CHYY Development Group Limited — Interim / Quarterly Report 2017

May 15, 2017

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TECHNOLOGY AND RESOURCES LINKS

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First Quarterly Report

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CHARACTERISTICS OF THE GROWTH ENTERPRISE MARKET (THE “GEM”) OF THE STOCK EXCHANGE OF HONG KONG LIMITED (THE “STOCK EXCHANGE”)

GEM has been positioned as a market designed to accommodate companies to which a higher investment risk may be attached than other companies listed on the Stock Exchange. Prospective investors should be aware of the potential risks of investing in such companies and should make the decision to invest only after due and careful consideration. The greater risk profile and other characteristics of GEM mean that it is a market more suited to professional and other sophisticated investors.

Given the emerging nature of companies listed on GEM, there is a risk that securities traded on GEM may be more susceptible to high market volatility than securities traded on the Main Board of the Stock Exchange and no assurance is given that there will be a liquid market in the securities traded on GEM.

Hong Kong Exchanges and Clearing Limited and the Stock Exchange take no responsibility for the contents of this report, 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 report.

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

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China Ground Source Energy Industry Group Limited First Quarterly Report 2017

HIGHLIGHTS

Revenue for the three months ended 31 March 2017 (the “Review Period”) amounted to approximately HK$101,607,000.

Net profit after tax of the Group for the Review Period amounted to approximately HK$2,850,000.

No dividend was declared for the Review Period.

FINANCIAL REVIEW

The following table provides a brief summary of the financial results of China Ground Source Energy Industry Group Limited (the “Company”) and its subsidiaries (collectively the “Group”). For more detailed information, please refer to the unaudited consolidated financial statements for the Review Period and for the three months ended 31 March 2016.

		Three months ended	Three months ended	Three months ended
		31 March
		2017		2016
		HK$’000		HK$’000
		(Unaudited)		(Unaudited)
Revenue
– Shallow ground source energy utilisation system		97,868		133,993
– Properties investment and development		3,739		3,675
		101,607		137,668
Profit for the period		2,850		2,436
Profit attributable to owners of the Company		4,099		2,836

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During the Review Period, the Group’s revenue amounted to approximately HK$101,607,000 which was mainly contributed by shallow ground source energy utilisation business as compared with that of approximately HK$137,668,000 for the corresponding period last year. The revenue decreased by approximately HK$36,061,000 as compared with that of corresponding period last year, and the Group’s gross profit margin increased from 23.2% in last corresponding period to 44.8% in the current period, it was mainly attributable to the fact that the Group had not built any demonstration projects for districts, these projects are low gross profit. Although the number of projects built and the revenue decreased, the gross profit margins increased significantly as compared with the corresponding period last year.

Other income decreased from approximately HK$19,455,000 in the corresponding period last year to approximately HK$3,340,000 for the three months ended 31 March 2017. The decrease was mainly attributable to the decrease in the one-off government incentives for development of the integration of heating and cooling emerging industry for the Review Period.

Selling and distribution expenses amounted to approximately HK$6,309,000 and HK$8,067,000 for the three months ended 31 March 2017 and 2016 respectively. The selling and distribution expenses in the Review Period decreased as compared with the corresponding period last year due to the decreased in the promotion and marketing activities by the Group during the Review Period, which is also in line with the decreased sales.

During the Review Period, administrative expenses decreased by approximately HK$2,025,000, or 7% as compared with that of three months ended 31 March 2016. Administrative expenses decreased mainly due to the decrease in staff costs.

Finance costs amounted to HK$7,931,000 was recorded for the three months ended 31 March 2017 as compared with approximately HK$9,335,000 for last corresponding period. The finance costs was represented the interest expense on the loan.

Profit for the Review Period (for the three months ended 31 March 2017) was approximately HK$2,850,000, whereas it was HK$2,436,000 for the corresponding period in last year.

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China Ground Source Energy Industry Group Limited First Quarterly Report 2017

BUSINESS REVIEW AND OUTLOOK

The Group has been devoted to research, development and promotion of ground source energy as the substitute energy in providing heating for buildings and focusing in the commercialization of its original technology to realize the intelligent heating (cooling) for buildings free of combustion so as to enhance the development of newly emerging industry of integrated heating and cooling with ground source energy.

In the second half of 2016, the Group goes along with the nation’s work plan that focuses on the implementation of “Coal to clean energy” in rural areas by organizing and utilizing the resources and the advantages of the Company to carry out no-coal transformation projects for whole village – “Heating Villages with Ground Source Energy” in rural area in Beijing and Hebei regions etc., installing HYY Ground Energy Heating Devices to realize energy revolution shifting from traditional coal-based heating to renewable ground source energy heating with renewable ground source energy as primary heating energy and complemented by electric power. The completed projects have achieved satisfactory results, highlighting the advantages of ground source energy as alternative energy for smart heating of buildings, and proving that our products suit and meet the requirements of heating supply, user and energy saving, while at the same time helping the nation’s implementation of no-coal projects to tackle the issue of heavy smog. Based on the experience gained from and performance achieved of the project – “Heating Villages with Ground Source Energy”, the Group continued with the preparation for the tenders of the upcoming no-coal project in this year. The preparation work includes organizing products, construction manpower and solution designs, aiming to acquire more no-coal projects this year in order to further develop the principal businesses of the Company.

During the Review Period, there was a geographical breakthrough in the business development as the Company has secured new projects in Guiyang, the city that fulfills and promotes ecofriendly civilization constructions, Nanjing, the city that is hot in summer and cold in winter, and Changchun, the city in extremely cold region. The project in Nanjing is to install smart heating (cooling) systems for factories engaging in green industry to build factories and equipment that are completely eco-friendly. This demonstrates the applicability of ground source energy as alternative energy sources for buildings heating with different geographical conditions.

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In addition, the project of St. Joseph’s Villa in Nebraska, that using our Company’s Single Well Circulation Heat Exchange Geothermal Energy Collection Technology, was awarded the first place of ASHRAE Regional Technology Award of 2016 by the American Society of Heating, Refrigerating and Air-Conditioning Engineers (the “ASHRAE”) in recognition of the outstanding achievement in the design and operation of energy-efficient buildings. Through these projects and international recognition which will introduce the Single Well Circulation Heat Exchange Geothermal Energy Collection Technology developed by our Company to the world and make this technology well-known to more people, so as to enhancing the promotion of the Company’s business and technology.

The company will continue to uphold its vision committed to the commercialization of its original technology, promotion of the utilization of ground source energy for smart heating (cooling) for buildings with no combustion, to achieve harmony between human and nature and bring high quality life for people to enjoy.

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China Ground Source Energy Industry Group Limited First Quarterly Report 2017

FINANCIAL RESULTS

The Board of Directors (the “Board”) of China Ground Source Energy Industry Group Limited (the “Company”) is pleased to announce the unaudited consolidated results of the Company and its subsidiaries (collectively referred to as the “Group”) for the three months ended 31 March 2017 together with the unaudited comparative figures for the corresponding period in 2016 as follows:

CONDENSED CONSOLIDATED STATEMENT OF PROFIT OR

LOSS AND OTHER COMPREHENSIVE INCOME

For the three months ended 31 March 2017

		Three months ended	Three months ended
		31 March
		2017	2016
	Notes	HK$’000	HK$’000
		(Unaudited)	(Unaudited)
Revenue	3	101,607	137,668
Cost of sales		(56,021)	(105,751)
Gross profit		45,586	31,917
Other income		3,340	19,455
Selling and distribution expenses		(6,309)	(8,067)
Administrative expenses		(25,839)	(27,864)
Profit from operations		16,778	15,441
Share of results of associates		(314)	(669)
Share of result of a joint venture		(426)	(584)
Share-based payment expenses		(2,527)	–
Financial costs	4	(7,931)	(9,335)
Profit before tax		5,580	4,853
Income tax expense	5	(2,730)	(2,417)
Profit for theperiod	6	2,850	2,436

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CONDENSED CONSOLIDATED STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME (Continued)

For the three months ended 31 March 2017

				Three months ended	Three months ended	Three months ended
				31 March
				2017		2016
		Notes		HK$’000		HK$’000
			(Unaudited)			(Unaudited)
Other comprehensive income (expense) for the period:
Fair value gains on available-for-sale investments				1		1,120
Share of other comprehensive expense of associates				(1)		(7)
Share of other comprehensive expense of a joint
venture				(1)		(6)
Exchange differences arising on translation
of foreign operation				8,455		8,323
Total other comprehensive income for the period				8,454		9,430
Total comprehensive income for the period				11,304		11,866
Profit (loss) attributable to:
Owners of the Company				4,099		2,836
Non-controllinginterests				(1,249)		(400)
				2,850		2,436
Total comprehensive income (expense) attributable to:
Owners of the Company				12,276		12,154
Non-controllinginterests				(972)		(288)
				11,304		11,866
Earnings per share		8
Basic (HK cents)				0.143		0.098
Diluted (HK cents)				0.143		0.098

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China Ground Source Energy Industry Group Limited First Quarterly Report 2017

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the three months ended 31 March 2017

1. GENERAL

China Ground Source Energy Industry Group Limited (the “Company”) was incorporated in Cayman Islands as an exempted company with limited liability and its shares are listed on the Growth Enterprise Market (“GEM”) of The Stock Exchange of Hong Kong Limited (the “Stock Exchange”).

The addresses of the registered office and principal place of business in Hong Kong of the Company are P.O. Box 31119, Grand Pavilion, Hibiscus Way, 802 West Bay Road, Grand Cayman KY1-1205, Cayman Islands and Units 3709-10, 37/F, The Center, 99 Queen’s Road Central, Central, Hong Kong respectively.

The principal activity of the Company is investment holding. Details of the principal activities of its subsidiaries, associates and a joint venture are production, sales and installation of ground source energy systems, property management, technical support service, sales of air conditioning heat hump and properties investment and development etc.

The consolidated financial statements are presented in Hong Kong dollars (“HK$”) which is different from the functional currency of the Company, Renminbi (“RMB”). As the Company is listed in Hong Kong, the directors of the Company consider that it is appropriate to present the consolidated financial statements in HK$. The majority of the Company’s subsidiaries are operating in the PRC with RMB as their functional currency.

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2. BASIS OF PREPARATION

The condensed consolidated financial statements have been prepared in accordance with the applicable disclosure requirements of Chapter 18 of the Rules Governing the Listing of Securities on the Growth Enterprise Market of The Stock Exchange of Hong Kong Limited (the “GEM Listing Rules”) and with Hong Kong Financial Reporting Standards (“HKFRSs”), Hong Kong Accounting Standards and Interpretations issued by the Hong Kong Institute of Certified Public Accountants (the “HKICPA”).

The accounting policies adopted in the preparation of the financial statements are consistent with those adopted in preparing the audited financial statements for the year ended 31 December 2016.

The Group has adopted new and amended standards and interpretations of HKFRSs which are mandatory for the accounting periods beginning on or after 1 January 2017 and relevant to its operations. The adoption of such new and amended standards and interpretations does not have material impact on the condensed consolidated first quarterly financial information and does not result in substantial changes to the Group’s accounting policies.

The Group has not applied the new HKFRSs that have been issued but are not yet effective but is in the process of assessing their impact on the results of operation and financial position of the Group.

The condensed consolidated accounts have not been audited by the Company’s auditor, but have been reviewed by the Company’s audit committee.

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China Ground Source Energy Industry Group Limited First Quarterly Report 2017

3. REVENUE

Revenue represents the amounts received and receivable for goods sold to customers, net of allowance for returns and trade discounts where applicable, and construction, installation and maintenance services rendered, as well as gross rental income received from investment properties.

An analysis of the Group’s revenue is as follows:

			Three months ended	Three months ended	Three months ended	Three months ended
			31 March
			2017			2016
			HK$’000			HK$’000
			(Unaudited)		(Unaudited)
	Shallow ground source energy utilisation system		97,868			133,993
	Rental income		3,739			3,675
			101,607			137,668
	FINANCE COSTS
			Three months ended
			31 March
			2017			2016
			HK$’000			HK$’000
			(Unaudited)		(Unaudited)
	Interest on borrowings		7,931			9,335

4. FINANCE COSTS

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5. INCOME TAX EXPENSE

INCOME TAX EXPENSE
	Three months	ended
	31 March
	2017		2016
	HK$’000		HK$’000
	(Unaudited)	(Unaudited)
PRC enterprise income tax	2,730		2,417

Hong Kong profits tax has not been provided as the Group did not generate any assessable profits arising in Hong Kong during the three months ended 31 March 2017 (2016: Nil).

PRC enterprise income tax has been provided at the relevant tax rate of the net assessable profits attributable to the Group’s operations in the PRC during the three months ended 31 March 2017.

6. PROFIT FOR THE PERIOD

Profit for the period is arrived at after charging:

	Three months ended	Three months ended	Three months ended
	31 March
	2017		2016
	HK$’000		HK$’000
	(Unaudited)	(Unaudited)
Cost of sales	56,021		105,751
Staff costs (including directors’ emolument)	20,555		22,367
Depreciation and amortisation	2,301		2,612
Minimum lease payments under operating leases in respect of
land and buildings	2,168		2,119

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China Ground Source Energy Industry Group Limited First Quarterly Report 2017

7. DIVIDENDS

No dividends were paid, declared or proposed during the reporting period. The directors do not recommend payment of any dividend for the three months ended 31 March 2017 (2016: nil).

8. EARNINGS PER SHARE

The calculation of the basic and diluted earnings per share attributable to the owners of the Company is based on the following data:

		Three months ended	Three months ended	Three months ended
		31 March
		2017		2016
		HK$’000		HK$’000
		(Unaudited)		(Unaudited)
Earnings
Profit for the period attributable to owners of the Company for
the purpose of basic and diluted earnings per share		4,099		2,836
		’000			’000
Number of shares
Weighted average number of ordinary shares for the purpose of
basic earnings per share		2,876,375		2,876,871
Effect of dilutive potential ordinary shares:
Share options_(note)_		–			–
Weighted average number of ordinary shares for the purpose
of diluted earnings per share		2,876,375		2,876,871

Note: The calculation of diluted earnings per share for the three months ended 31 March 2017 and 2016 does not assume the exercise of share options because the exercise price of the Company’s outstanding share options was higher than the average market price of shares for the three months ended 31 March 2017 and 2016.

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9. CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY (UNAUDITED)

For the three months ended 31 March 2017

					Attributable to owners	Attributable to owners	of the Company	of the Company
									Share-
					Assets				based	Exchange			Non-
	Share	Share	Statutory	Treasury	revaluation	Contributed	Special	Capital	payment	translation	Retained		controlling	Total
	capital	premium	reserve	shares	reserve	surplus	reserve	reserve	reserve	reserve	earnings	Total	interests	equity
	HK$’000	HK$’000	HK$’000	HK$’000	HK$’000	HK$’000	HK$’000	HK$’000	HK$’000	HK$’000	HK$’000	HK$’000	HK$’000	HK$’000
		(Note a)	(Note b)	(Note c)		(Note d)	(Note e)	(Note f)
At 1 January 2016
(audited)	225,184	885,718	2,935	(3,293)	26,217	154,381	(1,694)	32,903	51,142	(1,430)	103,965	1,476,028	44,423	1,520,451
Profit (loss) for the period	–	–	–	–	–	–	–	–	–	–	2,836	2,836	(400)	2,436
Other comprehensive
income (expense) for
the period:
Fair value gains on
available-for-sale
investments	–	–	–	–	–	–	–	1,120	–	–	–	1,120	–	1,120
Share of other
comprehensive
expense of
associates	–	–	–	–	–	–	–	–	–	(7)	–	(7)	–	(7)
Share of other
comprehensive
expense of a joint
venture	–	–	–	–	–	–	–	–	–	(6)	–	(6)	–	(6)
Exchange differences
arising on
translation of
foreign operation	–	–	–	–	–	–	–	–	–	8,211	–	8,211	112	8,323
Total other comprehensive
income for theperiod	–	–	–	–	–	–	–	1,120	–	8,198	–	9,318	112	9,430
Total comprehensive
income (expense) for
theperiod	–	–	–	–	–	–	–	1,120	–	8,198	2,836	12,154	(288)	11,866
Acquisition of additional
interest of a subsidiary	–	–	–	–	–	–	7,719	–	–	–	–	7,719	(26,353)	(18,634)
Cancellation of
repurchased ordinary
shares	(1,194)	(4,229)	–	3,293	–	–	–	–	–	–	–	(2,130)	–	(2,130)
At 31 March 2016
(unaudited)	223,990	881,489	2,935	–	26,217	154,381	6,025	34,023	51,142	6,768	106,801	1,493,771	17,782	1,511,553

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China Ground Source Energy Industry Group Limited First Quarterly Report 2017

9. CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY (UNAUDITED) (Continued)

For the three months ended 31 March 2017

						Attributable to owners	Attributable to owners	of the Company	of the Company
										Share-
						Assets				based	Exchange			Non-
		Share	Share	Statutory	Treasury	revaluation	Contributed	Special	Capital	payment	translation	Retained		controlling	Total
		capital	premium	reserve	shares	reserve	surplus	reserve	reserve	reserve	reserve	earnings	Total	interests	equity
		HK$’000	HK$’000	HK$’000	HK$’000	HK$’000	HK$’000	HK$’000	HK$’000	HK$’000	HK$’000	HK$’000	HK$’000	HK$’000	HK$’000
			(Note a)	(Note b)			(Note d)	(Note e)	(Note f)
At	1 January 2017 (audited)	223,990	881,489	2,935	–	28,086	154,381	2,975	31,811	36,483	(59,420)	93,117	1,395,847	45,455	1,441,302
Profit (loss) for the period		–	–	–	–	–	–	–	–	–	–	4,099	4,099	(1,249)	2,850
Other comprehensive
	income (expense) for
	the period:
	Fair value gains on
	available-for-sale
	investments	–	–	–	–	–	–	–	1	–	–	–	1	–	1
	Share of other
	comprehensive
	expense of
	associates	–	–	–	–	–	–	–	–	–	(1)	–	(1)	–	(1)
	Share of other
	comprehensive
	expense of a joint
	venture	–	–	–	–	–	–	–	–	–	(1)	–	(1)	–	(1)
	Exchange differences
	arising on
	translation of
	foreign operation	–	–	–	–	–	–	–	–	–	8,178	–	8,178	277	8,455
Total other comprehensive
	income for theperiod	–	–	–	–	–	–	–	1	–	8,176	–	8,177	277	8,454
Total comprehensive
	income (expense) for
	theperiod	–	–	–	–	–	–	–	1	–	8,176	4,099	12,276	(972)	11,304
Recognition of share-based
	payment expenses	–	–	–	–	–	–	–	–	2,527	–	–	2,527	–	2,527
Allocation		–	–	355	–	–	–	–	–	–	–	(355)	–	–	–
At	31 March 2017
	(unaudited)	223,990	881,489	3,290	–	28,086	154,381	2,975	31,812	39,010	(51,244)	96,861	1,410,650	44,483	1,455,133

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9. CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY (UNAUDITED) (Continued)

Notes:

• (a) The share premium of the Group includes (i) the excess of the issue price over the nominal value of the Company’s shares issued at a premium and (ii) the difference between the nominal value of the share capital of the subsidiaries acquired pursuant to the Group’s reorganisation scheme in preparation for the public listing of the Company’s shares on the Growth Enterprise Market of The Stock Exchange of Hong Kong Limited (the “Reorganisation”) in 2001 over the nominal value of the share capital of the Company issued in exchange therefore.

• (b) In accordance with the relevant People’s Republic of China (the “PRC”) regulations and joint venture agreements, the Sino-foreign joint ventures established in the PRC shall set aside a portion of their respective profit after tax, if any, to the statutory reserve. Such amount will be determined at the discretion of the board of directors of the respective entity.

• (c) 5,968,000 ordinary shares with the highest price of HK$0.36 and the lowest price of HK$0.34 were repurchased prior to 31 December 2015 and cancelled during the three months ended 31 March 2016.

• (d) Contributed surplus represents the cancellation of the paid-up capital and set off against the accumulated losses in prior years.

• (e) Special reserve represents the reserve arising from acquisition of additional interests of a subsidiary from non-controlling interests in prior years.

• (f) Capital reserve represents the deemed contribution from a substantial shareholder arising from the waiver of the convertible notes in prior years.

10. EVENTS AFTER THE REPORTING PERIOD

On 12 April 2017, the Company proposed to raise not less than approximately HK$115,100,000 and not more than approximately HK$132,400,000, before expenses, by way of issue of not less than 1,150,550,046 and not more than 1,323,758,046 rights shares pursuant to the rights issue on the basis of two (2) rights shares for every five (5) existing shares in issue on the record date at the rights issue price of HK$0.10 per rights share. Details of the proposed rights issue and transactions contemplated thereunder can be referred to the announcement of the Company dated 12 April 2017.

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China Ground Source Energy Industry Group Limited First Quarterly Report 2017

DIRECTORS’ AND CHIEF EXECUTIVE’S INTERESTS OR SHORT POSITIONS IN THE SHARE CAPITAL OF THE COMPANY AND ITS ASSOCIATED CORPORATIONS

As at 31 March 2017, the interests or short positions of the directors and the chief executive of the Company in the shares, underlying shares and debentures of the Company or its associated corporations (within the meaning of Part XV of the Securities and Futures Ordinance (the “SFO”)) which will be 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 and short position which they are taken or deemed to have taken under such provisions of the SFO), or which will be required to be entered into the register kept under Section 352 of the SFO or as otherwise notified to the Company and the Stock Exchange pursuant to Rules 5.46 to 5.67 of the GEM Listing Rules, were as follows:

(a) Long Positions and Short Positions in Shares and Equity Derivatives

Number of issued ordinary shares of US$0.01 each in the Company held and the capacity

			Approximate			Approximate
			percentage	Interests		percentage of
		Interests in	of interests	under equity	Aggregate	the aggregate
Name of director	Capacity	shares	in shares	derivatives	interests	interests
Mr. Xu Shengheng	Beneficial owner	508,319,000 (L)	17.67%	33,600,000 (L)	542,621,000 (L)	18.86%
(Note 1)	Beneficial owner	508,300,000 (S)	17.67%	–	508,300,000 (S)	17.67%
	Interest of spouse	702,000 (L)	0.02%	–
Ms. Chan Wai Kay	Beneficial owner	41,636,000 (L)	1.45%	39,000,000 (L)	90,710,000 (L)	3.15%
Katherine_(Note 2)_	Interest of spouse	10,074,000 (L)	0.35%	–
Mr. Wang Manquan	Beneficial owner	512,000 (L)	0.02%	27,000,000 (L)	27,512,000 (L)	0.96%
(Note 3)
Mr. Jia Wenzeng	Beneficial owner	–	–	4,300,000 (L)	4,300,000 (L)	0.15%
(Note 4)
Mr. Wu Desheng	Beneficial owner	–	–	2,800,000 (L)	2,800,000 (L)	0.10%
(Note 5)

(L): Long position, (S): Short position

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Notes:

1. Mr. Xu Shengheng (“Mr. Xu”) is interested in 508,319,000 Shares and 33,600,000 Shares issuable pursuant to exercise of share options of the Company, details of such share options can be referred to part (b) of this section. Ms. Luk Hoi Man (“Ms. Luk”), the spouse of Mr. Xu, holds 702,000 Shares. Therefore, under the SFO, Mr. Xu is deemed to be interested in 702,000 Shares in which Ms. Luk is interested.

2. Ms. Chan Wai Kay Katherine (“Ms. Chan”) is interested in 41,636,000 shares and 39,000,000 Shares issuable pursuant to exercise of share options of the Company, details of such share options can be referred to part (b) of this section and Mr. Chow Ming Joe Raymond (“Mr. Chow”), spouse of Ms. Chan, holds 10,074,000 Shares. Under the SFO, Ms. Chan is deemed to be interested in 10,074,000 Shares in which Mr. Chow is interested.

3. Mr. Wang Manquan is interested in 512,000 Shares and 27,000,000 Shares issuable pursuant to exercise of share options of the Company, details of such share options can be referred to part (b) of this section.

4. Mr. Jia Wenzeng is interested in 4,300,000 Shares issuable pursuant to exercise of share options of the Company, details of such share options can be referred to part (b) of this section.

5. Mr. Wu Desheng is interested in 2,800,000 Shares issuable pursuant to exercise of share options of the Company, details of such share options can be referred to part (b) of this section.

(b) Long Positions under Equity Derivatives The Share Option Plan

On 28 July 2010, the Company, by a shareholders’ resolution, conditionally adopted a new share option scheme (the “Share Option Plan”) for a period of ten years from the date on which the Share Option Plan became unconditional. On 7 August 2010, the Share Option Plan became unconditional and effective. Pursuant to the Share Option Plan, the board of directors was authorised, at its absolute discretion, to grant options to eligible participants, including directors of the Company or any of its subsidiaries, as defined in accordance with the terms of the Share Option Plan, to subscribe for shares in the Company under the terms of the Share Option Plan. As at 31 March 2017, the following directors and chief executive of the Company were interested in the following options under the Share Option Plan:

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China Ground Source Energy Industry Group Limited First Quarterly Report 2017

				Number of
				share options
			Exercise price	outstanding as at
Name of director	Date of grant	Exercise period	per share	31 March 2017
			HK$
Mr. Xu Shengheng	9 September 2010	9 September 2010 to	0.426	11,600,000
		8 September 2020
	8 December 2016	8 December 2016 to	0.300	22,000,000
		31 December 2020
Ms. Chan Wai Kay	9 September 2010	9 September 2010 to	0.426	17,000,000
Katherine		8 September 2020
	8 December 2016	8 December 2016 to	0.300	22,000,000
		31 December 2020
Mr. Wang Manquan	9 September 2010	9 September 2011 to	0.426	1,666,667
		8 September 2020
		9 September 2012 to	0.426	1,666,667
		8 September 2020
		9 September 2013 to	0.426	1,666,666
		8 September 2020
	8 December 2016	8 December 2016 to	0.300	22,000,000
		31 December 2020
Mr. Jia Wenzeng	9 September 2010	9 September 2010 to	0.426	1,500,000
		8 September 2020
	8 December 2016	8 December 2016 to	0.300	2,800,000
		31 December 2020
Mr. Wu Desheng	8 December 2016	8 December 2016 to	0.300	2,800,000
		31 December 2020

Save as disclosed above, as at 31 March 2017, none of the directors, chief executive of the Company or their respective associates had any interests or short positions in the shares, underlying shares and debentures of the Company or its associated corporations (within the meaning of Part XV of the SFO) which will be 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 and short position which they are taken or deemed to have taken under such provisions of the SFO), or which will be required to be entered into the register kept under Section 352 of the SFO or as otherwise notified to the Company and the Stock Exchange pursuant to the minimum standards of dealing by directors of the Company as referred to in Rules 5.46 to 5.67 of the GEM Listing Rules.

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INTERESTS DISCLOSEABLE UNDER SFO AND SUBSTANTIAL SHAREHOLDERS

So far as is known to the directors of the Company, as at 31 March 2017, persons (other than directors or chief executive of the Company) who had interests or short positions in the shares or underlying shares of the Company which would fall to be disclosed to the Company and the Stock Exchange under the provisions of Divisions 2 and 3 of Part XV of the SFO or which were required pursuant to Section 336 of the SFO, to be entered into the register referred to therein, were as follows:

Long Positions and Short Positions in Shares and Equity Derivatives

Name China Energy Conservation and Environmental Protection (Hong Kong) Investment Company Limited_(Note 1) China Energy Conservation and Environmental Protection Group(Note 1) Ms. Luk Hoi Man(Note 2)_

Number of issued ordinary shares of US$0.01 each in the Company held and capacity Capacity Interest in shares Percentage of interests in shares Interests under equity derivatives Aggregate interests Percentage of aggregate interests Beneficial owner 850,000,000 (L) 29.55% – 850,000,000 (L) 29.55% Interest of controlled corporation 850,000,000 (L) 29.55% – 850,000,000 (L) 29.55% Beneficial owner 702,000 (L) 0.02% – Interest of spouse 508,319,000 (L) 17.67% 33,600,000 (L) 542,621,000 (L) 18.86% Interest of spouse 508,300,000 (S) 17.67% – 508,300,000 (S) 17.67%

(L): Long position, (S): Short position

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China Ground Source Energy Industry Group Limited First Quarterly Report 2017

Notes:

1. China Energy Conservation and Environmental Protection (Hong Kong) Investment Company Limited is a wholly-owned subsidiary of China Energy Conservation and Environmental Protection Group (“CECEP”), therefore, under the SFO, CECEP is deemed to be interested in 850,000,000 Shares.

2. Ms. Luk Hoi Man (“Ms. Luk”), the spouse of Mr. Xu Shengheng (“Mr. Xu”), holds 702,000 Shares. Mr. Xu is interested in 508,319,000 Shares and 33,600,000 Shares issuable pursuant to exercise of share options of the Company. Therefore, under SFO, Ms. Luk is deemed to be interested in 508,319,000 Shares and 33,600,000 underlying shares issuable upon the exercise of the share options of the Company in which Mr. Xu is interested.

Save as disclosed above, as at 31 March 2017, the directors of the Company were not aware of any other person (other than directors or chief executive of the Company) who had an interest or short position in the shares or underlying shares of the Company which would fall to be disclosed to the Company and the Stock Exchange under the provisions of Divisions 2 and 3 of Part XV of the SFO or which were required, pursuant to Section 336 of the SFO, to be entered into the register referred to therein.

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OUTSTANDING SHARE OPTIONS

As at 31 March 2017, options to subscribe for an aggregate of 433,020,000 shares were outstanding (including the directors and chief executive of the Company as disclosed above). Details of which as at 31 March 2017 were as follows:

	As at	Granted	Exercised	Lapsed	As at			Exercise
Date of grant	1 January	during the	during the	during the	31 March	Vesting period	Exercise period	price per
of share options	2017	period	period	period	2017	of share options	of share options	share
								HK$
9 September 2010	50,388,000	–	–	–	50,388,000	–	9 September 2010 to	0.426
							8 September 2020
9 September 2010	31,666,667	–	–	–	31,666,667	9 September 2010 to	9 September 2011 to	0.426
						8 September 2011	8 September 2020
9 September 2010	31,666,667	–	–	–	31,666,667	9 September 2010 to	9 September 2012 to	0.426
						8 September 2012	8 September 2020
9 September 2010	31,666,666	–	–	–	31,666,666	9 September 2010 to	9 September 2013 to	0.426
						8 September 2013	8 September 2020
8 December 2016	71,600,000	–	–	–	71,600,000	–	8 December 2016 to	0.300
							31 December 2020
8 December 2016	108,016,000	–	–	–	108,016,000	8 December 2016 to	8 December 2017 to	0.300
						7 December 2017	31 December 2020
8 December 2016	108,016,000	–	–	–	108,016,000	8 December 2016 to	8 December 2018 to	0.300
						7 December 2018	31 December 2020
	433,020,000	–	–	–	433,020,000

COMPETITION AND CONFLICT OF INTERESTS

None of the directors, the management shareholders or substantial shareholders of the Company or any of their respective associates has engaged in any business that competes or may compete with the business of the Group or has any other conflict of interests with the Group.

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China Ground Source Energy Industry Group Limited First Quarterly Report 2017

AUDIT COMMITTEE

The Company has established an audit committee with written terms of reference which deal clearly with its authority and duties. The audit committee’s primary duties are to review and to supervise the financial reporting process and internal control system of the Group and to provide advice and comments to the directors of the Company.

The audit committee currently comprises four independent non-executive Directors, namely, Mr. Jia Wenzeng, Mr. Wu Desheng, Mr. Wu Qiang and Mr. Guo Qingui. Mr. Jia Wenzeng is the chairman of the audit committee. The audit committee has reviewed the Group’s unaudited results for the Review Period and has provided advice and comment thereon.

SECURITIES TRANSACTIONS BY DIRECTORS

The Company has not adopted its own code of conduct regarding securities transactions by directors, but having made specific enquiry of all directors and the Company was not aware of any non-compliance with the required standard of dealings as set out in Rules 5.48 to 5.67 of the GEM Listing Rules and its code of conduct regarding securities transactions by directors during the Review Period.

PURCHASE, REDEMPTION OR SALE OF LISTED SECURITIES

OF THE COMPANY

During the Review Period, neither the Company nor any of its subsidiaries purchased, redeemed or sold any of the Company’s listed securities.

As at the date of this report, the Board comprises Mr. An Yi, Mr. Xu Shengheng, Ms. Chan Wai Kay, Katherine, Mr. Wang Manquan, Mr. Zang Yiran and Mr. Dai Qi as executive Directors, Mr. Zhao Youmin as non-executive Director, Mr. Jia Wenzeng, Mr. Wu Desheng, Mr. Wu Qiang and Mr. Guo Qingui as independent non-executive Directors.

By Order of the Board of

China Ground Source Energy Industry Group Limited Xu Shengheng

Joint Chairman & Executive Director

Hong Kong, 15 May 2017

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