non-current liability on the amortised cost basis until extinguished on conversion or redemption. The remainder of the proceeds is allocated to the conversion option that is recognised and included in the convertible bond equity reserve, net of transaction costs. The carrying amount of the conversion option is not remeasured in subsequent years.

Transaction costs are apportioned between the liability and equity components of the convertible bonds based on the allocation of proceeds to the liability and equity components when the instruments are initially recognised.

Upon the exercise of the conversion options, the resulting shares issued are recorded by the Company as additional share capital at the nominal value of the shares issued, and the excess of the total carrying amount of the liability and equity components of the convertible bonds over the nominal value of the shares issued is recorded in the share premium account. When convertible bonds are redeemed, any difference between the amount paid and the carrying amount of the liability component is recognised in the income statement and that of the equity component is transferred to retained profits as a movement in reserves. Where the conversion option remains unexercised at the expiry date, any remaining balance of the equity component of the convertible bonds will be transferred to retained profits as a movement in reserves. No gain or loss is recognised in the income statement upon conversion or expiration of the conversion option.

Derecognition of financial liabilities

A financial liability is derecognised when the obligation under the liability is discharged or cancelled, or expires.

When an existing financial liability is replaced by another from the same lender on substantially different terms, or the terms of an existing liability are substantially modified, such an exchange or modification is treated as a derecognition of the original liability and a recognition of a new liability, and the difference between the respective carrying amounts is recognised in the income statement.

Inventories

Inventories are stated at the lower of cost and net realisable value. Cost is determined on the weighted average basis. Net realisable value is based on the estimated selling prices less any estimated costs to be incurred to completion and disposal.

Construction contracts

Contract costs incurred comprise direct materials, the costs of subcontracting, direct labour and an appropriate proportion of variable and fixed construction overheads.

Revenue from the construction of a sewage treatment plant under the terms of a service concession agreement is estimated on a cost-plus basis with reference to a prevailing market rate of gross margin at the date of the agreement applicable to similar construction services rendered in similar location, and is recognised on the percentage-of-completion method, measured by reference to the proportion of costs incurred to date to the estimated total cost of the relevant contract.

Provision is made for foreseeable losses as soon as they are anticipated by management.

Where contract costs incurred to date plus recognised profits less recognised losses exceed progress billings, the surplus is treated as an amount due from contract customers.

Where progress billings exceed contract costs incurred to date plus recognised profits less recognised losses, the surplus is treated as an amount due to contract customers.

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FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

Contracts for services

Contract revenue on the rendering of services comprises the agreed contract amount. Costs of rendering services comprise labour and other costs of personnel directly engaged in providing the services and attributable overheads.

Revenue from the rendering of services is recognised based on the percentage of completion of the transaction, provided that the revenue, the costs incurred and the estimated costs to completion can be measured reliably. The percentage of completion is established by reference to the costs incurred to date as compared to the total costs to be incurred under the transaction. Where the outcome of a contract cannot be measured reliably, revenue is recognised only to the extent that the expenses incurred are eligible to be recovered.

Provision is made for foreseeable losses as soon as they are anticipated by management.

Where contract costs incurred to date plus recognised profits less recognised losses exceed progress billings, the surplus is treated as an amount due from contract customers.

Where progress billings exceed contract costs incurred to date plus recognised profits less recognised losses, the surplus is treated as an amount due to contract customers.

Cash and cash equivalents

For the purpose of the consolidated cash flow statement, cash and cash equivalents comprise cash on hand and demand deposits, and short term highly liquid investments that are readily convertible into known amounts of cash, are subject to an insignificant risk of changes in value, and have a short maturity of generally within three months when acquired, less bank overdrafts which are repayable on demand and form an integral part of the Group’s cash management.

For the purpose of the balance sheets, cash and cash equivalents comprise cash on hand and at banks, including term deposits, and assets similar in nature to cash, which are not restricted as to use.

Provisions

A provision is recognised when a present obligation (legal or constructive) has arisen as a result of a past event and it is probable that a future outflow of resources will be required to settle the obligation, provided that a reliable estimate can be made of the amount of the obligation.

When the effect of discounting is material, the amount recognised for a provision is the present value at the balance sheet date of the future expenditures expected to be required to settle the obligation. The increase in the discounted present value amount arising from the passage of time is included in “Finance costs” in the income statement.

Income tax

Income tax comprises current and deferred tax. Income tax is recognised in the income statement, or in equity if it relates to items that are recognised in the same or a different period directly in equity.

Current tax assets and liabilities for the current and prior periods are measured at the amount expected to be recovered from or paid to the taxation authorities.

Deferred tax is provided, using the liability method, on all temporary differences at the balance sheet date between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes.

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FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

Deferred tax liabilities are recognised for all taxable temporary differences, except:

where the deferred tax liability arises from goodwill or the initial recognition of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss; and
in respect of taxable temporary differences associated with investments in subsidiaries and an associate, where the timing of the reversal of the temporary differences can be controlled and it is probable that the temporary differences will not reverse in the foreseeable future.

Deferred tax assets are recognised for all deductible temporary differences, carryforward of unused tax credits and unused tax losses, to the extent that it is probable that taxable profit will be available against which the deductible temporary differences, and the carryforward of unused tax credits and unused tax losses can be utilised, except:

where the deferred tax asset relating to the deductible temporary differences arises from the initial recognition of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss; and
in respect of deductible temporary differences associated with investments in subsidiaries and an associate, deferred tax assets are only recognised to the extent that it is probable that the temporary differences will reverse in the foreseeable future and taxable profit will be available against which the temporary differences can be utilised.

The carrying amount of deferred tax assets is reviewed at each balance sheet date and reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the deferred tax asset to be utilised. Conversely, previously unrecognised deferred tax assets are reassessed at each balance sheet date and are recognised to the extent that it is probable that sufficient taxable profit will be available to allow all or part of the deferred tax asset to be utilised.

Deferred tax assets and liabilities are measured at the tax rates that are expected to apply to the period when the asset is realised or the liability is settled, based on tax rates (and tax laws) that have been enacted or substantively enacted at the balance sheet date.

Deferred tax assets and deferred tax liabilities are offset if a legally enforceable right exists to set off current tax assets against current tax liabilities and the deferred taxes relate to the same taxable entity and the same taxation authority.

Government grants

Government grants are recognised at their fair value where there is reasonable assurance that the grant will be received and all attaching conditions will be complied with. When the grant relates to an expense item, it is recognised as income over the periods necessary to match the grant on a systematic basis to the costs that it is intended to compensate. Where the grant relates to an asset, the fair value is credited to a deferred income account and is released to the income statement over the expected useful life of the relevant asset by equal annual instalments.

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FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

Revenue recognition

Revenue is recognised when it is probable that the economic benefits will flow to the Group and when the revenue can be measured reliably, on the following bases:

(a) from construction contracts, on the percentage-of-completion basis, as further explained in the accounting policy for “Construction contracts” above;
(b) from the rendering of services, on the percentage-of-completion basis, as further explained in the accounting policy for “Contracts for services” above;
(c) from licensing of technical know-how, when the related technique has been delivered and accepted;
(d) from the sale of goods, when the significant risks and rewards of ownership have been transferred to the buyer, provided that the Group maintains neither managerial involvement to the degree usually associated with ownership, nor effective control over the goods sold;
(e) rental income, on a time proportion basis over the lease terms;
(f) interest income, on an accrual basis using the effective interest method by applying the rate that discounts the estimated future cash receipts through the expected life of the financial instrument to the net carrying amount of the financial asset;
(g) from the trading of listed investments, on the trade dates; and
(h) dividend income, when the right to receive payment has been established.

Employee benefits — Pension schemes

The Group has joined a number of defined contribution pension schemes organised by certain PRC provincial or municipal governments for certain of its employees, the assets of which are held separately from those of the Group. Contributions made are based on a percentage of the eligible employees’ salaries and are charged to the income statement as they become payable, in accordance with the rules of the pension schemes. The employer contributions vest fully once made.

For those employees that have not yet joined a pension scheme, the Group has accrued for the estimated future pension costs based on a percentage of their salaries. The related assets for the purpose of discharging such liabilities are not separately held from those of the Group.

The Group also operates a defined contribution Mandatory Provident Fund retirement benefits scheme in Hong Kong (the “MPF Scheme”) under the Hong Kong Mandatory Provident Fund Schemes Ordinance, for those employees who are eligible to participate in the MPF Scheme. Contributions are made based on a percentage of the employees’ basic salaries and are charged to the income statement as they become payable in accordance with the rules of the MPF Scheme. The assets of the MPF Scheme are held separately from those of the Group in an independently administered fund. The Group’s employer contributions vest fully with the employees when contributed into the MPF Scheme.

Borrowing costs

Borrowing costs directly attributable to the acquisition, construction or production of qualifying assets, i.e., assets that necessarily take a substantial period of time to get ready for their intended use or sale, are capitalised as part of the cost of those assets. The capitalisation of such borrowing costs ceases when the assets are substantially ready for their intended use or sale. Investment income earned on the temporary investment of specific borrowings pending their expenditure on qualifying assets is deducted from the borrowing costs capitalised.

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FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

Other borrowing costs are recognised as expenses in the income statement in the period in which they are incurred.

Foreign currencies

These financial statements are presented in Hong Kong dollar, which is the Company’s functional and presentation currency. Each entity in the Group determines its own functional currency and items included in the financial statements of each entity are measured using that functional currency. Foreign currency transactions are initially recorded using the functional currency rates ruling at the dates of the transactions. Monetary assets and liabilities denominated in foreign currencies are retranslated at the functional currency rates of exchange ruling at the balance sheet date. All differences are taken to the income statement. Non- monetary items that are measured in terms of historical cost in a foreign currency are translated using the exchange rates at the dates of the initial transactions. Non-monetary items measured at fair value in a foreign currency are translated using the exchange rates at the date when the fair value was determined.

The functional currency of the subsidiaries and the associate established in Mainland China are Renminbi (“RMB”). As at the balance sheet date, the assets and liabilities of these entities are translated into the presentation currency of the Company at the exchange rate ruling at the balance sheet date and their income statements are translated into Hong Kong dollars at the weighted average exchange rate for the period. The resulting exchange differences are included in the exchange fluctuation reserve. On disposal of a foreign entity, the deferred cumulative amount recognised in the exchange fluctuation reserve relating to that particular foreign operation is recognised in the income statement.

For the purpose of the consolidated cash flow statement, the cash flows of the subsidiaries established in Mainland China are translated into Hong Kong dollars at the exchange rates ruling at the dates of the cash flows. Frequently recurring cash flows of these subsidiaries which arise throughout the period are translated into Hong Kong dollars at the weighted average exchange rate for the period.

4. SIGNIFICANT ACCOUNTING JUDGEMENTS AND ESTIMATES

The preparation of the Group’s financial statements requires management to make judgements, estimates and assumptions that affect the reported amounts of revenues, expenses, assets and liabilities, and the disclosure of contingent liabilities, at the reporting date. However, uncertainty about these assumptions and estimates could result in outcomes that could require a material adjustment to the carrying amounts of the assets or liabilities affected in the future.

The major judgements, estimations and assumptions that have the most significant effect on the amounts recognised in the financial statements and have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are set out below:

Classification between operating concessions and trade receivables

As explained in note 3.4 to the financial statements, if the Group is paid for the construction services partly by a financial asset and partly by an intangible asset, it is necessary to account separately for each component of the operator’s consideration. The consideration received or receivable for both components shall be recognised initially at the fair value of the consideration received or receivable.

The segregation of the consideration for a service concession arrangement between the financial asset component and the intangible asset component, if any, requires the Group to make an estimate of a number of factors, which include, inter alia, expected future sewage treatment volume of the relevant sewage treatment plant over its service concession period, future guaranteed receipts and unguaranteed receipts, and also to choose a suitable discount rate in order to calculate the present value of those cash flows. The carrying amounts of the operating concessions and trade receivables carried as assets in the consolidated balance sheet as at 31 December 2008 were HK$429,589,000 (30 June 2007: Nil) and HK$1,382,685,000 (30 June 2007: Nil), respectively. Further details of which are set out in notes 17 and 24 to the financial statements, respectively.

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FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

Determination of fair value of contract revenue in respect of the construction services rendered

Revenue from the construction of a sewage treatment plant under the terms of a service concession agreement is estimated on a cost-plus basis with reference to a prevailing market rate of gross margin at the date of agreement applicable to similar construction services rendered in similar location, and is recognised on the percentage-of-completion method, measured by reference to the proportion of costs incurred to date to the estimated total cost of the relevant contract.

The construction margin is determined from the gross profit margins of market comparables by identifying relevant peer groups, which are listed in various stock exchanges in the world. Criteria for selection included:

(i) the peer firm must be doing business on construction of infrastructure, majoring in sewage treatment facilities in the PRC; and
(ii) information of the peer firm must be available and from a reliable source.

Percentage of completion of construction work and service contracts

The Group recognises revenue for construction work and service contracts according to the percentage of completion of the individual contract of construction or service work. The Group’s management estimates the percentage of completion of construction and service work based on the actual cost incurred over the total budgeted cost, where corresponding contract revenue is also estimated by management. Because of the nature of the activity undertaken in construction and service contracts, the date at which the activity is entered into and the date when the activity is completed usually fall into different accounting periods. The Group reviews and revises the estimates of both contract revenue and contract costs in the budget prepared for each construction contract and service contract as the contract progresses.

Provision for major overhauls of sewage and water treatment plants to a specified level of serviceability

The Group has contractual obligations which it must fulfill as a condition of its licence and that is (a) to maintain the sewage and water treatment plants it operates to a specified level of serviceability and/or (b) to restore the plants to a specified condition before they are handed over to the grantor at the end of the service concession arrangement. These contractual obligations to maintain or restore infrastructures, except for any upgrade element, are recognised and measured in accordance with HKAS 37 Provisions, Contingent Liabilities and Contingent Assets, i.e., at the best estimate of the expenditure that would be required to settle the present obligation at the balance sheet date. The estimation of the expenditure requires the Group to estimate the expected future cash outlays on major overhauls of the sewage and water treatment plants over the service concession periods and also to choose a suitable discount rate in order to calculate the present value of those cash flows. The carrying amount of the provision for major overhauls carried as a liability in the consolidated balance sheet as at 31 December 2008 was HK$69,006,000 (30 June 2007: Nil), further details of which are set out in note 34 to the financial statements.

Useful lives and residual values of equipment and intangible assets (other than goodwill)

The Group’s management determines the residual values, useful lives and related depreciation/amortisation charges for the Group’s equipment and intangible assets. This estimate is based on the historical experience of the actual residual values and useful lives of equipment and intangible assets of similar nature and functions. It could change significantly as a result of technical innovations and competitor actions in response to severe industry cycles. Management will increase the depreciation/amortisation charges where residual values or useful lives are less than previously estimated, or it will write off or write down technically obsolete or non- strategic assets that have been abandoned or sold. Actual economic lives may differ from estimated useful lives. Periodic review could result in a change

— 53 —

APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

in depreciable/amortisable lives and therefore depreciation/ amortisation in the future periods. The carrying amounts of equipment and intangible assets (other than goodwill) carried as assets in the consolidated balance sheet as at 31 December 2008 were HK$13,414,000 (30 June 2007: HK$71,000) and HK$431,245,000 (30 June 2007: Nil), respectively, further details of which are set out in notes 15, 17 and 18 to the financial statements.

Impairment of goodwill

The Group determines whether goodwill is impaired at least on an annual basis. This requires an estimation of the value in use of the cash-generating units to which the goodwill is allocated. Estimating the value in use requires the Group to make an estimate of the expected future cash flows from the cash-generating units and also to choose a suitable discount rate in order to calculate the present value of those cash flows. The carrying amount of goodwill in aggregate carried as an asset in the consolidated balance sheet as at 31 December 2008 was HK$1,466,915,000 (30 June 2007: Nil), details of which are set out in note 16 to the financial statements.

Impairment of equipment and intangible assets (other than goodwill)

The carrying amounts of items of equipment and intangible assets are reviewed for impairment when eventsor changes in circumstances indicate the carrying amounts may not be recoverable in accordance with the accounting policy as disclosed in note 3.4 to these financial statements. The recoverable amount is the higher of its fair value less costs to sell and value in use, and calculations of which involve the use of estimates. In estimating the recoverable amounts of assets, various assumptions, including future cash flows to be associated with the non-current assets and discount rates, are made. If future events do not correspond to such assumptions, the recoverable amounts will need to be revised, and this may have an impact on the Group’s results of operations or financial position.

Impairment of trade receivables and other receivables

The policy for provision for impairment of trade receivables and other receivables of the Group is based on the evaluation of collectibility and ageing analysis of accounts and on management’s estimation. A considerable amount of estimation is required in assessing the ultimate realisation of these receivables, including the current creditworthiness and the past collection history of each debtor. If the financial conditions of debtors were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. The carrying amounts of trade receivables and other receivables carried as assets in the consolidated balance sheet as at 31 December 2008 were HK$1,382,685,000 (30 June 2007: HK$2,104,000) and HK$421,423,000 (30 June 2007: HK$147,000), respectively, further details of which are set out in notes 24 and 25 to the financial statements.

Current tax and deferred tax

The Group is subject to income taxes in Hong Kong and Mainland China. The Group carefully evaluates tax implications of its transactions in accordance with prevailing tax regulations and makes tax provision accordingly. However, judgement is required in determining the Group’s provision for income taxes as there are many transactions and calculations of which the ultimate tax determination is uncertain during the ordinary course of business. Where the final tax outcome of these matters is different from the amounts that were initially recorded, such differences will impact on the income tax and deferred tax provision in the periods in which such determination is made. The carrying amount of income tax payable carried as liabilities in the consolidated balance sheet as at 31 December 2008 was HK$17,328,000 (30 June 2007: Nil).

Deferred tax assets relating to certain temporary differences and tax losses are not recognised as management considered these losses were arisen in subsidiaries that have been loss-making for some time and it is not considered probable that taxable profits will be available against which the tax losses can be utilised. Where the expectations are different from the original estimates, such differences will impact the recognition of deferred tax assets and deferred tax

— 54 —

APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

in the periods in which such estimates have been changed. The carrying amount of deferred tax assets and liabilities carried as assets and liabilities in the consolidated balance sheet as at 31 December 2008 were HK$27,112,000 (30 June 2007: Nil) and HK$59,707,000 (30 June 2007: Nil), respectively, details of which are set out in note 36 to the financial statements.

5. SERVICE CONCESSION ARRANGEMENTS

The Group has entered into a number of service concession arrangements with certain governmental authorities in Mainland China on a Build-Operate-Transfer (“BOT”) or a Transfer-Operate-Transfer (“TOT”) basis in respect of its sewage and water treatment businesses. These service concession arrangements generally involve the Group as an operator (i) constructing sewage and water treatment plants for those arrangements on a BOT basis; (ii) paying a specific amount for those arrangements on a TOT basis; (iii) operating and maintaining the sewage and water treatment plants at a specified level of serviceability on behalf of the relevant governmental authorities for periods ranging from 20 to 40 years (the “service concession periods”), and the Group will be paid for its services over the relevant periods of the service concession arrangements at prices stipulated through a pricing mechanism. The Group is entitled to use all the property, plant and equipment of the sewage and water treatment plants, however, the relevant governmental authorities as grantors will control and regulate the scope of services the Group must provide with the sewage and water treatment plants, and retain the beneficial entitlement to any residual interest in the sewage and water treatment plants at the end of the term of the service concession periods. Each of these service concession arrangements is governed by a contract and, where applicable, supplementary agreements entered into between the Group and the relevant governmental authority in Mainland China that set out, inter alia, performance standards, mechanisms for adjusting prices for the services rendered by the Group, specific obligations levied on the Group to restore the sewage and water treatment plants to a specified level of serviceability at the end of the service concession periods, and arrangements for arbitrating disputes. The accounting policies in respect of the classification of the service concession arrangements between financial assets (loans and receivables) and intangible assets (operating concessions) are set out under the heading of “Service concession arrangements” in note 3.4 to the financial statements.

As at 31 December 2008, the Group had 21 service concession arrangements on sewage treatment and 1 service concession arrangement on water treatment and distribution with various governmental authorities in Mainland China and a summary of the major terms of each service concession arrangement is set out as follows:

					Type of	Practical
		Name of sewage			service	processing	Service
	Name of subsidiary	and water		Name of	concession	capacity	concession
No.	as operator	treatment plant	Location	grantor	arrangement	m3/day	period
1.	江油中科成污水淨	江油市污水	Jiangyou, Sichuan	江油市人民政	BOT	25,000	30 years
	化有限公司	處理廠一期	Province, the	府			from 2002
			PRC				to 2032
2.	江油中科成污水淨	江油市污水處理廠	Jiangyou, Sichuan	江油市人民政	BOT	25,000	30 years
	化有限公司	二期	Province, the	府			from 2007
			PRC				to 2037
3.	成都雙流中科成污	雙流縣污水處理廠	Shuangliu, Sichuan	雙流縣人民政	BOT	25,000	20 years
	水淨化有限公司		Province, the	府			from 2004
			PRC				to 2024
4.	綿陽中科成污水淨	綿陽市塔子壩污水	Mianyang, Sichuan	綿陽市人民政	TOT	100,000	30 years
	化有限公司	處理廠一期	Province, the	府			from 2002
			PRC				to 2032

— 55 —

APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

					Type of	Practical
		Name of sewage			service	processing	Service
	Name of subsidiary	and water		Name of	concession	capacity	concession
No.	as operator	treatment plant	Location	grantor	arrangement	m3/day	period
5.	綿陽中科成污水淨	綿陽市塔子壩污水	Mianyang, Sichuan	綿陽市人民政	BOT	50,000	30 years
	化有限公司	處理廠二期	Province, the	府			from 2003
			PRC				to 2033
6.	成都華陽中科成污	雙流縣華陽污水處	Shuangliu, Sichuan	雙流縣人民政	BOT	40,000	20 years
	水淨化有限公司	理廠	Province, the	府			(Not yet
			PRC				started)
7.	長沙中科成污水淨	長沙市金霞污水處	Changsha, Hunan	長沙市公用事	TOT	180,000	20 years
	化有限公司	理廠	Province, the	業管理局			from 2004
			PRC				to 2024
8.	青島上馬中科成污	青島市城陽區上馬	Qingdao, Shandong	青島市城陽區	BOT	40,000	20 years
	水淨化有限公司	污水處理廠	Province, the	城市規劃建			from 2008
			PRC	設管理局			to 2028
9.	青島膠南中科成污	膠南市污水處理廠	Jiaonan, Shandong	膠南市城鄉建	BOT	60,000	20 years
	水淨化有限公司		Province, the	設局			from 2006
			PRC				to 2026
10.	青島中科成污水淨	山東省膠州市污水	Jiaozhou, Shandong	膠州市城鄉建	BOT	50,000	20 years
	化有限公司	處理廠	Province, the	設局			from 2004
			PRC				to 2024
11.	菏澤中科成污水淨	菏澤市污水處理廠	Heze, Shandong	菏澤市建設局	TOT	60,000	25 years
	化有限公司		Province, the				from 2008
			PRC				to 2032
12.	廣州中業污水處理	廣州市花都區新華	Guangzhou,	廣州市花都區	BOT	100,000	25 years
	有限公司	污水處理廠	Guangdong	市政園林管			from 2008
			Province, the	理局			to 2033
			PRC
13.	廣州中科成污水淨	廣州南沙開發區黃	Guangzhou,	廣州南沙開發	BOT	50,000	22 years
	化有限公司	閣污水處理廠	Guangdong	區建設局			from 2004
			Province, the				to 2026
			PRC
14.	台州市路橋中科成	路橋污水處理廠	Taizhou, Zhejiang	台州市建設規	BOT/TOT	40,000	27 years
	污水淨化有限公		Province, the	劃局路橋分			from 2007
	司		PRC	局			to 2034
15.	成都龍泉中科成污	龍泉驛區蘆溪河污	Chengdu, Sichuan	成都市龍泉驛	BOT	20,000	25 years
	水淨化有限公司	水處理廠	Province, the	區國有資產			(Not yet
			PRC	投資經營有			started)
				限公司

— 56 —

APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

					Type of	Practical
		Name of sewage			service	processing	Service
	Name of subsidiary	and water		Name of	concession	capacity	concession
No.	as operator	treatment plant	Location	grantor	arrangement	m3/day	period
16.	濟南十方水質淨化	濟南高新區水質淨	Jinan, Shandong	濟南高新技術	BOT/TOT	10,000	30 years
	有限公司	化一廠	Province, the	產業開發區			from 2008
			PRC	中心			to 2038
17.	彭州中科成污水淨	彭州第二污水處理	Pengzhou, Sichuan	彭州市興彭建	BOT	15,000	25 years
	化有限公司	廠	Province, the	設投資經營			(Not yet
			PRC	有限公司			started)
18.	佛山市三水中科成	佛山市三水區中心	Foshan, Guangdong	佛山市三水工	BOT	50,000	22
	水質淨化有限公	工業園南部污水	Province, the	業園區管理			years(Not
	司	處理廠	PRC	委員會			yet started)
19.	永州市北控污水淨	永州市下河綫污水	Yongzhou, Hunan	永州市公用事	BOT	50,000	30 years
	化有限公司	處理廠	Province, the	業管理局			(Not yet
			PRC				started)
20.	深圳華強豐泰投資	深圳市龍崗區橫嶺	Shenzhen,	深圳市龍崗區	BOT	200,000	25 years
	有限公司(“Hua	污水處理廠	Guangdong	人民政府			from 2007
	Qiang Feng Tai”)		Province, the				to 2032
			PRC
21.	沾化華強水務環保	沾化縣生態皮業城	Zhanhua, Shandong	沾化縣人民政	BOT	15,000	30 years
	有限公司(“Hua	污水處理廠	Province, the	府			from 2008
	Qiang Zhanhua”)		PRC				to 2038
22.	濱州華強西海水務	濱州市西海供水工	Binzhou, Shandong	濱州市人民政	BOT	50,000	40 years
	有限公司(“Hua	程	Province, the	府			from 2006
	Qiang Xihai”)#		PRC				to 2046

# Except for Hua Qiang Xihai operating under a service concession arrangement on water treatment and distribution,all other operators’ service concession arrangements are on sewage treatment.

Pursuant to the service concession agreements signed, the Group are granted the rights to use the property, plant and equipment of the sewage and water treatment plants and related land, which are generally registered under the names of the relevant companies in the Group, during the service concession periods, but the Group is generally required to surrender these property, plant and equipment to the grantors at a specified level of serviceability at the end of the respective service concession periods. As at 31 December 2008, the Group was in the process of applying for the changing of registration of the title certificates of certain land use rights and buildings of certain sewage treatment plants to which the Group’s service concession arrangements relate. The directors of the Company are of the opinion that the Group is entitled to the lawful and valid occupation or use of these buildings and land to which the above-mentioned land use rights relate, and that the Group would not have any legal barriers in obtaining the proper title certificates.

As at 31 December 2008, certain of the property, plant and equipment of the sewage treatment plants and the sewage treatment concession rights were pledged to secure certain bank loans granted to the Group (notes 17 and 31(a)(i)).

6. SEGMENT INFORMATION

Segment information is presented by way of two segment formats: (i) on a primary segment reporting basis, by business segment; and (ii) on a secondary segment reporting basis, by geographical segment.

— 57 —

APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

The Group’s operating businesses are structured and managed separately according to the nature of their operations and the products and services they provide. Each of the Group’s business segments represents a strategic business unit that offers products and services which are subject to risks and returns that are different from those of the other business segments. Particulars of the business segments are summarised as follows:

(a) the sewage treatment segment engages in the operation of sewage treatment;
(b) the sewage technical services segment engages in the provision of consultancy services and the licensing of technical know-how that are related to sewage treatment;
(c) the construction services segment engages in the construction of sewage and water treatment plants; and
(d) the corporate and others segment comprises the operation of water treatment and distribution, the trading of computer and related products and corporate income and expense items.

In determining the Group’s geographical segments, revenues are attributed to the segments based on the location of the customers, and assets are attributed to the segments based on the location of the assets.

Intersegment sales are transacted with reference to the prices used for sales made to third parties at the then prevailing market prices.

(a) Business segments

The following tables present revenue, profit/(loss) and certain asset, liability and expenditure information for the Group’s business segments for the period from 1 July 2007 to 31 December 2008 and for the year ended 30 June 2007:

Group

Period from 1 July 2007 to 31 December 2008

Segment revenue: Sales to external customers Intersegment sales Other income and gains, net Total Segment results Unallocated income and gains, net	Sewage treatment HK$’000 138,224 — 225 138,449 59,687	Sewage technical services Construction services Corporate and others Eliminations HK$’000 HK$’000 HK$’000 HK$’000 51,071 131,343 17,043 — 5,538 — — (5,538) — — 355 — 56,609 131,343 17,398 (5,538) 52,395 17,214 (23,884) —	Total HK$’000 337,681 — 580
			338,261
			105,412 10,808

— 58 —

APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

Profit from operating activities Finance costs Share of loss of an associate Profit before tax Tax Profit for the period Assets and liabilities Segment assets Interest in an associate Unallocated assets Total assets Segment liabilities Unallocated liabilities Total liabilities Other segment information: Depreciation Amortisation of operating concessions Amortisation of other intangible assets Impairment/(reversal of impairment) of trade receivables and other receivables, net Provision for major overhauls Capital expenditure	Sewage treatment HK$’000 2,018,691 — 2,018,691 464,092 742 5,412 — 1,953 7,216 588	Sewage technical services Construction services Corporate and others Eliminations HK$’000 HK$’000 HK$’000 HK$’000 551,852 249,929 2,387,540 (1,287,735) — — 25,313 — 551,852 249,929 2,412,853 (1,287,735) 961,784 52,101 666,670 (1,287,735) 278 — 210 — — — 387 — 78 — — — (69) — — — — — 69 — 552 4 3,969 —	Total HK$’000 116,220 (60,273) (811)
			55,136 (12,234)
			42,902
			3,920,277 25,313
			3,945,590 870,568
			4,816,158
			856,912 1,961,289
			2,818,201
			1,230 5,799 78 1,884 7,285 5,113

— 59 —

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

Group

Year ended 30 June 2007

Segment revenue: Sales to external customers Segment results Unallocated income and gains Unallocated expenses Loss from operating activities Finance costs Loss before tax Tax Loss for the year Assets and liabilities Segment assets Unallocated assets Total assets Segment liabilities Unallocated liabilities Total liabilities Other segment information: Depreciation Capital expenditure	Sewage treatment HK$’000 — — — — — —	Sewage technical services Construction services Corporate and others Eliminations HK$’000 HK$’000 HK$’000 HK$’000 — — 19,899 — — — (2,650) — — — 2,322 — — — 665 — — — 40 — — — 27 —	Total HK$’000 19,899
			(2,650) 1,362 (1,332)
			(2,620) —
			(2,620) 53
			(2,567)
			2,322 29,793
			32,115
			665 14
			679
			40 27

— 60 —

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

(b) Geographical segments

The following table presents revenue, and certain asset and expenditure information for the Group’s geographical segments for the period from 1 July 2007 to 31 December 2008 and for the year ended 30 June 2007:

Group

Hong Kong Period from 1 July 2007 to 31 December 2008 Year ended 30 June 2007 HK$’000 HK$’000 10,956 17,775 146 — 11,102 17,775 949,424 2,322 — — 949,424 2,322 658 27	Hong Kong Period from 1 July 2007 to 31 December 2008 Year ended 30 June 2007 HK$’000 HK$’000 10,956 17,775 146 — 11,102 17,775 949,424 2,322 — — 949,424 2,322 658 27	Mainland Period from 1 July 2007 to 31 December 2008 HK$’000 326,725 434	China Year ended 30 June 2007 HK$’000 2,124 —	Elimina Period from 1 July 2007 to 31 December 2008 HK$’000 — —	tions Year ended 30 June 2007 HK$’000 — —	Consoli Period from 1 July 2007 to 31 December 2008 HK$’000 337,681 580	dated Year ended 30 June 2007 HK$’000 19,899 —
11,102	17,775	327,159	2,124	—	—	338,261	19,899
949,424 —	2,322 —	3,846,363 25,313	— —	(875,510) —	— —	3,920,277 25,313	2,322 —
949,424	2,322	3,871,676	—	(875,510)	—	3,945,590 870,568	2,322 29,793
658	27	4,455	—	—	—
						4,816,158	32,115
						5,113	27

7. REVENUE, OTHER INCOME AND GAINS, NET

Revenue, which is also the Group’s turnover, represents: (1) an appropriate proportion of contract revenue of construction contracts and service contracts relating to sewage treatment, net of business tax and government surcharges; (2) the aggregate of the invoiced value of water sold and the estimated value of unbilled water distributed based on the consumption recorded by water meter readings, net of value-added tax, business tax and government surcharges; (3) the value of licence fees, net of business tax and government surcharges; (4) the net invoiced value of goods sold, net of value-added tax and government surcharges and after allowances for returns and trade discounts; and (5) the imputed interest income on service concession arrangements.

— 61 —

APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

An analysis of the Group’s revenue, other income and gains, net, is as follows:

	Period from
	1 July 2007 to	Year ended
	31 December	30 June
	2008	2007
	HK$’000	HK$’000
Revenue
Sewage treatment services *	138,224	—
Construction contracts *	131,343	—
Consultancy services	23,881	—
Licence fees	27,190	—
Sale of water	6,087	—
Sale of goods	10,956	19,899
	337,681	19,899
Other income
Bank interest income	9,193	1,067
Gross rental income#	268	—
Pipeline installation income	179	—
Dividend income from financial assets at fair value through profit or loss	137	—
Others	133	245
	9,910	1,312
Gains, net
Gain on disposal of financial assets at fair value through profit or loss, net	718	25
Gain on disposal of subsidiaries (note 41)	760	—
Foreign exchange differences, net	—	25
	1,478	50
Other income and gains, net	11,388	1,362

* Imputed interest income under service concession arrangements amounting to HK$60,241,000 and HK$2,398,000 are included in the revenue derived from “Sewage treatment services” and “Construction contracts”, respectively.

# The Group leased certain areas of buildings, which form part of the operating assets transferred to the Group by the grantors in respect of the Group’s sewage treatment operations, to third parties under operating lease arrangements and accordingly, earned rental income therefrom for the period. Further details of the operating lease arrangements are set out in note 44(a) to the financial statements.

— 62 —

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

8. PROFIT/(LOSS) FROM OPERATING ACTIVITIES

The Group’s profit/(loss) from operating activities is arrived at after charging/(crediting):

		Period from
		1 July 2007 to	Year ended
		31 December	30 June
		2008	2007
	Notes	HK$’000	HK$’000
Cost of sewage treatment services rendered		47,889	—
Cost of construction contracts		113,402	—
Cost of consultancy services rendered		2,651	—
Cost of licensing		26	—
Cost of water sold		2,318	—
Cost of goods sold		10,793	19,695
Depreciation	15	1,230	40
Amortisation of operating concessions *	17	5,799	—
Amortisation of other intangible assets *	18	78	—
Minimum lease payments under operating leases for land and
buildings		1,878	293
Auditors’ remuneration		3,207	166
Employee benefits expense (including directors’ remuneration —
note 10):
Salaries, allowances and benefits in kind		24,532	2,290
Net pension scheme contributions		917	44
Welfare and other expenses		3,397	169
		28,846	2,503
Loss on disposal of items of equipment, net		17	13
Impairment of trade receivables, net	24(b)	1,679	—
Impairment of other receivables, net	25(b)	205	—
Fair value loss on financial assets at fair value through profit or
loss		—	12
Foreign exchange differences, net		5,262	(25)

* The amortisation of operating concessions and other intangible assets for the period are included in “Cost of sales” and “Administrative expenses” on the face of the consolidated income statement, respectively.

— 63 —

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

9. FINANCE COSTS

		Group
		Period from
		1 July 2007 to	Year ended
		31 December	30 June
		2008	2007
	Notes	HK$’000	HK$’000
Interest on bank loans and other loans wholly repayable
within five years		28,061	—
Interest on other loans		799	—
Imputed interest on convertible bonds	32	35,426	—
Interest on a finance lease		643	—
Total interest expense		64,929	—
Increase in discounted amounts of provision for major overhauls
arising from the passage of time	34	595	—
Total finance costs		65,524	—
Less: Interest included in cost of construction contracts		(5,251)	—
		60,273	—

— 64 —

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

10. DIRECTORS’ REMUNERATION

Directors’ remuneration for the period, disclosed pursuant to The Rules Governing the Listing of Securities on the Stock Exchange and Section 161 of the Hong Kong Companies Ordinance, is as follows:


		Period from
		1 July 2007 to	Year ended
		31 December	30 June
		2008	2007
	Notes	HK$’000	HK$’000
Fees:
Executive directors		1,273	530
Independent non-executive directors		432	188
		1,705	718
Other	emoluments for executive directors:
Salaries, allowances and benefits in kind		1,153	46
Pension scheme contributions		27	—
		1,180	46
		2,885	764
(a)	Independent non-executive directors
	The fees paid to independent non-executive directors were as follows:
		Period from
		1 July 2007 to	Year ended
		31 December	30 June
		2008	2007
		HK$’000	HK$’000
	Mr. Shea Chun Lok, Quadrant	108	68
	Mr. Zhang Gaobo	78	—
	Mr. Guo Rui	58	—
	Ms. Hang Shijun	42	—
	Mr. Wang Kaijun	42	—
	Mr. Chan Wai Kwong, Peter	50	57
	Mr. So Kwok Keung	45	—
	Mr. Ngai Chi Yung	9	60
	Mr. Chan Yiu Kwong	—	3
		432	188

There were no other emoluments payable to the independent non-executive directors during the period (year ended 30 June 2007: Nil).

— 65 —

APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

(b) Executive directors

Period from 1 July 2007 to 31 December 2008 Mr. Zhang Honghai Mr. Liu Kai Mr. E Meng Mr. Jiang Xinhao Mr. Hu Xiaoyong Mr. Wang Taoguang Mr. Wu Xiaoming Mr. Zhou Min Mr. Li Haifeng Ms. Qi Xiaohong Mr. Ju Yadong Mr. Flynn Xuxian Huang Ms. Guan Mei Mr. Chase J Wong Year ended 30 June 2007 Mr. Flynn Xuxian Huang Ms. Guan Mei Mr. Chase J Wong Ms. Zhou Liping	Fees Salaries, allowances and benefits in kind Pension scheme contributions Total remuneration HK$’000 HK$’000 HK$’000 HK$’000 — — — — 92 — — 92 92 — — 92 57 — — 57 42 460 5 507 42 — — 42 42 — — 42 42 384 5 431 42 309 5 356 66 — — 66 66 — — 66 — — — — — — — — 690 — 12 702 1,273 1,153 27 2,453 — — — — — — — — 52 15 — 67 478 31 — 509 530 46 — 576	Fees Salaries, allowances and benefits in kind Pension scheme contributions Total remuneration HK$’000 HK$’000 HK$’000 HK$’000 — — — — 92 — — 92 92 — — 92 57 — — 57 42 460 5 507 42 — — 42 42 — — 42 42 384 5 431 42 309 5 356 66 — — 66 66 — — 66 — — — — — — — — 690 — 12 702 1,273 1,153 27 2,453 — — — — — — — — 52 15 — 67 478 31 — 509 530 46 — 576
		2,453
		— — 67 509
		576

There was no arrangement under which a director waived or agreed to waive any remuneration during the period (year ended 30 June 2007: Nil).

— 66 —

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

11. FIVE HIGHEST PAID EMPLOYEES

The five highest paid employees during the period included three (year ended 30 June 2007: one) directors, details of whose remuneration are set out in note 10 above. Details of the remuneration of the remaining two (year ended 30 June 2007: four) non-director, highest paid employees for the period are as follows:

		Period from
		1 July 2007 to	Year ended
		31 December	30 June
		2008	2007
		HK$’000	HK$’000
Salaries,	allowances and benefits in kind	1,214	1,082
Pension	scheme contributions	29	29
		1,243	1,111

The remuneration of the two non-director, highest paid employees for the period ended 31 December 2008 (year ended 30 June 2007: four) each fell within the range of nil to HK$1,000,000.

12. TAX

No provision of Hong Kong profits tax has been made for the current period as the Group did not generate any assessable profits arising in Hong Kong during the period (year ended 30 June 2007: Nil).

The income tax provision in respect of operations in Mainland China is calculated at the applicable tax rates on the estimated assessable profits for the period/year based on existing legislation, interpretations and practices in respect thereof. During the 5th session of the 10th National People’s Congress of the PRC, which was concluded on 16 March 2007, the PRC Corporate Income Tax Law (the “New PRC CIT Law”) was approved and became effective from 1 January 2008. The New PRC CIT Law introduces a wide range of changes which include, but are not limited to, the unification of the income tax rate for domestic-invested and foreign-invested enterprises at 25%. In accordance with the relevant tax rules and regulations of the PRC, certain of the Company’s subsidiaries in Mainland China enjoy income tax exemptions and reductions, by reason that these companies are engaged in the operations of sewage treatment.

		Group
	Period from
	1 July 2007 to	Year ended
	31 December		30 June
	2008		2007
	HK$’000		HK$’000
Current — PRC:
Hong Kong	—		—
Mainland China	3,905		—
Underprovision/(overprovision) in prior periods	78		(53)
Deferred (note 36)	8,251		—
Total tax charge/(credit) for the period/year	12,234		(53)

— 67 —

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

A reconciliation of the tax expense applicable to profit/(loss) before tax using the statutory rates for the countries/jurisdictions in which the Company and its subsidiaries are domiciled to the tax expense at the effective tax rates, and a reconciliation of the applicable rates (i.e., the statutory tax rates) to the effective tax rates, are as follows:

Group — Period from 1 July 2007 to 31 December 2008

Profit/(loss) before tax Tax at the statutory tax rate Lower tax rate of specific provinces or enacted by local authority Tax concession enjoyed Adjustments in respect of current tax of previous periods Loss attributable to an associate Income not subject to tax Expenses not deductible for tax Tax losses utilised from previous periods Tax losses not recognised as deferred tax assets Tax charge at the Group’s effective rate	Hong Kong HK$’000 % (36,300) (5,988) 16.5 — — — — — — — — (5,747) 15.8 6,052 (16.6) (15) — 5,698 (15.7) — —	Mainland China HK$’000 % 91,436 22,859 25.0 (4,534) (5.0) (8,877) (9.7) 78 0.1 203 0.2 (1,814) (2.0) 2,593 2.9 — — 1,726 1.9 12,234 13.4	Total HK$’000 55,136 16,871 (4,534) (8,877) 78 203 (7,561) 8,645 (15) 7,424 12,234	% 30.6 (8.2) (16.1) 0.1 0.4 (13.7) 15.6 — 13.5
				22.2

— 68 —

APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

Group — Year ended 30 June 2007

	Hong Kong		Mainland	China	Total
	HK$’000	%	HK$’000	%	HK$’000	%
Loss before tax	(2,475)		(145)		(2,620)
Tax at the statutory tax rate	(433)	17.5	(48)	33.0	(481)	18.4
Adjustments in respect of
current tax of previous
periods	—	—	(53)	36.6	(53)	2.0
Income not subject to tax	(145)	5.9	(79)	54.5	(224)	8.5
Expenses not deductible for
tax	84	(3.4)	—	—	84	(3.2)
Tax losses utilised from
previous periods	(44)	1.7	—	—	(44)	1.7
Tax losses not recognised as
deferred tax assets	538	(21.7)	127	(87.5)	665	(25.4)
Tax credit at the Group’s
effective rate	—	—	(53)	36.6	(53)	2.0

13. PROFIT/(LOSS) FOR THE PERIOD/YEAR ATTRIBUTABLE TO SHAREHOLDERS OF THE COMPANY

The consolidated profit attributable to shareholders of the Company for the period from 1 July 2007 to 31 December 2008 includes a loss of HK$47,168,000 (year ended 30 June 2007: HK$1,176,000), which has been dealt with in the financial statements of the Company (note 30(b)).

14. EARNINGS/(LOSS) PER SHARE ATTRIBUTABLE TO SHAREHOLDERS OF THE COMPANY

The calculation of basic earnings per share amount for the period from 1 July 2007 to 31 December 2008 is based on the profit for the period attributable to shareholders of the Company of HK$30,984,000 (year ended 30 June 2007: loss of HK$2,567,000), and the weighted average of 811,259,728 (year ended 30 June 2007: 83,285,449) ordinary shares in issue during the period.

The calculation of diluted earnings per share amount for the period from 1 July 2007 to 31 December 2008 is based on the profit for the period attributable to shareholders of the Company, adjusted to reflect the interest on the dilutive convertible bonds; and the weighted average number of ordinary shares assumed to have been issued on the deemed conversion of all dilutive convertible bonds into ordinary shares. Except for the Tranche 1 Bond (as defined in the Company’s circular dated 3 May 2007 (note 32)) issued by the Company on 27 July 2007, all other convertible bonds outstanding during the period had either an anti-dilutive effect or no diluting effect on the basic earnings per share for the period ended 31 December 2008.

A diluted loss per share amount for the year ended 30 June 2007 is not presented as no diluting event existed during that

year.

— 69 —

APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

The calculation of the basic and diluted earnings per share amounts for the period from 1 July 2007 to 31 December 2008 is based on the following data:

	Period from
	1 July 2007 to
	31 December 2008
	HK$’000
Earnings
Profit for the period attributable to shareholders of the Company, used in the basic
earnings per share calculation	30,984
Interest on dilutive convertible bonds	6,210
Profit for the period attributable to shareholders of the Company, used in the diluted
earnings per share calculation	37,194
	Period from
	1 July 2007 to
	31 December 2008
Number of ordinary shares
Weighted average number of ordinary shares in issue during the period used in the
basic earnings per share calculation	811,259,728
Effect of dilution of dilutive convertible bonds
— weighted average number of ordinary shares	188,818,182
Weighted average number of ordinary shares used in the diluted earnings per share
calculation	1,000,077,910

— 70 —

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

15. EQUIPMENT

Group

Office equipment HK$’000 Period from 1 July 2007 to 31 December 2008 At 30 June 2007 and 1 July 2007: Cost 200 Accumulated depreciation (162) Net carrying amount 38 Net carrying amount: At 1 July 2007 38 Acquisition of subsidiaries (note 40) 3,605 Additions 1,584 Depreciation provided during the period (367) Disposals (17) Exchange realignment (13) At 31 December 2008 4,830 At 31 December 2008: Cost 7,624 Accumulated depreciation (2,794) Net carrying amount 4,830 Year ended 30 June 2007 At 1 July 2006: Cost 199 Accumulated depreciation (162) Net carrying amount 37 Net carrying amount: At 1 July 2006 37 Additions 27 Depreciation provided during the year (13) Disposals (13) At 30 June 2007 38	Motor vehicles Leasehold improvements HK$’000 HK$’000 — 134 — (101) — 33 — 33 6,017 417 3,007 — (749) (114) — — (25) (2) 8,250 334 13,786 979 (5,536) (645) 8,250 334 — 134 — (74) — 60 — 60 — — — (27) — — — 33	Total HK$’000 334 (263)
		71
		71 10,039 4,591 (1,230) (17) (40)
		13,414
		22,389 (8,975)
		13,414
		333 (236)
		97
		97 27 (40) (13)
		71

— 71 —

APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

Company

		Office	Motor
		equipment	vehicles	Total
		HK$’000	HK$’000	HK$’000
	At 1 July 2006, 30 June 2007 and 1 July 2007:
	Cost and net carrying amount	—	—	—
	Net carrying amount:
	At 1 July 2006, 30 June 2007 and 1 July 2007	—	—	—
	Additions	26	490	516
	Depreciation provided during the period	(1)	(49)	(50)
	At 31 December 2008	25	441	466
	At 31 December 2008:
	Cost	26	490	516
	Accumulated depreciation	(1)	(49)	(50)
	Net carrying amount	25	441	466
16.	GOODWILL
	Group
			Period from
			1 July 2007 to	Year ended
		31	December 2008	30 June 2007
			HK$’000	HK$’000
	Cost and net carrying amount:
	At beginning of period/year		—	—
	Acquisition of subsidiaries (note 40)		1,466,760	—
	Exchange realignment		155	—
	At end of period/year		1,466,915	—

Impairment testing of goodwill

The carrying amount of the goodwill acquired through acquisitions has been allocated to the business operation of sewage and water treatment and related technical services of the Group for impairment testing.

The recoverable amount of the operation of sewage and water treatment has been determined by reference to a business valuation performed by CB Richard Eills Limited, independent professionally qualified valuers, on a

— 72 —

APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

value-in-use calculation using cash flow projections which are based on financial forecast approved by senior management covering a period of ten years and based on the assumption that the operation can generate cash flows perpetually. The discount rate applied to the cash flow projections for the first ten-year period is 12%, which is determined by reference to the average rates for the similar industry and the business risk of the relevant business unit. A growth rate of 3% is used for the perpetual period.

Based on the impairment testing of goodwill, in the opinion of the directors, no impairment provision is considered necessary for the Group’s goodwill as at 31 December 2008.

Key assumptions used in value-in-use calculations

The following describes each key assumption adopted by management in the preparation of the cash flow projections for the purpose of impairment testing of goodwill:

Budgeted turnover
in respect of the revenue from sewage treatment and water distribution operations, based on the projected sewage treatment and water sales volume.
in respect of the revenue from sewage technical services, based on the expected growth rate of the market.
Budgeted gross margins
in respect of the sewage treatment and water distribution operations, the basis used to determine the latest sewage treatment and water selling price up to the date of valuation report.
the basis used to determine the value assigned to the budgeted gross margins is the average gross margins achieved in the period immediately before the budgeted year, increased for expected efficiency improvements.
Business environment
There have been no major changes in the existing political, legal and economic conditions in Mainland China.
Under the service concession arrangements, the Group has been granted with priority for renewal of operating rights of sewage and water treatment plants. Given its historical performance record and its long-established relationship with the grantor, the Group has key advantages over other operators. In addition, the high investment cost has also created an entry barrier for new competitors. Therefore, in the opinion of the directors, the operating rights of sewage and water treatment plants shall be renewed at expiry, and therefore the sewage treatment and water distribution operations can generate income perpetually.

— 73 —

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

17. OPERATING CONCESSIONS

				Group
		Period from
		1 July 2007 to			Year ended
	31	December 2008		30		June 2007
			HK$’000			HK$’000
Net carrying amount:
At beginning of period/year			—				—
Acquisition of subsidiaries (note 40)			436,105				—
Amortisation provided during the period/year			(5,799)				—
Exchange realignment			(717)				—
At end of period/year			429,589				—
	31 December 2008	30 June 2007			1 July 2006
	HK$’000		HK$’000			HK$’000
Cost	483,337		—				—
Accumulated amortisation	(53,748)		—				—
Net carrying amount	429,589		—				—

The operating concessions of the Group are the service concession rights to operate sewage and water treatment plants in Mainland China in respect of a number of service concession arrangements with certain governmental authorities in Mainland China, as further detailed in note 5 to the financial statements.

At 31 December 2008, certain sewage treatment concession rights of the Group in a then aggregate net carrying amount of HK$98,529,000 (30 June 2007: Nil) are pledged to secure certain bank loans granted to the Group (notes 5 and 31(a)(i)).

The accounting policies in respect of the classification of the service concession arrangements between financial assets (loans and receivables) and intangible assets (operating concessions) are set out under the heading of “Service concession arrangements” in note 3.4 to the financial statements.

— 74 —

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

18. OTHER INTANGIBLE ASSETS

Group

At 1 July 2006, 30 June 2007 and 1 July 2007: Cost Accumulated amortisation Net carrying amount Net carrying amount: At 1 July 2006, 30 June 2007 and 1 July 2007 Acquisition of subsidiaries (note 40) Additions Amortisation provided during the period Exchange realignment At 31 December 2008 At 31 December 2008: Cost Accumulated amortisation Net carrying amount 19. INTERESTS IN SUBSIDIARIES Unlisted shares or investments, at cost Due from subsidiaries Due to subsidiaries	Patents HK$’000 — — — — 133 — (26) (1) 106 555 (449) 106 31 Note (a) (a)	Computer software HK$’000 — — — — 1,086 522 (52) (6) 1,550 1,628 (78) 1,550 Company December 2008 HK$’000 1,943,342 942,352 — 2,885,694	Total HK$’000 — —
			—
			— 1,219 522 (78) (7)
			1,656
			2,183 (527)
			1,656
			30 June 2007 HK$’000 202 30,697 (1,700)
			29,199

Notes:

(a) The amounts due from/to subsidiaries are unsecured, interest-free and have no fixed terms of repayment. The carrying amounts of these balances approximate to their fair values.

— 75 —

APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

(b) Particulars of the principal subsidiaries are as follows:

	Place of	Nominal value of
	incorporation/	issued and paid-up	Percentage of
	registration and	capital/ registered	attributable	equity
Company name	operations	capital	interest held by		Principal activities
			Company	Group
Z.K.C Environmental Group Co.,	PRC/	RMB286,969,071	—	88.43	Consultancy service
Ltd. (“ZKC Environmental”) �	Mainland China				and investment
					holding
深圳華強創新投資有限公司	PRC/	RMB300,000,000	—	53.06	Investment holding
(“Shenzhen Hua Qiang”) �	Mainland China
深圳華強豐泰投資有限公司�	PRC/	RMB70,000,000	—	42.45	Sewage treatment
	Mainland China
綿陽中科成污水淨化有限公司�	PRC/	RMB40,000,000	—	88.43	Sewage treatment
	Mainland China
長沙中科成污水淨化有限公司�	PRC/	RMB50,000,000	—	79.59	Sewage treatment
	Mainland China
廣州中業污水處理有限公司�	PRC/	RMB40,000,000	—	88.43	Sewage treatment
	Mainland China
江油中科成污水淨化有限公司�	PRC/	RMB8,000,000	—	88.43	Sewage treatment
	Mainland China
成都雙流中科成污水淨化有限公司�	PRC/	RMB10,000,000	—	70.74	Sewage treatment
	Mainland China
青島膠南中科成污水淨化有限公司�	PRC/	RMB30,000,000	—	88.43	Sewage treatment
	Mainland China
青島中科成污水淨化有限公司�	PRC/	RMB20,000,000	—	88.43	Sewage treatment
	Mainland China
廣州中科成污水淨化有限公司�	PRC/	RMB30,000,000	—	88.43	Sewage treatment
	Mainland
	China
青島上馬中科成污水淨化有限公司�	PRC/	RMB15,000,000	—	88.43	Sewage treatment
	Mainland China
成都華陽中科成污水淨化有限公司�	PRC/	RMB9,000,000	—	88.43	Sewage treatment
	Mainland China

— 76 —

APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

	Place of	Nominal value of
	incorporation/	issued and paid-up	Percentage of
	registration and	capital/ registered	attributable	equity
Company name	operations	capital	interest held by			Principal activities
			Company	Group
台州市路橋中科成污水淨化	PRC/	RMB55,500,000	—	88.43		Sewage treatment
有限公司�	Mainland China
成都龍泉中科成污水淨化有限公司�	PRC/	RMB27,600,000	—	88.43		Sewage treatment
	Mainland China
菏澤中科成污水淨化有限公司�	PRC/	RMB30,000,000	—	88.43		Sewage treatment
	Mainland China
濟南十方水質淨化有限公司�	PRC/	RMB20,000,000	—	88.43		Sewage treatment
	Mainland China
彭州中科成污水淨化有限公司�	PRC/	RMB28,000,000	—	88.43		Sewage treatment
	Mainland China
佛山三水中科成水質淨化有限公司�	PRC/	RMB76,000,000	—	88.43		Sewage treatment
	Mainland China
北控水務(廣西)有限公司��	PRC/	HKD30,000,000	—		100	Investment holding
	Mainland China
永州市北控污水淨化有限公司��	PRC/	HKD45,000,000	100		100	Sewage treatment
	Mainland China
濱州華強西海水務有限公司�	PRC/	RMB50,000,000	—	44.46		Water treatment and
	Mainland China					distribution
沾化華強水務環保有限公司�	PRC/	RMB10,000,000	—	49.19		Sewage treatment
	Mainland China
Wanon Industries Limited	Hong Kong	HK$500,000	100		100	Trading of computer
						and related products
Wanon Trading Limited	Hong Kong	HK$2	—		100	Trading of computer
						and related products
Beijing Enterprises Water	Hong Kong	HK$1	100		100	Investment holding
(Hong Kong) Limited �

† These entities are accounted for as subsidiaries by virture of the Company’s control over them.

� These entities are registered as wholly-foreign-owned enterprises under the PRC Law.

� Acquired/incorporated during the period.

— 77 —

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

On 1 August 2008, the Group acquired the entire equity interest in Gainstar Limited, which indirectly holds a 88.43% equity interest in ZKC Environmental. Gainstar Limited and its subsidiaries (collectively referred to as the “ZKC Group”) are engaged in the operations of sewage treatment and the provision of related services in Mainland China.

In addition, on 28 September 2008, the Group acquired a 60% equity interest in Shenzhen Hua Qiang. Shenzhen Hua Qiang and its subsidiaries (collectively referred to as the “Hua Qiang Group”) are engaged in the operations of sewage treatment and water distribution in Mainland China.

Further details of the above acquisition transactions are included in note 40 to the financial statements.

The principal subsidiaries disposed of by the Group during the period included Shanghai Classic Limited and its subsidiary. Further details of the disposal transaction are included in note 41 to the financial statements.

The above table lists the subsidiaries of the Company which, in the opinion of the directors, principally affected the results for the period or formed a substantial portion of the net assets of the Group. To give details of other subsidiaries would, in the opinion of the directors, result in particulars of excessive length.

20. INTEREST IN AN ASSOCIATE

Particulars of the Group’s associate, which was acquired by the Group during the period and is an unlisted entity indirectly held by the Company, are as follows:

			Percentage of	Percentage of
			Ownership
	Place of		interest
	incorporation/		attributable
	registration and		to the	Voting	Profit
Company name	operations	Registered capital	Group	power	sharing	Principal activities
中信產業投資基金管理	PRC/	RMB100,000,000	23.00	14.29	23.00	Fund management
有限公司	Mainland China

The following tables illustrate the summarised financial information of the Group’s associate:

31 Share of the associate’s assets and liabilities Non-current assets Current assets Current liabilities Net assets	December 2008 HK$’000 7 25,312 (6) 25,313	30 June 2007 HK$’000 — — —
		—

— 78 —

APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

	Period from
	1 July 2007 to	Year ended
	31 December	30 June
	2008	2007
	HK$’000	HK$’000
Share of the associate’s results
Revenue	259	—
Total expenses	(1,070)	—
Loss before tax	(811)	—
Tax	—	—
Loss for the period/year	(811)	—

21. AVAILABLE-FOR-SALE INVESTMENT

The available-for-sale investment of the Group as at 31 December 2008 is a 4.08% equity interest in 四川省水處理及資源化工程技術研究中心, which is an unlisted equity investment in Mainland China.

The investment was not stated at fair value but at cost less any accumulated impairment losses because it does not have a quoted market price in an active market and hence, in the opinion of the directors, the range of reasonable fair value estimates is significant and the probabilities of the various estimates cannot be reasonably assessed.

22. INVENTORIES

31 Raw materials Low value consumables AMOUNTS DUE FROM CONTRACT CUSTOMERS 31 Contract costs incurred plus recognised profits less recognised losses to date	Group December 2008 HK$’000 3,179 954 4,133 Group December 2008 HK$’000 200,462	30 June 2007 HK$’000 — —
		—
		30 June 2007 HK$’000 —

23. AMOUNTS DUE FROM CONTRACT CUSTOMERS

— 79 —

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

24. TRADE RECEIVABLES

31 Trade receivables Impairment (note (b)) Portion classified as current assets Non-current portion	Group December 2008 HK$’000 1,392,116 (9,431) 1,382,685 (144,376) 1,238,309	30 June 2007 HK$’000 2,104 —
		2,104 (2,104)
		—

Notes:

(a) The Group’s trade receivables mainly arise from the sewage treatment service and consultancy service. The Group’s trading terms with its customers are mainly on credit. The credit period is generally one month, and can be extended up to three months for major customers. Overdue balances are reviewed regularly by senior management. Trade receivables are non-interest-bearing.

An aged analysis of the trade receivables as at the balance sheet date, based on the invoice date and net of impairment, is as follows:

31 Billed: Within 3 months 4 to 6 months 7 to 12 months 1 to 2 years Unbilled	Group December 2008 HK$’000 64,540 42,121 35,661 2,054 144,376 1,238,309 1,382,685	30 June 2007 HK$’000 2,104 — — —
		2,104 —
		2,104

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FINANCIAL INFORMATION OF THE GROUP

(b) The movements in the provision for impairment of the Group’s trade receivables are as follows:

		Group
	Period from
	1 July	2007 to	Year ended
	31 December		30 June
		2008	2007
	HK$’000		HK$’000
At beginning of period/year		—	—
Acquisition of subsidiaries		7,749	—
Impairment during the period/year recognized
in the income statement (note 8)		1,773	—
Amount written back during the period/year (note 8)		(94)	—
Exchange realignment		3	—
At end of period/year		9,431	—

The above provision for impairment of trade receivables as at 31 December 2008 was made against the whole balances of the trade receivables collectively as at that date. The Group does not hold any collateral or other credit enhancements over these balances.

An aged analysis of the billed trade receivables that are neither individually nor collectively considered to be impaired is as follows:

31 Neither past due nor impaired Less than 1 month past due 1 to 3 months past due 4 to 6 months past due 7 months to 1 year past due Over 1 year past due	Group December 2008 HK$’000 31,478 35,869 31,455 18,522 25,043 2,009 144,376	30 June 2007 HK$’000 2,031 73 — — — —
		2,104

Receivables classified as non-current were neither past due nor impaired. The above trade receivables were mainly due from governmental authorities in Mainland China as grantors in respect of the Group’s sewage treatment business.

Based on past experience, the directors of the Company are of the opinion that no provision for impairment is necessary in respect of these balances as there has not been a significant change in credit quality and the balances are still considered fully recoverable. The Group does not hold any collateral or other credit enhancements over these balances.

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FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

25. PREPAYMENTS, DEPOSITS AND OTHER RECEIVABLES

31 Prepayments Deposits and other debtors Advances to suppliers Due from related parties (note 26) Impairment (note (b)) Portion classified as current assets Non-current portion	Group December 2008 30 June 2007 31 HK$’000 HK$’000 516 — 249,923 147 47,170 — 124,888 — 422,497 147 (1,074) — 421,423 147 (302,099) (147) 119,324 —	Company December 2008 30 June 2007 HK$’000 HK$’000 — — 200 — — — — — 200 — — — 200 — (200) — — —	Company December 2008 30 June 2007 HK$’000 HK$’000 — — 200 — — — — — 200 — — — 200 — (200) — — —
			— —
			— —
			—

Notes:

(a) The Group’s deposits and other debtors as at 31 December 2008 included, inter alia, the following:
(i) an investment deposit of RMB50,001,600 (equivalent to HK$56,792,000) paid to a government authority in Mainland China in connection with the acquisition of a 66.67% equity interest in 貴港市供水有限責任公司 (“Guigang Water”). Further details of the acquisition are set out in note 49(ii) to the financial statements and the Company’s circular dated 31 December 2008 in respect of this acquisition. The balance is classified as a non-current asset;
(ii) a deposit of RMB18,000,000 (equivalent to HK$20,444,000) paid for the purchase of a land use right in Yongzhou, Hunan Province, the PRC. The balance is classified as a non-current asset;
(iii) a deposit of RMB10,150,000 (equivalent to HK$11,528,000) paid for the purchase of an office building in Chengdu, Sichuan Province, the PRC. The balance is classified as a non-current asset;
(iv) a deposit of RMB8,000,000 (equivalent to HK$9,086,000) paid to guarantee the performance of all obligations under a lease arrangement for the purchase of certain equipment. The balance is classified as a non-current asset and further details of the lease arrangement are set out in note 33 to the financial statements;
(v) cash advances of RMB41,107,000 (equivalent to HK$46,689,000) in aggregate made to a contract customer of the Group in connection with a contract of service dated 8 May 2008 entered into between the two parties, pursuant to which the Group is providing (i) construction management services to the customer regarding the construction of a sewage treatment plant in Mainland China by the customer; and (ii) funding at the maximum amount of RMB60,000,000 (equivalent to HK$68,148,000) to the customer to finance the construction of the sewage treatment plant. Any advances made will be due for repayment on 25 April 2009 and hence, the cash advances made to the customer as at 31 December 2008 are classified as current assets.

— 82 —

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

A service fee of RMB12,000,000 will be charged by the Group under this contract, of which RMB5,522,000 (equivalent to HK$6,273,000) has been recognised in the income statement during the period by reference to the stage of completion of the contract as at 31 December 2008;

(vi) a deposit of RMB39,005,000 (equivalent to HK$44,302,000) paid to a government authority in Mainland China for the procurement of a concession right to operate a sewage treatment plant on a BOT basis. The balance is classified as a current asset;
(vii) various tender deposits of RMB30,650,000 (equivalent to HK$34,812,000) in aggregate paid by the Group for the bidding of potential sewage treatment projects. These deposits are classified as current assets.
(b) Movements in the provision for impairment of the Group’s other receivables during the period/year are as follows:

		Group
	Period from
	1 July	2007 to	Year ended
	31 December		30 June
		2008	2007
	HK$’000		HK$’000
At beginning of period/year		—	—
Acquisition of subsidiaries		786	—
Impairment during the period/year recognised
in the income statement (note 8)		313	—
Amount written back during the period/year (note 8)		(108)	—
Exchange realignment		83	—
At end of period/year		1,074	—

The above provision for impairment of other receivables as at 31 December 2008 was made against the whole balances of the other receivables collectively as at that date. The Group does not hold any collateral or other credit enhancements over these balances.

26. DUE FROM/TO RELATED PARTIES/A SHAREHOLDER

(a) The amounts due from/to related parties are unsecured, interest-free and have no fixed terms of repayment.

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APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

(b) Particulars of the amounts due from related parties, disclosed pursuant to Section 161B of the Hong Kong Companies Ordinance, are as follows:

Group

31 Name 成都太然投資有限公司* Other related parties	December 2008 Maximum amount outstanding during the period HK$’000 HK$’000 14,195 14,195 110,693 124,888	1 July 2007 HK$’000 — —
		—

Mr. Hu Xiaoyong, a director of the Company, has a beneficial interest in this company.
(c) Included in the amounts due from related parties of the Group as at 31 December 2008 is an amount of RMB86,908,000 (equivalent to HK$98,710,000) due from 鴻橋投資有限公司 (“Hong Qiao”), a company established in Mainland China holding a 40% equity interest in Shenzhen Hua Qiang. Pursuant to the Assignment of Equity Interest Agreement (as defined in the Company’s circular dated 6 October 2008) entered into between the Group and Hong Qiao in connection with the acquisition of Shenzhen Hua Qiang, the Group was required to settle the purchase consideration of RMB156,908,000 payable by Hong Qiao to the vendor on behalf of Hong Qiao, which will repay the amount to the Group in future periods.

As at 31 December 2008, RMB70,000,000 has been settled by Hong Qiao and the remaining balance of RMB86,908,000 will be settled by the deduction in the same amount of the capital contributed by Hong Qiao in Shenzhen Hua Qiang in accordance with a memorandum of understanding entered into between the Group and Hong Qiao on 27 March 2009. As at the date of approval of these financial statements, the arrangement has not yet been completed. Notwithstanding the above, in the opinion of the directors, no impairment loss on the amount is foreseen.

(d) The amount due to a shareholder of the Group and the Company as at 31 December 2008 is the outstanding consideration payable in connection with the Group’s acquisition of 100% equity interest in Monico Investments Limited (“Monico”), as further detailed in note 40(a) to the financial statements.

27. FINANCIAL ASSETS AT FAIR VALUE THROUGH PROFIT OR LOSS

The Group’s financial assets at fair value through profit or loss as at 30 June 2007 were listed equity investments in Hong Kong, which were stated at market value.

— 84 —

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

28. CASH AND CASH EQUIVALENTS

31 Cash and bank balances Cash equivalents Time deposits Less: Restricted cash and pledged deposits (note (a)) Cash and cash equivalents	Group December 2008 30 June 2007 31 HK$’000 HK$’000 671,240 29,287 1,392 — 170,370 75 843,002 29,362 (8,066) (75) 834,936 29,287	Company December 2008 30 June 2007 HK$’000 HK$’000 15,376 2,307 — — — — 15,376 2,307 — — 15,376 2,307	Company December 2008 30 June 2007 HK$’000 HK$’000 15,376 2,307 — — — — 15,376 2,307 — — 15,376 2,307
			2,307 —
			2,307

Notes:

(a) As at 31 December 2008, bank balances of RMB7,000,000 (equivalent to HK$7,951,000) (30 June 2007: Nil) and RMB101,000 (equivalent to HK$115,000) (30 June 2007: Nil) were pledged to (i) certain government authorities in Mainland China as a condition to place tenders for sewage treatment projects; and (ii) banks to secure certain banking facilities granted to the Group, respectively.
(b) At the balance sheet date, the cash and bank balances and time deposits of the Group denominated in RMB amounted to HK$827,043,000 (30 June 2007: HK$10,518,000). The RMB is not freely convertible into other currencies, however, under Mainland China’s Foreign Exchange Control Regulations and Administration of Settlement, Sale and Payment of Foreign Exchange Regulations, the Group is permitted to exchange RMB for other currencies through banks authorised to conduct foreign exchange business.
(c) The bank balances and pledged deposits are deposited with creditworthy banks with no recent history of defaults.

29. SHARE CAPITAL

31 Notes Authorised: 15,000,000,000 (30 June 2007: 1,500,000,000) ordinary shares of HK$0.10 each (a) Issued and fully paid: 2,405,073,357 (30 June 2007: 83,285,449) ordinary shares of HK$0.10 each (b)	December 2008 HK$’000 1,500,000 240,507	30 June 2007 HK$’000 150,000
		8,328

— 85 —

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

Notes:

(a) Pursuant to an ordinary resolution of shareholders of the Company passed on 4 March 2008, the authorised share capital of the Company was increased from HK$150,000,000 to HK$1,500,000,000 by the creation of an additional 13,500,000,000 ordinary shares of HK$0.10 each, ranking pari passu in all respects with the then existing share capital of the Company.
(b) A summary of the movements in the Company’s issued share capital during the period ended 31 December 2008 and the year ended 30 June 2007 is as follows:

		Number of		Share
		ordinary	Issued	premium
		shares in	capital	account	Total
	Notes	issue	HK$’000	HK$’000	HK$’000
At 1 July 2006, 30 June 2007
and 1 July 2007		83,285,449	8,328	—	8,328
Share placement	(i)	247,000,000	24,700	74,100	98,800
Allotment of shares for the acquisition
of Gainstar Limited	(ii)	559,787,908	55,979	694,137	750,116
Shares issued upon conversion of
convertible bonds	(iii)	1,515,000,000	151,500	460,211	611,711
Share issue expenses		—	—	(2,968)	(2,968)
At 31 December 2008		2,405,073,357	240,507	1,225,480	1,465,987

(i) Pursuant to a subscription agreement (the “Shang Hua Subscription Agreement”) dated 21 January 2008 entered into between BEHL, BE Environmental and the Company, 247,000,000 new ordinary shares of the Company were allotted and issued to BE Environmental at a subscription price of HK$0.40 per ordinary share for a total cash consideration, before any issuance expenses, of HK$98,800,000, for the purpose of providing additional working capital to the Group.
(ii) Pursuant to an acquisition agreement (the “ZKC Acquisition Agreement”) entered into between, among others, the Company, Besto Holdings Limited (“Besto”), Tenson Investment Limited (“Tenson”) and Newton Finance Holdings Limited (“Newton”) (collectively the “ZKC Environmental Vendors”) on 3 June 2008, 559,787,908 new ordinary shares of the Company were issued as part of the consideration for the acquisition of a 100% equity interest in Gainstar Limited. The fair value of these ordinary shares, determined by reference to the closing quoted market price of the Company’s ordinary shares on the Stock Exchange at the date of acquisition of 1 August 2008, amounted to HK$750,116,000. Further details of the transaction are set out in note 40(a) to the financial statements.

Immediately following the acquisition of Gainstar Limited by the Group, Besto, Tenson and Newton became major shareholders of the Company. Tenson is beneficially owned as to 52.62% and 44.94% by Messrs. Hu Xiaoyong and Zhou Min, directors of the Company, respectively. Newton is beneficially owned as to 50% by Mr. Wang Taoguang, another director of the Company.

— 86 —

APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

(iii) During the period ended 31 December 2008, convertible bonds of the Company with an aggregate principal amount of HK$606,000,000 were converted by certain bondholders into 1,515,000,000 new ordinary shares of the Company in total at a conversion price of HK$0.40 per ordinary share. The difference of HK$460,211,000 between nominal value of the ordinary shares issued and the then aggregate carrying amounts of the liability and equity components of the relevant convertible bonds at the dates of conversions was transferred to the Company’s share premium account.

30. RESERVES

(a) Group
(i) The amounts of the Group’s reserves and the movements therein for the current period and the prior year are presented in the consolidated statement of changes in equity on page 38 of the financial statements.
(ii) The Group’s contributed surplus account represents the difference between the nominal value of the shares and the share premium account of the subsidiaries acquired pursuant to the group reorganisation undertaken in prior years, over the nominal value of the Company’s ordinary shares issued in exchange therefor.
(iii) The PRC reserve funds are reserves set aside in accordance with the PRC Companies Law or the Law of the PRC on Joint Ventures Using Chinese and Foreign Investment as applicable to the Group’s subsidiaries. None of the Group’s PRC reserve funds as at 31 December 2008 were distributable in the form of cash dividends.

— 87 —

APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

(b) Company

Notes At 1 July 2006 Loss for the year and total income and expense for the year 13 At 30 June 2007 and 1 July 2007 Share issue expenses and total income and expense recognized directly in equity Loss for the period 13 Total income and expense for the period Share placement 29(b)(i) Allotment of shares for the acquisition of Gainstar Limited 29(b)(ii) Issue of convertible bonds 32 Conversion of convertible bonds 29(b)(iii), 32 At 31 December 2008	Share Premium account Contributed surplus Convertible Bond equity reserve Accumulated losses HK$’000 HK$’000 HK$’000 HK$’000 — 60,859 — (36,513) — — — (1,176) — 60,859 — (37,689) (2,968) — — — — — — (47,168) (2,968) — — (47,168) 74,100 — — — 694,137 — — — — — 364,524 — 460,211 — (120,780) — 1,225,480 60,859 243,744 (84,857)	Total HK$’000 24,346 (1,176)
		23,170 (2,968) (47,168)
		(50,136) 74,100 694,137 364,524 339,431
		1,445,226

The Company’s contributed surplus account represents the excess of the fair value of the shares of the subsidiaries acquired pursuant to the group reorganisation undertaken in prior years, over the nominal value of the Company’s shares in exchange therefor. Under the Bermuda Companies Act 1981, the Company may make distribution to its members out of contributed surplus subject to the Company’s articles of association and provided that immediately following the distribution of dividends, the Company will be in a position to pay off its debts as and when they fall due in the ordinary course of business.

— 88 —

APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

31. BANK AND OTHER BORROWINGS

31 Bank loans, secured Other loans, unsecured Total bank and other borrowings Analysed into: Bank loans repayable: Within one year In the second year In the third to fifth years, inclusive Beyond five years Other loans repayable: Within one year In the second year In the third to fifth years, inclusive Beyond five years Total bank and other borrowings Portion classified as current liabilities Non-current portion	Group December 2008 HK$’000 1,155,949 43,160 1,199,109 201,224 137,159 420,309 397,257 1,155,949 11,017 4,203 12,607 15,333 43,160 1,199,109 (212,241) 986,868	30 June 2007 HK$’000 — —
		—
		— — — —
		—
		— — — —
		—
		— —
		—

Notes:

(a) The Group’s bank loans are secured by:
(i) mortgages over sewage treatment concession rights, land use rights and certain operating facilities of the sewage treatment plants which are under the management of the Group pursuant to the relevant service concession agreements signed with the grantors. These land use rights and operating facilities are normally registered under the names of the relevant entities in the Group and are required to be returned to the grantors at the end of the respective service concession periods (notes 5 and 17);

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FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

(ii) guarantees given by the Company and/or its subsidiaries; and/or
(iii) a pledge over the Group’s equity interest in Shenzhen Hua Qiang.
(b) HK$3,067,000 (30 June 2007: Nil) of the Group’s unsecured other loans as at 31 December 2008 were guaranteed by 濱州市水利局.
(c) All the Group’s bank and other loans as at 31 December 2008 are denominated in RMB. Except for an interest-free government loan of HK$6,815,000 and a bank loan of HK$68,148,000 which bears fixed interest rate at 7.47% per annum, all the Group’s bank and other loans bear interest at floating interest rates.

32. CONVERTIBLE BONDS

The Company issued six batches of convertible bonds during the period from 1 July 2007 to 31 December 2008, the summary information of which are set out as follows:

Group and Company

					Second	ZKC
	Tranche	Tranche	Firm	First Option	Option	Convertible
	1 Bond*	2 Bond*	Bonds*	Bond*	Bond*	Bonds*
	(note (a))	(note (a))	(note (b))	(note (b))	(note (b))	(note (c))
Issuance date	27/7/2007	31/3/2008	4/3/2008	17/7/2008	17/7/2008	24/7/2008
Maturity date	26/7/2010	30/3/2011	3/3/2011	16/7/2011	16/7/2011	23/7/2013
Original principal amount
(HK$’000)	100,000	100,000	200,000	300,000	200,000	589,304
Coupon rate	Zero	Zero	Zero	Zero	Zero	Zero
Conversion price per
ordinary share (HK$)	0.40	0.40	0.40	0.40	0.40	0.69

As defined in the respective circulars of the Company in connection with the issuance of the convertible bonds (see notes below).

— 90 —

APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

Each batch of these convertible bonds is bifurcated into a liability component and an equity component for accounting purposes as further described in the accounting policy for “Convertible bonds” set out in note 3.4 to the financial statements. The following tables summarise the movements in the principal amounts, liability and equity components of the Company’s convertible bonds during the period:

Group and Company

							ZKC
	Tranche	Tranche		First Option		Second	Convertible
	1 Bond	2 Bond	Firm Bonds	Bonds	Option Bonds		Bonds	Total
	HK$’000	HK$’000	HK$’000	HK$’000		HK$’000	HK$’000	HK$’000
	(note (a))	(note (a))	(note (b))	(note (b))		(note (b))	(note (c))
Principal amount
outstanding
At 1 July 2006, 30 June 2007
and 1 July 2007	—	—	—	—		—	—	—
Issue of convertible bonds	100,000	100,000	200,000	300,000		200,000	589,304	1,489,304
Conversion to ordinary shares	(66,000)	(20,000)	(20,000)	(300,000)		(200,000)	—	(606,000)
At 31 December 2008	34,000	80,000	180,000	—		—	589,304	883,304
Liability component
At 1 July 2006, 30 June 2007
and 1 July 2007	—	—	—	—		—	—	—
Issue of convertible bonds	82,724	78,707	160,228	239,315		159,543	404,263	1,124,780
Imputed interest expense
(note 9)	6,210	4,357	9,782	375		740	13,962	35,426
Transfer to share capital and
share premium accounts
upon conversion to
ordinary shares (note
29(b)(iii))	(58,155)	(16,157)	(16,646)	(239,690)		(160,283)	—	(490,931)
At 31 December 2008	30,779	66,907	153,364	—		—	418,225	669,275
Equity component (included
in convertible bond
equity reserve)
At 1 July 2006, 30 June 2007
and 1 July 2007	—	—	—	—		—	—	—
Issue of convertible bonds	17,276	21,293	39,772	60,685		40,457	185,041	364,524
Transfer to share capital and
share premium accounts
upon conversion to
ordinary shares (notes
29(b)(iii) and 30(b))	(11,402)	(4,259)	(3,977)	(60,685)		(40,457)	—	(120,780)
At 31 December 2008	5,874	17,034	35,795	—		—	185,041	243,744

— 91 —

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

Notes:

(a) Tranche 1 Bond and Tranche 2 Bond were issued to Pioneer Wealth Limited, a shareholder of the Company, pursuant to a convertible bond subscription agreement dated 12 April 2007 for the purpose of financing future investments in water treatment businesses in the PRC (as amended) and providing additional working capital (as amended) to the Group. Further details of these convertible bonds are set out in the Company’s circular dated 3 May 2007 and announcements dated 27 July 2007, 31 March 2008 and 12 June 2008.
(b) The Firm Bonds, the First Option Bond and the Second Option Bond were issued to BE Environmental, the immediate holding company, pursuant to the Shang Hua Subscription Agreement entered into between BEHL, BE Environmental and the Company for the purpose of financing investment and development of water treatment and environmental business and providing additional working capital to the Group. Further details of these convertible bonds are set out in the Company’s circular dated 18 February 2008.
(c) The ZKC Convertible Bonds were issued to the ZKC Environmental Vendors as part of the consideration for the acquisition of the 100% equity interest in Gainstar Limited, which holds indirectly a 88.43% equity interest in ZKC Environmental, pursuant to the ZKC Acquisition Agreement as further detailed in note 40(a) to the financial statement. Further details of the ZKC Convertible Bonds are set out in the Company’s circular dated 30 June 2008 (the “ZKC Acquisition Circular”).

33. FINANCE LEASE PAYABLE

The purchase of certain equipment, which forms part of a sewage treatment plant constructed by the Group, was financed by a finance lease arrangement with an original lease term of 5 years. Pursuant to the lease agreement, a deposit of RMB8,000,000 (equivalent to HK$9,086,000) is required to be placed at the lessor as a guarantee in respect of the arrangement, which will be refunded from the lessor upon the completion of all obligations by the Group under the lease arrangement (note 25(a)(iv)).

At 31 December 2008, the total future minimum lease payments under the finance lease and their present values were as follows:

Group

			Present value of	Present value of
	Minimum lease	Minimum lease	minimum lease	minimum lease
	payments	payments	payments	payments
	31 December	30 June	31 December	30 June
	2008	2007	2008	2007
	HK$’000	HK$’000	HK$’000	HK$’000
Amounts payable:
Within one year	6,953	—	5,311	—
In the second year	6,633	—	5,816	—
In the third year	4,975	—	4,743	—
Total minimum finance lease payments	18,561	—	15,870	—
Future finance charges	(2,691)	—
Total net finance lease payable	15,870	—
Portion classified as current liabilities	(5,311)	—
Non-current portion	10,559	—

— 92 —

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

34. PROVISION FOR MAJOR OVERHAULS

Pursuant to the service concession agreements entered into by the Group, the Group has contractual obligations to maintain the sewage and water treatment plants it operates to a specified level of serviceability and/or to restore the plants to a specified condition before they are handed over to the grantors at the end of the service concession periods. These contractual obligations to maintain or restore the sewage and water treatment plants, except for any upgrade element, are recognised and measured in accordance with HKAS 37, i.e., at the best estimate of the expenditure that would be required to settle the present obligation at the balance sheet date. The future expenditure on these maintenance and restoration costs is collectively referred to as “major overhauls”. The estimation basis is reviewed on an ongoing basis, and revised where appropriate.

The movements in the provision for the major overhauls of sewage and water treatment plants for the period ended 31 December 2008 and the year ended 30 June 2007, are as follows:

	Group
	Period from
	1 July 2007 to	Year ended
	31 December	30 June
	2008	2007
	HK$’000	HK$’000
At beginning of period/year	—	—
Acquisition of subsidiaries (note 40)	61,447	—
Additional provision	7,285	—
Increase in discounted amounts arising from the passage of time (note 9)	595	—
Exchange realignment	(321)	—
At end of period/year	69,006	—

35. DEFERRED INCOME

Deferred income of the Group represented subsidies received from third parties and government authorities in respect of the Group’s sewage treatment businesses. The subsidies are interest-free and not required to be repaid, and are recognised upon the completion of the relevant projects.

36. DEFERRED TAX

Net deferred tax assets/(liabilities) recognised in the consolidated balance sheet are as follows:

31 Deferred tax assets Deferred tax liabilities	Group December 2008 HK$’000 27,112 (59,707) (32,595)	30 June 2007 HK$’000 — —
		—

— 93 —

APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

The components of deferred tax assets and liabilities and the movements during the period are as follows:

Group

		Fair value			Temporary
		adjustments			difference
		arising from			related to
		acquisition	Impairment	Provision of	service
		of	and	major	concession
		subsidiaries	provision	overhauls	arrangements	Total
	Notes	HK$’000	HK$’000	HK$’000	HK$’000	HK$’000
At 1 July 2006, 30 June 2007 and
1 July 2007		—	—	—	—	—
Acquisition of subsidiaries	40	49,909	2,066	14,613	(91,291)	(24,703)
Deferred tax credited/(charged) to
the income statement during the
period	12	—	432	1,970	(10,653)	(8,251)
Exchange realignment		30	—	(78)	407	359
At 31 December 2008		49,939	2,498	16,505	(101,537)	(32,595)

Notes:

(a) The Group had unutilised tax losses of approximately HK$41,437,000 (30 June 2007: HK$78,964,000) as at 31 December 2008, that can be carried forward for five years from that date for offsetting against future taxable profits of the entities in which the losses arose. Deferred tax assets are recognised for tax losses carried forward only to the extent that the realisation of related benefits through future taxable profits is probable. The Group did not recognise deferred tax assets of HK$7,424,000 (30 June 2007: HK$13,828,000) as at 31 December 2008, in respect of such unutilised tax losses due to the unpredictability of future profit streams in the subsidiaries to which the tax losses relate.
(b) Pursuant to the New PRC CIT Law, a 10% withholding tax is levied on dividends declared to foreign investors from the foreign investment enterprises established in Mainland China. The requirement is effective from 1 January 2008 and applies to earnings after 31 December 2007. A lower withholding tax rate may be applied if there is a tax treaty between China and jurisdiction of the foreign investors. For the Group, the applicable rate is 5% or 10%. The Group is therefore liable to withholding taxes on dividends distributed by those subsidiaries established in Mainland China in respect of earnings generated from 1 January 2008.

At 31 December 2008, no deferred tax has been recognised for withholding taxes that would be payable on the unremitted earnings that are subject to withholding taxes of the Group’s subsidiaries established in Mainland China. In the opinion of the directors, it is not probable that these subsidiaries will distribute such earnings in the foreseeable future. The aggregate amount of temporary differences associated with investments in subsidiaries in Mainland China for which deferred tax liabilities have not been recognised is approximately HK$139,671,000 at 31 December 2008 (30 June 2007: Nil).

— 94 —

APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

(c) In the opinion of the directors, there are no income tax consequences regarding the Company’s convertible bonds issued during the period and hence, no deferred liabilities have been provided in respect to these convertible bonds.

37. TRADE PAYABLES

An aged analysis of the Group’s trade payables as at the balance sheet date, based on the invoice date, is as follows:

31 Within 3 months 4 to 6 months 7 months to 1 year 1 to 2 years 2 to 3 years Over 3 years	Group December 2008 HK$’000 45,965 12,911 2,561 12,508 4,390 6,860 85,195	30 June 2007 HK$’000 313 — — — — —
		313

The trade payables are non-interest-bearing and unsecured and are normally settled on 60-day terms.

38. OTHER PAYABLES AND ACCRUALS

31 Notes Accruals Other liabilities Other taxes payables 39 Due to a shareholder 26(d) Due to related parties 26 Portion classified as current liabilities Non-current portion	Group December 2008 30 June 2007 31 HK$’000 HK$’000 22,706 207 134,008 159 1,358 — 542,451 — 1,010 — 701,533 366 (632,205) (366) 69,328 —	Company December 2008 30 June 2007 HK$’000 HK$’000 4,277 8 — — — — 542,451 — — — 546,728 8 (546,728) (8) — —	Company December 2008 30 June 2007 HK$’000 HK$’000 4,277 8 — — — — 542,451 — — — 546,728 8 (546,728) (8) — —
			8 (8)
			—

— 95 —

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

The Group’s other liabilities as at 31 December 2008 included, inter alia, the following:

(i) outstanding considerations in the amounts of RMB33,680,000 (equivalent to HK$38,255,000) and RMB41,159,000 (equivalent to HK$46,748,000), payable to the Mianyang Government for the transfer and construction of sewage treatment facilities to the Group under a TOT arrangement and a BOT arrangement, respectively. The outstanding considerations will be repayable in four annual instalments of RMB15,000,000 and the last instalment of RMB14,839,000 being due for repayment in 2012.
(ii) outstanding consideration in the amount of RMB4,000,000 (equivalent to HK$4,543,000) payable to Taizhou Government for the transfer of a sewage treatment facility to the Group under a TOT arrangement. The balance is fully repayable in 2009.

Other payables are non-interest-bearing and have an average term of three months.

39. OTHER TAXES PAYABLES

31 Business tax Value-added tax Others	Group December 2008 HK$’000 211 239 908 1,358	30 June 2007 HK$’000 — — —
		—

— 96 —

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

40. BUSINESS COMBINATIONS

Except for the operating concessions of the ZKC Group and the Hua Qiang Group with respective carrying amounts of HK$212,479,000 and HK$414,293,000 immediately before the acquisitions, the fair values of the identifiable assets and liabilities of the subsidiaries acquired during the period as at their respective dates of acquisition have no significant differences from their respective carrying amounts, and are set out as follows:

ZKC Group Hua Qiang Group Notes HK$’000 HK$’000 (note (a)) (note (b)) Net assets acquired: Equipment 15 7,886 2,153 Operating concessions 17 101,702 334,403 Other intangible assets 18 1,219 — Interest in an associate 26,268 — Available-for-sale investment 457 — Prepayments, deposits and other receivables 76,532 15,021 Deferred tax assets 36 8,245 20,485 Inventories 1,999 897 Amounts due from contract customers 110,177 — Trade receivables 1,302,451 63,129 Cash and bank balances 79,928 221,764 Trade payables (67,442) (37,955) Other payables and accruals (194,196) (29,319) Income tax payable (10,304) (5,442) Bank and other borrowings (695,002) (275,461) Finance lease payable (16,675) — Provision for major overhauls 34 (58,627) (2,820) Deferred income (1,184) — Deferred tax liabilities 36 (41,806) (11,627) Minority interests (90,425) (137,902) 541,203 157,326 Goodwill on acquisition 16 1,357,139 109,621 1,898,342 266,947 Satisfied by: Cash — 266,947 New ordinary shares of the Company (a) 1,053,871 — New convertible bonds (a) 828,000 — Costs associated with the acquisitions 16,471 — 1,898,342 266,947 Profit for the period since acquisition 72,507 4,286	Total HK$’000 10,039 436,105 1,219 26,268 457 91,553 28,730 2,896 110,177 1,365,580 301,692 (105,397) (223,515) (15,746) (970,463) (16,675) (61,447) (1,184) (53,433) (228,327)
	698,529 1,466,760
	2,165,289
	266,947 1,053,871 828,000 16,471
	2,165,289
	76,793

— 97 —

APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

An analysis of the net inflow/(outflow) of cash and cash equivalents in respect of the acquisition of subsidiaries is as follows:

ZKC Group Hua Qiang Group HK$’000 HK$’000 (note (a)) (note (b)) Cash consideration — (266,947) Cash and bank balances acquired 79,928 221,764 Cash paid for costs associated with the acquisitions (16,471) — Net inflow/(outflow) of cash and cash equivalents in respect of the acquisition of subsidiaries 63,457 (45,183)	Total HK$’000 (266,947) 301,692 (16,471)
	18,274

Had the acquisition of the ZKC Group and the Hua Qiang Group taken place on 1 July 2007, the Group’s profit for the period before minority interests for the period ended 31 December 2008 would have been HK$220,149,000, and the Group’s revenue (comprising turnover and other income and gains, net) would have been HK$972,335,000.

Notes:

(a) Pursuant to the ZKC Acquisition Agreement entered into between, among others, the Company and the ZKC Environmental Vendors on 3 June 2008 and as approved by the Company’s shareholders at a special general meeting held on 15 July 2008, the Group acquired from the ZKC Environmental Vendors the entire issued share capital of Gainstar Limited, an investment holding company holding indirectly an aggregate of 88.43% equity interest in ZKC Environmental after the completion of its acquisition of Monico (see below). The acquisition was completed on 1 August 2008.

In accordance with the ZKC Acquisition Agreement, total consideration for the acquisition, subject to adjustments in certain circumstances, amounted to HK$1,370,665,000, of which HK$975,557,782 (the “Gainstar Consideration”) was payable to the ZKC Environmental Vendors for the transfer of the entire issued share capital of Gainstar Limited and the remaining balance of HK$395,107,218 (the “Monico Consideration”) payable to Tenson or its nominees for the transfer of the entire issued share capital of Monico to Gainstar Limited.

The Gainstar Consideration, which has been fully settled as at 31 December 2008, was satisfied by the allotment and issuance of 559,787,908 new ordinary shares of the Company and the issue of the ZKC Convertible Bonds with an aggregate principal amount of HK$589,304,125 by the Company to the ZKC Environmental Vendors. The fair value of the Gainstar Consideration amounted to approximately HK$1,339,420,000, being the aggregate amount of the fair value of the 559,787,908 consideration shares of HK$750,116,000 (determined based on the closing price of the Company’s ordinary shares on the Stock Exchange on the date of acquisition of 1 August 2008) and the nominal value of the ZKC Convertible Bonds issued. Further details of the ZKC Convertible Bonds are set out in note 32 to the financial statements.

The Monico Consideration, which remained unsettled as at the date of approval of these financial statements and is included in the amount due to a shareholder of the Group and the Company (note 26(d) and 38) as at 31 December 2008, is to be satisfied by the allotment and issuance of 226,683,106 new ordinary shares of the Company and the issue of convertible bonds with an aggregate principal amount of HK$238,695,875 (the “Monico Convertible Bonds”) by the Company to Tenson or its nominees. The fair value of the Monico Consideration

— 98 —

APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

amounted to approximately HK$542,451,000, being the aggregate amount of the fair value of the 226,683,106 consideration shares of HK$303,755,000 (determined based on the closing price of the Company’s ordinary shares on the Stock Exchange on the date of acquisition of 1 August 2008) and the nominal value of the Monico Convertible Bonds to be issued.

Further details of this transaction are set out in the ZKC Acquisition Circular.

The purchase price allocation in respect of the acquisition of the ZKC Group set out above is still preliminary, as the Gainstar Consideration is subject to adjustments contingent on future events, which include, inter alia, (i) the attainment of a profit for the year attributable to equity holders of RMB100 million by ZKC Environmental and its subsidiaries for the year ended 31 December 2008, as determined on the basis set out in the ZKC Acquisition Circular; and (ii) the ultimate settlement of billed trade receivables outstanding as at 1 August 2008 (date of completion of the acquisition of Gainstar Limited).

(b) Pursuant to a share transfer agreement dated 8 September 2008 (the “Hua Qiang Acquisition Agreement”) entered into between ZKC Environmental, Hong Qiao and two third parties independent to the Group, the Group acquired a 60% equity interest in Shenzhen Hua Qiang from the two third parties for a total cash consideration of RMB235,362,074 (equivalent to HK$266,947,000), which was fully settled during the period. The acquisition was completed on 28 September 2008.

Shenzhen Hua Qiang is an investment holding company holding a 80%, 83% and 55% equity interest in Hua Qiang Feng Tai, Hua Qiang Xihai and Hua Qiang Zhanhua, respectively. Shenzhen Hua Qiang and its three subsidiaries (collectively the “Hua Qiang Group”) are engaged in the operations of sewage and water treatment, and water distribution in Mainland China.

41. DISPOSAL OF SUBSIDIARIES

Pursuant to a sale and purchase agreement dated 27 May 2008, the Group disposed of its entire equity interest in Shanghai Classic Limited, a then wholly-owned subsidiary of the Company, to an independent third party for a cash consideration of HK$11,412,420. Shanghai Classic Limited and its subsidiary, 上海建開國際貿易有限公司, did not actively engage in any business at the date of disposal. Details of the disposal transaction are summarised as below:

	Period from
	1 July 2007 to	Year ended
	31 December 2008	30 June 2007
	HK$’000	HK$’000
Net assets disposed of:
Cash and bank balances	1,664	—
Prepayments, deposits and other receivables	10,875	—
	12,539	—
Exchange fluctuation reserve realised	(1,887)	—
Gain on disposal of subsidiaries (note 7)	760	—
	11,412	—
Satisfied by cash	11,412	—

— 99 —

APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

An analysis of the net inflow of cash and cash equivalents in respect of the disposal of subsidiaries is as follows:

	Period from
	1 July 2007 to	Year ended
	31 December 2008	30 June 2007
	HK$’000	HK$’000
Cash consideration	11,412	—
Cash and bank balance disposal of	(1,664)	—
Net inflow of cash and cash equivalents in respect of the disposal of
subsidiaries	9,748	—

42. NOTE TO THE CONSOLIDATED CASH FLOW STATEMENT

Major non-cash transactions

(a) The Gainstar Consideration for the acquisition of Gainstar Limited during the period was settled by way of the issue of new ordinary shares of the Company and convertible bonds by the Company, details of which are set out in note 40(a) to the financial statements.
(b) During the period, convertible bonds with an aggregate principal amount of HK$606,000,000 were converted into 1,515,000,000 ordinary shares of the Company (note 29(b)(iii)).

43. CONTINGENT LIABILITIES

At 31 December 2008, the Group did not have any significant contingent liabilities (30 June 2007: Nil).

At 31 December 2008, a corporate guarantee of RMB324,000,000 (equivalent to HK$367,999,000) was given by the Company to a bank in connection with a bank loan of an equivalent amount granted to a subsidiary of the Company (30 June 2007: Nil).

44. OPERATING LEASE ARRANGEMENTS

(a) As lessor

The Group leases certain portion of the buildings (which the Group has the right to use under service concession agreements) under operating lease arrangements, with the leases negotiated for terms ranging from 3 to 4 years. The terms of the leases generally also require the tenants to pay security deposits and to provide for periodic rent adjustments.

— 100 —

APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

At 31 December 2008, the Group had total future minimum lease receivables under non-cancellable operating leases with its tenants falling due as follows:

31 Within one year In the second to fifth years, inclusive	Group December 2008 HK$’000 282 517 799	30 June 2007 HK$’000 — —
		—

At 31 December 2008, the Company did not have any operating lease arrangements as lessor (30 June 2007: Nil).

(b) As lessee

The Group leases a piece of land, motor vehicle, certain office properties and staff quarters under operating lease arrangements with the leases negotiated for terms ranging from 1 to 45 years.

At 31 December 2008, the Group had total future minimum lease payments under non-cancellable operating leases falling due as follows:

31 Within one year In the second to fifth years, inclusive After five years	Group December 2008 HK$’000 1,734 3,024 8,580 13,338	30 June 2007 HK$’000 237 165 —
		402

At 31 December 2008, the Company did not have any operating lease commitments as lessee (30 June 2007: Nil).

— 101 —

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

45. COMMITMENTS

In addition to the operating lease commitment detailed in note 44(b) above, the Group had the following commitments at the balance sheet date:

31 Purchase of plant and equipment, and a land use right under service concession arrangements: Authorised, but not contracted for Contracted, but not provided for	Group December 2008 HK$’000 77,839 110,368 188,207	30 June 2007 HK$’000 — —
		—

At 31 December 2008, the Company had a capital commitment of HK$154,988,000 (30 June 2007: Nil) in respect of its capital contributions to a subsidiary, which is contracted but not provided for.

46. RELATED PARTY DISCLOSURES

(a) Other than the transactions and balances detailed in notes 25, 26, 29, 32 and 38 to the financial statements, the Group had no other transactions and outstanding balances with related parties during the period ended 31 December 2008 and the year ended 30 June 2007.
(b) Compensation of key management personnel of the Group

	Period from
	1 July 2007 to	Year ended
	31 December	30 June
	2008	2007
	HK$’000	HK$’000
Short term employee benefits	2,858	1,191
Pension scheme contributions	27	—
Total compensation paid to key management personnel	2,885	1,191

Further details of directors’ emoluments are included in note 10 to the financial statements.

47. FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES

The Group’s principal financial instruments comprise bank and other borrowings, convertible bonds, and cash and bank balances. The main purpose of these financial instruments is to raise finance for the Group’s operations. The Group has various other financial assets and liabilities such as trade receivables, deposits and other receivables, trade payables, other payables and amounts due from/to related parties/a shareholder, which arise directly from its operations.

— 102 —

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

The main risks arising from the Group’s financial instruments are interest rate risk, foreign currency risk, credit risk and liquidity risk. The directors of Company review and agree policies for managing each of these risks and they are summarised below.

Interest rate risk

Interest rate risk is the risk that the value and the future cash flows of a financial instrument will fluctuate because of changes in market interest rates. The Group is exposed to both fair value and cash flow rate risks. The Group’s exposure to market risk for changes in interest rates relates primarily to the Group’s long term debt obligations.

Banks loans, convertible bonds, cash and bank balances are stated at amortised cost and not revalued on a periodic basis. Floating rate interest income and expenses are credited/charged to the income statement as earned/incurred.

The following tables set out the carrying amounts, by maturity, of the Group’s financial instruments as at the balance sheet date that are exposed to interest rate risk:

		More than	More than	More than	More than
	Within	1 year but	2 years but	3 years but	4 years but			Effective
	1 year or on	less than	less than	less than	less than	More than		interest
	demand	2 years	3 years	4 years	5 years	5 years	Total	rate
	HK$’000	HK$’000	HK$’000	HK$’000	HK$’000	HK$’000	HK$’000	%
31 December 2008
Floating rate:
Cash and cash equivalents	663,174	—	—	—	—	—	663,174	0.35
Bank and other borrowings	137,279	141,362	153,838	150,766	128,311	412,591	1,124,147	7.01
Fixed rate:
Cash and cash equivalents	171,762	—	—	—	—	—	171,762	2.67
Bank and other borrowings	68,148	—	—	—	—	—	68,148	7.47
Convertible bonds	—	30,779	220,271	—	418,225	—	669,275	7.78
30 June 2007
Floating rate:
Cash and cash equivalents	29,287	—	—	—	—	—	29,287	1.84
Fixed rate:
Restricted cash and pledged
deposits	75	—	—	—	—	—	75	3.06

At 31 December 2008, it is estimated that a general decrease/increase of 100 basis points in interest rate of average balances of bank and other loans, cash and bank balances during the period/year, with all other variables held constant, would increase/decrease the Group’s profit before tax for the period ended 31 December 2008 by approximately HK$2,158,000 (year ended 30 June 2007: increase/decrease the Group’s loss before tax by approximately HK$307,000).

The sensitivity analysis above has been determined assuming that the change in interest rates had occurred at the respective balance sheet dates and had been applied to the exposure to interest rate risk for non- derivative financial instruments in existence at these dates. The 100 basis point decrease or increase represents management’s assessment of a reasonably possible change in interest rates over the period until the next annual balance sheet date.

— 103 —

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

Foreign currency risk

Foreign currency risk is the risk that the value of a financial instrument will fluctuate because of changes in foreign exchange rates. As a result of its significant investment operations in Mainland China, the Group’s balance sheet can be affected significantly by movements in the RMB/HK$ exchange rate.

The following table demonstrates the sensitivity at the balance sheet date to a reasonably possible change in RMB/HK$ exchange rate, with all other variables held constant, of the Group’s profit before tax and the Group’s equity.

		Increase/
		(decrease)	Increase/
		in profit	(decrease)
		before tax	in equity
		HK$’000	HK$’000
31	December 2008
If	Hong Kong dollar weakens against RMB by 5%	4,400	42,173
If	Hong Kong dollar strengthens against RMB by 5%	(4,400)	(42,173)
30	June 2007
If	Hong Kong dollar weakens against RMB by 5%	(8)	614
If	Hong Kong dollar strengthens against RMB by 5%	8	(614)

The Group has minimal transactional currency exposure which arises from sales or purchases by an operating unit in currencies other than unit’s functional currency.

Credit risk

Credit risk is the risk that one party to a financial instrument will cause a financial loss for the other party by failing to discharge an obligation.

The Group does not have any significant credit risk as credit given to any individual or corporate entity is not significant. The main credit risk exposure to the Group arises from default or delinquency in principal payment of trade receivables and amounts due from contract customers. In respect of trade receivables and amounts due from contract customers, the Group trades mainly with municipal government in different provinces which do not have significant credit risk. In addition, trade receivable balances and amounts due from contract customers are monitored on an ongoing basis, in the opinion of directors, the credit risk is not significant.

With respect to credit risk arising from the other major financial assets of the Group, which comprise deposits and other receivables, amounts due from related parties and cash and cash equivalents, the Group’s exposure to credit risk arises from default of the counterparties, with a maximum exposure equal to the carrying amounts of these instruments.

Liquidity risk

Due to the capital intensive nature of the Group’s business, the Group ensures that it maintains sufficient cash and credit lines to meet its liquidity requirements. The Group’s objective is to maintain a balance between continuity of funding and flexibility through the use of bank loans, other interest-bearing loans and convertible bonds. In the opinion of the directors of the Company, most of the borrowings that mature within one year can be renewed, and hence the Group expects to have adequate sources of funding to finance the Group and manage its liquidity position.

— 104 —

APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

The maturity profile of the Group’s financial liabilities as at each balance sheet dates based on the contracted undiscounted payments, was as follows:

31 December 2008 Bank loans Other loans Trade payables Other liabilities Finance lease payable Due to a shareholder Due to related parties Convertible bonds 30 June 2007 Trade payables Other liabilities	On demand HK$’000 — 6,815 — 15,863 — — 1,010 — 23,688 313 159 472	Within 1 year HK$’000 275,076 6,614 85,195 48,817 5,311 542,451 — — 963,464 — — —	More than 1 year but less than 2 years HK$’000 198,595 6,345 — 18,400 5,816 — — 30,779 259,935 — — —	More than 2 year but less than 3 years HK$’000 200,945 6,076 — 17,037 4,743 — — 220,271 449,072 — — —	More than 3 year but less than 4 years HK$’000 187,440 5,807 — 33,891 — — — — 227,138 — — —	More than 4 year but less than 5 years HK$’000 155,536 5,537 — — — — — 418,225 579,298 — — —	More than 5 years HK$’000 446,939 15,933 — — — — — — 462,872 — — —	Total HK$’000 1,464,531 53,127 85,195 134,008 15,870 542,451 1,010 669,275
								2,965,467
								313 159
								472

Fair values

The following table sets out a comparison by category of carrying amounts and fair values of the Group’s financial instruments that are carried in the financial statements at other than fair values. The fair values of these financial instruments have been calculated by discounting the expected future cash flows at prevailing interest rates.

31 Financial assets: Non-current trade receivables Non-current other receivables Financial liabilities: Non-current bank and other floating rate borrowings Convertible bonds Finance lease payable	Carrying amount December 2008 30 June 2007 31 HK$’000 HK$’000 1,238,309 — 13,173 — 986,868 — 669,275 — 10,559 —	Fair value December 2008 30 June 2007 HK$’000 HK$’000 1,238,309 — 13,173 — 986,868 — 713,028 — 10,559 —	Fair value December 2008 30 June 2007 HK$’000 HK$’000 1,238,309 — 13,173 — 986,868 — 713,028 — 10,559 —
			— — —

— 105 —

APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

Note: The carrying amounts of financial assets and liabilities which are due to be received or settled within one year are reasonable approximation of their respective fair values, and accordingly, no disclosure of the fair values of these financial instruments is made. In addition, as disclosed in note 21 to the financial statements, the available-for-sale investment of the Group is not stated at fair value but at cost less any accumulated impairment losses because fair value of which cannot be reasonably assessed and therefore no disclosure of the fair value of this financial instrument is made.

Capital Management

The primary objective of the Group’s capital management is to safeguard the Group’s ability to continue as a going concern, so that it can continue to provide returns to shareholders and benefits to other stakeholders, and to provide an adequate return to shareholders by pricing products and services commensurately with the level of risk.

The Group manages its capital structure and makes adjustments to it in the light of changes in economic conditions. In order to maintain or adjust the capital structure, the Group may issue new shares to increase capital or sell assets to reduce debt.

The Group monitors capital using the gearing ratio. This ratio is calculated based on net debt and total equity. Net debt is calculated as total interest-bearing bank and other borrowings and convertible bonds (as shown in the balance sheet) less cash and cash equivalents. The gearing ratios at 31 December 2008 and 30 June 2007 were as follows:

31 Net debt Total equity Gearing ratio	December 2008 HK$’000 1,033,448 1,997,957 52%	30 June 2007 HK$’000 —
		31,436
		0%

48. FINANCIAL INSTRUMENTS BY CATEGORY

Other than an unlisted equity investment being classified as an available-for-sale investment and financial assets at fair value through profit or loss as disclosed in notes 21 and 27 to the financial statements, respectively, all financial assets and liabilities of the Group and the Company as at 31 December 2008 and 30 June 2007 were loans and receivables, and financial liabilities stated at amortised cost, respectively.

49. EVENTS AFTER THE BALANCE SHEET DATE

Save as disclosed in note 26(c) to the financial statements, the following significant events occurred after the balance sheet date:

(i) On 8 January 2009, certain of the Firm Bonds and the ZKC Convertible Bonds in principal amounts of HK$60,000,000 and HK$34,244,700 were converted into 150,000,000 and 49,630,000 new ordinary shares of the Company at conversion prices of HK$0.40 and HK$0.69, respectively, resulting in additional issued share capital and share premium of the Company of HK$19,963,000 and HK$78,274,000, respectively.

— 106 —

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

(ii) At a special general meeting held on 19 January 2009, the Company’s shareholders approved a share transfer agreement dated 17 November 2008 entered into between the Group and a third party independent to the Group in relation to the acquisition of a 66.67% equity interest in Guigang Water, a limited liability company established in the PRC, at a cash consideration of RMB50,001,600.

In addition, in accordance with the share transfer agreement, after the registration of the transfer of 66.67% equity interests in Guigang Water to the Group, the Group shall made an additional capital contribution of RMB50,000,000 to Guigang Water to increase its equity interest in Guigang Water to 80%. As at the date of the approval of these financial statements, the legal process of the abovementioned transaction has not yet been completed. However, the directors of the Company is of the view that there is presently no legal barrier for the completion of the transaction.

Guigang Water and its subsidiaries are principally engaged in the operations of water treatment and distribution, and the provision of related water distribution services in Guigang Municipality, Guangxi Province, the PRC.

Further details of the acquisition are set out in the Company’s circular dated 31 December 2008.

Since the share transfer agreement was effected shortly before the date of approval of these financial statements, the Group is not yet in a position to disclose any financial impact of this transaction to the Group.

50. COMPARATIVE AMOUNTS

Certain comparative amounts have been reclassified to conform to the current period’s presentation.

51. APPROVAL OF THE FINANCIAL STATEMENTS

The financial statements were approved and authorised for issue by the board of directors on 30 March 2009.

— 107 —

OTHER INFORMATION OF THE GROUP

APPENDIX II

A. INDEBTEDNESS STATEMENT

Borrowings

At the close of business on 30 June 2009, being the Latest Practicable Date prior to the printing of this circular for the purpose of this indebtedness statement, the Group (as defined in this circular) had secured bank loans of HK$1,083,228,000, unsecured other loans of HK$60,699,000, finance lease payable of HK$13,161,000 and unsecured convertible bonds with a principal amount of HK$833,755,000 in aggregate.

The secured bank loans and the finance lease payable of the Group as at 30 June 2009 are secured by:

(i) mortgages over sewage treatment concession rights, land use rights and certain operating facilities of the sewage treatment plants which are under the management of the Group pursuant to the relevant service concession agreements signed with the grantors. The aforesaid land use rights and operating facilities are normally registered under the names of the relevant entities in the Group and are required to be returned to the grantors at the end of the respective service concession periods;
(ii) the Group’s equity interest in a subsidiary; and

(iii) corporate guarantees given by the Company and certain subsidiaries of the Group.

Contingent liabilities

At the close of business on 30 June 2009, the Group did not have any significant contingent liabilities.

Save as aforesaid or as otherwise disclosed herein and apart from intra-group liabilities, the Group did not have, at the close of business on 30 June 2009, other outstanding liabilities or any mortgages, charges, debentures, loan capital, bank overdrafts, loans, liabilities under acceptance or other similar indebtedness, hire purchase or finance lease obligations or any guarantees or other material contingent liabilities.

— 108 —

OTHER INFORMATION OF THE GROUP

APPENDIX II

B. MATERIAL ADVERSE CHANGE

As at the Latest Practicable Date, the Directors confirmed that there had been no material adverse change in the financial or trading position or prospect of the Group since 31 December 2008, the date to which the latest published audited financial statements of the Company were made up.

C. WORKING CAPITAL STATEMENT

The Directors, after due and carefully enquiry, are of the opinion that following the completion of the Services and Facilities Agreement, after taking into account the financial resources available to the Group, including internal resources, the available banking facilities, convertible bonds and other sources of financing, the Group has sufficient working capital for its present requirements for at least the next 12 months from the date of this circular.

D. MANAGEMENT DISCUSSION AND ANALYSIS

Set out below are the management discussion and analysis of the Group as extracted from the annual reports of the Company for the period from 1 July 2007 to 31 December 2008 and each of the two years ended 30 June 2007:

For the period from 1 July 2007 to 31 December 2008

FINANCIAL HIGHLIGHTS

In order to align the financial year end date of the Company with that of its holding company, BEHL, the Board of Directors (the “Board”) resolved to change the financial year end date of the Company from 30 June to 31 December commencing from the financial year 2008. As a result, the current financial period covers an eighteen months period from 1 July 2007 to 31 December 2008 (“the period”). Accordingly, the comparative amounts presented for the consolidated income statement and the related notes, which were prepared for the year ended 30 June 2007, are not comparable.

During the period, the revenue of the Group was HK$337.7 million, representing a surge of 17 times as compared with the financial year ended 30 June 2007 (“last year”). The profit attributable to shareholders of the Company for the period was HK$31.0 million which was substantially turned around from a loss of HK$2.6 million last year. Basic earnings per share for the period was HK3.82 cents (loss per share last year: HK3.08 cents). The substantial growth of profit for the period signified our success of strategic move from computer trading business to the provision of water service during this period. The Board does not recommend the payment of a final dividend for the period.

In August 2008, the Group has acquired Bei Kong ZKC Environmental Group, a leading operator in China’s water market. The net profit of Bei Kong ZKC Environmental Group for the twelve months ended 31 December 2008 was HK$148.6 million, representing an increase of 63% as compared with its corresponding period in 2007. Based on the Group’s 88.43% equity interest in Bei Kong ZKC Environmental Group, the net profit attributable to the Group would be HK$132.9 million. However,

After the elimination of intragroup transaction between Bei Kong ZKC Environmental Group and the Group

— 109 —

APPENDIX II

OTHER INFORMATION OF THE GROUP

since the completion of acquisition was in August 2008, the Group can only share five months profits of Bei Kong ZKC Environmental Group which amounted of HK$83.1 million*. In view of this, we believe the acquisition of Bei Kong ZKC Environmental Group has already laid a strong foundation for our business growth and prosperity in future years.

BUSINESS REVIEW

Upon the acquisition of Bei Kong ZKC Environmental Group, the principal business of the Group includes sewage treatment service, construction service, sewage technical service, water supply service and others. The financial results of these businesses during the period are set out in details below:

Sewage treatment service Construction service Sewage technical service Water supply service Computer trading	Revenue GP ratio Net profit attributable to the Group* HK$’M % % HK$’M % 138.2 41% 61% 30.5 36% 131.3 39% 14% 11.8 14% 51.2 15% 95% 40.3 48% 6.1 2% 56% 1.3 2% 10.9 3% 1% 0.0 0% 337.7 100% 83.9 100%	Revenue GP ratio Net profit attributable to the Group* HK$’M % % HK$’M % 138.2 41% 61% 30.5 36% 131.3 39% 14% 11.8 14% 51.2 15% 95% 40.3 48% 6.1 2% 56% 1.3 2% 10.9 3% 1% 0.0 0% 337.7 100% 83.9 100%
		100%

Profit for the period attributable to shareholders of the Company of HK$31.0 million was arrived after deducting head office overheads of HK$16.7 million and convertible bond interest of HK$35.4 million from the Bei Kong ZKC Environmental Group’s net profit attributable to the Group of HK$83.1 million*. Bei Kong ZKC Environmental Group’s net profit attributable to the Group of HK$83.1 million was arrived after deducting share of loss of an associate of HK$0.8 million from the net profit attributable to the Group contributed by the principal business of HK$83.9 million as stated above.

Sewage treatment service

General situation

The Group commenced its sewage treatment service since the acquisition of Bei Kong ZKC Environmental Group in August 2008. Bei Kong ZKC Environmental Group is one of the leading operators in China’s water market with a key focus on waste water treatment. As at 31 December 2008, the Group has 20 sewage treatment plants across China which are capable of processing 1,480,000 tonnes of waste water per day. Sewage treatment capacity of 1,140,000 tonnes are in operation and the remaining 340,000 tonnes are under construction. The average price of water treatment is approximately HK$1.02 per tonne. The actual processing volume from 1 August 2008 (as at the

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APPENDIX II

OTHER INFORMATION OF THE GROUP

acquisition date of Bei Kong ZKC Environmental Group) to 31 December 2008 was 114.3 million tonnes contributing a revenue of HK$138.2 million during the period, which represents 41% of the Group’s total revenue. Net profit attributable to the Group was HK$30.5 million. The information of sewage treatment service in China is as follows:

1. Western China

Bei Kong ZKC Environmental Group has established its footprint in Western China since 2002. Riding on its extensive experience in this region, the Group has established seven water plants with total daily processing capacity of 415,000 tonnes, of which 315,000 tonnes are in operation and 100,000 tonnes are under construction. The name of seven water plants are Mianyang, Jiangyou, Huayang, Shuangliu, Longquan, Guizhou and Pengzhou respectively. They are mainly located in Sichuan and Yunan. The actual processing volume from 1 August 2008 to 31 December 2008 was 31.6 million tonnes contributing an operating revenue of HK$35.6 million during the period. Net profit attributable to the Group amounted to HK$9.7 million.

2. Southern China

The Group’s expansion in Southern China was rapid during the period. Through the acquisition of Bei Kong ZKC Environmental Group, the Group had taken over three new projects with daily processing capacity of 330,000 tonnes in Southern China. Following a series of successful bidding in water projects and acquisition in the fourth quarter of 2008, the Group’s water treatment capacity in this region has been doubled to 680,000 tonnes at the end of 2008. As at 31 December 2008, the Group has six water plants in this region and are mainly located in Guangdong and Hunan provinces. The name of water plants are Zhongye, Guangzhou, Changsha, Sanshui, Yongzhou and Shenzhen Hua Qiang respectively. Those water processing capacities of 530,000 tonnes are in operation and the remaining 150,000 tonnes are still under construction. The newly acquired Shenzhen Hua Qiang project has daily processing capacity of 200,000 tonnes. It was consolidated into the Group’s results since the completion of acquisition in October 2008. The actual processing volume from 1 August 2008 to 31 December 2008 amounted to 43.7 million tonnes contributing an operating revenue of HK$54.9 million and net profit attributable to the Group of HK$10.2 million during the period.

3. Eastern China

The Group’s investments in Eastern China are mainly focused in Shandong province. With the fast-growing industrial activities, the demand for waste water treatment service is relatively high in Shandong. Favorable policies were introduced by the municipal government to attract foreign and private investments in water industry. Taking this advantage, the Group has established six treatment plants with total daily processing capacity of 295,000 tonnes in Shandong. The name of six water plants are Jiaonan, Heze, Jiaozhou, Shangma, Zhanhua Hua Qiang and Jinan respectively. Together with Taizhou Project in Zhejiang province, the Group has achieved processing capacity of 385,000 tonnes per day, of which 90,000 tonnes was under construction. The actual processing volume from 1 August 2008 to 31 December 2008 was 39.0 million tonnes contributing an operating revenue of HK$47.7 million during the period. Net profit attributable to the Group was HK$10.6 million.

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APPENDIX II

Construction service

Bei Kong ZKC Environmental Group has entered into a number of service concession contracts on a BOT basis in respect of its sewage treatment business. Under HK(IFRIC)-Int 12 Service Concession Arrangements, Bei Kong ZKC Environmental Group should recognize the construction revenue with reference to the fair value of the construction service delivered in the building phase. The fair value of such service is estimated on a cost-plus basis with reference to a prevailing market rate of gross margin at the inception date of service concession agreement. Construction revenue is recognized by using the percentage of completion method.

During the period, three water plants namely Longquan, Taizhou Phase II and Mianyang Phase III were under construction. These water plants are located in Sichuan and Zhejiang province. The total design capacity of these water plants is 120,000 tonnes. Total construction revenue generated by these water plants for the period was HK$131.3 million and net profit attributable to the Group was HK$11.8 million. At present, the construction of these water plants is running smoothly and it is expected that the operation of these water plants shall commence in 2009. Apart from this, four water plants namely Pengzhou, Sanshui, Yongzhou and Jinan Phase II with aggregate design capacity of 220,000 tonnes have just conducted the preliminary construction planning work at the end of 2008 and thus no construction revenue was contributed during the period. The construction work of these water plants shall commence in 2009.

Sewage technical service

Bei Kong ZKC Environmental Group, being an all-rounded market player in water market, has not only acquired extensive experience in bidding, building and operating waste water treatment projects, but also successfully marketed its patented treatment technology, “LIER-POOLK” to other operators. The patented treatment technology is characterized as cost-saving and has complied with government standards. Revenue from the provision of technical services was HK$51.2 million which represents 15% of the Group’s total revenue. The net profit attributable to the Group was HK$40.3 million.

Water supply service

While the Group has gained strong presence in China’s waste water treatment sector, it has also started to explore water supply market. In October 2008, the Group has acquired Binzhou Hua Qiang project in Shandong with a design water supply capacity of 50,000 tonnes per day. Though the revenue contribution from water supply service was minimal during the period, it generated revenue of HK$6.1 million (2% of the Group’s total revenue) and net profit attributable to the Group of HK$1.3 million. The Group expects great growth potential from this sector in future. From the track record, the annual water supply increment for Binzhou Hua Qiang project is over 10%. When its water supply volume reaches 50,000 tonnes, the Group is entitled to start phase II construction of the above project.

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OTHER INFORMATION OF THE GROUP

APPENDIX II

FINANCIAL PERFORMANCE ANALYSIS

Income and expenditure

Revenue

During the period, the Group recorded revenue of HK$337.7 million, representing a surge of 17 times as compared with the year ended 30 June 2007. This was mainly attributable to the newly acquired water treatment business in August 2008 which bolsters the substantial growth of the Group’s revenue.

Cost of sales

As a result of the business expansion, the cost of sales also increased by 828.6% to HK$182.9 million. The costs of sales mainly included construction cost of HK$113.4 million and operating cost of water plants of HK$56.0 million. The construction cost was mainly represented by the subcontracting charges. For the operation of water plants, the major costs were electricity charges of HK$19.9 million, staff cost of HK$9.7 million and major overhaul charge of HK$7.3 million. Major overhaul charge was the estimated expenditure to be incurred for the restoration of water plants before they are handed over to the grantor at the end of service arrangement. The amount was estimated based on discounted future cash outlays on major overhauls during the service concession periods. The amount was charged to income statement based on amortisation method during the service concession periods.

Gross profit margin

During the period, gross profit margin increased sharply from 1.0% to 45.8% as a result of successful business transformation from computer trading to the provision of water services. Due to keen competition in the computer consumer products market, only low profit margin was generated last year. Whereas, the provision of water service can generate higher profit margin due to relatively low cost input.

Other income and gains, net

The Group recorded other income of HK$11.4 million (2007: HK$1.4 million). The increase was mainly due to interest income growth of HK$8.1 million driven by bank deposits from fund raising activities held during this period.

Administrative expenses

Administrative expenses increased 907.1% from HK$4.2 million in 2007 to HK$42.3 million in the period which was mainly resulted from the increase in scale of operation. As a result of the business expansion, the number of staff employed by the Group increased to 1,025 employees from 18 employees in last year. Accordingly, staff cost included in administrative expenses for this period increased significantly to HK$18.5 million, representing increase of 11 times as compared with last year.

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OTHER INFORMATION OF THE GROUP

APPENDIX II

Finance costs

Finance costs mainly comprised interest on bank and other borrowings of HK$23.6 million and convertible bond interest of HK$35.4 million. During the period, zero coupon convertible bonds of HK$1,489.3 million were issued by the Company to finance the funding for new business development and acquisition, which resulted in imputed interest expenses of HK$35.4 million. The imputed interest was resulted from accounting treatment and it did not affect the actual cashflow of the Group.

Tax

Income tax expense for the period included current PRC income tax of HK$3.9 million. The effective tax rate for PRC operation was around 8% which was lower than the PRC income tax rate of 25% as some of the subsidiaries enjoyed tax concession benefit during the period. Deferred tax for the period was HK$8.3 million.

Liquidity and financial resources

During the period, the Group has revamped its business strategy and actively seeked various opportunities to step into water treatment market. With a view to capitalizing sufficient financial resources for new business development, the Company raised total proceed of HK$998.8 million during the period by debt and capital financing. These capital resources provided a substantial support for the Group’s expansion and development in the water treatment and environmental businesses.

1. Debt financing

The Company issued convertible bonds with an aggregated principal amount of HK$200 million to Pioneer Wealth Limited, a shareholder of the Company, and convertible bonds with principal value of HK$700 million to Beijing Enterprises Environmental Construction Limited (formerly known as Lucky Crown Management Limited and a wholly-owned subsidiary of BEHL).

2. Capital financing

To further strengthen its financial base, the Company issued 247,000,000 new shares at a subscription price of HK$0.40 and generated total funding of HK$98.8 million.

Apart from fund raising purpose during the period, 559,787,908 new shares at HK$0.69 per share and convertible bonds with principal value of HK$589.3 million were also issued as consideration for acquisition of Bei Kong ZKC Environmental Group.

As at 31 December 2008, the issued shares of the Company has increased to 2,405,073,357 shares. Since the convertible bonds contain both financial liability and equity components, the proceeds from issuance are classified separately as liability and reserves under equity. Thus, the issuance of convertible bonds also gives rise to the increase in equity. Accordingly, together with the effect of issuance of new shares, total equity of the Group increased significantly to HK$1,998.0 million.

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APPENDIX II

OTHER INFORMATION OF THE GROUP

As at 31 December 2008, the Group has achieved a strong liquidity position with cash and cash equivalents surged to HK$834.9 million. The funds were mainly raised through the issuance of new shares and convertible bonds during the period.

The Group’s total borrowings amounted to HK$1,868.4 million as at 31 December 2008, comprising convertible bonds of HK$669.3 million and bank and other borrowings of HK$1,199.1 million. The bank and other borrowings are carried in PRC subsidiaries for the financing of construction of water plants and thus were mainly repayable in long term. Only 17.7% of the bank and other borrowings are repayable within one year. The gearing ratio (defined as total borrowings, net of cash and cash equivalents, divided by the total equity) was 0.52 as at 31 December 2008.

Capital expenditures

During the period, the Group’s total capital expenditures were HK$271.5 million (2007: HK$27,000), of which HK$4.6 million was spent on the acquisition of property, plants and equipments while HK$266.9 million was paid as consideration of the acquisition of Shenzhen Hua Qiang. The significant increase in capital expenditures was in line with the expansion plans of the Group.

PROSPECT

Looking ahead, the Group will progressively reduce its reliance on trading of computers and related products. Yet, the Company does not intend to dispose of the existing computer business. It is expected that with the proposed business diversification, the contribution from the computer business to the Group would become less material.

On the other hand, the Group will focus on water treatment and environmental businesses. Given that most of bidding and acquisition of water plants took place since August 2008, there are rooms for the growth of the Group’s operating results. In addition, the Group shall continuously achieve the growth through both greenfield development and acquisition. Recently, the Group has acquired Guigang Water in Guangxi province which has a water supply plant and a sewage treatment plant with daily capacity of 100,000 tonnes respectively. Guigang city is one of the fast-growing cities in Guangxi. With the rapid industrial and urban development in Guigang city, the demand of water supply and sewage treatment will continue to accelerate. The Group has also signed some memorandum of understanding for waste water treatment projects and water supply projects with an aggregated water treatment capacity of approximately 1.2 million tonnes and daily water supply capacity of 1.0 million tonnes. These potential projects are mainly located in Heilonjiang and Yunan. The Group is also evaluating certain waste water treatment and water supply projects in provinces and cities such as Beijing, Fujian, Guizhou, Hebei and Hunan with a total capacity of approximately 5.6 million tonnes per day for waste water treatment and 1.6 million tonnes per day for water supply. We shall continue to identify and actively seek water treatment and environmental projects with sound potential growth so as to generating considerable return for shareholders and investors.

Employees and remuneration policies

As at 31 December 2008, the Group employed 1,025 employees. The Group’s remuneration packages are generally structured by reference to market terms and individual merit. Salaries are normally reviewed on an annual basis based on performance appraisals and other relevant factors.

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OTHER INFORMATION OF THE GROUP

APPENDIX II

Significant investments and acquisitions

During the period from 1 July 2007 to 31 December 2008, the Group acquired 88.43% equity interests in Bei Kong ZKC Environmental Group for HK$1,898,342,000 and 60% equity interests in Shenzhen Bei Kong for HK$266,947,000.

Saved as mentioned above, the Group had no material significant investments and acquisitions of subsidiaries and affiliated companies during the year ended 31 December 2008.

Capital commitments

As at 31 December 2008, the Group did not have any capital commitment.

Contingent liabilities

At 31 December 2008, the Group did not have any significant contingent liabilities.

Charges on group assets

Saved as mentioned above, the Group did not have any charges on the Group’s assets.

Foreign exchange exposure

The Group’s exposure to currency exchange rate is minimal as majority of the subsidiaries of the Group operates in the PRC with most of the transaction denominated and settled in RMB. Accordingly, the Group has not use derivative financial instruments to hedge its foreign currency risk.

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OTHER INFORMATION OF THE GROUP

APPENDIX II

For the year ended 30 June 2007

Financial Review

Results

For the year ended 30 June 2007, the Group recorded a turnover of approximately HK$19,899,000, representing a decrease of approximately 44.39% as compared to the last year (2006: HK$35,786,000). This significant contraction in business during the financial year is a result of keen competition in the computer consumer products market during the year.

The Group’s gross profit margin was approximately 1.03% for the year ended 30 June 2007 as compared to approximately 2.45% in 2006. Other revenue earned by the Group for the year ended 30 June 2007 was approximately HK$1,362,000, representing an increase of approximately 57.82% as compared to the last year (2006: HK$863,000).

The Group’s administrative expense was approximately HK$4,186,000 for the year ended 30 June 2007, representing a decrease of approximately 13.99% as compared to the last year (2006: HK$4,867,000).

The Group has no finance cost during the year ended 30 June 2007 as the Group incurred no borrowing for the year.

For the year ended 30 June 2007, the loss attributable to shareholders of the Group was amounted to HK$2,567,000, representing an improvement of approximately HK$621,000 or a decrease of approximately 19.48% as compared to the last year (2006: HK$3,188,000). This improvement was due to the effective control of the overall operating expenses of the Group.

Significant investments and acquisitions

The share capital of Shang Hua Capital Limited, a wholly-owned subsidiary of the Company, was increased from HK$200,000 to HK$10,000,000.

Saved as mentioned above, the Group had no material significant investments and acquisitions of subsidiaries and affiliated companies during the year ended 30 June 2007. (2006: Nil).

Capital commitments

As at 30 June 2007, the Group did not have any capital commitment (2006: Nil).

Contingent liabilities

As at 30 June 2007, the Group did not have any contingent liabilities (2006: Nil).

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OTHER INFORMATION OF THE GROUP

APPENDIX II

Charges on group assets

As at 30 June 2007, the Group pledged bank deposits of approximately HK$75,000 (2006: HK$75,000), which carry fixed interest rate of 3.75% to secure general banking facilities granted to a subsidiary.

Saved as mentioned above, the Group did not have any charges on the Group’s assets.

Foreign exchange exposure

The Group mainly earns revenue and incurs cost in Hong Kong dollars and Renminbi. The Directors consider the impact of foreign exchange exposure of the Group is not significant as the terms of purchase and sales contracts dealt with foreigners will consider the foreign exchange effect and will not bear unforeseeable foreign currency exchange risk.

Liquidity and financial resources

The Group generally finances its operations with internally generated resources. As at 30 June 2007, the Group did not have any banking facilities.

As at 30 June 2007, there was a surplus in the shareholders’ funds amounting to approximately HK$31,436,000 (2006: HK$33,352,000). Current assets amounted to approximately HK$32,044,000, of which approximately 91.4% or HK$29,287,000 was bank and cash balances. The Group’s current liabilities amounted to approximately HK$679,000 which mainly was trade and other payables. The current ratio was about 47 with times (2006: 46 times). Basically, the Group’s own liquid resources are sufficient to finance the existing business activities of the Company.

On 12 April 2007, the Company entered into a subscription agreement with the major shareholder, Pioneer Wealth Limited, in which the Company contemplated to issue convertible bonds to Pioneer Wealth Limited in the aggregate amount of HK$200 million. The new funding is primarily for development of the new business in financial service sector in next two years.

Furthermore, the Group has sufficient resources to enable the Company to participate into new business if and when suitable opportunity arises.

Gearing ratio

As at 30 June 2007, the Group’s gearing ratio was almost zero as the Group has no borrowing.

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OTHER INFORMATION OF THE GROUP

APPENDIX II

Employees and Remuneration Policies

As at 30 June 2007, the Group had 18 employees (including the directors) (2006: 14) and staff costs (excluding directors’ remuneration) amounted to approximately HK$2,503,000 (2006: HK$2,425,000) whilst the directors’ remuneration amounted to approximately HK$764,000 (2006: HK$484,000). The Group’s remuneration packages are generally structured by reference to market terms and individual merit. Salaries are normally reviewed on an annual basis based on performance appraisals and other relevant factors. All of the share options were lapsed on 30 June 2003 and during the year, no share option has been granted or exercised. The Group operates a Mandatory Provident Fund Scheme for all qualifying employees. Employees of the Group in the PRC are members of the state-sponsored pension operated by the PRC government. The Group is required to contribute a certain percentage of their payroll to the pension scheme to fund the benefits.

The Group has continued and will continue to employ additional operational and business development personnel to strengthen the operation of the Group and to promote the Group’s products.

Business Review

In the year under review, the competition in computer consumer products was keen, and the turnover and gross profit margin were continued declining. This situation of intense competition is expected to continue and the Board believes that prospects in this market will not be exciting in the near term future.

The Group will continue to identify and actively seek prospective business to broaden its income sources.

On the other hand, the Group has imposed effective cost controls to reduce the administrative costs by approximately 13.99% for the year ended 30 June 2007.

Prospects

Given the keen competition in the computer consumer products market in recent years, the Group is pessimistic about its future prospects. The Group has revamped its business strategy by diversifying its focus and resources to new business, and will continue to develop and introduce new profitable business. In time, the Group will continue to collaborate with local co-operative partners to seek prospective business in areas of high growth.

The Group believes its business prospects in the near future especially in view of the increasing attractions of financial markets in Hong Kong, Macau and China, as well as the increasing demand on environmental protection worldwide.

The Group is expecting to realize stronger and better business performance in the coming future.

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OTHER INFORMATION OF THE GROUP

APPENDIX II

For the year ended 30 June 2006

Results

Revenue of the Group for the year amounted to approximately HK$35,786,000, representing a decrease of 45.81% over the last financial year. The net loss for the year amounted to approximately HK$3,188,000.

Dividend

The board of Directors (the “Board”) does not recommend the payment of any dividend for the year ended 30 June 2006.

Business Review And Prospects

There is keen competition in the market of computer consumer products. The gross profit margin has decreased from 2.94% to 2.45% compared to last financial year.

The Group will continue its existing business which focus on the computer consumer products, including various types of computer products including wireless LAN, broadband router, Ethernet LAN, PCMCIA adapter, flash memory, card reader and various types of storage solution in Hong Kong.

The Group will continue to seek opportunities to diversify the business of the Group in order to broaden the revenue base.

Financial And Capital Structure

On 22 August 2005, the Company raised net proceeds of approximately HK$2.6 million by an open offer of 27,761,816 offer shares at HK$0.10 per share on the basis of one offer share for every two shares held (the “Open Offer”) to provide additional working capital for the Group. Upon completion of the Open Offer, the number of ordinary shares issued and fully paid of the Company was increase from 55,523,633 to 83,285,449. As at 30 June 2006, the bank and cash balances were totalling approximately HK$32,088,000. The current ratio was about 46 times with the net current assets amounting to approximately HK$33,255,000. Basically, the Group’s own liquid resources are sufficient to finance the existing business activities of the Company. The gearing ratio has remained almost at zero for the past three years. The Group has little exposure to foreign exchange fluctuations as most of its assets, receipts and payment are in Hong Kong dollars or Chinese Renminbi. At 30 June 2006, the Group was not liable to any borrowings or guarantees given to any banks or financial institutions. In addition, other than bank deposits of approximately HK$75,000 were pledged to secure general banking facilities granted to a subsidiary, none of Group’s assets was charged or subject to encumbrance.

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OTHER INFORMATION OF THE GROUP

APPENDIX II

Employee And Remuneration Policies

Including the directors of the Group, as at 30 June 2006, the Group employed a total of approximately 14 staffs. The Group’s remuneration packages are generally structured by reference to market terms and individual merit. Salaries are normally reviewed on an annual basis based on performance appraisals and other relevant factors. All of the share options were lapsed at 30 June 2003 and during the year, no share option has been granted or exercised. The Group operates a Mandatory Provident Fund Scheme for all qualifying employees. Employees of the Group in the PRC are members of the state-sponsored pension operated by the PRC Government. The Group is required to contribute a certain percentage of their payroll to the pension scheme to fund the benefits.

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GENERAL INFORMATION

APPENDIX III

1. RESPONSIBILITY STATEMENT

This circular includes particulars given in compliance with the Listing Rules for the purpose of giving information with regard to the Group. The Directors collectively and individually accept full responsibility for the accuracy of the information contained in this circular and confirm, having made all reasonable enquiries, that to the best of their knowledge and belief, there are no other facts the omission of which would make any statement herein misleading.

2. DISCLOSURE OF INTERESTS

(a) Directors’ interests and short positions in the securities of the Company and its associated corporations

As at 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 any associated corporation (within the meaning of Part XV of the SFO) which (a) 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 any such Director and chief executive of the Company is taken or deemed to have under such provisions of the SFO); or which (b) were required to be entered into the register maintained by the Company, pursuant to Section 352 of the SFO; or which (c) were required to be notified to the Company and the Stock Exchange, pursuant to the Model Code for Securities Transactions by Directors of Listed Companies contained in the Listing Rules are set out below:

(i) Long positions in the Shares and underlying shares of the Company

			Approximate
		Number of	percentage of
		shares of	the issued
Name of Director	Nature of Interest	the Company	share capital
Mr. Hu Xiaoyong	Interest of controlled	585,547,693	16.90%
	corporation (Note 1)
Mr. Wang Taoguang	Interest of controlled	324,152,081	9.35%
	corporation (Note 2)
Mr. Zhou Min	Interest of controlled	585,547,693	16.90%
	corporation (Note 1)

Notes:

Messrs. Hu Xiaoyong, Zhou Min and Hou Feng are interested in Tenson Investment Limited as to approximately 52.62%, 44.94% and 2.45% respectively. Tenson Investment Limited holds 129,021,081 Shares and 456,526,612 underlying Shares and therefore is therefore interested in 585,547,693 Shares in total.
Mr. Wang Taoguang and his spouse Ms. Zhang Lan each are interested in Newton Finance Holdings Limited as to 50% respectively. Newton Finance Holdings Limited holds 125,383,413 Shares and 198,768,668 underlying Shares and is therefore interested in 324,152,081 Shares in total.

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APPENDIX III

GENERAL INFORMATION

(ii) Long positions in the shares of associated corporations

		Approximate
	Number of	percentage of
	shares of	the issued
Name of Director	BEHL	share capital
Mr. E Meng	40,000	0.004%
Mr. Jiang Xinhao	10,000	0.001%

Note: Based on the total number of issued shares of BEHL of 1,137,281,000 Shares as at the Latest Practicable Date.

(iii) Long position in underlying shares of associated corporations

		Number of
Name of Director	Name of the associated corporations	share options
Mr. Jiang Xinhao	BEHL	30,000

Save as disclosed above, as at the Latest Practicable Date, none of the Directors, the chief executive of the Company nor their associates, had any other interests or short positions in the Shares, underlying Shares and debentures of the Company or any associated corporations (within the meaning of Part XV of the SFO) which (a) 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 any such Director or the chief executive of the Company is taken or deemed to have under such provisions of the SFO); or which (b) were required to be entered into the register maintained by the Company, pursuant to Section 352 of the SFO; or which (c) were required to be notified to the Company or the Stock Exchange, pursuant to the Model Code for Securities Transaction by Directors of Listed Companies contained in the Listing Rules.

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GENERAL INFORMATION

APPENDIX III

(b) Persons who have interests or short positions which are discloseable under Divisions 2 and 3 of Part XV of the SFO

As at the Latest Practicable Date, the register of substantial shareholders maintained under Section 336 of the SFO, showed that the Company has been notified of the following interests, being 5% or more of the Company’s issued share capital. These interests are in addition to those disclosed above in respect of the Directors and the chief executive of the Company.

Interests in the Shares and underlying shares of the Company

	Number of ordinary shares and underlying	Number of ordinary shares and underlying	Number of ordinary shares and underlying
	shares held, capacity and nature of interest			Percentage of
	Directly	Through		the Company’s
	beneficially	controlled		issued share
Name	owned	corporation	Total	capital
Beijing Enterprises Environmental	1,997,000,000	—	1,997,000,000	57.62%
Construction Limited
(“BE Environmental”)
BEHL	—	1,997,000,000(a) 1,997,000,000		57.62%
Beijing Enterprises Group (BVI)	—	1,997,000,000(b) 1,997,000,000		57.62%
Company Limited (“BE Group
BVI”)
Beijing Enterprises Group Company	—	1,997,000,000(c) 1,997,000,000		57.62%
Limited (“Beijing Enterprises
Group”) 北京控股集團有限公司
Tenson Investment Limited(d)	585,547,693	—	585,547,693	16.90%
Besto Holdings Limited(e)	197,980,590	—	197,980,590	5.71%
Newton Finance Holdings Limited(f)	324,152,081	—	324,152,081	9.35%
Faith Access Holdings Limited(g)	218,338,540	—	218,338,540	6.30%
Allyking Holdings Limited(h)	195,820,963	—	195,820,963	5.65%

Notes:

(a) BEHL is deemed to be interested in the 1,997,000,000 Shares by virtue of its controlling interests in its wholly-owned subsidiary, BE Environmental.
(b) The interest disclosed includes the Shares owned by BEHL as detailed in note (a). BEHL is held directly as to approximately 36.16% by BE Group BVI. Accordingly, BE Group BVI is deemed to be interested in the Shares owned by BEHL.
(c) The interest disclosed includes the Shares owned by BE Group BVI as detailed in note (b). BE Group BVI is held directly as to 100% by Beijing Enterprises Group. Accordingly, Beijing Enterprises Group is deemed to be interested in the Shares held by BE Group BVI.
(d) The share capital of Tenson Investment Limited is beneficially owned as to approximately 52.62% by Mr. Hu Xiaoyong and as to approximately 44.94% by Mr. Zhou Min, both of whom are regarded as interested in the 585,547,693 Shares (comprising 129,021,081 Shares and 456,526,612 underlying Shares) owned by Tenson Investment Limited.

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APPENDIX III

GENERAL INFORMATION

(e) The entire share capital of Besto Holdings Limited is beneficially owned by Mr. Xiao Wei Hong, who is regarded as interested in the 197,980,590 Shares (comprising 48,841,922 Shares and 149,138,668 underlying Shares) owned by Besto Holdings Limited.
(f) The share capital of Newton Finance Holdings Limited is beneficially owned by Mr. Wang Taoguang and his spouse Ms. Zhang Lan each by 50% respectively, both of whom are regarded as interested in the 324,152,081 Shares (comprising 125,383,413 Shares and 198,768,668 underlying Shares) owned by Newton Finance Holdings Limited.
(g) The entire share capital of Faith Access Holdings Limited is beneficially owned by Luo Dongfeng, who is regarded as interested in the 218,338,540 Shares (comprising 86,433,815 Shares and 131,904,725 underlying Shares) owned by Faith Access Holdings Limited.
(h) The entire share capital of Allyking Holdings Limited is beneficially owned by Li Laam, who is regarded as interested in the 195,820,963 Shares (comprising 69,471,193 Shares and 126,349,770 underlying Shares) owned by Allyking Holdings Limited.

Save as disclosed above, as at the Latest Practicable Date, the Directors and the chief executive of the Company were not aware of any person (other than a Director or chief executive of the Company) who had any interest or short position in the Shares or underlying shares of the Company which would fall to be disclosed to the Company under Divisions 2 and 3 of Part XV of the SFO.

3. DIRECTOR’ SERVICE CONTRACTS

As at the Latest Practicable Date, each of Messrs. Zhang Honghai, Liu Kai and E Meng, all being executive Directors, had a service contract with BEHL for a term of three years commencing on 3 December 2006, 16 January 2007 and 17 June 2008 respectively.

Save as disclosed above, as at the Latest Practicable Date, none of the Directors or proposed Directors had any existing service contract or proposed service contract with any member of the Group which will not expire or is not determinable by the Company within one year without payment of compensation (other than statutory compensation).

4. DIRECTORS’ INTERESTS IN THE GROUP’S ASSETS OR CONTRACTS OR ARRANGEMENTS SIGNIFICANT TO THE GROUP

As at the Latest Practicable Date, none of the Directors or proposed Directors, directly or indirectly, had any interest in any assets which had since 31 December 2008 (being the date to which the latest published audited financial statements of the Company were made up) been acquired or disposed of by or leased to any member of the Group, or are proposed to be acquired or disposed of by or leased to any member of the Group.

There was no contract or arrangement subsisting as at the Latest Practicable Date, in which any of the Directors was materially interested and which was significant to the business of the Group.

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GENERAL INFORMATION

APPENDIX III

5. COMPETING INTERESTS

As at the Latest Practicable Date, none of the Directors and their respective associates had any interest in a business which competes or may compete with the businesses of the Group (as would be required to be disclosed under Rule 8.10 of the Listing Rules if each of them were a controlling shareholder of the Company).

6. QUALIFICATIONS AND CONSENTS OF EXPERTS

The following are the qualifications of the experts who have given opinion or advice which is contained in this circular:

Name Qualification Guangdong Securities a licensed corporation for type 1 (dealing in securities), type 4 (advising on securities), type 6 (advising on corporate finance) and type 9 (asset management) regulated activities under the SFO Ernst & Young Certified public accountants

Each of the experts referred to above has given and has not withdrawn its written consent to the issue of this circular with the inclusion of its letter and/or reference to its name or opinion in the form and context in which it appears.

As at the Latest Practicable Date, each of the experts referred to above was not beneficially interested in the share capital of any member of the Group nor did they have 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, none of the experts referred to above, directly or indirectly, had any interest in any assets which had since 31 December 2008 (being the date to which the latest published audited financial statements of the Company were made up) been acquired or disposed of by or leased to any member of the Group, or are proposed to be acquired or disposed of by or leased to any member of the Group.

7. LITIGATION

As at the Latest Practicable Date, save as disclosed below, no member of the Group was engaged in any litigation or claims of material importance known to the Directors to be pending or threatened against any member of the Group.

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GENERAL INFORMATION

APPENDIX III

8. MATERIAL CONTRACTS

The following contracts (being contracts not entered into in the ordinary course of business of the Group) have been entered into by the members of the Group after the date of two years immediately preceding the date of this circular, and up to the Latest Practicable Date, and are or may be material:

a subscription agreement (the “Subscription Agreement”) dated 12 April 2007 between Pioneer Wealth Limited (“PWL”) and the Company whereby PWL agreed to subscribe for the Tranche 1 Bond (as defined in the Subscription Agreement) and the Tranche 2 Bond (as defined in the Subscription Agreement) in the aggregate principal amount of HK$200,000,000;
a letter dated 21 June 2007 from the Company to PWL whereby the Company agreed to postpone the Tranche 1 Bond’s issue date to 31 July 2007 or any later day as agreed between the parties;
a letter dated 18 January 2008 from the Company to PWL whereby the Company agreed to postpone the Tranche 2 Bond’s issue date to 31 March 2008;
the memorandum of cooperation dated 9 January 2008 between the Company and BEHL;
the Subscription Agreement;
a letter dated 20 January 2008 from PWL to the Company whereby PWL unconditionally and irrevocably agrees to, and shall procure that any subsequent holder(s) of the Tranche 1 Bond and the Tranche 2 Bond to, waive the rights for any adjustment of conversion price under the subscription agreement referred to in paragraph (1) above, the Tranche 1 Bond and Tranche 2 Bond arising from or in connection with (i) the entering into of the Subscription Agreement; and (ii) the Acquisition and any actions including the issue of any Shares contemplated by or referred to therein;
an addendum dated 28 January 2008 between the Company, the Subscriber and BEHL amending certain terms of the Subscription Agreement, pursuant to which among others, the Company shall use its reasonable endeavours to ensure that the relevant provisions as to the minimum public float requirement of the Listing Rules are complied with and the holder(s) of the zero coupon bond in the aggregate principal amount of HK$200,000,000 issued by the Company to BEHL, the zero coupon bond in the aggregate principal amount of HK$300,000,000 issued by the Company to BEHL and the Second Option Bond (as defined in the announcement of the Company dated 28 January 2008) shall not exercise any of the conversion rights attaching to the bonds, if following such exercise, the Company’s minimum public float of the Shares as required under the Listing Rules cannot be maintained;
the sale and purchase agreement (“3 June 2008 SPA”) dated 3 June 2008 entered into between Good Strategy Group Limited, Besto Holdings Limited, Tenson Investment

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APPENDIX III

GENERAL INFORMATION

Limited, Newton Finance Holdings Limited, the Company, Terisa Yutinnie Liang, Hu Xiaoyong, Zhou Min, Hou Feng and Ngai Hiu Tung as amended by the supplemental agreement dated 11 June 2008 summary of the principal contents of such contracts and particulars of any consideration passing to or from any member of the group;

the joint venture agreement entered into on 17 November 2008 between Beijing Enterprises Water (Hong Kong) Limited and State-owned Assets Supervision and Administration Commission of People’s Government of Guigang Municipality setting out the principal terms of the management of Guigang Municipality Water Supply Limited Liability Company;
the joint venture agreement entered into on 17 November 2008 between Beijing Enterprises Water (Hong Kong) Limited and State-owned Assets Supervision and Administration Commission of People’s Government of Guigang Municipality setting out the principal terms of the management of Guigang Municipality Water Supply Limited Liability Company, the joint venture articles of Guigang Municipality Water Supply Limited Liability Company entered into on 17 November 2008 between Beijing Enterprises Water (Hong Kong) Limited and State-owned Assets Supervision and Administration Commission of People’s Government of Guigang Municipality to give effect to the joint venture agreement dated 17 November 2008; the pipelines leasing and management agreement to be entered into between Guigang Municipality Water Supply Limited Liability Company and Guigang SASAC, pursuant to which State-owned Assets Supervision and Administration Commission of People’s Government of Guigang Municipality will grant an exclusive license to Guigang Municipality Water Supply Limited Liability Company for leasing the pipelines network for the supply of water in the Guigang Municipality; the sewage treatment franchise agreement to be entered into between Guigang Municipality Water Supply Limited Liability Company and 貴港市市政局, pursuant to which 貴港市市政局 will grant an exclusive franchise to Guigang Municipality Water Supply Limited Liability Company to provide sewage treatment for the Guigang Municipality; the water supply franchise agreement to be entered into between Guigang Municipality Water Supply Limited Liability Company and 貴港市市政局, pursuant to which 貴港市市政局 will grant an exclusive franchise to Guigang Municipality Water Supply Limited Liability Company to provide water supply for the Guigang Municipality, which have been signed;
The Equity Interests Change Agreement; and
The Services and Facilities Agreement.

9. GENERAL

(a) The registered address of the Company is at Canon’s Court, 22 Victoria Street, Hamilton HM 12, Bermuda.
(b) The head office and principal place of business of the Company in Hong Kong is at Room 4301, 43/F., Central Plaza, 18 Harbour Road, Wanchai, Hong Kong.

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GENERAL INFORMATION

APPENDIX III

(c) The company secretary of the Company is Mr. Tung Woon Cheung, Eric, who is a Certified Public Accountant of both the Hong Kong Institute of Certified Public Accountants and The American Institute of Certified Public Accountants.
(d) In the event of any inconsistency, the English text of this circular shall prevail over the Chinese text.

10. DOCUMENTS AVAILABLE FOR INSPECTION

Copies of the following documents will be available for inspection during business hours at the head office and principal place of business of the Company at Room 4301, 43/F., Central Plaza, 18 Harbour Road, Wanchai, Hong Kong from the date of this circular up to and including the date of the SGM:

(a) the memorandum of association of the Company;
(b) the bye-laws of the Company;
(c) the Equity Interests Change Agreement and the Services and Facilities Agreement;
(d) the written consents from the experts as referred to under the section headed “Qualifications and Consents of Experts” in this appendix;
(e) the letter from the Independent Board Committee as set out in this circular;
(f) the letter from Guangdong Securities as set out in this circular;
(g) all the material agreements/contracts as referred to in this circular;
(h) the annual reports of the Company for the period from 1 July 2007 to 31 December 2008 and the financial year ended 30 June 2007; and
(i) this circular.

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NOTICE OF SGM

==> picture [266 x 67] intentionally omitted <==

(Incorporated in Bermuda with limited liability)

(Stock code: 371)

NOTICE IS HEREBY GIVEN THAT the special general meeting of Beijing Enterprises Water Group Limited (the “ Company ”) will be held at Room 4302, 43/F., Central Plaza, 18 Harbour Road, Wanchai, Hong Kong on Thursday, 24 September 2009 at 3:00 p.m. for the purpose of considering and, if thought fit, passing, with or without modification, the following resolutions as ordinary resolutions of the Company:

ORDINARY RESOLUTIONS

1. “ THAT

(A) the Equity Interests Change Agreement dated 30 June 2009 entered among Bei Kong ZKC Environmental Group, Hong Qiao and Shenzhen Bei Kong, a copy of which has been produced to the meeting and marked “A”, and initialled by the chairman of the meeting for the purpose of identification, the terms thereof and the transactions contemplated thereunder be and are hereby approved, confirmed and ratified;
(B) all other transactions contemplated under the Equity Interests Change Agreement be and are hereby approved, confirmed and ratified; and
(C) any one director of the Company be and is hereby authorised to do all such acts and things as he in his sole and absolute discretion deems necessary, desirable or expedient to implement, give effect to and/or complete the Equity Interests Change Agreement and the transactions contemplated thereunder, and, where required, any amendment of the terms of the Equity Interests Change Agreement and the transactions contemplated thereunder.”
“ THAT
(A) the Services and Facilities Agreement entered into between the Purchaser and the Seller on 30 June 2009, a copy of which has been produced to the meeting and marked “B”, and initialled by the chairman of the meeting for the purpose of identification, the terms thereof and the transactions contemplated thereunder be and are hereby approved, confirmed and ratified;
(B) all other transactions contemplated under the Services and Facilities Agreement be and are hereby approved, confirmed and ratified; and

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NOTICE OF SGM

(C) any one director of the Company be and is hereby authorised to do all such acts and things as he in his sole and absolute discretion deems necessary, desirable or expedient to implement, give effect to and/or complete the Services and Facilities Agreement and the transactions contemplated thereunder, and, where required, any amendment of the terms of the Services and Facilities Agreement and the transactions contemplated thereunder.”

By order of the Board Beijing Enterprises Water Group Limited Zhang Honghai Chairman

Hong Kong, 18 August 2009

Notes:

A member entitled to attend and vote at the meeting is entitled to appoint not more than two proxies to attend and vote instead of him. In the case of a recognized clearing house, it may authorize such person(s) as it thinks fit to act as its representative(s) at the meeting and vote in its stead. A proxy need not be a member of the Company.
In order to be valid, the form of proxy together with a power of attorney or other authority, if any, under which it is signed or a notarially certified copy of such power or authority must be deposited to the Company’s share registrar in Hong Kong, Tricor Tengis Limited, at 26/F, Tesbury Centre, 28 Queen’s Road East, Hong Kong not less than 48 hours before the time fixed for holding the meeting or any adjournment thereof.

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AI assistant

Beijing Enterprises Water Group Limited — Proxy Solicitation & Information Statement 2009

49167_rns_2009-08-17_4be4a188-3c39-479f-a1bb-d0f805cfd5ce.pdf

THIS CIRCULAR IS IMPORTANT AND REQUIRES YOUR IMMEDIATE ATTENTION

CONNECTED TRANSACTION: EQUITY INTERESTS CHANGE OF A NON-WHOLLY OWNED SUBSIDIARY;

MAJOR & CONNECTED TRANSACTION: PROVISION OF FACILITIES AND SERVICES TO A CONNECTED PARTY

CONTENTS

DEFINITIONS

“BEHL”

DEFINITIONS

DEFINITIONS

LETTER FROM THE BOARD

(Stock code: 371)

CONNECTED TRANSACTION: EQUITY INTERESTS CHANGE OF A NON-WHOLLY OWNED SUBSIDIARY;

MAJOR & CONNECTED TRANSACTION: PROVISION OF FACILITIES AND SERVICES TO A CONNECTED PARTY

INTRODUCTION

LETTER FROM THE BOARD

(I) THE EQUITY INTERESTS CHANGE AGREEMENT

Principal terms of the Equity Interests Change Agreement

LETTER FROM THE BOARD

Shareholding of Shenzhen Bei Kong

Conditions precedent

Reasons for the entering into of the Equity Interests Change Agreement

LETTER FROM THE BOARD

POSSIBLE FINANCIAL EFFECTS OF THE EQUITY INTERESTS CHANGE

Information on Shenzhen Bei Kong

LETTER FROM THE BOARD

Listing Rules implications

(II) THE SERVICES AND FACILITIES AGREEMENT

Principal terms of the Services and Facilities Agreement

LETTER FROM THE BOARD

Consideration

Other major terms of the Services and Facilities Agreement:

LETTER FROM THE BOARD

Reasons for the Services and Facilities Agreement

POSSIBLE FINANCIAL EFFECTS OF THE SERVICES AND FACILITIES AGREEMENT

FINANCIAL AND TRADING PROSPECT OF THE GROUP

LETTER FROM THE BOARD

Listing Rules implications

GENERAL

SGM

LETTER FROM THE BOARD

RECOMMENDATION

ADDITIONAL INFORMAITON

LETTER FROM THE INDEPENDENT BOARD COMMITTEE

CONNECTED TRANSACTION: EQUITY INTERESTS CHANGE OF A NON-WHOLLY OWNED SUBSIDIARY;

MAJOR & CONNECTED TRANSACTION: PROVISION OF FACILITIES AND SERVICES TO A CONNECTED PARTY

LETTER FROM GUANGDONG SECURITIES

1. CONNECTED TRANSACTION: EQUITY INTEREST CHANGE OF A NON-WHOLLY OWNED SUBSIDIARY 2. MAJOR & CONNECTED TRANSACTION: PROVISION OF FACILITIES AND SERVICES TO A CONNECTED PARTY

INTRODUCTION

The Equity Interests Change Agreement

LETTER FROM GUANGDONG SECURITIES

The Services and Facilities Agreement

LETTER FROM GUANGDONG SECURITIES

BASIS OF OUR OPINION

I. THE EQUITY INTERESTS CHANGE AGREEMENT

PRINCIPAL FACTORS AND REASONS CONSIDERED

(1) Background of the Equity Interests Change

Information on the Group

Information on Shenzhen Bei Kong

LETTER FROM GUANGDONG SECURITIES

(2) Reasons for the entering into of the Equity Interests Change Agreement

(3) Terms of the Equity Interests Change Agreement

LETTER FROM GUANGDONG SECURITIES

LETTER FROM GUANGDONG SECURITIES

Rights and obligations

LETTER FROM GUANGDONG SECURITIES

Other terms of the Equity Interests Change Agreement

(4) Possible financial effects of the Equity Interests Change

Effect on earnings

Effect on gearing and working capital

LETTER FROM GUANGDONG SECURITIES

RECOMMENDATION ON THE EQUITY INTERESTS CHANGE AGREEMENT

II. THE SERVICES AND FACILITIES AGREEMENT

PRINCIPAL FACTORS AND REASONS CONSIDERED

(1) Background of the provision of the Services and Facilities

(2) Reasons for the entering into of the Services and Facilities Agreement

LETTER FROM GUANGDONG SECURITIES

(3) Principal terms of the Services and Facilities Agreement

The Consideration

Beijing Enterprises Water Group Limited Proxy Solicitation & Information Statement 2009