CM Energy Tech Co., Ltd. - Proxy Solicitation & Information Statement 2018

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 a licensed securities dealer or registered institution in securities, bank manager, solicitor, professional accountant or other professional adviser.

If you have sold or transferred all your shares in TSC Group Holdings Limited, you should at once hand this circular, together with the enclosed form of proxy to the purchaser(s) or transferee(s) or to the bank, licensed securities dealer or other agent through whom the sale or transfer was effected for transmission to the purchaser(s) or transferee(s).

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.

This circular appears for information purposes only and does not constitute an invitation or offer to acquire, purchase or subscribe for securities of TSC Group Holdings Limited.

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TSC Group Holdings Limited

(Incorporated in the Cayman Islands with limited liability)

(Stock code: 206)

(1) PROPOSED SUBSCRIPTION OF SUBSCRIPTION SHARES UNDER SPECIFIC MANDATE (2) APPLICATION FOR WHITEWASH WAIVER (3) RESIGNATION OF DIRECTORS AND PROPOSED APPOINTMENT OF DIRECTORS AND (4) NOTICE OF EGM

Financial Adviser to the Subscriber

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

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A letter from the Board is set out on pages 7 to 32 of this circular.

A letter from the Independent Board Committee containing its recommendation to the Independent Shareholders is set out on pages 33 to 34 of this circular.

A letter from Lego Corporate Finance Limited, the Independent Financial Adviser, containing its advice to the Independent Board Committee and the Independent Shareholders is set out on pages 35 to 66 of this circular.

A notice convening the EGM to be held at 2/F, Pacific Room, Island Pacific Hotel, 152 Connaught Road West, Hong Kong at 10 a.m. on Monday, 5 February 2018, is set out on pages EGM-1 to EGM-3 of this circular. A form of proxy for use at the EGM or any adjournment thereof is enclosed. Whether or not you propose to attend the EGM, you are requested to complete the enclosed form of proxy in accordance with the instructions printed thereon and return the same to the Company’s principal place of business in Hong Kong at Unit 03, 19/F, Bangkok Bank Building, No. 18 Bonham Strand West, Sheung Wan, Hong Kong as soon as possible and in any event not less than 48 hours before the time appointed for the holding of the EGM (i.e. at 10 a.m. on 3 February 2018) or any adjournment thereof. Completion and return of the proxy form will not preclude you from attending and voting in person at the extraordinary general meeting or any adjournment thereof should you so wish.

19 January 2018

CONTENTS

	Page
DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	1
LETTER FROM THE BOARD . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	7
LETTER FROM THE INDEPENDENT BOARD COMMITTEE . . . . . . . . . . .	33
LETTER FROM INDEPENDENT FINANCIAL ADVISER . . . . . . . . . . . . . . .	35
APPENDIX I – FINANCIAL INFORMATION OF
THE GROUP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	I-1
APPENDIX II – GENERAL INFORMATION . . . . . . . . . . . . . . . . . . .	II-1
NOTICE OF EGM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	EGM-1

– i –

DEFINITIONS

In this circular, unless the context otherwise requires, the following expressions have the following meanings:

“%”
per cent.
“acting in concert”
has the meaning ascribed thereto in the Takeovers Code
“Announcement”

the announcement of the Company dated 14 December 2017 in relation to, among other things, the Subscription and the Whitewash Waiver

“associate(s)”
has the meaning ascribed thereto in the Listing Rules
“Board”
the board of directors of the Company
“Business Day”

any day (other than a Saturday or Sunday or public holiday in Hong Kong and any day on which a tropical cyclone warning signal no. 8 or above or a “black” rainstorm warning signal is hoisted in Hong Kong) on which commercial banks are open for business in Hong Kong and in the PRC

“CIMC (Group)”

China International Marine Containers (Group) Co., Ltd. (中國國際海運集裝箱（集團）股份有限公司) (stock code: 2039), a joint stock company incorporated in the PRC with limited liability, the A shares of which are listed on the Shenzhen Stock Exchange and the H shares of which are listed on the Stock Exchange and CM Group is the indirect single largest shareholder of the CIMC (Group), holding, through its wholly owned subsidiaries, approximately 24.49% of the total issued shares in CIMC (Group)

“CIMC (HK)”

China International Marine Containers (Hong Kong) Limited (中國國際海運集裝箱（香港）有限公司), a company incorporated in Hong Kong with limited liability and a wholly-owned subsidiary of CIMC (Group), holding approximately 13.12% of the total issued share capital of the Company as at the Latest Practicable Date

– 1 –

DEFINITIONS

“CM Group”
“CM Industry”
“Companies Ordinance”
“Company”
“Completion”
“Completion Date”
“Condition(s)”
“connected person(s)”
“Directors”
“EGM”
“Executive”
China Merchants Group Limited* (招商局集團有限公司), a company incorporated in the PRC with limited liability. It is wholly owned by the State-owned Assets Supervision and Administration Commission of the State Council of the PRC. CM Group is the ultimate holding company holding 100% of equity interest in CM Industry
China Merchants Industry Holdings Co., Ltd., a company incorporated in Hong Kong with limited liability and is indirectly wholly owned by CM Group
the Companies Ordinance (Chapter 622 of the Laws of Hong Kong as amended and supplemented from time to time)
TSC Group Holdings Limited (Stock code: 206), a company incorporated in the Cayman Islands with limited liability, the shares of which are listed on the Main Board of the Stock Exchange
means completion of the Subscription pursuant to the terms of the Subscription Agreement
means the third Business Day after all of the Conditions have been fulfilled or waived (or such later date as the parties to the Subscription Agreement may agree in writing)
means the conditions precedent set out under the section headed “Conditions of the Subscription” in this circular
has the meaning ascribed to this term under the Listing Rules
members of the board of directors of the Company
the extraordinary general meeting of the Company to be held to approve, among other things, the Subscriptions and the Whitewash Waiver
the Executive Director of the Corporate Finance Division of the Securities and Futures Commission or any delegate of the Executive Director

* For identification purpose only

– 2 –

DEFINITIONS

“Fund GP”
“Fund Manager”
“Group”
“GW Asset Management”
“GWAMC International”
“HK$”
“Hong Kong”
“Independent Board Committee”

China Merchants Great-Wall GP Limited, an exempted company incorporated in Cayman Islands with limited liability

China Merchants Great-Wall Capital Management Limited, an exempted company incorporated in Cayman Islands with limited liability in which CM Group and GW Asset Management indirectly hold, in aggregate, 75% and 25% respectively
the Company and each of its subsidiaries from time to time
China Great Wall Asset Management Co., Ltd. a joint stock company incorporated in the PRC with limited liability. Its ultimate beneficial shareholders are Ministry of Finance of the People’s Republic of China, National Council for Social Security Fund of the People’s Republic of China and China Life Insurance (Group) Company, each holding 97%, 2% and 1% of equity interest, respectively
China Great Wall AMC (International) Holdings Company Limited, a company incorporated in Hong Kong with limited liability, which is wholly owned by GW Asset Management
Hong Kong dollars, the lawful currency of Hong Kong
the Hong Kong Special Administrative Region of the PRC
an independent board committee, comprised of all the non-executive Directors, namely Mr. Jiang Longsheng, Mr. Brian Chang, Mr. Chan Ngai Sang, Kenny, Mr. Guan Zhichuan and Dr. Lu Xiaoming, except for Mr. Wang Jianzhong, to advise the Independent Shareholders in relation to the Subscription and the Whitewash Waiver

– 3 –

DEFINITIONS

“Independent Financial Adviser”
“Independent Shareholders”
“Last Trading Day”
“Latest Practicable Date”
“Listing Committee”
“Listing Rules”
“PRC”
“Relevant Period”
“SFC”
“SFO”
“Share(s)”
Lego Corporate Finance Limited, a licensed corporation to carry out Type 6 (advising on corporate finance) regulated activity under the SFO, appointed by the Company as the independent financial adviser to advise the Independent Board Committee and the Independent Shareholders in relation to the Subscription and the Whitewash Waiver
shareholders other than CIMC (HK), the Subscriber, the Subscriber Nominee, their associates and the parties acting in concert with them and other Shareholders, including Mr. Jiang Bing Hua, Mr. Zhang Menggui, Morgan, Global Energy Investors, LLC. and his/its respective associates, who are interested or involved in the Subscription and the Whitewash Waiver
14 December 2017, being the last trading day before the entering into of the Subscription Agreement
means 16 January 2018, the latest practicable date prior to the printing of this circular for ascertaining certain information for the purpose of inclusion in this circular
has the meaning given to it under the Listing Rules
the Rules Governing the Listing of Securities on the Stock Exchange
the People’s Republic of China, and for the purpose of this circular only excluding Hong Kong, the Macau Special Administrative Region of the PRC and Taiwan
the period beginning six months immediately prior to the date of the Announcement and ending on and including the Latest Practicable Date
the Securities and Futures Commission of Hong Kong
The Securities and Futures Ordinance (Cap. 571 of the Laws of Hong Kong)
ordinary share(s) of HK$0.1 each in the capital of the Company

– 4 –

DEFINITIONS

“Share Option(s)”
“Shareholder(s)”
“Specific Mandates(s)”
“Stock Exchange”
“Subscriber”
“Subscriber Nominee”
“Subscription”
“Subscription Agreement”
“Subscription Price”
“Subscription Shares”
“Takeovers Code”
“Update Announcement”
the share option(s) issued under the pre-IPO share option scheme, post-IPO share option scheme and the new share option scheme adopted by the Company on 19 October 2005, 20 October 2005 and 5 August 2009, respectively, entitling the holder thereof to subscribe for Shares
holder(s) of the Share(s)
the authority to be sought from the Shareholders and/or the Independent Shareholders (as the case may be) to authorize the Board to issue the Subscription Shares
The Stock Exchange of Hong Kong Limited
China Merchants & Great Wall Ocean Strategy & Technology Fund (L.P.), an exempted limited partnership registered in the Cayman Islands
Prime Force Investment Corporation, a company incorporated in the British Virgin Islands, which is wholly owned by the Subscriber and the designated nominee for taking up the Subscription Shares under the Subscription Agreement
the subscription of the Subscription Shares by the Subscriber (or the Subscriber Nominee) subject to the terms and conditions of the Subscription Agreement
the subscription agreement dated 14 December 2017 and entered into, among others, between the Company and the Subscriber
the price of HK$0.67 for the subscription of each Subscription Share
subject to the fulfilment of the Conditions and the terms of the Subscription Agreement, 765,186,000 newly issued Shares to be subscribed by the Subscriber (or the Subscriber Nominee) upon Completion
the Hong Kong Code on Takeovers and Mergers (as amended and supplemented from time to time)
the update announcement of the Company dated 22 December 2017 in relation to the change of shareholdings of the Subscriber

– 5 –

DEFINITIONS

“US$” United States of America dollars, the lawful currency of the United States of America

“Whitewash Waiver”

a waiver from the Executive pursuant to Note 1 on Dispensations from Rule 26 of the Takeovers Code in respect of the obligations of the Subscriber Nominee to make a mandatory general offer for all of the Shares not already owned or agreed to be acquired by the Subscriber, the Subscriber Nominee or parties acting in concert with them which would, if the Subscription proceeds, otherwise arise as a result of the allotment and issuance of the Subscription Shares to the Subscriber Nominee

In this circular, if there is any inconsistency between the Chinese names of entities or enterprises established in the PRC or Chinese government authorities or departments and their English translations, the Chinese names shall prevail.

For illustration purposes, amounts in US$ have been translated into HK$ at US$1.00 = HK$7.78 in this circular.

– 6 –

LETTER FROM THE BOARD

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TSC Group Holdings Limited

(Incorporated in the Cayman Islands with limited liability)

(Stock code: 206)

Executive Directors: Mr. Jiang Bing Hua Mr. Zhang Menggui, Morgan Mr. Wang Yong

Non-executive Directors: Mr. Jiang Longsheng Mr. Brian Chang Mr. Wang Jianzhong

Independent non-executive Directors: Mr. Chan Ngai Sang, Kenny Mr. Guan Zhichuan Dr. Lu Xiaoming

Registered office: Cricket Square Hutchins Drive P.O. Box 2681 Grand Cayman KY1-1111 Cayman Islands

Principal place of business in Hong Kong: Unit 03, 19/F Bangkok Bank Building No. 18 Bonham Strand West Sheung Wan Hong Kong 19 January 2018

To the Shareholders

Dear Sir or Madam,

(1) PROPOSED SUBSCRIPTION OF SUBSCRIPTION SHARES UNDER SPECIFIC MANDATE;

(2) APPLICATION FOR WHITEWASH WAIVER; (3) RESIGNATION OF DIRECTORS AND PROPOSED APPOINTMENT OF DIRECTORS; AND (4) NOTICE OF EGM

INTRODUCTION

Reference is made to the Announcement and the Update Announcement in relation to, among other things, the Subscription and the Whitewash Waiver. The Company entered into the Subscription Agreement with the Subscriber. Pursuant to the Subscription Agreement, the Company has conditionally agreed to allot and issue to the Subscriber or the Subscriber Nominee, and the Subscriber has conditionally agreed to subscribe or nominate the Subscriber Nominee to subscribe for, at Completion, 765,186,000 Subscription Shares at the Subscription Price of HK$512,674,620, being HK$0.67 per Subscription Share.

– 7 –

LETTER FROM THE BOARD

The primary purpose of this circular is to provide you with, among other matters, (i) further details of the Subscription and the Whitewash Waiver; (ii) recommendation of the Independent Board Committee to the Independent Shareholders in relation to the Subscription and the Whitewash Waiver; (iii) letter of advice from the Independent Financial Adviser to the Independent Board Committee and the Independent Shareholders in relation to the Subscription and the Whitewash Waiver; and (iv) the notice of the EGM.

SUBSCRIPTION AGREEMENT

Date: 14 December 2017 (after trading hours)

Parties

(i) The Company, as issuer; and
(ii) China Merchants & Great Wall Ocean Strategy & Technology Fund (L.P.), as Subscriber.

Save for the 92,800,000 Shares held by CIMC (HK), representing approximately 13.12% of the issued share capital of the Company as at the Latest Practicable Date, (i) the Subscriber, Subscriber Nominee and their ultimate beneficial owner are independent of, not connected with and not acting in concert with any of the Directors, the chief executives or the substantial Shareholders of the Company or its subsidiaries or any of their respective associates; and (ii) as at the Latest Practicable Date, the Subscriber, Subscriber Nominee and their concert parties did not hold any existing Shares.

The Subscription

Pursuant to the Subscription Agreement, the Company has conditionally agreed to allot and issue to the Subscriber or the Subscriber Nominee, and the Subscriber has conditionally agreed to subscribe for or nominate the Subscriber Nominee to subscribe for, at Completion, 765,186,000 Subscription Shares (representing approximately (i) 108.21% of the issued share capital of the Company as at the Latest Practicable Date; (ii) approximately 51.97% of the issued share capital of the Company as enlarged by the allotment and issuance of the Subscription Shares; and (iii) approximately 51.03% of the issued share capital of the Company as enlarged by the allotment and issuance of the Subscription Shares and the exercise in full of all the outstanding Share Options) at the Subscription Price of HK$512,674,620, being HK$0.67 per Subscription Share. The Subscriber, Subscriber Nominee together with parties acting in concert with them, including CIMC (HK), will be interested in 857,986,000 Shares as at the Latest Practicable Date and which is approximately 58.27% of the issued share capital of the Company as enlarged by the allotment and issuance of the Subscription Shares.

The Subscriber has notified the Company that it will nominate the Subscriber Nominee to subscribe for the Subscription Shares pursuant to the terms of the Subscription Agreement.

The effect on the changes in the Company’s shareholding structure immediately upon the allotment and issuance of the Subscription Shares at Completion is set out in the section headed “Effect of the Subscription on the Shareholding Structure of the Company” in this circular.

– 8 –

LETTER FROM THE BOARD

Completion shall be conditional upon the completion conditions as described in the sub-section headed “Conditions of the Subscription” in this letter.

The Company will allot and issue the Subscription Shares under a specific mandate to be approved by the Independent Shareholders at the EGM by an ordinary resolution.

The Subscription Shares, when issued and fully paid, will rank equally in all respects among themselves and with all other Shares in issue as at the date of their allotment and issue. The Subscriber (or the Subscriber Nominee) will be entitled to receive all dividends and distributions which are declared, made or paid after the date of allotment of the Subscription Shares in their fully-paid form. Each Subscription Share is an ordinary share.

The Subscription Price

The aggregate amount of the consideration for the Subscription Shares is HK$512,674,620, which shall be payable by the Subscriber or the Subscriber Nominee in cash at Completion by telegraphic transfer payable to the Company on the Completion Date.

The Subscription Price, being HK$0.67 per Subscription Share, represents:

(i) a discount of approximately 30.21% to the closing price of HK$0.960 per Share as quoted on the Stock Exchange on 14 December 2017, being the Last Trading Day;
(ii) a discount of approximately 21.18% to the average of the closing prices per Share of approximately HK$0.850 for the last five (5) trading days as quoted on the Stock Exchange up to and including the Last Trading Day;
(iii) a discount of approximately 19.28% to the average of the closing prices per Share of approximately HK$0.830 for the last ten (10) trading days as quoted on the Stock Exchange up to and including the Last Trading Day;
(iv) a discount of approximately 17.89% to the average of the closing prices per Share of approximately HK$0.816 for the last thirty (30) trading days as quoted on the Stock Exchange up to and including the Last Trading Day;
(v) a discount of approximately 9.34% to the average of the closing prices per Share of approximately HK$0.739 for the last ninety (90) trading days as quoted on the Stock Exchange up to and including the Last Trading Date;
(vi) a discount of approximately 25.56% to the closing price of HK$0.900 per Share as quoted on the Stock Exchange on 16 January 2018, being the Latest Practicable Date;
(vii) a discount of approximately 26.21% to the average of the closing prices per Share of approximately HK$0.908 for the last five (5) trading days as quoted on the Stock Exchange up to and including the Latest Practicable Date;
(viii) a discount of approximately 25.31% to the average of the closing prices per Share of approximately HK$0.897 for the last ten (10) trading days as quoted on the Stock Exchange up to and including the Latest Practicable Date;

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LETTER FROM THE BOARD

(ix) a discount of approximately 23.34% to the average of the closing prices per Share of approximately HK$0.874 for the last thirty (30) trading days as quoted on the Stock Exchange up to and including the Latest Practicable Date;
(x) a discount of approximately 17.15% to the average of the closing prices per Share of approximately HK$0.809 for the last ninety (90) trading days as quoted on the Stock Exchange up to and including the Latest Practicable Date;
(xi) a discount of approximately 34.95% to the consolidated unaudited net asset value per Share of approximately US$0.132 (equivalent to approximately HK$1.03) (calculated by dividing the unaudited net asset value as at 30 June 2017 as shown in the interim report of the Company for the six months ended 30 June 2017 of approximately US$93,348,000 divided by 707,120,204 Shares in issue as at the Latest Practicable Date); and
(xii) a discount of approximately 36.79% to the consolidated net asset value per Share of approximately US$0.136 (equivalent to approximately HK$1.06) (calculated by dividing the audited net asset value as at 31 December 2016 as shown in the annual report of the Company for the year ended 31 December 2016 of approximately US$96,074,000 divided by 707,120,204 Shares in issue as at 31 December 2016).

The Subscription Price was arrived at after arm’s length negotiations between the Company and the Subscriber, where the Company has taken into consideration the following factors:

(i) the audited financial information of the Company for the year ended 31 December 2016, in particular:
‧ for the year ended 31 December 2016, the Group generated a loss of approximately US$111.6 million;
‧ the Group did not generate any net cash from its operating activities for the year ended 31 December 2016; and
‧ as of 31 December 2016, the Group had bank balances and cash of only approximately US$10.0 million and pledged bank deposits of approximately US$1.5 million;

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LETTER FROM THE BOARD

(ii) the unaudited financial information of the Company for the six months ended 30 June 2017, in particular:
‧ for the six months ended 30 June 2017, the Group generated a loss of approximately US$3.7 million;
‧ the Group did not generate any net cash from its operating activities for the six months ended 30 June 2017; and
‧ as of 30 June 2017, the Group had bank balances and cash of only approximately US$12.1 million and pledged bank deposits of approximately US$1.9 million;
(iii) the Subscription is a valuable opportunity for the Group to bring in a solid strategic investor namely the Subscriber, whose general partner is the Fund GP (a company jointly held by CM Group indirectly as to an aggregate of 75% and GW Asset Management indirectly as to 25%). The Subscriber is primarily focused on making investments in the marine industry. As informed by the Subscriber, subject to further review on the Group’s business performance and financial position, the Subscriber plans to seek for new investment opportunities for the Group after Completion, which is expected to enhance the business mix, business network, growth prospects, capital structure, financing capability, branding and business profile of the Group; and
(iv) through the Subscription, the Company will raise a substantial amount of additional funds which will improve the financial position and liquidity of the Group and provide the Company with the financial flexibility necessary for the expansion of the Group’s existing business and the capability to capture any prospective acquisition opportunities as and when they arise.

In light of the factors set out above, the Directors (excluding the members of the Independent Board Committee whose opinion is set out in the “Letter from the Independent Board Committee” in this circular) consider that the basis in determining of the Subscription Price is fair and reasonable and the entering into of the Subscription Agreement is in the best interests of the Company and the Shareholders as a whole.

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LETTER FROM THE BOARD

Ranking

The Subscription Shares, when allotted and issued, will rank pari passu in all respects with the Shares in issue as at the date of allotment and issue of the Subscription Shares.

Mandates to issue the Subscription Shares

The issue of the Subscription Shares is subject to the approval by the Shareholders (or the Independent Shareholders, as the case may be) at the EGM. Ordinary resolutions will be proposed at the EGM to seek, among other things, the Specific Mandate to issue the Subscription Shares under the Subscription Agreement.

Listing Application

An application will be made to the Listing Committee of the Stock Exchange for the listing of, and permission to deal in, the Subscription Shares.

Conditions of the Subscription

Completion is conditional upon satisfaction (or waiver) of the following Conditions:

(i) the obtaining of all necessary approvals by the Independent Shareholders at the EGM as required by the Listing Rules to approve the allotment and issuance of the Subscription Shares to the Subscriber or the Subscriber Nominee;
(ii) the obtaining of all necessary approvals by the Independent Shareholders at the EGM as required by the Takeovers Code for the Whitewash Waiver;
(iii) the SFC granting the Whitewash Waiver to the Subscriber and the Whitewash Waiver remaining valid;
(iv) the Listing Committee of the Stock Exchange having granted the approval (either unconditionally or subject only to conditions to which neither the Company nor the Subscriber reasonably objects) for the listing of and permission to deal in the Subscription Shares, and such approval not having been revoked or withdrawn prior to the Completion;

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LETTER FROM THE BOARD

(v) the Subscriber having notified the Company in writing that it is satisfied, in its absolute discretion, with the results of the due diligence review conducted or to be conducted on the Group and its business and operations (including but not limited to the financials, corporate information, taxation, business, operations and assets of each member of the Group);
(vi) each of the warranties of the Company under the Subscription Agreement remaining true, complete and accurate and not misleading at the Completion as if repeated at the Completion and at all times between the date of the Subscription Agreement and the Completion;
(vii) the Company having duly performed and observed all of the obligations, undertakings, covenants and agreements required to be performed and observed by it prior to the Completion under the Subscription Agreement;

(viii) there having been no material adverse changes prior to the Completion;

(ix) each of the Subscriber’s warranties under the Subscription Agreement remaining true, complete and accurate and not misleading at the Completion as if repeated at the Completion and at all times between the date of the Subscription Agreement and the Completion; and
(x) the Company having made filings with the relevant PRC regulatory authorities regarding:
(a) the alteration of capital increase in Qingdao TSC Offshore Equipment Co., Ltd.* (青島天時海洋石油裝備有限公司), an indirect wholly owned subsidiary of the Company, to the satisfaction of the Subscriber;
(b) the registration of supervisor and supervising committee of TSC-HHCT Control and Drive Technology Co., Ltd.* (海爾海斯（西安）控制技術有限公司), an indirect wholly owned subsidiary of the Company; and
(c) the amendment of owner of the patent held with TSC Oil and Gas Services Holdings Ltd.* (青島天時油氣裝備服務集團股份有限公司), an indirect wholly owned subsidiary of the Company, to the satisfaction of the Subscriber.

The Subscriber may at any time by notice in writing to the Company waive all or any of the Conditions (save for those set out in (i) to (iv) and (ix)) above. The Company may at any time by notice in writing to the Subscriber waive the Condition (ix) above. The Conditions set out in (i) to (iv) are not waivable by any party. Hence, among other things, if the Whitewash Waiver is not granted by the Executive or approved by the Independent Shareholders at the EGM, the Subscription will not proceed.

* For identification purpose only

– 13 –

LETTER FROM THE BOARD

In relation to Condition (x)(a), Qingdao TSC Offshore Equipment Co., Ltd. (青島天時海洋石油裝備有限公司) will file for application to alter capital increasing method and deadline with the relevant PRC regulatory authorities. In relation to Condition (x)(b), TSC-HHCT Control and Drive Technology Co., Ltd. (海爾海斯（西安）控制技術有限公司) will make registration of its newly established supervisor and supervising committee with the relevant PRC regulatory authorities. In relation to Condition (x)(c), TSC Oil and Gas Services Holdings Ltd.* (青島天時油氣裝備服務集團股份有限公司) will update registration of ownership of patents to its correct corporate owner name. The PRC regulatory filings referred to in Condition (x) are required in compliance with the relevant PRC laws and regulations. The Subscriber is of the view that completion of such filings are in the best interests of the Shareholders as a whole and as such has requested the Company to complete the filings prior to Completion. The Company is of the view that completion of such filings are in the best interests of the Company and its Shareholders as a whole and the Company is capable to fulfil the Condition (x).

In the event that any of the Conditions shall not have been fulfilled (or waived, if applicable) prior to 31 March 2018 or such later date which may be agreed by the Subscriber and the Company, and consented to by the SFC, the Subscription Agreement shall cease to be of any effect.

As at the Latest Practicable Date, Condition (x) set out above has been satisfied.

Completion

Completion will take place on the third Business Day after all of the Conditions have been fulfilled or waived, or on such later date as the Subscriber and the Company may agree.

Pursuant to the Specific Mandate obtained at the EGM, if for whatever reason, the Completion does not take place on or before the third Business Day after 31 March 2018, the Company will seek another specific mandate to be approved by the Independent Shareholders at another EGM to be held by the Company to authorize the Board to issue the Subscription Shares.

Board Composition

With effect immediately after Completion, the Company shall:

(i) cause such person, as the Subscriber may nominate by giving not less than three Business Days’ prior written notice to the Company, to be validly appointed as Directors, which shall include the appointment of two executive Directors and one non-executive Director nominated by the Subscriber, with effect immediately after Completion representing a majority of the Board immediately following such appointment; and

* For identification purpose only

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LETTER FROM THE BOARD

(ii) procure (a) the shareholders to vote in favor of such appointment and (b) five existing Directors to resign as Directors as agreed between the Company and the Subscriber.

With effect from Completion, it is expected that the Board shall continue to consist of nine Directors, comprising:

(i) four executive Directors, two of which are existing executive Directors and two of which are persons nominated by the Subscriber;
(ii) two non-executive Directors, one of which is an existing non-executive Director and one of which is a person nominated by the Subscriber; and
(iii) three independent non-executive Directors.

Please also see the paragraphs headed “Proposed Change in Composition of the Board” below for more details.

Undertaking by Mr. Zhang Menggui, Morgan, Mr. Jiang Bing Hua and Global Energy Investors, LLC.

Pursuant to the Subscription Agreement, each of Mr. Zhang Menggui, Morgan, Mr. Jiang Bing Hua and Global Energy Investors, LLC. jointly and severally undertakes to the Subscriber that they will (i) vote as a Director (for Mr. Zhang Menggui, Morgan and Mr. Jiang Bing Hua) and (ii) vote, and Mr. Zhang Menggui, Morgan and Mr. Jiang Bing Hua will procure Global Energy Investors, LLC. to vote, as a Shareholder in favour of any resolutions approving any capital that may be contributed by the Subscriber to the Company from time to time after the Completion to be used for purposes in connection with business expansion, and not to be used for repayment of any debts, provided always that they need not vote in favour of any such resolutions if such voting would be inconsistent with Mr. Zhang Menggui, Morgan’s and Mr. Jiang Bing Hua’s exercise of their fiduciary duties to the Shareholders under applicable laws.

This undertaking is enforceable against Mr. Zhang Menggui, Morgan, Mr. Jiang Bing Hua and Global Energy Investors, LLC. for so long as Mr. Zhang Menggui, Morgan and Mr. Jiang Bing Hua remain a Director and/or for so long as Mr. Zhang Menggui, Morgan, Mr. Jiang Bing Hua and Global Energy Investors, LLC. remain a Shareholder.

The undertaking is to ensure that any future funding from the Subscriber will be used to aid the growth of the Company’s business. Further, this undertaking is subject to the fiduciary duty of Mr. Zhang Menggui, Morgan and Mr. Jiang Bing Hua as a Director. As such, the Company considers this undertaking is fair and reasonable and in the interests of the Company.

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LETTER FROM THE BOARD

Lock-up

Pursuant to the Subscription Agreement, each of Mr. Zhang Menggui, Morgan, Mr. Jiang Bing Hua and Global Energy Investors, LLC. jointly and severally undertakes to the Subscriber that at any time during the period commencing on the date of the Subscription Agreement, and ending on a date which is twelve months from the Completion Date (the “ Lock-Up Period ”), he/it will not sell, dispose of or offer to sell or dispose of any Shares (or securities, options or rights convertible or exchangeable into Shares), except that each of Mr. Zhang Menggui, Morgan, Mr. Jiang Bing Hua and Global Energy Investors, LLC. may sell or dispose of, or offer for sale or disposal of, up to 20% of the Shares held by each of them respectively as of the date of the Subscription Agreement during the Lock-Up Period provided that:

(i) during the period commencing on the date of the Subscription Agreement and ending on the date immediately preceding the Completion, they have obtained the prior written consent of the Subscriber which can be withheld by the Subscriber in its sole and absolute discretion; and
(ii) during the period commencing on the date of the Completion and ending on a date which is twelve months from the Completion Date, they have obtained the prior written consent of the Board of the Company which can be withheld by the Board of the Company in its sole and absolute discretion.

Apart from the Subscription Agreement, there is no other understanding, arrangement or agreement between Global Energy Investors, LLC., Mr. Zhang Menggui, Morgan and Mr. Jiang Bing Hua on the one hand and the Company or the Subscriber on the other.

EFFECT OF THE SUBSCRIPTION ON THE SHAREHOLDING STRUCTURE OF THE COMPANY

As of the Latest Practicable Date, the Company had a total of 707,120,204 Shares and existing Share Options entitling the holders thereof to subscribe for a total of 27,058,000 Shares, representing 3.83% of the issued share capital of the Company. Save for the above, the Company does not have any other Shares, outstanding warrants, options, derivatives or other securities carrying conversion or subscription rights into Shares.

The following table illustrates the shareholding structure of the Company:

(i) as at the Latest Practicable Date;
(ii) immediately upon Completion, assuming there is no other change in the issued share capital of the Company other than the issuance of the Subscription Shares; and
(iii) immediately upon Completion, assuming that all the outstanding Share Options had been exercised and there are no other changes in the issued share capital of the Company.

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LETTER FROM THE BOARD

Name of Shareholder The Subscriber, the Subscriber Nominee and parties acting in concert with them The Subscriber/ Subscriber Nominee CIMC (HK)(Note 1) Sub-total Global Energy Investors, LLC.(Note 2) Mr. Zhang Menggui, Morgan_(Note 2) Mr. Jiang Bing Hua (Note 2) Mr. Jiang Longsheng (Note 3) Mr. Chan Ngai Sang, Kenny(Note 3) Mr. Guan Zhichuan (Note 3) Mr. Bian Junjiang(Note 3) Mr. Wang Yong(Note 3) Windmere International Limited(Note 4) Harmony Master Fund (Note 5) Other public shareholders (Note 6 & 9)_ Total	(i) As at the Latest Practicable Date No. of Shares Approx % – – 92,800,000 13.12 92,800,000 13.12 120,046,200 16.98 4,656,000 0.66 4,656,000 0.66 – – 500,000 0.07 300,000 0.04 – – – – 66,072,800 9.34 70,687,800 10.00 347,401,404 49.13 707,120,204 100.00	(ii) Immediately upon Completion and assuming no other change in the issued share capital of the Company other than the issuance of the Subscription Shares No. of Shares Approx % 765,186,000 51.97 92,800,000 6.30 857,986,000 58.27 120,046,200 8.15 4,656,000 0.32 4,656,000 0.32 – – 500,000 0.03 300,000 0.02 – – – – 66,072,800 4.49 70,687,800 4.80 347,401,404 23.60 1,472,306,204 100.00	(iii) Immediately upon Completion and assuming all the outstanding Share Options had been exercised and there are no other changes in the issued share capital of the Company No. of Shares Approx % 765,186,000 51.03 92,800,000 6.19 857,986,000 57.22 120,046,200 8.01 4,656,000 0.31 4,656,000 0.31 400,000 0.03 500,000 0.03 300,000 0.02 350,000 0.02 3,000,000 0.20 66,072,800 4.41 70,687,800 4.71 370,709,404 24.73 1,499,364,204 100.00	(iii) Immediately upon Completion and assuming all the outstanding Share Options had been exercised and there are no other changes in the issued share capital of the Company No. of Shares Approx % 765,186,000 51.03 92,800,000 6.19 857,986,000 57.22 120,046,200 8.01 4,656,000 0.31 4,656,000 0.31 400,000 0.03 500,000 0.03 300,000 0.02 350,000 0.02 3,000,000 0.20 66,072,800 4.41 70,687,800 4.71 370,709,404 24.73 1,499,364,204 100.00
				57.22
				8.01 0.31 0.31 0.03 0.03 0.02 0.02 0.20 4.41 4.71 24.73
				100.00

Notes:

CIMC (HK) is the beneficial owner of 92,800,000 Shares. CIMC (HK) is a wholly-owned subsidiary of CIMC (Group). CM Industry indirectly, through two wholly owned subsidiaries, holds approximately 24.49% of the total issued shares in CIMC (Group). CM Industry is a limited partner of the Subscriber holding approximately 29.989% limited partnership interest in the Subscriber. CM Industry also holds 30% of equity interest in Fund GP.

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LETTER FROM THE BOARD

As at the Latest Practicable Date, Global Energy Investors, LLC. was the beneficial owner of 120,046,200 Shares. The entire share capital of Global Energy Investors, LLC. is beneficially owned as to 50% each by Mr. Zhang Menggui, Morgan, an executive Director and Mr. Jiang Bing Hua, an executive Director and Executive Chairman. Accordingly, both Mr. Zhang Menggui, Morgan and Mr. Jiang Bing Hua are deemed to be interested in the 120,046,200 Shares beneficially owned by Global Energy Investors, LLC. under Part XV of the SFO. Each of Mr. Zhang Menggui, Morgan and Mr. Jiang Bing Hua is personally interested in 4,656,000 Shares.
Mr. Wang Yong, an executive Director, holds 3,000,000 Share Options. Mr. Jiang Longsheng, a non-executive Director, holds 400,000 Share Options. Mr. Chan Ngai Sang, Kenny and Mr. Guan Zichuan are independent non-executive Directors. Mr. Bian Junjiang is the former independent non-executive Director, who has resigned on 25 May 2017 and holds 350,000 Share Options.
As at the Latest Practicable Date, Mr. Brian Chang, a non-executive Director, indirectly held 66,072,800 Shares through Windmere International Limited which is his wholly-owned company.
Harmony Master Fund (“ Harmony Fund ”) is a long-only equity fund registered in Cayman Islands. Harmony Fund is managed by DM Fund Management Limited, a company registered in Cayman Islands and of its sole shareholder is DM Capital Limited, a company incorporated in British Virgin Islands. DM Capital Limited is held by four individuals, namely Zheng Lixin, Wang Zhixin, Li Jun and Zhou Hangbing, who are independent third parties of the Company. Harmony Fund primarily holds long equity positions in small capitalization stocks that derive a majority of their revenues within the Greater China region. Harmony Fund will be counted as a public Shareholder upon Completion.
The other public Shareholders including the employees hold 23,308,000 Share Options.
The details of the outstanding Share Options as at the Latest Practicable Date are as follows:

			Balance as at
			the Latest
		Exercise price	Practicable
Date of Grant	Exercisable Period	per share	Date
		(HK$)
12 August 2008	12 August 2008 to 11 August 2018	2.32	1,700,000
29 December 2008	29 December 2008 to 28 December 2018	0.54	1,730,000
18 September 2009	18 September 2009 to 17 September 2019	2.06	7,288,000
1 September 2010	1 September 2010 to 31 August 2020	1.27	2,320,000
4 September 2012	4 September 2012 to 3 September 2022	1.02	7,065,000
30 August 2013	30 August 2013 to 29 August 2023	2.90	4,105,000
2 September 2014	2 September 2014 to 1 September 2024	4.16	2,250,000
24 December 2014	24 December 2014 to 23 December 2024	2.11	600,000

The Company adopted a share award plan (“ Share Award Plan ”) on 16 January 2015 and a share award incentive scheme (“ Share Award Incentive Scheme ”) on 27 May 2016. Pursuant to the Share Award Incentive Scheme, the Company can grant awards of new Shares of not more than 3% of the total number of issued Shares as at the adoption date of Share Award Incentive Scheme (i.e. 21,213,606 new Shares). For details of the Share Award Plan, please refer to the Company’s announcement dated 16 January 2015. Regarding the Share Award Incentive Scheme, please refer to the Company’s announcement dated 7 April 2016 and the Company’s circular dated 8 April 2016. No awards have been granted as at the Latest Practicable Date.
The public shareholders, including Harmony Master Fund and other public shareholders, will hold, in aggregate, at least approximately 28.4% of the Shares. The Company is able to maintain the minimum public float of 25% upon Completion.
Certain figures and percentage figures included in the above table have been subject to rounding adjustments.

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LETTER FROM THE BOARD

INFORMATION ON THE GROUP

The Group is principally engaged in developing, manufacturing, marketing, installing and servicing a comprehensive line of products for the onshore and offshore oil and gas exploration and production and decommissioning industries.

INFORMATION ON THE SUBSCRIBER

The Subscriber is an exempted limited partnership registered in the Cayman Islands. The Subscriber Nominee is a company incorporated in the British Virgin Islands and is wholly owned by the Subscriber.

The Subscriber’s general partner is the Fund GP, a Cayman Islands exempted company. CM Group holds indirectly, in aggregate, 75% of equity interest in Fund GP. GW Asset Management holds indirectly the remaining 25% of equity interest in Fund GP.

The Subscriber ’s limited partners are China Merchants Capital Holdings (International) Limited, CM Industry, Great Wall International Investment V Limited, Meris Global Investments Limited and Essence International CMBC Fund SP (“ Essence Fund SP ”), each holding approximately 9.996%, 29.989%, 39.986%, 0.035% and 19.993% of limited partnership interest in the Subscriber, respectively. CM Group is the indirect holding company of and holding 100% in each of China Merchants Capital Holdings (International) Limited and CM Industry. Through GWAMC International, GW Asset Management is the indirect holding company of and holding 100% equity interest in Great Wall International Investment V Limited. As such, CM Group and GW Asset Management each indirectly holds approximately 39.986% of limited partnership interests in the Subscriber. Essence Fund SP, an independent third party of the Subscriber, has subscribed for approximately 19.993% of the limited partnership interests in the Subscriber on behalf of China Minsheng Banking Corp., Ltd. (HKSE Stock Code: 01988), which is the ultimate beneficiary of Essence Fund SP and provided the financial resources for the said subscription. Meris Global Investments Limited is a co-investment vehicle of the management team of the Fund Manager. The management team of the Fund Manager, including Mr. Wang Hongyuan, Mr. Yang Guohui and Ms. Li Rong, holds in aggregate 81% beneficial interests in Meris Global Investments Limited. The remaining 19% beneficial interests in Meris Global Investments Limited are held by independent third parties.

The Fund Manager is the management company of the Subscriber. CM Group and GW Asset Management hold indirectly, in aggregate, 75% and 25% of equity interest in Fund Manager, respectively. The Fund Manager is responsible for managing the day-to-day affairs of the Subscriber, while the overall control of the Subscriber is vested exclusively in the Fund GP, which is indirectly controlled by CM Group.

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LETTER FROM THE BOARD

The following chart depicts the corporate structure of the Subscriber and Subscriber Nominee:

==> picture [363 x 185] intentionally omitted <==

----- Start of picture text -----

CM Group (Note 2)
100%
China Merchants Steam Navigation Company Limited
Essence Fund SP (Note 4)
100% 100%
China Merchants Capital Investment Co., Ltd. China Merchants Holdings GW Asset Management
（招商局資本投資有限責任公司） (Hong Kong) Company Ltd. (Note 1)
100%
100% 100% GWAMC International
China Merchants Capital Management Co. Ltd. China Merchants Capital Holdings Co. Ltd.
（招商局資本管理有限責任公司）（招商局資本控股有限責任公司）
100% 100% 100% Meris Global 100%
China Merchants Capital Management China Merchants Capital Holdings Investments Great Wall International
(International) Limited (International) Limited CM Industry Limited (Note 3) Investment V Limited
45% 9.996% 30% 29.989% 0.035% 25% 39.986% 19.993%
Equity
Interest
Limited Fund Manager Manage day to day
partnership affairs
interest in the Fund GP Overall control Subscriber
Subscriber
100%
Subscriber Nominee
----- End of picture text -----*

For identification purpose only
Note 1: The ultimate beneficial shareholders of GW Asset Management are Ministry of Finance of the People’s Republic of China, National Council for Social Security Fund of the People’s Republic of China and China Life Insurance (Group) Company, each holding 97%, 2% and 1% of equity interest, respectively.
Note 2: CM Group is wholly owned by the State-owned Assets Supervision and Administration Commission of the State Council of the People’s Republic of China.
Note 3: Meris Global Investments Limited is a co-investment vehicle of the management team of the Fund Manager. The management team of the Fund Manager, including Mr. Wang Hongyuan, Mr. Yang Guohui and Ms. Li Rong, holds in aggregate 81% beneficial interests in Meris Global Investments Limited. The remaining 19% beneficial interests in Meris Global Investments Limited are held by independent third parties.
Note 4: Essence Fund SP, an independent third party of the Subscriber, has subscribed for the limited partnership interests in the Subscriber on behalf of China Minsheng Banking Corp., Ltd. (HKSE Stock Code: 01988), which is the ultimate beneficiary of Essence Fund SP and provided the financial resources for the said subscription.
Note 5: The percentages of the limited partnership interest in the Subscriber as stated in the above are rounded to the nearest three decimal places, and the total number of percentages may not add up to 100% due to rounding.

The Subscriber is primarily focused on making investments in the marine industry including, but not limited to, existing or future equipment of CM Group or its affiliates, up and down streams of offshore oil and gas production chains, automated manufacturing, logistics, marine technology research centres, marine industrial real assets and other frontier or profitable marine technology sectors.

– 20 –

LETTER FROM THE BOARD

independent of the Company and the connected persons (as defined under the Listing Rules) of the Company; and (ii) before the Completion, the Subscriber, the Subscriber Nominee and parties acting in concert with them do not have any interest in the Company.

DEALING AND INTEREST OF THE SUBSCRIBER, THE SUBSCRIBER NOMINEE AND PARTIES ACTING IN CONCERT WITH THEM IN THE SECURITIES OF THE COMPANY

As at the Latest Practicable Date, save for the Subscription:

(i) save for the 92,800,000 Shares held by CIMC (HK), which is indirectly held by CM Group through its subsidiaries including CM Industry, representing approximately 13.12% of the issued share capital of the Company as at the Latest Practicable Date, the Subscriber, the Subscriber Nominee and parties acting in concert with them did not hold, control or have direction over any Shares and right over Shares, outstanding options, warrants, or any securities that are convertible into Shares or any derivatives in respect of securities in the Company, or hold any relevant securities (as defined in Note 4 to Rule 22 of the Takeovers Code) in the Company;
(ii) the Subscriber, the Subscriber Nominee and parties acting in concert with them have not borrowed or lent any relevant securities (as defined in Note 4 to Rule 22 of the Takeovers Code) in the Company;
(iii) there is no arrangement referred to in Note 8 to Rule 22 of the Takeovers Code (whether by way of option, indemnity or otherwise) in relation to the relevant securities (as defined in Note 4 to Rule 22 of the Takeovers Code) of the Company or the Subscriber or the Subscriber Nominee, which might be material to the Subscription and/or the Whitewash Waiver, with any other persons;
(iv) there is no agreement or arrangement to which the Subscriber and the Subscriber Nominee is a party which relates to circumstances in which it may or may not invoke or seek to invoke a pre-condition or a condition to the Subscription and/or the Whitewash Waiver;
(v) none of the Subscriber or the Subscriber Nominee or any parties acting in concert with them have received any irrevocable commitment to vote for or against the Subscription or the Whitewash Waiver; and

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LETTER FROM THE BOARD

(vi) neither the Subscriber, the Subscriber Nominee nor any parties acting in concert with them, has dealt in the Shares, outstanding options, derivatives, warrants or other securities convertible or exchangeable into Shares, during the six months prior to the date of the Announcement and up to the Latest Practicable Date.

CONFIRMATION OF NO DISQUALIFYING TRANSACTIONS

Except for entering into the Subscription Agreement, neither the Subscriber, the Subscriber Nominee nor any parties acting in concert with them has acquired or disposed of or entered into any agreement or arrangement to acquire or dispose of any voting rights in the Company during the six months prior to the date of Announcement up to the Latest Practicable Date, and, save for 92,800,000 Shares held by CIMC (HK), which is indirectly held by CM Group through its subsidiaries including CM Industry, representing approximately 13.12% of the issued share capital of the Company as at the Latest Practicable Date, none of them was interested in any issued Shares or other relevant securities (as defined in Note 4 to Rule 22 of the Takeovers Code) of the Company as at the Latest Practicable Date.

FUTURE INTENTIONS OF THE SUBSCRIBER AND THE SUBSCRIBER NOMINEE REGARDING THE GROUP

The Directors were informed by the Subscriber and the Subscriber Nominee that, upon obtaining control of the Company, the Subscriber and the Subscriber Nominee intend that the Company’s existing principal activities will be maintained, and at the same time after Completion, the Subscriber and the Subscriber Nominee will assist the Company in reviewing its business and operations, developing its existing business and seeking for new investment opportunities that are complementary to the Group’s existing business including (i) offshore drilling business and (ii) plug and abandonment and decommissioning business. In this regard, the Subscriber and the Subscriber Nominee may look into business opportunities and consider whether any asset disposals, asset acquisitions, business rationalization, business divestment, fund raising, restructuring of the business and/or business diversification will be appropriate in order to enhance the long-term growth potential of the Group. Should such corporate actions materialise, further announcement(s) will be made in accordance with the Listing Rules.

Save for the Subscriber’s and the Subscriber Nominee’s intention regarding the Group as set out above and subject to the review on existing business and operations, the Subscriber and the Subscriber Nominee have no current intention to introduce major changes to the business of the Group, including any redeployment of fixed assets other than those in its ordinary course of business. Save for the proposed change as mentioned in the section headed “Proposed Change to the Board Composition”, the Subscriber and the Subscriber Nominee will, depending on the business operations and development of the Group in the future, review the composition of the Board and senior management. Any changes to the Board composition will be made in the best interests of the Group and the Shareholders as a whole and in compliance with the Takeovers Code and the Listing Rules. However, the Subscriber and the Subscriber Nominee reserve the right to make any

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LETTER FROM THE BOARD

changes that them deem necessary or appropriate to the Group’s businesses and operations to optimise the value of the Group.

PROPOSED CHANGE IN COMPOSITION OF THE BOARD

Resignation of Directors

Subject to the Completion having taken place, each of Mr. Jiang Longsheng, Mr. Brian Chang and Mr. Wang Yong will resign as Directors with effect from the Completion Date.

Proposed appointment of Directors

In place of the above resigning Directors, the Board has proposed the following persons, namely, Mr. Wang Hongyuan, Mr. Yang Guohui and Ms. Li Rong as the candidates for election as the Directors (collectively the “ Candidates for Directors ”) at the EGM. If the Candidates for Directors are approved by the Shareholders at the EGM, their appointment as the Directors will take effect from Completion.

The biographical details of the Candidates for Directors are set out below:

Executive Directors

Mr. Wang Hongyuan , aged 42, is a deputy general manager of CM Industry, the general manager of the Fund Manager and a supervisor of CIMC (Group). Mr. Wang served as the senior project manager of the business development department of CM Group from 2003 to 2005, the senior project manager of the business management department of China Merchants Holding (International) Company Limited from 2005 to 2008, the general manager of China Merchants International Cold Chain (Shenzhen) Co., Ltd. (招商局國際冷鏈（深圳）有限公司) from 2009 to 2010, the executive vice president of China Merchants Americold (Hong Kong) Holdings Company Limited from 2010 to 2011, the deputy general manager of China Merchants Port Services (Shenzhen) Company Limited (招商港務（深圳）有限公司) from January 2013 to December 2013, the general manager assistant of China Merchants Food Supply Chain Management Co., Ltd.* (招商局食品供應鏈管理有限公司) from 2014 to 2015, and the director assistant of the capital management department of CM Group from 2015 to 2016. Mr. Wang has extensive experience in strategic planning, mergers and acquisitions, capital operations and investments in sectors such as offshore marine and shipping, port and bonded logistics, cold chain and food supply chain management.

Mr. Wang obtained a bachelor’s degree in ocean vessel driving and a master’s degree in transportation management from Dalian Maritime University in the PRC in 1997 and 2004, respectively.

For identification purpose only

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LETTER FROM THE BOARD

Mr. Yang Guohui , aged 44, is an executive director of China Merchants Capital Management (International) Limited. Mr. Yang worked for various positions such as an engineer, a manager in workforce planning and a manager in assets transactions under the group companies of Transocean Ltd. during the period from 2001 to 2013. He then worked as the general manager of ESSM Pte Ltd. from September 2013 to October 2014 and chief operating officer for Scott & English Energy Pte Ltd. in Singapore from August 2015 to 2017.

Mr. Yang obtained a master’s degree in engineering from University of Petroleum in 1999. He also obtained a master’s degree in business administration from Nanyang Technological University, Singapore in 2017.

Non-executive Director

Ms. Li Rong , aged 49, is a managing director of China Merchants Capital Management (International) Limited and a director of Meris Global Investments Limited. Prior to joining China Merchants Capital Management (International) Limited, Ms. Li worked for J.P. Morgan from July 2006 to August 2012. Her last position with J.P. Morgan was vice president in global special opportunities department.

Ms. Li obtained a master’s degree in business administration from Kellogg School of Management of Northwestern University, United States in 1997.

As at the Latest Practicable Date, the Candidates for Directors had not entered into any service contracts with the Company and they are subject to retirement by rotation and re-election in accordance with the articles of association of the Company. The directors’ fees of the Candidates for Directors are to be determined by the Board with reference to their relevant experience and prevailing market levels for director’s fees. As at the Latest Practicable Date, the Candidates for Directors have no interest in the Shares of the Company within the meaning of the SFO. Saves as disclosed above, the Candidates for Directors had not held any other directorships in any public listed companies in the past three years and, are not connected with any Directors, senior management or substantial or controlling shareholders (as defined in the Listing Rules) of the Company. The Candidates for Directors have confirmed that there is no other information to be disclosed pursuant to Rule 13.51(2)(h) to (v) of the Listing Rules and there are no matters that need to be brought to the attention of the Shareholders.

Announcement in relation to the Resignation of the Directors and the Appointment of the Proposed Directors

The Company will make an announcement immediately following the resignation of the Directors and the appointment of the proposed Directors in compliance with the relevant disclosure requirements under the Listing Rules as and when appropriate. It is proposed that each of the proposed Directors will enter into a service agreement for a term of three years with the Company subject to retirement by rotation and re-election in accordance with the articles of association of the Company.

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LETTER FROM THE BOARD

REASONS FOR AND BENEFITS OF THE SUBSCRIPTION

The Directors (excluding the members of the Independent Board Committee whose opinion is set out in the “Letter from the Independent Board Committee” in this circular) are of the view that:

(i) the Subscriber is primarily focused on making investments in the marine industry and its general partner, the Fund GP, is indirectly held by CM Group as to 75% and GW Asset Management as to 25%. The Subscription represents a valuable opportunity for the Group to bring in a strategic investor, CM Group, with extensive expertise and business network in its own industries, including construction and installation of offshore production equipment, to develop the existing businesses and to broaden the income streams for the Group. It also represents a good opportunity to introduce valuable investment opportunities to the Company which will be beneficial to the Company and the Shareholders as a whole in the long term;
(ii) the Subscription will enlarge the shareholder base and significantly strengthen the shareholder profile of the Company by introducing a reputable investor, namely, the Subscriber, which is controlled by the Fund GP. The Fund GP is indirectly controlled by the CM Group, which is a leading state-owned conglomerate with three business platforms of industry, finance, capital investment and operating;
(iii) the Subscription will raise a substantial amount of additional funds for the Company;
(iv) the Subscription will improve the financial position and liquidity of the Group;
(v) the Subscription will provide the Group with the needed management capability and resources, and financial flexibility for future business development and capturing prospective investment opportunities when they arise; and
(vi) the Subscription represents a good opportunity to introduce valuable investment opportunities to the Company which will be beneficial to the Company and the Shareholders as a whole in the long term. CM Group has a mature market network and rich experience in maritime trade and industry. It is expected that the Company will be able to benefit from the investment opportunities available to CM Group as the Subscriber Nominee becomes the Shareholder.

In light of the factors set out above, the Directors (excluding the members of the Independent Board Committee whose opinion is set out in the “Letter from the Independent Board Committee” in this circular) consider that the terms of the Subscription are fair and reasonable and on normal commercial terms and the entering into of the Subscription Agreement is in the interests of the Company and the Shareholders as a whole.

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LETTER FROM THE BOARD

USE OF PROCEEDS

The gross proceeds from the Subscription is expected to amount to approximately HK$512.67 million. The net proceeds, after taking into account the estimated expenses in relation to the Subscription, would be approximately HK$505.07 million, representing a net price of approximately HK$0.66 per Subscription Share.

In particular, the net proceeds of the Subscription are intended to be allocated as follows:

(1) Repayment of a portion of the existing debts of the Group: approximately HK$101.01 million, representing approximately 20% of the proceeds are intended to repay a portion of the existing debts of the Group.

As at 30 November 2017, the Group recorded cash and bank balances of approximately US$6.28 million (equivalent to approximately HK$48.86 million). It had outstanding borrowings of approximately US$62.66 million (equivalent to approximately HK$487.49 million), comprising: (i) secured bank borrowings of approximately US$20.26 million (equivalent to approximately HK$157.62 million) of which approximately US$3.72 million (equivalent to approximately HK$28.94 million) was guaranteed; (ii) unsecured bank borrowings of approximately US$14.96 million (equivalent to approximately HK$116.39 million) of which approximately US$11.05 million (equivalent to approximately HK$85.97 million) was guaranteed; and (iii) unsecured and unguaranteed bond of approximately US$27.44 million (equivalent to approximately HK$213.48 million). Of which, approximately US$10.36 million (equivalent to approximately HK$80.60 million) will expire within 3 months. The Company confirms that none of the creditors to be repaid by using the proceeds to be raised from the Subscription are Shareholders.

The Company intends to first apply approximately HK$101.01 million towards repayment of borrowings including short-term borrowings which will become due for repayment within 3 months and which the Company is unable to fully refinance through extension of the facilities or replacement by new facilities. The Company shall repay other debts based on the interest rate, maturity term and other commercial terms of the outstanding debts as well as its negotiations with the creditors.

The remaining debts which are not repaid from the proceeds from the Subscription will be negotiated by the Company with the existing banks for renewal and extension of existing facilities or to refinance such borrowing with new facilities from other banks. In addition, subject to Completion, the review of the financial position of the Company and the negotiation status between the Company and the creditors, the Subscriber considers to carry out debt restructuring exercises and/or provide financial support to the Group as and when appropriate. The Board believes that upon Completion, the Subscription will bring positive commercial and financial impact to the Group and the Company will be in a better position to negotiate with the creditors and be able to extend most of the existing bank facilities.

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LETTER FROM THE BOARD

(2) Expansion of the Group’s existing business and/or potential acquisition to be decided by the Board after Completion: approximately HK$353.55 million, representing approximately 70% of the proceeds are intended to be used to fund the expansion of the Group’s existing business and/or potential acquisition to be decided by the Board after Completion.

The Company will selectively invest in or acquire businesses that are complementary to its existing business including (i) offshore drilling business and (ii) plug and abandonment (P&A) and decommissioning business.

The Group recorded decrease in both revenue and gross profit for the six months ended 30 June 2017 compared with the corresponding period and a loss of approximately US$3.7 million for the six months ended 30 June 2017. The deterioration in the financial performance of the Group is mainly due to the prevailing depressed drilling market following the downturn in the oil and gas exploration and production sector and decrease in sales orders.

In order to broaden the revenue base and improve financial performance, the Group has carried out several feasibility studies to identify potential business development and investment opportunities such as (i) offshore drilling business and (ii) P&A and decommissioning business which will complement and be synergistic to its existing business. In determining the potential investment or acquisition targets, the Company will generally consider a number of factors, including alignment with the Group’s strategic plans, degree of potential synergies, market position, experience of management team, valuation, historical operating metrics and financial performance. These business development and investment opportunities will be further discussed with the Subscriber upon Completion. As at the Latest Practicable Date, the Company had not entered into any definitive agreements in connection with potential acquisitions or investment targets. If any acquisition(s) or investment(s) materialize in the future, the Company will make announcement(s) as and when appropriate in accordance with the requirements of the Listing Rules.

The Subscriber is a fund primarily focused on making investments in the marine industry and from time to time, the Subscriber considers various investment opportunities in relation to marine industry. The Board understands that the Subscriber is currently in discussion with and have performed feasibility studies and/or due diligence on potential investment targets including companies engaging in the offshore drilling business. After taking into account of the prospect of the offshore drilling business during the negotiation process with the Subscriber, upon Completion, the Group expects to collaborate with the Subscriber to invest in companies providing drilling, workover and well construction services in shallow water to upstream oil and gas companies through the use of jack-up rigs and in regions that are more resilient, such as Middle East and India in 2018 in order to create synergies with the business of the Subscriber.

– 27 –

LETTER FROM THE BOARD

For the development of P&A and decommissioning business, the Group has developed various rig design solutions which have gained interest of oil companies planning to carry out P&A and decommissioning activities. The Group has completed two years of intensive technical and market development of the P&A and decommissioning business and has now reached the phase where the proposed use of proceeds allocation will be necessary to execute the business opportunities developed. These intensive technical and market developments were an extension and transformation of existing business necessary during this phase of the oil price cycle. The opportunities presented in this business sector relates to specific and identified customers with specific needs and interest in the Group’s new products. Several major oil companies consider the solutions presented to be innovative, effective and will be cost effective for the purposes required.

To complete the process of securing such contracts, the Group now seeks funds to commence construction and preparation for participation in potential work contracts. As such, the Group expects to apply part of the net proceeds of the Subscription for the manufacture of certain equipment such as jacking systems, deck cranes, electrical controls, pay deposits on the purchase of certain other critical equipment from third parties to be installed on P&A rigs and hire specialized team members to assist in the project. The Group plans to commence manufacture and purchase the above equipment in 2018.

In view of the above, the Directors consider that there exists an imminent need for the Group to timely raise funds to pursue the aforesaid opportunities. In addition, the Board considers that the Company will be in a better position to negotiate with the counterparties with a strengthened shareholding background from the Subscriber and to have a stronger liquidity position to capture the opportunities in timely manner upon Completion. As such, it is beneficial for the Company to launch the Subscription at this time and to apply the net proceeds as planned above.

(3) General working capital of the Group: approximately HK$50.51 million, representing approximately 10% of the proceeds are intended to be used for general working capital of the Group to support its daily business operations, including:

(a) to meet contractual payment terms;
(b) to meet any immediate operational funding requirement; and
(c) to provide funds for operational cost on projects.

After Completion, the Company will monitor the progress of the actual use of proceeds of the Subscription. In addition, if the actual use of proceeds of the Subscription significantly deviates from the intended use as disclosed above (or as subsequently disclosed by the Company), the Company will appropriately disclose such information as soon as reasonably practicable by way of an announcement if and when required.

FUND RAISING EXERCISE FOR THE PAST 12 MONTHS

Save for the Subscription, the Company did not undertake any equity fund raising exercise in the past 12 months immediately prior to the Latest Practicable Date.

– 28 –

LETTER FROM THE BOARD

IMPLICATIONS UNDER THE TAKEOVERS CODE AND THE APPLICATION FOR WHITEWASH WAIVER

Immediately after Completion, assuming there is no other change in the issued share capital of the Company, the Subscriber and the Subscriber Nominee (together with parties acting in concert with them (as defined in the Takeovers Code)) will be interested in 857,986,000 Shares, representing approximately 121.34% of the issued share capital of the Company as at the Latest Practicable Date and approximately 58.27% of the issued share capital of the Company as enlarged by the allotment and issuance of the Subscription Shares and approximately 57.22% of the issued share capital of the Company as enlarged by the allotment and issuance of the Subscription Shares and the exercise in full of all the outstanding Share Options.

Under Rule 26.1 of the Takeovers Code, the Subscriber Nominee would be obliged to make a mandatory general offer to the Shareholders for all the issued Shares and other securities of the Company not already owned or agreed to be acquired by the Subscriber, the Subscriber Nominee and parties acting in concert with them, unless the Whitewash Waiver is obtained from the Executive. The Subscriber Nominee has therefore made an application to the Executive for the Whitewash Waiver in respect of the allotment and issuance of the Subscription Shares.

The Whitewash Waiver, if granted by the Executive, will be subject to approval by the Independent Shareholders at the EGM by way of a poll.

If the Whitewash Waiver is not granted by the Executive or not approved by the Independent Shareholders, the Subscription will not proceed.

None of the Subscriber, the Subscriber Nominee and parties acting in concert with them has dealt in the relevant securities (as defined under Note 4 to Rule 22 under Takeovers Code) of the Company in the six months prior to the date of the Announcement up to the Latest Practicable Date.

As at the Latest Practicable Date, the Company did not believe that the proposed Subscription gives rise to any concerns in relation to compliance with other applicable rules or regulations (including the Listing Rules). The Company notes that the Executive may not grant the Whitewash Waiver if the proposed Subscription does not comply with other applicable rules and regulations.

– 29 –

LETTER FROM THE BOARD

If the Whitewash Waiver is approved by the Independent Shareholders and Completion occurs, the aggregate shareholding of the Subscriber, the Subscriber Nominee and parties acting in concert with them in the Company will exceed 50%. The Subscriber and the Subscriber Nominee may further increase their shareholdings in the Company without incurring any further obligations under Rule 26 of the Takeovers Code to make a general offer.

INDEPENDENT BOARD COMMITTEE AND INDEPENDENT FINANCIAL ADVISER

The Independent Board Committee has been formed pursuant to Rule 2.8 of the Takeovers Code, comprising all non-executive Directors, namely Mr. Jiang Longsheng, Mr. Brian Chang, Mr. Chan Ngai Sang, Kenny, Mr. Guan Zhichuan and Dr. Lu Xiaoming, except for Mr. Wang Jianzhong, to advise the Independent Shareholders in relation to the Subscription and the Whitewash Waiver. Mr. Wang Jianzhong, a non-executive Director, who is the president of CIMC Raffles Offshore (Singapore) Limited, an indirect subsidiary of CIMC (Group). CM Industry indirectly, through two wholly owned subsidiaries, holds approximately 24.49% of the total issued shares in CIMC (Group). CM Industry is a limited partner of the Subscriber holding approximately 29.989% limited partnership interest in the Subscriber. CM Industry also directly holds 30% of equity interest in Fund GP. CM Group is the ultimate holding company holding 100% of equity interest in CM Industry. Thus, to avoid any potential conflict of interest, Mr. Wang Jianzhong will not be a member of the Independent Board Committee.

Lego Corporate Finance Limited, a licensed corporation to carry out Type 6 (advising on corporate finance) regulated activity under the SFO, has been appointed by the Company as the independent financial adviser to advise the Independent Board Committee and the Independent Shareholders in relation to the Subscription and the Whitewash Waiver. Such appointment has been approved by the Independent Board Committee.

THE EGM

The EGM will be held to consider and, if thought fit, pass the resolutions to approve, among other things: (i) the execution, delivery and performance of the Subscription Agreement; (ii) the allotment and issuance of the Subscription Shares in accordance with the Subscription Agreement; (iii) the specific mandate under which the Subscription Shares will be issued; and (iv) the Whitewash Waiver.

The resolutions in relation to the Subscription Agreement and the Whitewash Waiver at the EGM will be voted on by the Independent Shareholders by way of a poll.

An announcement on the results of the EGM will be made by the Company following the EGM in accordance with the Takeovers Code and the Listing Rules.

– 30 –

LETTER FROM THE BOARD

In accordance with the Listing Rules and Takeovers Code, CIMC (HK) and Shareholders who are (i) the Subscriber, the Subscriber Nominee or their associates; (ii) any parties acting in concert with the Subscriber or the Subscriber Nominee; (iii) parties involved or interested in the Subscription or the Whitewash Waiver, as well as the executive Directors who participated in extensive negotiations with the Subscriber of the terms of the Subscription, namely Mr. Jiang Bing Hua and Mr. Zhang Menggui, Morgan and the corporate shareholder that they are interested in, i.e. Global Energy Investors, LLC., are required to abstain from voting at the EGM. No other Directors participated in negotiation of the Subscription. As at the Latest Practicable Date, the Subscriber, the Subscriber Nominee and parties acting in concert with them hold 92,800,000 Shares, representing approximately 13.12% of the issued share capital of the Company. As at the Latest Practicable Date, each of Mr. Zhang Menggui, Morgan and Mr. Jiang Bing Hua personally holds 4,656,000 Shares, each representing approximately 0.66% of the issued share capital of the Company and Global Energy Investors, LLC. holds 120,046,200 Shares, representing approximately 16.98% of the issued share capital of the Company.

Mr. Chan Ngai Sang Kenny and Mr. Guan Zhichuan will vote for the relevant ordinary resolutions to be proposed at the EGM to approve the Subscription and the Whitewash Wavier to the extent they hold any shares in the Company.

Application will be made to the Listing Committee for the listing of, and permission to deal in, the Subscription Shares.

Shareholders, Share Options holders and potential investors are advised to exercise caution when dealing in the Shares, and are recommended to consult their professional advisers if they are in any doubt about their position and as to actions that they should take.

RECOMMENDATION

Your attention is drawn to (i) the letter from the Independent Board Committee which contains the recommendation of the Independent Board Committee to the Independent Shareholders regarding the resolutions to approve the Subscription and the Whitewash Waiver; and (ii) the letter from the Independent Financial Adviser which contains its advice to the Independent Board Committee and the Independent Shareholders regarding the Subscription and the Whitewash Waiver.

The Board (including members of the Independent Board Committee after taking the advice of the Independent Financial Adviser) considers that (i) the execution, delivery and performance of the Subscription Agreement; (ii) the allotment and issuance of the Subscription Shares in accordance with the Subscription Agreement; and (iii) the Whitewash Waiver are fair and reasonable and in the interests of the Company and the Shareholders as a whole, and recommends that the Shareholders vote in favour of the resolutions relating thereto at the EGM.

– 31 –

LETTER FROM THE BOARD

GENERAL

Your attention is drawn to the additional information set out in the appendices to this circular and the EGM Notice.

Shareholders and potential investors are advised to exercise caution when dealing in the Shares, and are recommended to consult their professional advisers if they are in any doubt about their position and as to actions that they should take.

Yours faithfully, On behalf of the Board TSC Group Holdings Limited Jiang Bing Hua Executive Chairman

– 32 –

LETTER FROM THE INDEPENDENT BOARD COMMITTEE

The following is the text of a letter of advice from the Independent Board Committee setting out its recommendation to the Independent Shareholders for the purpose of inclusion in this circular.

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TSC Group Holdings Limited

(Incorporated in the Cayman Islands with limited liability)

(Stock code: 206)

19 January 2108

To the Independent Shareholders

Dear Sir or Madam,

(1) PROPOSED SUBSCRIPTION OF SUBSCRIPTION SHARES UNDER SPECIFIC MANDATE; AND (2) APPLICATION FOR WHITEWASH WAIVER

We refer to the circular of the Company dated 19 January 2018 (the “ Circular ”), of which this letter forms part. Unless specified otherwise, capitalised terms used herein shall have the same meanings as defined in the Circular.

We have been appointed to form the Independent Board Committee to advise you in connection with the Subscription and the Whitewash Waiver, details of which are set out in the letter from the Board in the Circular.

We wish to draw your attention to the letter from the Board, as set out on pages 7 to 32 of the Circular, and the letter of advice from the Independent Financial Adviser, as set out on pages 35 to 66 of the Circular. Having considered the terms of the Subscription Agreement, the Whitewash Waiver, the advice given by the Independent Financial Adviser, and the principal factors and reasons taken into consideration by it in arriving at its advice, we are of the opinion that the terms of the Subscription and the Whitewash Waiver are fair and reasonable and the Subscription and the Whitewash Waiver are in the interests of the Company and the Shareholders as a whole as far as the Independent Shareholders are concerned.

– 33 –

LETTER FROM THE INDEPENDENT BOARD COMMITTEE

Accordingly, we recommend the Independent Shareholders to vote in favour of the resolutions to be proposed at the EGM to approve, among other things, the Subscription and the Whitewash Waiver.

Yours faithfully,

For and on behalf the Independent Board Committee of TSC Group Holdings Limited

Mr. Jiang Longsheng Mr. Brian Chang Non-executive Director Non-executive Director Mr. Chan Ngai Sang, Kenny Mr. Guan Zhichuan Independent non-executive Director Independent non-executive Director

Dr. Lu Xiaoming

Independent non-executive Director

– 34 –

LETTER FROM INDEPENDENT FINANCIAL ADVISER

The following is the full text of the letter of advice from Lego Corporate Finance Limited, the Independent Financial Adviser to the Independent Board Committees and the Independent Shareholders, in respect of the Subscription, which has been prepared for the purpose of inclusion in this circular.

==> picture [404 x 42] intentionally omitted <==

19 January 2018

To the Independent Board Committee and the Independent Shareholders

Dear Sirs or Madams,

(I) ISSUE AND SUBSCRIPTION OF NEW SHARES UNDER SPECIFIC MANDATE; AND (II) APPLICATION FOR WHITEWASH WAIVER

INTRODUCTION

Issue and subscription of new Shares under specific mandate

We refer to our appointment as the independent financial adviser to advise the Independent Baord Committee and the Independent Shareholders in respect of the Subscription, details of which are set out in the “Letter from the Board” (the “ Letter from the Board ”) contained in the circular issued by the Company to the Shareholders dated 19 January 2018 (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 otherwise requires.

On 14 December 2017 (after trading hours), the Company entered into the Subscription Agreement with the Subscriber. Pursuant to the Subscription Agreement, the Company has conditionally agreed to allot and issue to the Subscriber or the Subscriber Nominee and the Subscriber has conditionally agreed to subscribe for or nominate the Subscriber Nominee to subscribe for, at Completion, 765,186,000 Subscription Shares (representing approximately (i) 108.21% of the issued share capital of the Company as at the Latest Practicable Date; (ii) approximately 51.97% of the issued share capital of the Company as enlarged by the allotment and issuance of the Subscription Shares; and (iii) approximately 51.03% of the issued share capital of the Company as enlarged by the allotment and issuance of the Subscription Shares and the exercise in full of all the outstanding Share Options, at the Subscription Price of HK$512,674,620, being HK$0.67 per Subscription Share.

– 35 –

LETTER FROM INDEPENDENT FINANCIAL ADVISER

The Subscriber is an exempted limited partnership registered in the Cayman Islands. The Subscriber Nominee is a company incorporated in the British Virgin Islands and a wholly-owned subsidiary of the Subscriber. The Subscriber’s general partner is the Fund GP, a Cayman Islands exempted company. CM Group holds indirectly, in aggregate, 75% of equity interest in the Fund GP. GW Asset Management holds indirectly the remaining 25% of equity interest in the Fund GP.

The Subscriber ’s limited partners are China Merchants Capital Holdings (International) Limited, CM Industry, Great Wall International Investment V Limited, Meris Global Investments Limited and Essence Fund SP, each holding 9.996%, 29.989%, 39.986%, 0.035% and 19.993% of limited partnership interest in the Subscriber, respectively. CM Group is the indirect holding company of and holding 100% in each of China Merchants Capital Holdings (International) Limited and CM Industry. Through GWAMC International, GW Asset Management is the indirect holding company of and holding 100% equity interest in Great Wall International Investment V Limited. As such, CM Group and GW Asset Management each indirectly holds approximately 39.986% of limited partnership interests in the Subscriber. Essence Fund SP, an independent third party of the Subscriber, has subscribed for approximately 19.993% of the limited partnership interests in the Subscriber on behalf of China Minsheng Banking Corp., Ltd. (HKSE Stock Code: 01988), which is the ultimate beneficiary of Essence Fund SP and provided the financial resources for the said subscription.

Meris Global Investments Limited is a co-investment vehicle of the management team of the Fund Manager. The management team of the Fund Manager, including Mr. Wang Hongyuan, Mr. Yang Guohui and Ms. Li Rong, holds in aggregate 81% beneficial interests in Meris Global Investments Limited. The remaining 19% beneficial interests in Meris Global Investments Limited are held by independent third parties.

Save for the 92,800,000 Shares held by CIMC (HK), representing approximately 13.12% of the issued share capital of the Company as at the Latest Practicable Date, the Subscriber and parties acting in concert with it do not currently hold any Shares and accordingly will not vote on any of the resolutions at the EGM.

– 36 –

LETTER FROM INDEPENDENT FINANCIAL ADVISER

Application for Whitewash Waiver

As stated in the Letter from the Board, assuming there is no other change in the issued share capital of the Company, the Subscriber and the Subscriber Nominee (together with parties acting in concert with them) will be interested in 857,986,000 Shares, representing approximately 121.34% of the issued share capital of the Company as at the Latest Practicable Date, approximately 58.27% of the issued share capital of the Company as enlarged by the allotment and issuance of the Subscription Shares and approximately 57.22% of the issued share capital of the Company as enlarged by the allotment and issuance of the Subscription Shares and the exercise in full of all the outstanding Share Options. Under Rule 26.1 of the Takeovers Code, the Subscriber Nominee would be obliged to make a mandatory general offer to the Shareholders for all the issued Shares and other securities of the Company not already owned or agreed to be acquired by the Subscriber, the Subscriber Nominee and parties acting in concert with them, unless the Whitewash Waiver is obtained from the Executive. An application has been made by the Subscriber Nominee to the Executive for the Whitewash Waiver in respect of the allotment and issuance of the Subscription Shares.

The Whitewash Waiver, if granted by the Executive, and the Subscription will be subject to approval by the Independent Shareholders at the EGM by way of a poll. In accordance with the Listing Rules and Takeovers Code, CIMC (HK) and Shareholders who are (i) the Subscriber, the Subscriber Nominee or their associates; (ii) any parties acting in concert with the Subscriber or the Subscriber Nominee; or (iii) parties involved or interested in the Subscription or the Whitewash Waiver and the executive Directors who participated in extensive negotiations with the Subscriber of the terms of the Subscription, namely Mr. Jiang Bing Hua and Mr. Zhang Menggui, Morgan, and the corporate shareholder that they are interested in, i.e. Global Energy Investors, LLC., are required to abstain from voting at the EGM. No other Directors participated in negotiation of the Subscription.

It is a condition precedent to Completion that the Whitewash Waiver is granted by the Executive. If the Whitewash Waiver is not granted by the Executive or if the conditions (if any) imposed thereon are not fulfilled, the Subscription will not proceed. None of the Subscriber, the Subscriber Nominee and parties acting in concert with them has dealt in the relevant securities (as defined under Note 4 to Rule 22 under Takeovers Code) of the Company in the six months prior to the Latest Practicable Date.

The Independent Board Committee has been formed pursuant to Rule 2.8 of the Takeovers Code, comprising all non-executive Directors, namely Mr. Jiang Longsheng, Mr. Brian Chang, Mr. Chan Ngai Sang, Kenny, Mr. Guan Zhichuan and Dr. Lu Xiaoming, except for Mr. Wang Jianzhong, to advise the Independent Shareholders as to whether the terms of the Subscription Agreement are on normal commercial terms and are fair and reasonable so far as the Independent Shareholders are concerned, whether the Subscription and the Whitewash Waiver are in the interests of the Company and the Shareholders as a whole, and to advise the Independent Shareholders on how to vote in respect of the relevant resolutions to be proposed at the EGM to approve the Subscription Agreement, the transactions contemplated thereunder and the Whitewash Waiver. As the Independent Financial Adviser, our role is to give an independent opinion to the Independent Baord Committee and the Independent Shareholders in such regard. Our appointment as the Independent Financial Adviser has been approved by the Independent

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LETTER FROM INDEPENDENT FINANCIAL ADVISER

Board Committee. Mr. Wang Jianzhong, a non-executive Director, is the president of CIMC Raffles Offshore (Singapore) Limited, an indirect subsidiary of CIMC (Group). CM Industry indirectly, through two wholly owned subsidiaries, holds approximately 24.49% of the total issued shares in CIMC (Group). CM Industry is a limited partner of the Subscriber holding approximately 29.989% limited partnership interest in the Subscriber. CM Industry also directly holds 30% of equity interest in Fund GP. CM Group is the ultimate holding company holding 100% of equity interest in CM Industry. Thus, to avoid any potential conflict of interest, Mr. Wang Jianzhong will not be a member of the Independent Board Committee.

We are independent from the Company, the Subscriber and the Subscriber Nominee, their respective controlling shareholders and any party acting, or presumed to be acting, in concert with any of them or any company controlled by any of them, accordingly, are considered eligible to give independent advice on the Subscription and the Whitewash Waiver. Apart from normal professional fees paid or payable to us in connection with this appointment as the Independent Financial Adviser, no arrangements exist whereby we have received or will receive any fees or benefits from the Company, the Subscriber and the Subscriber Nominee, their respective controlling shareholders and any party acting, or presumed to be acting, in concert with any of them or any company controlled by any of them.

BASIS OF OUR OPINION

In formulating our opinion and advice, we have relied on (i) the information and facts contained or referred to in the Circular; (ii) the information supplied by the Group and its advisers; (iii) the opinions expressed by and the representations of the management of the Group; and (iv) our review of the relevant public information. We have assumed that all the information provided and representations and opinions expressed to us by the Directors and/or the management of the Group, for which they are solely and wholly responsible for, or contained or referred to in the Circular were true, accurate and complete in all respects as at the date thereof and may be relied upon. We have also assumed that all statements contained and representations made or referred to in the Circular are true at the time they were made and continued to be true as at the Latest Practicable Date and the Shareholders will be notified of any material changes to such information and representations as soon as possible in accordance with Rule 9.1 of the Takeovers Code until and including the date of the EGM. We have also assumed that all such statements of belief, opinions and intentions of the management of the Group and those as set out or referred to in the Circular were reasonably made after due and careful enquiry. We have no reason to doubt the truth, accuracy and completeness of the information and representations provided to us by the management of the Group and/or the advisers of the Company. We have also sought and received confirmation from the management of the Group that no material facts have been withheld or omitted from the information provided and referred to in the Circular and that all information or representations provided to us by the management of the Group are true, accurate, complete and not misleading in all respects at the time they were made and continued to be so until the Latest Practicable Date.

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LETTER FROM INDEPENDENT FINANCIAL ADVISER

We consider that we have reviewed sufficient information currently available to reach an informed view and to justify our reliance on the accuracy of the information contained in the Circular so as to provide a reasonable basis for our recommendation. We have not, however, carried out any independent verification of the information provided, representations made or opinion expressed by the management of the Group, nor have we conducted any form of in-depth investigation into the business, affairs, operations, financial position or future prospects of the Company or the Subscriber or any of their respective subsidiaries and associates.

PRINCIPAL FACTORS AND REASONS CONSIDERED

In arriving at our recommendation in respect of the Subscription, we have considered the following principal factors and reasons:

1. Background information of the Group

1.1. Principal businesses and information on the Group

The Company is a company incorporated in the Cayman Islands with limited liability, and the Shares have been listed on the Stock Exchange since 28 November 2005, with business focus on the provision of design, manufacture, installation and commissioning of capital equipment and packages on land and offshore rigs and oilfield expendables and supplies and the provision of engineering services. As disclosed in the interim report of the Company published on 7 September 2017 (the “ 2017 Interim Report ”), the Group intends to explore business opportunities in, (i) plug and abandonment (“ P&A ”) which refers to the process where offshore oil wells are closed and sealed after they have become unprofitable and oil reservoirs have been depleted; and (ii) decommissioning which refers to the process after completion of P&A where offshore installations on which oil and gas were extracted, process and stored (commonly collectively known as production) are required to be removed and the site is reinstated to its original environmental condition, as the Company believes that the demand for equipment and services relating to the closure of uneconomical oil wells followed by the removal of offshore installations is likely to gain importance and momentum and it is likely that demand for decommissioning will keep growing.

As at the Latest Practicable Date, the Group extended beyond the oil and gas exploration and production sector to include decommissioning of offshore late-life assets and installations.

1.2. Historical financial information

The following table summarises the financial information of the Group for the years ended 31 December 2015 and 2016 and the six months ended 30 June 2016 and 2017 as extracted from the annual report of the Company for the year ended 31

– 39 –

LETTER FROM INDEPENDENT FINANCIAL ADVISER

December 2016 (the “ 2016 Annual Report ”) and the 2017 Interim Report, respectively:

	For the year ended	For the year ended	For the six months ended	For the six months ended
	31 December		30 June
	2015	2016	2016	2017
	US$’000	US$’000	US$’000	US$’000
	(audited)	(audited)	(unaudited)	(unaudited)
Revenue	194,899	142,531	75,471	45,881
Segment revenue:
– Capital equipment
and packages	122,070	76,067	42,665	16,272
– Oilfield expendables
and supplies	58,500	60,874	30,067	26,747
– Engineering services	14,329	5,590	2,739	2,862
Gross profit	54,356	37,786	24,971	14,078
Gross profit margin	27.9%	26.5%	33.1%	30.7%
Profit/(loss) for the
year/period	1,297	(111,576)	2,261	(3,721)
		As at 31 December		As at 30
		2015	2016	June 2017
		US$’000	US$’000	US$’000
		(audited)	(audited)	(unaudited)
Cash at bank and in hand		46,505	9,952	12,110
Total assets		569,729	412,824	409,664
Total liabilities		350,734	316,750	316,316
Net assets		218,995	96,074	93,348

For the years ended 31 December 2015 and 2016

The revenue of the Group decreased from approximately US$194.9 million for the year ended 31 December 2015 to approximately US$142.5 million for the year ended 31 December 2016, representing a decrease of approximately 26.9% as compared to the prior year. As stated in the 2016 Annual Report, the decrease was mainly driven by (i) the decrease of approximately US$46.0 million or 37.7% in the capital equipment and packages segment due to the downturn in the oil and gas exploration and production sector, which resulted in less drilling activities as well as no new orders for rig-turnkey package in 2016; and (ii) the decrease of approximately US$8.7 million or 61.0% in the engineering services attributable to the reduced offshore drilling activities and reduced global demand for offshore engineering services, in particular, operations in Brazil and the United States have been scaled down due to the reduced activity levels. The decreases in the gross profit and gross profit margin were mainly due to the drop in the gross profit of rig products and technology.

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LETTER FROM INDEPENDENT FINANCIAL ADVISER

The Group experienced significant deterioration in profitability from a profit of approximately US$1.3 million for the year ended 31 December 2015 to a loss of approximately US$111.6 million for the year ended 31 December 2016. Such decrease was primarily attributable to the impairment losses made on (i) doubtful debts of US$56.9 million in respect of the receivables related to customers that were in financial difficulties and the Directors assessed that only a portion of the receivables is expected to be recoverable; (ii) other financial assets of approximately US$2.4 million related to available-for-sale equity securities, the impairment of which was made based on the Directors’ assessment on the recoverable amount of the equity investment; (iii) goodwill of approximately US$19.6 million due to the carrying amounts of the Group’s cash generating unit exceeded its recoverable amounts which was determined based on value-in-use calculations and was affected by the extended period of low oil price; and (iv) gross amount due from customers for contract work of approximately US$30.0 million after the Directors’ assessment of the expected outcome of individual construction contracts. As a result, the Group incurred a loss of approximately US$111.6 million for the year ended 31 December 2016.

As at 31 December 2016, total assets of the Group amounted to approximately US$412.8 million, of which gross amount due from customers for contract work amounted to approximately US$199.2 million, representing approximately 48.2% of the total assets. Meanwhile, cash and cash equivalents amounted to approximately US$9.9 million, representing approximately 2.4% of the total assets.

As at 31 December 2016, total liabilities of the Group amounted to approximately US$316.8 million, of which trade and other payables amounted to approximately US$259.5 million, representing approximately 81.9% of the total liabilities; and total bank loans and other borrowings amounted to approximately US$49.3 million, representing approximately 15.6% of the total liabilities.

For the six months ended 30 June 2016 and 2017

The revenue of the Group decreased from approximately US$75.5 million for the six months ended 30 June 2016 to approximately US$45.9 million for the six months ended 30 June 2017, representing a decrease of approximately 39.2% as compared to the corresponding period in 2016. Such decrease was driven by the decrease in the segment revenue of capital equipment and packages by approximately US$26.4 million, mainly due to the prevailing depressed drilling market which resulted in low capital expenditure by oil and gas companies leading to a decrease in revenue in the capital equipment and packages segment. The gross profit decreased from approximately US$25.0 million for the six months ended 30 June 2016 to approximately US$14.1 million for the six months ended 30 June 2017, representing a decrease of approximately 43.6%. Such decrease was in line with the decrease in the Group’s revenue and the decrease in gross profit margin was mainly due to the reduction in sales order and thus, the production facilities were not fully utilised for the six months ended 30 June 2017. The Group recorded a loss of approximately US$3.7 million for the six months ended 30 June 2017. Such loss was mainly due to the decrease in revenue and gross profit as discussed above, partially

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LETTER FROM INDEPENDENT FINANCIAL ADVISER

net off by the decrease in the administrative expenses of approximately US$5.2 million as the management of the Company focused on cost reduction since 2016.

As at 30 June 2017, total assets of the Group were approximately US$409.7 million, representing a decrease of approximately 0.8% as compared to the balance of approximately US$412.8 million as at 31 December 2016. Such decrease was mainly due to the combined effect of the decrease in trade and other receivables of approximately US$5.0 million and the increase in gross amount due from customers for contract work of approximately US$2.7 million.

As at 30 June 2017, total liabilities of the Group were relatively stable at approximately US$316.3 million as compared to approximately US$316.8 million as at 31 December 2016.

As indicated by the above analysis, it is noted that the Group’s business has recently been negatively affected by the downturn in the oil and gas exploration and production sector, which resulted in less drilling activities, and in turn led to less demand for the Group’s products and services. Therefore, we concur with the Directors’ view regarding the need to explore business opportunities by exploring new sectors, i.e. the P&A and decommissioning businesses, as further discussed in the section headed “3.2 Development opportunities of the offshore drilling business and decommissioning business”. Further, in view of the deteriorating financial performance of the Group as evidenced by (i) the decrease in the revenue; (ii) the net loss recognised for the six months ended 30 June 2017; and (iii) the decrease in the net assets, the Directors are of the view, and we concur, that the Group has an imminent need to raise additional fund to improve the financial position and the liquidity of the Group.

1.3. Overview of the offshore drilling business and P&A and decommissioning businesses

As further discussed in the section headed “3.2 Development opportunities of the offshore drilling business and decommissioning business”, the Company will selectively invest in or acquire businesses that are complementary to its existing business including (i) offshore drilling business and (ii) P&A and decommissioning businesses which aim to support the future business development. Accordingly, we set out below an overview of the offshore drilling market and P&A and decommissioning market to illustrate the potential growth of the markets and the opportunities that may be offered to the Group.

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LETTER FROM INDEPENDENT FINANCIAL ADVISER

Offshore drilling business

According to Rystad Energy, an independent oil and gas consulting services and business intelligence data firm founded in 2004, covering the global oil and gas industry with a team of over 120 industry experts and its research and data published are widely used by media and global drilling companies, shallow water production is a key source of global liquid production, representing 19.0% of total liquids production globally and approximately 64.9% of total offshore production in 2016. While shale oil has been increasing its share of global liquids production in recent years, in 2016, shallow water production was more than twice that of shale liquid production and four times that of deepwater liquids production. With 23.0% of the remaining discovered oil and gas resources globally, shallow water supply sources contain more than twice as much discovered resource as shale and tight oil supply sources and nearly four times as much as offshore deepwater sources.

Shallow water projects offer relatively low breakeven prices and short cycle times. According to Rystad Energy, breakeven price for shallow water projects in the Middle East and India are generally superior to those of North American shale and deepwater projects. Moreover, the Brent crude oil equivalent forward-looking breakeven prices for shallow water projects in the Middle East and India are US$24.7 and US$28.9, respectively, which are below the Brent crude oil of US$69.2 as of 16 January 2018. The comparatively low cost of drilling, proximate to existing facilities or infrastructure and lower cost and complexity of production have resulted in shallow water hydrocarbon basins being significantly more developed than deepwater basins. Moreover, despite the jack-up rig count in the rest of the world has fallen 41.0% from January 2015 to June 2017, Middle Eastern and Indian rig counts have remained relatively steady, with the Middle East experiencing only 11.0% decrease and India remaining flat. Both of these regions represented an increasing share of the contracted jack-up rig market, increasing from a combined approximately 38.6% in 2014 to approximately 55.6% in 2016.

P&A and decommissioning businesses

The major trends driving the oil and gas decommissioning market are ageing oil reserves and abandoned wells. According to the report published by Energy Industries Council, the leading trade association established in 1943 with over 650 United Kingdom (“ UK ”) companies that provides energy market intelligence and a database of active and ongoing projects, on November 2016, over the next decades offshore decommissioning activity is projected to increase as existing infrastructures approach the end of their productive lives. The oil price drop combined with deteriorating infrastructure, late-life technical limits and regulatory pressure, has led mature basin operators to focus on the expensive and technically complex challenge of decommissioning.

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LETTER FROM INDEPENDENT FINANCIAL ADVISER

The Gulf of Mexico, Asia Pacific and the North Sea offer an abundance of opportunities for decommissioning market where the Gulf of Mexico has been decommissioning approximately 4,600 structures and Asia Pacific has great future potential with around 1,800 offshore structures of which half are 20 years or older and over 95% are fixed jackets.

The North Sea market has huge near-term potential, with an estimation of approximately US$50.0 billion to be spent in the next 25 years by Energy Industries Council, which was established in 1943, and is a not-for-profit organisation with a membership of over 650 UK-registered companies who deliver goods and services to the energy industries worldwide. The majority of this expenditure is in the UK sector, with costs expected to reach up to approximately £2.0 billion a year. According to Oil & Gas UK, the leading representative body for the UK offshore oil and gas industry established in 2007 with a pedigree stretching back over 40 years, estimated that in the next 10 years, more than 100 platforms are forecasted for complete or partial removal from both the UK and Norwegian continental shelves. More than 1,800 wells are scheduled to be plugged and abandoned, while about 7,500 kilometers of pipeline is forecast to be decommissioned. Oil & Gas UK expected the percentage of total expenditure to rise above 12% in 2017 as a result of more projects, plus, the reduction of operating costs and falling capital investment by operators in the lower oil price environment. They forecasted decommissioning expenditure on the United Kingdom Continental Shelf between 2016 and 2025 will be approximately £17.6 billion.

According to the report “Western Europe Decommissioning Market Forecast 2017-2040”, published by Douglas-Westwood which was founded in 1990 and has been providing market research and consulting services across the many sectors that comprise the global energy industry, Western Europe will become the first area outside the US Gulf of Mexico to see large-scale decommissioning activity with approximately US$105.0 billion spending on decommissioning between 2017 and 2040, the market is expected to experience a series of peaks and troughs over 2017-2040 and particularly high levels of expenditure between 2031 and 2035 as activity increases in Norway and the UK. The rise in decommissioning activity will provide an opening for specialist companies aiming to establish themselves within the industry, from vessel contractors and cutting service or equipment providers to shipyards and companies specialising in waste management or disposal.

In the view of the above, the Directors are of the view, and we concur that the developments of the (i) offshore drilling business; and (ii) P&A and decommission industries are expected to offer opportunities for the Group to expand its business scope.

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LETTER FROM INDEPENDENT FINANCIAL ADVISER

2. Background information of the Subscriber

2.1. The Subscriber

The Subscriber is an exempted limited partnership registered in the Cayman Islands.

The Subscriber’s general partner is the Fund GP, a Cayman Islands exempted company. CM Group holds indirectly, in aggregate, 75% of equity interest in the Fund GP. GW Asset Management holds indirectly the remaining 25% of equity interest in the Fund GP.

The Subscriber’s limited partners are China Merchants Capital Holdings (International) Limited, CM Industry, Great Wall International Investment V Limited, Meris Global Investments Limited and Essence Fund SP, each holding 9.996%, 29.989%, 39.986%, 0.035% and 19.993% of limited partnership interest in the Subscriber, respectively. CM Group is the indirect holding company of and holding 100% in each of China Merchants Capital Holdings (International) Limited and CM Industry. Through GWAMC International, GW Asset Management is the indirect holding company of and holding 100% equity interest in Great Wall International Investment V Limited. As such, CM Group and GW Asset Management each indirectly holds approximately 39.986% of limited partnership interests in the Subscriber. Essence Fund SP, an independent third party of the Subscriber, has subscribed for approximately 19.993% of the limited partnership interests in the Subscriber on behalf of China Minsheng Banking Corp., Ltd. (HKSE Stock Code: 01988), which is the ultimate beneficiary of Essence Fund SP and provided the financial resources for the said subscription.

The Subscriber is primarily focused on making investments in the marine industry including, but not limited to, existing or future development of CM Group or its affiliates, up and down streams of offshore oil and gas production chains, automated manufacturing, logistics, marine technology research centres, marine industrial real assets and other frontier or profitable marine technology sectors.

Save for the 92,800,000 Shares held by CIMC (HK), which is indirectly held by CM Group through its subsidiaries including CM Industry, representing approximately 13.12% of the issued share capital of the Company as at the Latest Practicable Date, (i) the Subscriber and its ultimate beneficial owners are parties independent of the Company and the connected persons (as defined under the Listing Rules) of the Company; and (ii) the Subscriber and parties acting in concert with it did not have any interest in the Company.

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LETTER FROM INDEPENDENT FINANCIAL ADVISER

3. Reasons for and benefits of the Subscription

As stated in the Letter from the Board, the Directors are of the view that the Subscription represents a valuable opportunity for the Group to bring in a strategic investor with extensive expertise and business network in its own industries, including construction and installation of offshore production equipment, to develop the existing businesses and to broaden the income streams for the Group. The Directors consider that the entering into of the Subscription Agreement represents a good opportunity to (i) significantly strengthen the shareholder profile of the Company; (ii) raise a substantial amount of additional funds for the Company; (iii) improve the financial position and liquidity of the Group; (iv) provide the Group with the needed management capability and resources, and financial flexibility for future business development and capturing prospective investment opportunities when they arise; and (v) introduce valuable investment opportunities to the Company which will be beneficial to the Company and the Shareholders as a whole in the long term.

In arriving at our opinion on the reasons for and benefits of the Subscription, we have considered the following factors in relation to (i) intended use of the net proceeds from the Subscription; (ii) development opportunities of the offshore drilling business and decommissioning business; (iii) future intention of the Subscriber regarding the Group and potential synergy effect with CM Group; (iv) financing alternatives of the Group; and (v) proposed change of board composition of the Company, which are detailed below.

3.1. Intended use of net proceeds from the Subscription

As set out in the Letter from the Board, the gross proceeds from the Subscription is expected to amount to approximately HK$512.7 million. The net proceeds, after taking into account the estimated expenses in relation to the Subscription, would be approximately HK$505.1 million, representing a net price of approximately HK$0.66 per Subscription Share. It is intended that the net proceeds from the Subscription will be used in the following manners:

(i) as to approximately 20.0% or HK$101.0 million of the proceeds are intended to repay a portion of the existing debts of the Group;
(ii) as to approximately 70.0% or HK$353.6 million of the proceeds are intended to be used to fund the expansion of the Group’s existing business and/or potential acquisition to be decided by the Board after Completion; and
(iii) the remaining 10.0% of HK$50.5 million of the proceeds are intended to be used for general working capital of the Group to support its daily business operations.

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LETTER FROM INDEPENDENT FINANCIAL ADVISER

As stated in the Letter from the Board, as at 30 November 2017, the Group recorded cash and bank balances of approximately US$6.3 million (equivalent to approximately HK$48.9 million). It had outstanding borrowings of approximately US$62.7 million (equivalent to approximately HK$487.5 million), comprising: (i) secured bank borrowings of approximately US$20.3 million (equivalent to approximately HK$157.6 million) of which approximately US$3.7 million (equivalent to approximately HK$28.9 million) was guaranteed; (ii) unsecured bank borrowings of approximately US$15.0 million (equivalent to approximately HK$116.4 million) of which approximately US$11.1 million (equivalent to approximately HK$86.0 million) was guaranteed; and (iii) unsecured and unguaranteed bonds of approximately US$27.4 million (equivalent to approximately HK$213.5 million). Of which, approximately US$10.4 million (equivalent to approximately HK$80.6 million) will expire within three months.

The Company intends to apply approximately HK$101.0 million of the net proceeds from the Subscription towards repayment of borrowings including short-term borrowings which will become due for repayment within three months and which the Company is unable to fully refinance through extension of the facilities or replacement by new facilities. The Company shall repay other debts based on the interest rate, maturity term and other commercial terms of the outstanding debts as well as its negotiations with the creditors.

In view of (i) the decrease in the Group’s liquidity as demonstrated by the decrease in the net current assets from approximately US$51.4 million as at 31 December 2016 to US$25.4 million as at 30 June 2017; and (ii) the Group’s cash and cash equivalents of approximately US$6.3 million as at 30 November 2017, we are of the opinion that there is no certainty that adequate cash resources will be available to the Group to settle the existing debts of the Group, in particular, two outstanding bonds of approximately US$27.4 million or equivalent to approximately HK$213.5 million in total, which are due in April 2018 and May 2018, respectively and fund the existing business and/or potential acquisition. We were advised by the Directors that the two outstanding bonds will be settled partially by the net proceeds of the Subscription and partially by extension of maturity date of the bonds and refinancing from other sources such as banks which the Company has existing facilities or other banks which the Directors expected upon Completion, the Company will be in a better position to negotiate with the counterparties with the

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LETTER FROM INDEPENDENT FINANCIAL ADVISER

strengthened shareholding background from the Subscriber. To the best knowledge of the Directors, the bondholders are not Shareholders.

We were also advised that approximately 10.0% of the net proceeds of the Subscription, equivalent to approximately HK$50.5 million or US$6.5 million would be used to fund the daily business operation of the Group. According to the 2016 Annual Report, we noted that the general and administrative expenses and other operating expenses for the year ended 31 December 2016 amounted to approximately US$33.4 million and US$5.4 million, respectively. Accordingly, for illustrative purpose, the theoretically monthly operating expense would be over US$3.2 million. Given that (i) the potential expansion of offshore drilling business and P&A and decommissioning businesses would increase the Group’s expenditure; and (ii) the planned allocation of net proceeds of the Subscription for general working capital plus the cash and cash equivalents balance of the Group of approximately US$6.3 million as at 30 November 2017 were equivalent to around four months of the Group’s theoretical operating expenses only, we consider the allocation of the net proceeds of the Subscription for general working capital to be reasonable.

Based on the aforesaid, in particular, considering the financial position and debt level of the Group, we are of the view that there is genuine need for the Group to raise external funding to finance the repayment of debt, the development of existing business and/or potential acquisitions (as further discussed below) and the operating expenses of the Group.

3.2. Development opportunities of the offshore drilling business and decommissioning business

As stated in the Letter from the Board, the Company will selectively invest in or acquire businesses that are complementary to its existing business including (i) offshore drilling business and (ii) P&A and decommissioning business which aims to support the future business development.

We have enquired with the management of the Group and was advised that for the development of offshore drilling business, they understand that the Subscriber is currently in discussion with and have performed feasibility studies and/or due diligence on potential investment targets including companies engaging in the offshore drilling business. Upon Completion, the Company expects to collaborate with the Subscriber to invest in companies providing drilling, workover and well construction services in shallow water to upstream oil and gas companies through the use of jack-up rigs and in regions that are more resilient, such as Middle East and India in 2018. The expected amount of the investment would range from approximately US$40.0 million to US$50.0 million. Such opportunities can only be seized if and when the Group has sufficient funds available in order to participate in the relevant tenders or negotiations.

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LETTER FROM INDEPENDENT FINANCIAL ADVISER

For the development of P&A and decommissioning business, we were advised that the Company has developed various rig design solutions which have gained interest of oil companies planning to carry out P&A and decommissioning activities. The Group has completed two years of intensive technical and market development of the P&A and decommissioning businesses and has now reached the phase where the proposed use of proceeds from the Subscription allocated will be necessary to execute the business opportunities developed. These intensive technical and market developments were an extension and transformation of existing business necessary during this phase of the oil price cycle. The opportunities presented in this business sector relate to specific and identified customers with specific needs and interest in the Group’s new products. Several major oil companies consider the solutions presented to be innovative, effective and will be cost effective for the purposes required. To complete the process of securing such contracts, the Company now seeks funds to commence construction and preparation for participation in potential work contracts. As such, the Company expects to utilise approximately US$5.0 million of the amount from the net proceeds of the Subscription for the manufacture of certain equipment such as jacking systems, deck cranes, electrical controls and also for paying the deposits on the purchase of certain other critical equipment from third parties to be installed on P&A rigs and hire specialised team members to assist in the project. The Group plans to commence manufacture and purchase of the above equipment in 2018.

We have reviewed the acquisitions of offshore drilling business from September 2016 to August 2017 from the database of Mergermarket, a market insight provider on global merger and acquisition market and noted that the deal size ranged from approximately US$22.0 million to US$3,340 million. The expected investment in the offshore drilling business of the Group is within the range of the deals size as discussed above. We were also advised that in determining the potential investment in strategic opportunities especially for the purpose of improving future financial and business performance, the Company will take into consideration factors including: (i) alignment with the Group’s strategic plans; (ii) degree of potential synergies; (iii) market position; (iv) experience of management team; (v) valuation; and (vi) historical operating metrics and financial performance. Based on the above, we are of the view that the expansion of the offshore drilling business and decommissioning business is in line with the Company’s strategic planning and the allocation of net proceeds of the Subscription to fund the expansion of the Group’s existing business and/or potential acquisition is in the interests of the Company and the Shareholders as a whole.

Moreover, as stated in the Letter from the Board, the Directors consider that there exists an imminent need for the Company to timely raise funds to pursue the aforesaid opportunities for purposes of improving financial and business performance of the Company. In addition, the Board considers that the Company will be in a better position to negotiate with potential counterparties with a strengthened shareholding background from the Subscriber and to have a stronger liquidity position to capture any opportunities in a timely manner upon Completion.

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LETTER FROM INDEPENDENT FINANCIAL ADVISER

In view of the Group’s thin liquidity position given its cash and cash equivalents of only approximately US$6.2 million and a relatively larger amount of outstanding bank loans and other borrowings of approximately US$46.2 million as at 30 November 2017, together with the down cycle of the oil and gas exploration and production sector, we consider there is no certainty that the Group could obtain alternative funding on a timely manner and on commercially acceptable terms when potential investment/acquisition opportunities arise, in the absence of the Subscription. Further, we consider that if the Group’s financial strength is not improved, it may impede the Company in negotiating a potential investment/acquisition as any potential seller(s) may doubt the financial ability of the Company in completing the investment/acquisition. In addition, if the Company only begins to seek funding after a concrete investment/acquisition target is identified, the time it requires for the Company to do so (including the time to complete necessary regulatory procedures/approvals, if applicable) may cause the Company to lose an investment opportunity to another potential buyer. In view of the above, we consider there is an imminent need for the Company to raise capital despite there is no potential investment/acquisition target identified currently.

Moreover, we would like to emphasise that besides raising funds, another important purpose of the Subscription is to introduce a strong strategic investor to the Company that is expected to benefit the future development of the Group by creating potential synergy effects with CM Group, as further discussed in the section headed “3.3 Further intention of the Subscriber regarding the Group and potential synergy effect with CM Group”. The financial strength of CM Group through the Subscriber will significantly improve the credit status of the Company. This will enable the Group to qualify for projects with large oil companies which require certain minimum levels of financial standing which the Group is unable to meet on its own. The Group will also be on a stronger footing in negotiations with vendors, business partners and financial institutions to secure better commercial terms.

In view of the above, we consider that the Subscription and the introduction of the Subscriber can immediately strengthen the Group’s liquidity and the shareholder profile which in turn, may increase the possibilities to secure P&A and decommissioning contracts and potential investments to expand the offshore drilling business, which may broaden the business scope and revenue base and improve the financial performance of the Group. Therefore, we consider the Subscription, at this point in time, is fair and reasonable and in the interest of the Company and the Shareholders as a whole.

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LETTER FROM INDEPENDENT FINANCIAL ADVISER

3.3. Future intention of the Subscriber regarding the Group and potential synergy effect with CM Group

As stated in the Letter from the Board, upon obtaining control of the Company, the Subscriber and the Subscriber Nominee intend that the Company’s existing principal activities will be maintained, and at the same time after Completion, the Subscriber and the Subscriber Nominee will assist the Company in reviewing its business and operations, developing its existing business and seeking for new investment opportunities. In this regard, the Subscriber and the Subscriber Nominee may look into business opportunities and consider whether any asset disposals, asset acquisitions, business rationalisation, business divestment, fund raising, restructuring of the business and/or business diversification will be appropriate in order to enhance the long-term growth potential of the Group.

Save for the Subscriber’s and the Subscriber Nominee’s intention regarding the Group as set out above and subject to the review on existing business and operations, the Subscriber and the Subscriber Nominee have no current intention to introduce major changes to the business of the Group, including any redeployment of fixed assets other than those in its ordinary course of business. Save for the proposed change as mentioned in the section headed “Proposed change to the Board composition” in the Letter from the Board, the Subscriber and the Subscriber Nominee will, depending on the business operations and development of the Group in the future, review the composition of the Board and senior management. Any changes to the Board composition will be made in the best interests of the Group and the Shareholders as a whole and in compliance with the Takeovers Code and the Listing Rules. However, the Subscriber and the Subscriber Nominee reserve the right to make any changes that they deem necessary or appropriate to the Group’s businesses and operations to optimise the value of the Group.

We have reviewed the background of CM Group. It is noted that CM Group has a long operating history. Founded in 1872, it is a state-owned conglomerate based in Hong Kong under direct supervision of State-owned Assets Supervision and Administration Commission of the State Council of the PRC, with investments covering areas such as ports, toll roads, shipping, logistics, zone development, real estate, offshore engineering and trade, offshore production equipment construction and maritime trade industries, etc.

We have enquired with the management of the Company and based on our review of the background of CM Group as discussed above, the Director advised, and we concurred that CM Group and the Group would create synergies from (i) cost savings from the integration of equipment packages, installation, commissioning and maintenance; (ii) potential business opportunities in the global market for plug, abandonment and decommissioning of offshore platforms, integrated mobile offshore production and drilling platforms units (MODPU), accommodation platforms, wind power installation platforms, multi service drilling and platform maintenance; (iii) offering a more competitive and innovative range of offshore platforms working with shipyard in-house design teams; and (iv) sharing of technological development through continuous improvements.

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LETTER FROM INDEPENDENT FINANCIAL ADVISER

Having taken into consideration CM Group’s long operating history and investments in offshore production equipment construction and maritime trade industries; and the business synergies as discussed above, we are of the view that the introduction of the Subscriber as a strategic investor to the Group upon Completion is in the interest of the Company and the Shareholder as a whole.

3.4. Financing alternatives of the Group

Upon enquiry with the management of the Group, we were given to understand that, other than the Subscription, the Company has also considered the feasibility of other fund-raising methods such as (i) debt financing; (ii) placement of new Shares to independent investors; and (iii) other form of equity financing as detailed below.

(a) Debt financing

The Group recorded a loss of approximately US$111.6 million for the year ended 31 December 2016 and a loss of approximately US$3.7 million for the six months ended 30 June 2017. In addition, the Group also recorded a high level of indebtedness, with its gearing ratio (calculated as a ratio of total interest-bearing loans over total equity) at approximately 62.0% as at 30 June 2017.

The Directors considered that debt financing may incur interest burden on the Group and may be subject to lengthy due diligence and negotiations with banks or financial institutions taking into account the Group’s financial position as discussed above and the then financial market condition.

(b) Placement of new Shares to independent investors

Given the thin trading volume of the Shares during the Review Period as discussed under the sub-section headed “Review on trading liquidity of the Shares” in this letter, the Directors consider that it is difficult for a placing agent to seek independent third parties to subscribe for new Shares without a large discount as compared with the Subscription Price.

(c) Other form of equity financing

Despite that both open offer and rights issue would allow the Shareholders to participate in the subscription on new Shares to be issued by the Company and maintain their respective pro-rata shareholdings in the Company, the Directors are of the view that it will involve existing Shareholders increasing their amount of investment in the Company, which may not be their original intention since the Company has been loss-making and its existing businesses are not expected to achieve significant growth in the short term to be able to improve its financial condition. Furthermore, the time required to execute a rights issue or an open offer is relatively longer as compared to the Subscription and involve additional cost and works such as (i) identifying underwriter(s) with favorable terms; and (ii) administrative work for preparation and issue of related documents such as prospectus and application forms for acceptance as well as unaudited pro forma financial information to be included in the prospectus.

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LETTER FROM INDEPENDENT FINANCIAL ADVISER

We are given to understand that the above alternatives, in particular, (i) the additional interest burden under debt financing; (ii) the difficulty in finding placing agent with acceptable terms in view of the thin trading volume of the Shares in general; and (iii) the additional time, costs and works required under a rights issue or open offer, we concur with the view of the Directors that the Subscription offers the most efficient and cost-effective way of raising funds based on the circumstances of the Company and serves as a vote of confidence in the Company by the Subscriber.

Having considered (i) the low trading volume of the Shares as set forth under sub-section headed “Review on trading liquidity of the Shares” below; (ii) the development opportunities of the decommissioning business; and (iii) the pros and cons of alternative financing means, we concur with the view of the Directors that the Subscription is a more preferred method of fund raising for the Group based on the circumstances of the Company and the Subscription is in the interests of the Company and the Shareholders as a whole.

3.5. Proposed change of board composition of the Company

As at the Latest Practicable Date, the Board comprised three executive Directors, namely Mr. Jiang Bing Hua, Mr. Zhang Menggui, Morgan and Mr. Wang Yong; three non-executive Directors, namely Mr. Jiang Longsheng, Mr. Brian Chang and Mr. Wang Jianzhong; and three independent non-executive Directors, namely Mr. Chan Ngai Sang, Kenny, Mr. Guan Zhichuan and Dr. Lu Xiaoming. Subject to the Completion having taken place, each of Mr. Jiang Longsheng, Mr. Brian Chang and Mr. Wang Yong will resign as Directors with effect from the Completion Date.

As stated in the Letter from the Board, in place of the above resigning Directors, the Board has proposed the following persons, namely, Mr. Wang Hongyuan, Mr. Yang Guohui and Ms. Li Rong as the candidates for election as the Directors (collectively, the “ Candidates for Directors ”) at the EGM. If the Candidates for Directors are approved by the Shareholders at the EGM, their appointment as the Directors will take effect from Completion.

The biographical details of each of the Candidates for Directors are set out in the paragraph headed ‘‘Proposed change of board composition of the Company’’ in the Letter from the Board. We have reviewed the biographies of each of the Candidates for Directors and noted that:

(i) Both Mr. Wang Hongyuan and Mr. Yang Guohui, the proposed executive Directors have extensive management experience in the shipping and vessel or offshore oil and gas industry, and Mr. Wang Hongyuan has obtained a master’s degree in transportation management from Dalian Maritime University while Mr. Yang Guohui has obtained a master’s degree in business administration from Nanyang Technological University in Singapore; and

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LETTER FROM INDEPENDENT FINANCIAL ADVISER

(ii) Ms. Li Rong, the proposed non-executive Director has extensive experience in investments and has obtained a master’s degree in business administration from Kellogg School of Management of Northwestern University in the United States.

Having considered that (i) the Subscriber intends to continue the principal businesses of the Group; (ii) only one out of the existing three executive Directors and two non-executive Directors will resign as Director with effect from Completion; (iii) the academic background and management experience of the Candidates for Directors are expected to strengthen the knowledge and expertise of the Board; and (iv) the incoming Directors will work closely with the existing Directors and management of the Company to review the Group’s operation and focus on improving long-term growth potential of the Group, we are of the view that the future management (including the proposed incoming Directors and existing management) of the Group has sufficient experiences to manage the Group’s business.

Taking into account of the above and in particular:

(i) the deteriorating financial condition of the Group which indicated that the Group has an imminent need to raise additional fund to improve the financial position and the liquidity as discussed in the section headed “1.2 Historical financial information”;
(ii) the potential synergy effect with CM Group as discussed under the section headed “3.3 Future intention of the Subscriber regarding the Group and potential synergy effect with CM Group”;
(iii) the potential opportunities of offshore drilling and P&A and decommissioning industries as discussed under the section headed “Overview of the offshore drilling business and P&A and decommissioning businesses”;
(iv) the available financing alternatives; and
(v) the background of the Candidates for Directors,

we consider that the reasons for and benefits of the Subscription is justifiable.

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LETTER FROM INDEPENDENT FINANCIAL ADVISER

4. Principal terms of the Subscription Agreement

On 14 December 2017 (after trading hours), the Company and the Subscriber entered into the Subscription Agreement. The principal terms of the Subscription Agreement are included in the Letter from the Board under the section headed “The Subscription Agreement”, and are summarised as below:

Date : 14 December 2017
Parties involved : The Company (as the issuer); and China Merchants & Great Wall Ocean Strategy & Technology Fund (L.P.), as Subscriber
Subscription Shares
: Pursuant to the Subscription Agreement, the Company conditionally agreed to allot and issue, and the Subscriber conditionally agreed to subscribe for or nominate for Subscriber Nominee to subscribe for, the Subscription Shares at the Subscription Price
Number of : An aggregate of 765,186,000 Subscription Shares

Subscription Shares

Subscription Price : HK$ 0.67 per Subscription Share

Subscription Price

The Subscription Price represents:

(i) a discount of approximately 30.2% to the closing price of HK$0.96 per Share as quoted on the Stock Exchange on 14 December 2017, being the Last Trading Day;
(ii) a discount of approximately 21.2% to the average closing price of approximately HK$0.85 per Share as quoted on the Stock Exchange for the last five (5) consecutive Trading Days up to and including the Last Trading Day;
(iii) a discount of approximately 19.3% to the average closing price of approximately HK$0.83 per Share as quoted on the Stock Exchange for the last ten (10) consecutive Trading Days up to and including the Last Trading Day;

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LETTER FROM INDEPENDENT FINANCIAL ADVISER

(iv) a discount of approximately 17.9% to the average closing price of approximately HK$0.82 per Share as quoted on the Stock Exchange for the last thirty (30) consecutive Trading Days up to and including the Last Trading Day;
(v) a discount of approximately 9.3% over the average closing price of approximately HK$0.74 per Share as quoted on the Stock Exchange for the last ninety (90) consecutive Trading Days up to and including the Last Trading Day;
(vi) a discount of approximately 35.0% to the consolidated unaudited net asset value per Share of approximately US$0.132 (equivalent to approximately HK$1.03) (calculated by dividing the unaudited net asset value as at 30 June 2017 as shown in the interim report of the Company for the six months ended 30 June 2017 of approximately US$93,348,000 divided by 707,120,204 Shares in issue as at the Latest Practicable Date); and
(vii) a discount of approximately 36.8% to the consolidated net asset value per Share of approximately US$0.136 (equivalent to approximately HK$1.06) (calculated by dividing the audited net asset value as at 31 December 2016 as shown in the annual report of the Company for the year ended 31 December 2016 of approximately US$96,074,000 divided by 707,120,204 Shares in issue as at the Latest Practicable Date).

As set out in the Letter from the Board, the Subscription was arrived at after arm’s length negotiations between the Company and the Subscriber and with reference to (i) the audited financial information of the Company for the year ended 31 December 2016; (ii) the unaudited financial information of the Company for the six months ended 30 June 2017; (iii) the valuable opportunity for the Group to bring in a solid strategic investor namely the Subscriber, whose general partner is the Fund GP (a company jointly held by CM Group indirectly as to an aggregate of 75% and GW Asset Management indirectly as to 25%); and (iv) the substantial amount of additional funds which will improve the financial position and liquidity of the Group and provide the Company with the financial flexibility necessary for the expansion of the Group’s existing business and the capability to capture any prospective acquisition opportunities as and when they arise.

– 56 –

LETTER FROM INDEPENDENT FINANCIAL ADVISER

4.1. Review on Share price performance

In order to assess the fairness and reasonableness of the Subscription Price, we have reviewed the daily closing price of the Shares as quoted on the Stock Exchange from 15 December 2016 up to and including the Last Trading Day (the “ Review Period ”), being approximately one year prior to the date of the Subscription Agreement. We consider that the Review Period is adequate to illustrate the recent price movement of the Shares for conducting a reasonable comparison among the historical closing prices of the Shares and the Subscription Price since only the historical closing prices prior to entering into of the Subscription Agreement was relevant to the analysis of the fairness and reasonableness of the Subscription Price, as the share prices before the Announcement represent a fair market value of the Company the Shareholders expected, while that after the Announcement, the value may have taken into account the potential upside of the Subscription Agreement which may distort the analysis. The comparison of daily closing prices of the Shares and the Subscription Price is illustrated as follows:

==> picture [363 x 176] intentionally omitted <==

----- Start of picture text -----

HK$ Historical daily closing price per Share
1.4
1.2
1
0.8
0.6
Subscription Price is HK$0.67 per Share
0.4
0.2
0
Closing Price Subscription Price
----- End of picture text -----

Source: the website of the Stock Exchange (www.hkex.com.hk)

During the Review Period, the closing price of the Shares maintained a decreasing trend in general with the lowest daily closing price per Share being HK$0.52 on 25 August 2017 and the highest closing price per Share being HK$1.20 on 9 January 2017 and the average daily closing price per Share being approximately HK$0.83. It is noted that the Subscription Price is within the range of the lowest and highest closing price of the Shares as quoted on the Stock Exchange during the Review Period and represents (i) a premium of approximately 28.8% over the lowest daily closing price during the Review Period; (ii) a discount of approximately 44.2% to the highest daily closing price during the Review Period; and (iii) a discount of approximately 19.3% to the average daily closing price per Share of HK$0.83 during the Review Period.

– 57 –

LETTER FROM INDEPENDENT FINANCIAL ADVISER

4.2. Review on trading liquidity of the Shares

The following table sets out (i) the average daily trading volume of the Shares; and (ii) the percentage of the average daily trading volume of the Shares to total number of issued Shares as at the end of each month/period during the Review Period:

					Percentage of
					the average
				Percentage of	daily trading
				the average	volume to total
				daily trading	number of
				volume to total	issued Shares
				number of	(excluding
				issued	Shares held by
	Total trading	Number of	Average daily	Shares as at	CIMC (HK)) as
	volume of	trading	trading volume	the end of the	at the end of the
	the Shares	days	of the Shares	month/period	month/period
2016
December	3,714,000	10	371,400	0.05%	0.06%
2017
January	19,100,000	19	1,005,263	0.14%	0.16%
February	17,650,400	20	882,520	0.12%	0.14%
March	20,801,000	23	904,391	0.13%	0.15%
April	7,952,353	17	467,785	0.07%	0.08%
May	7,076,000	20	353,800	0.05%	0.06%
June	11,892,000	22	540,545	0.08%	0.09%
July	6,588,400	21	313,733	0.04%	0.05%
August	6,633,000	22	301,500	0.04%	0.05%
September	11,901,000	21	566,714	0.08%	0.09%
October	8,172,000	20	408,600	0.06%	0.07%
November	6,282,000	22	285,545	0.04%	0.05%
December	7,239,000	10	723,900	0.10%	0.12%
Maximum			1,005,263	0.14%	0.16%
Minimum			285,545	0.04%	0.05%
Average			548,131	0.08%	0.09%

Source: the website of the Stock Exchange (www.hkex.com.hk)

– 58 –

LETTER FROM INDEPENDENT FINANCIAL ADVISER

As illustrated in the above table, the average daily trading volume was low during the Review Period, with a range of approximately 286,000 Shares to approximately 1,005,000 Shares, representing approximately 0.04% to 0.14% of the number of Shares in issue as at the end of relevant month/period. It means the trading of the Shares is not considered as active, therefore setting the Subscription Price at a discount could provide more incentive for the Subscriber to participate in the Subscription. As such, we are of the view that it is reasonable to set the Subscription Price at a discount to the latest Share prices to balance the low liquidity of the Shares during the Review Period.

4.3. Market comparable analysis

As part of our analysis, we have also identified from the website of the Stock Exchange an exhaustive list of transactions which involve subscription of new shares under specific mandate without involving acquisition and/or restructuring of assets or business by companies listed on the Stock Exchange for the 12 month period immediately prior to the date of the Subscription Agreement (the “ Comparables ”) (excluding transactions involving (i) H-share companies whose share capital structure is different from that of the Company as not all the issued shares of H-share company can be traded in the Stock Exchange such as its A-share or domestic shares; (ii) issues by listed companies under prolonged suspension; (iii) issues of convertible securities; and (iv) open offers or rights issues of new shares, which we consider these are different from the Company’s circumstance and different pricing considerations would be applied).

We consider that a sampling period of 12 months is adequate and appropriate given that such period is sufficient to capture the recent market conditions because the Comparables are considered for the purpose of taking a general reference for the recent market environment in relation to the subscription price under other transactions as compared to the relevant prevailing market share prices under the recent market conditions and sentiment.

As such, we are of the view that the Comparables as set out below are fair and representative samples for comparison purpose as they can provide the Independent Shareholders or potential investors of the Company a general trend and data of subscription of new shares under specific mandate in the market for their further information to make decision with respect to the Subscription. In addition, Independent Shareholders should note that the business, operations, financial positions and prospects of the Company are not the same as the companies which make the Comparables. We have not conducted any independent investigation with regards to the business, operations, financial positions and prospects of the companies but it shall not affect our analysis as we are comparing the general trend of subscription of new shares under specific mandate in the market.

– 59 –

LETTER FROM INDEPENDENT FINANCIAL ADVISER

					Premium/(discount)
					of the
					subscription
					price over/(to)
					closing price
					per share on
					the last trading
				Number of	day prior to/on
				subscription	the date of
				shares to the	announcements/
				respective	agreements in
				enlarged issued	relation to the
				share capital	respective
			Connected	upon	subscription of
Date of announcement	Company name	Stock code	transaction	completion	shares
			(Yes/No)	(%)	(%)
6 December 2017	Brockman Mining	159	Yes	1.4	(18.7)
	Limited
5 December 2017	Blockchain Group	364	Yes	16.3	114.3
	Company Limited
	(outliner)
29 November 2017	AKM Industrial	1639	Yes	19.8	(8.0)
	Company Limited
17 November 2017	Alibaba Health	241	Yes	4.5	(4.3)
	Information
	Technology Limited
16 November 2017	OP Financial	1140	No	28.1	(4.6)
	Investments Limited
9 November 2017	Trinity Limited	891	No	51.4	(60.0)
11 October 2017	Pak Tak International	2668	Yes	20.8	(21.4)
	Limited
11 October 2017	Eagle Legend Asia	936	Yes	9.4	7.8
	Limited
12 September 2017	Truly International	732	Yes	1.8	(12.9)
	Holdings Limited
12 September 2017	Ourgame International	6899	Yes	22.3	0.0
	Holdings Limited
30 August 2017	C&D International	1908	Yes	31.4	(13.1)
	Investment Group
	Limited
17 August 2017	Yida China Holdings	3639	Yes	11.6	1.8
	Limited

– 60 –

LETTER FROM INDEPENDENT FINANCIAL ADVISER

					Premium/(discount)
					of the
					subscription
					price over/(to)
					closing price
					per share on
					the last trading
				Number of	day prior to/on
				subscription	the date of
				shares to the	announcements/
				respective	agreements in
				enlarged issued	relation to the
				share capital	respective
			Connected	upon	subscription of
Date of announcement	Company name	Stock code	transaction	completion	shares
			(Yes/No)	(%)	(%)
25 July 2017	Beijing Sports and	1803	Yes	9.4	(21.0)
	Entertainment
	Industry Group
	Limited
14 July 2017	China Health Group	673	No	9.2	23.5
	Limited
5 June 2017	Sunshine Oilsands	2012	Yes	7.7	(16.4)
	Limited
12 May 2017	Grand Ocean Advanced	65	No	66.5	(64.5)
	Resources Company
	Limited
19 April 2017	United Photovoltaics	686	No	8.6	(20.8)
	Group Limited
21 March 2017	Jutal Offshore Oil	3303	No	50.1	(40.0)
	Services Limited
20 March 2017	Jinchuan Group	2362	No	10.0	(31.6)
	International
	Resources Co. Limited
3 March 2017	HMV Digital China	8078	No	21.3	(16.7)
	Group Limited
24 February 2017	C Cheng Holdings	1486	No	28.8	(36.8)
	Limited
20 January 2017	National Arts	8228	Yes	11.1	0.9
	Entertainment and
	Culture Group
	Limited
18 January 2017	Universe International	1046	No	37.5	(13.5)
	Financial Holdings
	Limited

– 61 –

LETTER FROM INDEPENDENT FINANCIAL ADVISER

					Premium/(discount)
					of the
					subscription
					price over/(to)
					closing price
					per share on
					the last trading
				Number of	day prior to/on
				subscription	the date of
				shares to the	announcements/
				respective	agreements in
				enlarged issued	relation to the
				share capital	respective
			Connected	upon	subscription of
Date of announcement	Company name	Stock code	transaction	completion	shares
			(Yes/No)	(%)	(%)
13 January 2017	C Cheng Holdings	1486	Yes	22.4	(37.6)
	Limited
9 January 2017	Ground International	989	No	17.0	(20.0)
	Development Limited
4 January 2017	China Oil Gangran	8132	Yes	11.7	(12.2)
	Energy Group
	Holdings Limited
3 January 2017	Eminence Enterprise	616	No	18.3	(8.0)
	Limited
21 December 2016	A8 New Media Group	800	Yes	33.7	(12.8)
	Limited
19 December 2016	Hunghua Group	196	No	33.1	(20.6)
	Limited
14 December 2016	Winshine Science	209	No	18.6	(10.9)
	Company Limited
	Maximum			66.5	23.5
	(Excluding outliner)
	Minimum			1.4	(64.5)
	(Excluding outliner)
	Average			21.3	(17.0)
	(Excluding outliner)
14 December 2017	The Company	206	Yes	52.0	(30.2)

– 62 –

LETTER FROM INDEPENDENT FINANCIAL ADVISER

The subscription price of the share subscription of Blockchain Group Company Limited announced on 5 December 2017 represented a premium of approximately 114.3% to the closing share price on the last trading day prior to the announcement in relation to the share subscription. Such premium is significantly higher than the rest of the Comparables and is considered as an outliner. Therefore, such precedent case was not being considered in our analysis.

As demonstrated by the above table, the subscription price of the Comparables ranged from a discount of approximately 64.5% to a premium of approximately 23.5% over their respective closing share price on their respective last trading day prior to/on the date of the announcement/agreement in relation to the relevant share subscription (the “ Market Range ”), with an average of a discount of approximately 17.0%. We also noted that the percentage of number of subscription shares of the Comparables to their respective enlarged issued share capital upon completion (the “ Market Implied Dilution ”) ranged from approximately 1.4% to 66.5% with an average of approximately 21.3%.

Despite the discount of the Subscription Price is higher than the average of the discount of the Comparables, having considered that (i) the Subscription Price of HK$0.67 per Subscription Share is within the Market Range and the range of closing prices of the Shares as quoted on the Stock Exchange during the Review Period which indicated the Subscription Price represented an acceptable price with reference to the recent market condition and recent comparable transactions; (ii) the percentage of number of Subscription Shares to the enlarged issued share capital of the Company upon Completion of approximately 52.0% falls within the range of the Market Implied Dilution; (iii) the liquidity of the Shares during the Review Period was low; (iv) the Subscription is a preferred means to raise funds given the Company’s circumstance comparing to other fundraising methods; (v) the deteriorating financial performance of the Group as discussed in section headed “1.2. Historical financial information”; and (vi) the raised funds will be used to repay the outstanding bank loans as well as to develop the Group’s businesses and improve its financial position as discussed in the above section headed “3. Reasons for and benefits of the Subscription”, we consider that the Subscription Price is fair and reasonable so far as the Independent Shareholders are concerned.

Taking into account the principal terms of the Subscription Agreement as highlighted above, we are of the view that the terms of the Subscription Agreement are on normal commercial terms and are fair and reasonable so far as the Independent Shareholders are concerned.

– 63 –

LETTER FROM INDEPENDENT FINANCIAL ADVISER

5. Possible dilution effect on the shareholding interests of Shareholders

As shown in the table under the section headed “Effect of the Subscription on the shareholding structure of the Company” in the Letter from the Board, upon completion of the Subscription, the shareholding interests of the existing public Shareholders would be diluted by approximately 25.5%, representing a decrease in the public Shareholders interests in the Company from approximately 49.1% to approximately 23.6%, assuming no other change in the issued share capital of the Company other than the issuance of the Subscription Shares. Nonetheless, in view of (i) the reasons for and the potential benefits of the Subscription to the Group, details of which are set out under the section headed “Reasons for and benefits of the Subscription” of this letter; and (ii) the deteriorating financial performance of the Group and its imminent need for external funds to improve financial position and liquidity, we consider that such dilution effect on the shareholding interests of the existing public Shareholders resulting from the issue of the Subscription Shares is acceptable and that the terms of the Subscription Agreement are fair and reasonable so far as the Independent Shareholders are concerned.

6. Financial effects of the Subscription to the Group

6.1. Liquidity

According to the 2017 Interim Report, the Group had cash and cash equivalents of approximately US$12.1 million as at 30 June 2017. Upon completion of the Subscription, the liquidity and cash position of the Group will be improved as the Subscription will facilitate the Company to raise net proceeds of approximately HK$505.1 million. The total liabilities of the Group will also decrease after the repayment of part of the outstanding debts of the Group. Accordingly, the cash position, net current assets and current ratio of the Group are expected to be improved upon Completion and the repayment of the outstanding debts.

6.2. Gearing ratio

As at 30 June 2017, the Group’s total borrowings were approximately US$57.9 million and the gearing ratio (calculated as a ratio of total interest-bearing loans over total equity) was approximately 62.0%. Given that following Completion and the repayment of the outstanding debts of the Group, the liabilities of the Group will be reduced, it is expected that the Subscription will have positive impact on the gearing ratio of the Group.

As such, the Subscription may have an overall positive effect on the Group’s financial position. It should be noted that the aforementioned financial effects are for illustrative purpose only and does not purport to represent how the financial position of the Group will be upon completion of the Subscription.

– 64 –

LETTER FROM INDEPENDENT FINANCIAL ADVISER

7. Application for Whitewash Waiver

As stated in the Letter from the Board, assuming no other change in the issued share capital of the Company, the Subscriber and the Subscriber Nominee (together with parties acting in concert with them (as defined in the Takeovers Code)) will be interested in 765,186,000 Shares, representing approximately 108.2% of the issued share capital of the Company as at the Latest Practicable Date and approximately 52.0% of the issued share capital of the Company as enlarged by the allotment and issuance of the Subscription Shares. Under such circumstance, the Subscriber Nominee would be required to make a mandatory general offer for all the issued Shares under Rule 26.1 of the Takeovers Code, unless a Whitewash Waiver is granted by the Executive.

An application has been made by the Subscriber Nominee to the Executive for the granting of the Whitewash Waiver pursuant to Rule 26.1 of the Takeovers Code. The Whitewash Waiver, if granted, will be conditional upon, among other things, the condition precedent of the Subscription and the approval of the Independent Shareholders of the Whitewash Waiver and the Subscription at the EGM by way of poll. If the Whitewash Waiver is not granted or not approved by the Independent Shareholders, the Subscription Agreement will not become unconditional and the Subscription will not proceed. Accordingly, the Company will lose all the benefits that are expected to be brought by the Subscription, including but not limited to the availability of funds to be raised from the Subscription. Based on our analysis on the reasons for and benefit of the Subscription as discussed in the above sections, we are of the view that the grant of the Whitewash Waiver, which is a precedent condition for the completion of the Subscription, is fair and reasonable so far as the Independent Shareholders are concerned and in the interests of the Company and the Shareholders as a whole.

RECOMMENDATION

Having considered the principal factors and reasons, in particular:

(i) the imminent need of additional fund to improve financial position and liquidity of the Group as set out in the section headed “1.2 Historical financial information”;
(ii) the potential synergy effect with CM Group as discussed under the section headed “3.3 Future intention of the Subscriber regarding the Group and potential synergy effect with CM Group”;
(iii) the potential opportunities of offshore drilling and P&A and decommissioning industries as discussed under the section headed “Overview of the offshore drilling business and P&A and decommissioning businesses”;
(iv) the Subscription is a more preferred means of raising additional capital as set out in the section headed “3.4. Financing alternatives of the Group”;

– 65 –

LETTER FROM INDEPENDENT FINANCIAL ADVISER

(v) the terms of the Subscription Agreement are considered fair and reasonable, in particular, given the deteriorating financial condition of the Group, setting the Subscription Price at a discount could provide more incentive for the Subscriber to participate in the Subscription;
(vi) the overall positive effect on the Group’s financial position as a result of the Subscription as set out in the section headed “6. Financial effects of the Subscription to the Group”; and
(vii) the approval of the Whitewash Waiver by the Independent Shareholders is a conditional precedent to the Subscription, and if the Whitewash Waiver is not approved by the Independent Shareholders, the Subscription will not proceed,

we are of the opinion that (i) the terms of the Subscription Agreement are on normal commercial terms and are fair and reasonable so far as the Independent Shareholders are concerned; and (ii) the Subscription and the Whitewash Waiver 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 EGM to approve the Subscription Agreement, the transactions contemplated thereunder and the Whitewash Waiver.

Yours faithfully, For and on behalf of Lego Corporate Finance Limited Kristie Ho Managing Director

Ms. Kristie Ho is a licensed person registered with the Securities and Futures Commission and a responsible officer of Lego Corporate Finance Limited to carry out Type 6 (advising on corporate finance) regulated activity under the Securities and Futures Ordinance (Chapter 571 of the laws of Hong Kong). She has over 12 years of experience in the finance and investment banking industry.

– 66 –

APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

1. FINANCIAL SUMMARY

The following is a summary of the financial results of the Group for each of the three years ended 31 December 2016 and six months ended 30 June 2017. The information is extracted from the annual reports of the Company for the years ended 31 December 2015 and 2016 and the interim report of the Company for the six months ended 30 June 2017, which is prepared in accordance with Hong Kong Financial Reporting Standards (“ HKFRS “) issued by the Hong Kong Institute of Certified Public Accountants. The auditors of the Company for each of the three years ended 31 December 2014, 2015 and 2016, KPMG, did not issue any qualified opinion on the financial statements of the Group for each of the three years ended 31 December 2014, 2015 and 2016.

Financial results

Revenue Profit/(loss) before taxation Income tax Profit/(loss) for the year Attributable to: Equity shareholders of the Company Non-controlling interests Earnings/(loss) per share – Basic – Diluted	Year ended 31 December 2014 2015 2016 $’000 $’000 $’000 270,586 194,899 142,531 24,307 2,035 (111,312) (3,365) (738) (264) 20,942 1,297 (111,576) 20,502 2,097 (110,450) 440 (800) (1,126) 20,942 1,297 (111,576) 2.95 cents 0.30 cent (15.73 cents) 2.87 cents 0.30 cent (15.73 cents)	Six months ended 30 June 2017 $’000 45,881 (5,574) 1,853 (3,721) (3,748) 27 (3,721) (0.54 cent) (0.54 cent)

The Board does not recommend the payment of any dividend for each of three years ended 31 December 2014, 2015 and 2016 and the six months ended 30 June 2017.

Assets and liabilities

Non-currents assets Current assets Non-current liabilities Current liabilities Net assets	As 2014 $’000 103,090 390,903 (38,360) (230,466) 225,167	at 31 December 2015 2016 $’000 $’000 115,591 86,057 454,138 326,767 (38,453) (41,391) (312,281) (275,359) 218,995 96,074	As at 30 June 2017 $’000 84,780 324,884 (16,800) (299,516) 93,348

– I-1 –

APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

2. FINANCIAL INFORMATION OF THE GROUP FOR THE YEAR ENDED 31 DECEMBER 2016

The following is the full text of the unqualified audited financial statements of the Group for the year ended 31 December 2016 as extracted from the annual report of the Company for the year ended 31 December 2016:

Consolidated statement of profit or loss

for the year ended 31 December 2016 (Expressed in United States dollars)

Notes Revenue 3 Cost of sales Gross profit Other revenue and net income 4 Selling and distribution expenses General and administrative expenses Other operating expenses Impairment losses on goodwill 13 Impairment losses on doubtful debts 19(b) Impairment losses on gross amount due from customers for contract work 20 (Loss)/profit from operations Finance costs 5(a) (Loss)/profit before taxation 5 Income tax 6(a) (Loss)/profit for the year Attributable to: Equity shareholders of the Company Non-controlling interests (Loss)/profit for the year (Loss)/earnings per share 9 Basic Diluted	2016 $’000 142,531 (104,745) 37,786 5,685 (5,170) (33,409) (5,440) (19,621) (56,864) (29,916) (106,949) (4,363) (111,312) (264) (111,576) (110,450) (1,126) (111,576) (15.73) cents (15.73) cents	2015 $’000 194,899 (140,543) 54,356 3,842 (12,554) (33,089) (4,034) – (1,941) – 6,580 (4,545) 2,035 (738) 1,297 2,097 (800) 1,297 0.30 cent 0.30 cent

– I-2 –

APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

Consolidated statement of profit or loss and other comprehensive income

for the year ended 31 December 2016 (Expressed in United States dollars)

(Loss)/profit for the year Other comprehensive income for the year: Items that may be reclassified subsequently to profit or loss: –Exchange differences on translation of financial statements of subsidiaries and associate (with nil tax effect) Total comprehensive income for the year Attributable to: Equity shareholders of the Company Non-controlling interests Total comprehensive income for the year	2016 $’000 (111,576) (11,007) (122,583) (121,400) (1,183) (122,583)	2015 $’000 1,297 (6,771) (5,474) (4,544) (930) (5,474)

– I-3 –

APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

Consolidated statement of financial position

at 31 December 2016

(Expressed in United States dollars)

Notes Non-current assets Property, plant and equipment 10 Investment properties 10 Property under development 11 Interest in leasehold land held for own use under operating leases 12 Goodwill 13 Other intangible assets 14 Interest in associate 16 Other financial assets 17 Prepayments 19 Deferred tax assets 24(b) Current assets Inventories 18 Trade and other receivables 19 Gross amount due from customers for contract work 20 Amount due from a related company 21 Pledged bank deposits Cash at bank and in hand Tax recoverable 24(a) Current liabilities Trade and other payables 22 Bank loans and other borrowings 23 Tax payable 24(a) Net current assets	2016 $’000 50,778 8,207 – 7,339 – 3,619 182 2,226 – 13,706 86,057 - - - - - - - - - - - - 39,714 76,068 199,186 101 1,505 9,952 241 326,767 - - - - - - - - - - - - 259,467 8,057 7,835 275,359 - - - - - - - - - - - - 51,408 - - - - - - - - - - - -	2015 $’000 42,400 – 18,732 8,063 22,996 6,464 193 4,661 46 12,036
		115,591 - - - - - - - - - - - - 58,523 107,293 236,539 101 5,045 46,505 132
		454,138 - - - - - - - - - - - - 278,230 28,725 5,326
		312,281 - - - - - - - - - - - -
		141,857 - - - - - - - - - - - -

– I-4 –

APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

Notes Total assets less current liabilities Non-current liabilities Bank loans and other borrowings 23 Deferred tax liabilities 24(b) NET ASSETS CAPITAL AND RESERVES Share capital 28(b) Reserves Total equity attributable to equity shareholders of the Company Non-controlling interests TOTAL EQUITY	2016 $’000 137,465 - - - - - - - - - - - - 41,260 131 41,391 - - - - - - - - - - - - 96,074 9,094 86,202 95,296 778 96,074	2015 $’000 257,448 - - - - - - - - - - - - 38,185 268
		38,453 - - - - - - - - - - - -
		218,995

		9,094 207,530
		216,624 2,371
		218,995

– I-5 –

APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

Attributable to equity shareholders of the Company	Shares held	Employee for share Retained	share-based award profits/ Non-	Share Share Merger Exchange compensation scheme Capital Revaluation Reserve (accumulated controlling	capital premium reserve reserve reserve reserve reserve reserve funds losses) Total interests Total equity	$’000 $’000 $’000 $’000 $’000 $’000 $’000 $’000 $’000 $’000 $’000 $’000 $’000	9,066 127,485 2,161 3,626 5,939 – 512 627 7,289 65,182 221,887 3,280 225,167			– – – – – – – – – 2,097 2,097 (800) 1,297	– – – (6,641) – – – – – – (6,641) (130) (6,771)	– – – (6,641) – – – – – 2,097 (4,544) (930) (5,474) - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -	28 320 – – (105) – – – – – 243 – 243	– – – – 323 – – – – – 323 – 323	– – – – – (1,285) – – – – (1,285) – (1,285)	– – – – – – – – 1,526 (1,526) – – –	– – – – – – – – – – – 21 21	9,094 127,805 2,161 (3,015) 6,157 (1,285) 512 627 8,815 65,753 216,624 2,371 218,995		– – – – – – – – – (110,450) (110,450) (1,126) (111,576)	– – – (10,950) – – – – – – (10,950) (57) (11,007)	– – – (10,950) – – – – – (110,450) (121,400) (1,183) (122,583) - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -	– – – – (821) – – – – 893 72 – 72	– – – – – – 4,970 – (520) (4,450) – – –	– – – – – – – – – – – 4 4	– – – – – – – – – – – (414) (414)	9,094 127,805 2,161 (13,965) 5,336 (1,285) 5,482 627 8,295 (48,254) 95,296 778 96,074
							Balance at 1 January 2015		Changes in equity for 2015:	Profit for the year	Other comprehensive income	Total comprehensive income	Shares issued under share option schemes	Equity-settled share-based transactions	Purchase of shares for share award scheme_(note 26)_	Transferred to reserve funds	Capital contribution from non-controlling interests	Balance at 31 December 2015 and 1 January 2016	Changes in equity for 2016:	Loss for the year	Other comprehensive income	Total comprehensive income	Equity-settled share-based transactions	Transferred to capital reserve_(note 28(c)(v))_	Capital contribution from non-controlling interests	Dividends paid to non-controlling interests	Balance at 31 December 2016

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APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

Consolidated cash flow statement

for the year ended 31 December 2016 (Expressed in United States dollars)

Notes Operating activities (Loss)/profit before taxation Adjustments for: Depreciation 5(c) Impairment losses on doubtful debts 5(c) Impairment losses on others financial assets 5(c) Impairment losses on goodwill 5(c) Impairment losses on gross amount due from customers for contract work 5(c) Write-off of trade debtors 5(c) Write down of inventories 18(b) Amortisation of interest in leasehold land held for own use under operating leases 5(c) Amortisation of intangible assets 5(c) Finance costs 5(a) Interest income 4 Loss on disposal of property, plant and equipment 5(c) Equity-settled share-based payment expenses 5(b) Foreign exchange loss Operating profit before changes in working capital Decrease/(increase) in inventories Increase in trade and other receivables and gross amount due from customers for contract work (Decrease)/increase in trade and other payables Cash (used in)/generated from operations People’s Republic of China (“PRC”) enterprise income tax and overseas tax paid Net cash (used in)/generated from operating activities	2016 $’000 (111,312) 5,975 56,864 2,435 19,621 29,916 16 9,752 211 2,294 4,363 (371) 520 72 861 21,217 7,573 (22,431) (20,182) (13,823) (1,571) (15,394) - - - - - - - - - - - -	2015 $’000 2,035 5,161 1,941 – – – 44 899 226 2,632 4,545 (186) 476 323 3,518 21,614 (10,561) (69,240) 80,490 22,303 (4,480) 17,823 - - - - - - - - - - - -

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APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

Notes Investing activities Payment for purchase of property, plant and equipment Payment for acquisition of intangible assets Interest received Decrease/(increase) in pledged bank deposits Proceeds from disposal of property, plant and equipment Construction expenditure on property under development Payment for purchase of other financial assets Payment for investment in an associate Net cash generated from/(used in) investing activities Financing activities Proceeds from shares issued under share option scheme Capital contribution from non-controlling interests Interest paid Proceeds from new bank loans Repayment of bank loans Dividends paid to non-controlling interests Payment for purchase of shares for share award scheme Net cash used in financing activities Net decrease in cash and cash equivalents Cash and cash equivalents at 1 January Effect of foreign exchange rate changes Cash and cash equivalents at 31 December	2016 $’000 (908) (45) 371 3,434 566 (3,239) – – 179 - - - - - - - - - - - - – 4 (3,897) 10,524 (27,225) (414) – (21,008) - - - - - - - - - - - - (36,223) 46,505 (330) 9,952	2015 $’000 (15,952) (203) 186 (918) 4,311 (8,089) (100) (193) (20,958) - - - - - - - - - - - - 243 21 (3,549) 28,452 (25,684) – (1,285) (1,802) - - - - - - - - - - - - (4,937) 52,337 (895) 46,505

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APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

Notes to the financial statements

(Expressed in United States dollars unless otherwise indicated)

1. SIGNIFICANT ACCOUNTING POLICIES

(a) Statement of compliance

These financial statements have been prepared in accordance with all applicable Hong Kong Financial Reporting Standards (“ HKFRSs ”), which collective term includes all applicable individual Hong Kong Financial Reporting Standards, Hong Kong Accounting Standards (“ HKASs ”) and Interpretations issued by the Hong Kong Institute of Certified Public Accountants (“ HKICPA ”), accounting principles generally accepted in Hong Kong and the disclosure requirements of the Hong Kong Companies Ordinance. These financial statements also comply with the applicable disclosure provisions of the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited (“ the Listing Rules ”). Significant accounting policies adopted by the Group are disclosed below.

The HKICPA has issued certain new and revised HKFRSs that are first effective or available for early adoption for the current accounting period of the Group. Note 1(c) provides information on any changes in accounting policies resulting from initial application of these developments to the extent that they are relevant to the Group for the current and prior accounting periods reflected in these financial statements.

(b) Basis of preparation of the financial statements

The consolidated financial statements for the year ended 31 December 2016 comprise the Group and the Group’s interest in associate.

The functional currency of the Company is Hong Kong dollars. Subsidiaries of the Company have their functional currencies in Renminbi (“ RMB ”), United States dollars and Pound Sterling. In view of expanded foreign operations, the directors of the Company consider United States dollars, being an internationally well-recognised currency, can provide more meaningful information to the Company’s investors and meet the needs of the Group’s global customers. Therefore, the directors choose United States dollars as the presentation currency of the financial statements.

The measurement basis used in the preparation of the financial statements is the historical cost basis.

The preparation of financial statements in conformity with HKFRSs requires management to make judgements, estimates and assumptions that affect the application of policies and reported amounts of assets, liabilities, income and expenses. The estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis of making the judgements about carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.

The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision affects only that period, or in the period of the revision and future periods if the revision affects both current and future periods.

Judgements made by management in the application of HKFRSs that have significant effect on the financial statements and major sources of estimation uncertainty are discussed in note 2.

– I-9 –

APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

(c) Changes in accounting policies

The HKICPA has issued a number of amendments to HKFRSs that are first effective for the current accounting period of the Group. None of these development has had a material effect on how the Group’s results and financial position for the current or prior periods have been prepared or presented.

The Group has not applied any new standard or interpretation that is not yet effective for the current accounting period.

(d) Subsidiaries and non-controlling interests

Subsidiaries are entities controlled by the Group. The Group controls an entity when it is exposed, or has rights, to variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity. When assessing whether the Group has power, only substantive rights (held by the Group and other parties) are considered.

An investment in a subsidiary is consolidated into the consolidated financial statements from the date that control commences until the date that control ceases. Intra-group balances, transactions and cash flows and any unrealised profits arising from intra-group transactions are eliminated in full in preparing the consolidated financial statements. Unrealised losses resulting from intra-group transactions are eliminated in the same way as unrealised gains but only to the extent that there is no evidence of impairment.

Non-controlling interests represent the equity in a subsidiary not attributable directly or indirectly to the Company, and in respect of which the Group has not agreed any additional terms with the holders of those interests which would result in the Group as a whole having a contractual obligation in respect of those interests that meets the definition of a financial liability. For each business combination, the Group can elect to measure any non-controlling interests either at fair value or at the non-controlling interests’ proportionate share of the subsidiary’s net identifiable assets.

Non-controlling interests are presented in the consolidated statement of financial position within equity, separately from equity attributable to the equity shareholders of the Company. Non-controlling interests in the results of the Group are presented on the face of the consolidated statement of profit or loss and the consolidated statement of profit or loss and other comprehensive income as an allocation of the total profit or loss and total comprehensive income for the year between non-controlling interests and the equity shareholders of the Company. Loans from holders of non-controlling interests and other contractual obligations towards these holders are presented as financial liabilities in the consolidated statement of financial position in accordance with notes 1(q) or 1(r) depending on the nature of the liability.

Changes in the Group’s interests in a subsidiary that do not result in a loss of control are accounted for as equity transactions, whereby adjustments are made to the amounts of controlling and non-controlling interests within consolidated equity to reflect the change in relative interests, but no adjustments are made to goodwill and no gain or loss is recognised.

When the Group loses control of a subsidiary, it is accounted for as a disposal of the entire interest in that subsidiary, with a resulting gain or loss being recognised in profit or loss. Any interest retained in that former subsidiary at the date when control is lost is recognised at fair value and this amount is regarded as the fair value on initial recognition of a financial asset or, when appropriate, the cost on initial recognition of an investment in an associate or joint venture.

In the Company’s statement of financial position, an investment in a subsidiary is stated at cost less impairment losses (see note 1(m)).

– I-10 –

APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

(e) Associates

An associate is an entity in which the Group or Company has significant influence, but not control or joint control, over its management, including participation in the financial and operating policy decisions.

An investment in an associate is accounted for in the consolidated financial statements under the equity method. Under the equity method, the investment is initially recorded at cost, adjusted for any excess of the Group’s share of the acquisition-date fair values of the investee’s identifiable net assets over the cost of the investment (if any). Thereafter, the investment is adjusted for the post acquisition change in the Group’s share of the investee’s net assets and any impairment loss relating to the investment (see notes 1(f) and 1(m)). Any acquisition-date excess over cost, the Group’s share of the post-acquisition, post-tax results of the investees and any impairment loss for the year are recognised in the consolidated statement of profit or loss, whereas the Group’s share of the post-acquisition post-tax items of the investee’s other comprehensive income is recognised in the consolidated statement of profit or loss and other comprehensive income.

When the Group’s share of losses exceeds its interest in the associate, the Group’s interest is reduced to nil and recognition of further losses is discontinued except to the extent that the Group has incurred legal or constructive obligations or made payments on behalf of the investee. For this purpose, the Group’s interest is the carrying amount of the investment under the equity method together with the Group’s long-term interests that in substance form part of the Group’s net investment in the associate.

Unrealised profits and losses resulting from transactions between the Group and its associates are eliminated to the extent of the Group’s interest in the investee, except where unrealised losses provide evidence of an impairment of the asset transferred, in which case they are recognised immediately in profit or loss.

If an investment in an associate becomes an investment in a joint venture or vice versa, retained interest is not remeasured. Instead, the investment continues to be accounted for under the equity method.

In all other cases, when the Group ceases to have significant influence over an associate, it is accounted for as a disposal of the entire interest in that investee, with a resulting gain or loss being recognised in profit or loss. Any interest retained in that former investee at the date when significant influence is lost is recognised at fair value and this amount is regarded as the fair value on initial recognition of a financial asset.

In the Company’s statement of financial position, investment in an associate is stated at cost less impairment losses (see note 1(m)).

(f) Goodwill

Goodwill represents the excess of

(i) the aggregate of the fair value of the consideration transferred, the amount of any non-controlling interest in the acquiree and the fair value of the Group’s previously held equity interest in the acquiree; over
(ii) the net fair value of the acquiree’s identifiable assets and liabilities measured as at the acquisition date.

– I-11 –

APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

When (ii) is greater than (i), then this excess is recognised immediately in profit or loss as a gain on a bargain purchase.

Goodwill is stated at cost less accumulated impairment losses. Goodwill arising on a business combination is allocated to each cash-generating unit, or groups of cash-generating units, that is expected to benefit from the synergies of the combination and is tested annually for impairment (see note 1(m)).

On disposal of a cash-generating unit during the year, any attributable amount of purchased goodwill is included in the calculation of the profit or loss on disposal.

(g) Other investments in equity securities

The Group’s and the Company’s policies for investments in equity securities, other than investments in subsidiaries, associates and joint ventures, are as follows:

Investments in equity securities are initially stated at fair value, which are their transaction price unless it is determined that the fair value at initial recognition differs from the transaction price and that fair value is evidenced by a quoted price in an active market for an identical asset or liability or based on a valuation technique that uses only data from observable markets. Cost includes attributable transaction costs, except where indicated otherwise below. These investments are subsequently accounted for as follows, depending on their classification:

Investments in securities held for trading are classified as current assets. Any attributable transaction costs are recognised in profit or loss as incurred. At the end of each reporting period the fair value is remeasured, with any resultant gain or loss being recognised in profit or loss. The net gain or loss recognised in profit or loss does not include any dividends or interest earned on these investments as these are recognised in accordance with the policies set out in notes 1(w)(v) and (vi).

Investments in securities which do not fall into the above category are classified as available-for-sale securities. At the end of each reporting period the fair value is remeasured, with any resultant gain or loss being recognised in other comprehensive income and accumulated separately in equity in the fair value reserve. As an exception to this, investments in equity securities that do not have a quoted price in an active market for an identical instrument and whose fair value cannot otherwise be reliably measured are recognised in the statement of financial position at cost less impairment losses (see note 1(m)). Dividend income from equity securities is recognised in profit or loss in accordance with the policies set out in note 1(w)(v).

When the investments are derecognised or impaired (see note 1(m)), the cumulative gain or loss recognised in equity is reclassified to profit or loss. Investments are recognised/derecognised on the date the Group commits to purchase/sell the investments or they expire.

(h) Investment properties

Investment properties are land and buildings which are owned or held under a leasehold interest to earn rental income and/or for capital appreciation. These include land held for a currently undetermined future use and property that is being constructed or developed for future use as investment property.

Investment properties are stated at cost less accumulated depreciation and impairment losses (see note 1(m) (ii)). Depreciation is calculated to write off the cost of investment properties, less their estimate residual value, if any, using the straight line method over their estimate useful lives of 20 years. Rental income from investment properties is accounted for as described in note 1(w)(iv).

– I-12 –

APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

(i) Property, plant and equipment

The following items of property, plant and equipment are stated at cost less accumulated depreciation and impairment losses (see note 1(m)):

freehold land and buildings;
buildings held for own use which are situated on leasehold land classified as under operating leases (see note 1(l)); and
other items of plant and equipment.

The cost of self-constructed items of property, plant and equipment includes the cost of materials, direct labour, the initial estimate, where relevant, of the costs of dismantling and removing the items and restoring the site on which they are located, and an appropriate proportion of production overheads and borrowing costs (see note 1(y)).

Gains or losses arising from the retirement or disposal of an item of property, plant and equipment are determined as the difference between the net disposal proceeds and the carrying amount of the item and are recognised in profit or loss on the date of retirement or disposal.

Depreciation is calculated to write off the cost of items of property, plant and equipment, less their estimated residual value, if any, using the straight line method over their estimated useful lives as follows:

Freehold land is not depreciated.
Buildings situated on freehold land are depreciated over their estimated useful lives, being no more than 40 years after the date of completion.
Buildings situated on leasehold land are depreciated over the shorter of the unexpired term of lease and their estimated useful lives, being no more than 40 years after the date of completion.
Leasehold improvements are depreciated over the shorter of the unexpired term of lease or 5 years.

–	Office equipment, furniture and fixtures	3 – 5 years
–	Plant and machinery	3 – 20 years
–	Motor vehicles	5 years

Where parts of an item of property, plant and equipment have different useful lives, the cost of the item is allocated on a reasonable basis between the parts and each part is depreciated separately. Both the useful life of an asset and its residual value, if any, are reviewed annually.

(j) Property under development

Property under development represents buildings under construction, which is stated at cost less impairment losses (see note 1(m)), and is not depreciated. Cost comprises the direct cost of construction and borrowings costs (see note 1(y)). Property under development is reclassified to the appropriate category of property, plant and equipment when substantially completed and ready for its intended use.

– I-13 –

APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

(k) Intangible assets (other than goodwill)

Expenditure on research activities is recognised as an expense in the period in which it is incurred. Expenditure on development activities is capitalised if the product or process is technically and commercially feasible and the Group has sufficient resources and the intention to complete development. The expenditure capitalised includes the costs of materials, direct labour, and an appropriate proportion of overheads and borrowing costs, where applicable (see note 1(y)). Capitalised development costs are stated at cost less accumulated amortisation and impairment losses (see note 1(m)). Other development expenditure is recognised as an expense in the period in which it is incurred.

Other intangible assets that are acquired by the Group are stated at cost less accumulated amortisation (where the estimated useful life is finite) and impairment losses (see note 1(m)). Expenditure on internally generated goodwill and brands is recognised as an expense in the period in which it is incurred.

Amortisation of intangible assets with finite useful lives is charged to profit or loss on a straight-line basis over the assets’ estimated useful lives. The following intangible assets with finite useful lives are amortised from the date they are available for use and their estimated useful lives are as follows:

–	Brand name	20 years
–	Computer software	2 – 10 years
–	Cooperation agreement	8 years
–	Customer relationships	10 – 11 years
–	Order backlog	2 – 6 years
–	Patents	5 – 6 years
–	Technical knowledge	5 – 10 years

Both the period and method of amortisation are reviewed annually.

(l) Leased assets

An arrangement, comprising a transaction or a series of transactions, is or contains a lease if the Group determines that the arrangement conveys a right to use a specific asset or assets for an agreed period of time in return for a payment or a series of payments. Such a determination is made based on an evaluation of the substance of the arrangement and is regardless of whether the arrangement takes the legal form of a lease.

(i) Classification of assets leased to the Group

Assets that are held by Group under leases which transfer to the Group substantially all the risks and rewards of ownership are classified as being held under finance leases. Leases which do not transfer substantially all the risks and rewards of ownership to the Group are classified as operating leases, except that land held for own use under an operating lease, the fair value of which cannot be measured separately from the fair value of a building situated thereon at the inception of the lease, is accounted for as being held under a finance lease, unless the building is also clearly held under an operating lease. For these purposes, the inception of the lease is the time that the lease was first entered into by the Group, or taken over from the previous lessee.

– I-14 –

APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

(ii) Operating lease charges

Where the Group has the use of assets held under operating leases, payments made under the leases are charged to profit or loss in equal instalments over the accounting periods covered by the lease term, except where an alternative basis is more representative of the pattern of benefits to be derived from the leased asset. Lease incentives received are recognised in profit or loss as an integral part of the aggregate net lease payments made. Contingent rentals are charged to profit or loss in the accounting period in which they are incurred.

The cost of acquiring land held under an operating lease is amortised on a straight-line basis over the period of the lease term.

(m) Impairment of assets

(i) Impairment of investments in equity securities and other receivables

Investments in equity securities and other current and non-current receivables that are stated at cost or amortised cost or are classified as available-for-sale securities are reviewed at the end of each reporting period to determine whether there is objective evidence of impairment. Objective evidence of impairment includes observable data that comes to the attention of the Group about one or more of the following loss events:

significant financial difficulty of the debtor;
a breach of contract, such as a default or delinquency in interest or principal payments;
it becoming probable that the debtor will enter bankruptcy or other financial reorganisation;
significant changes in the technological, market, economic or legal environment that have an adverse effect on the debtor; and
a significant or prolonged decline in the fair value of an investment in an equity instrument below its cost.

If any such evidence exists, any impairment loss is determined and recognised as follows:

For investment in associate accounted for under the equity method in the consolidated financial statements (see note 1(e)), the impairment loss is measured by comparing the recoverable amount of the investment with its carrying amount in accordance with note 1(m)(ii). The impairment loss is reversed if there has been a favourable change in the estimates used to determine the recoverable amount in accordance with note 1(m)(ii).
For unquoted equity securities carried at cost, the impairment loss is measured as the difference between the carrying amount of the financial asset and the estimated future cash flows, discounted at the current market rate of return for a similar financial asset where the effect of discounting is material. Impairment losses for equity securities carried at cost are not reversed.

– I-15 –

APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

–

For trade and other current receivables and other financial assets carried at amortised cost, the impairment loss is measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows, discounted at the financial asset’s original effective interest rate (i.e. the effective interest rate computed at initial recognition of these assets), where the effect of discounting is material. This assessment is made collectively where these financial assets share similar risk characteristics, such as similar past due status, and have not been individually assessed as impaired. Future cash flows for financial assets which are assessed for impairment collectively are based on historical loss experience for assets with credit risk characteristics similar to the collective group.

If in a subsequent period the amount of an impairment loss decreases and the decrease can be linked objectively to an event occurring after the impairment loss was recognised, the impairment loss is reversed through profit or loss. A reversal of an impairment loss shall not result in the asset’s carrying amount exceeding that which would have been determined had no impairment loss been recognised in prior years.

Impairment losses are written off against the corresponding assets directly, except for impairment losses recognised in respect of trade debtors and bills receivable included within trade and other receivables, whose recovery is considered doubtful but not remote. In this case, the impairment losses for doubtful debts are recorded using an allowance account. When the Group is satisfied that recovery is remote, the amount considered irrecoverable is written off against trade debtors and bills receivable directly and any amounts held in the allowance account relating to that debt are reversed. Subsequent recoveries of amounts previously charged to the allowance account are reversed against the allowance account. Other changes in the allowance account and subsequent recoveries of amounts previously written off directly are recognised in profit or loss.

(ii) Impairment of other assets

Internal and external sources of information are reviewed at the end of each reporting period to identify indications that the following assets may be impaired or, except in the case of goodwill, an impairment loss previously recognised no longer exists or may have decreased:

property, plant and equipment;
investment property;
property under development;
interest in leasehold land held for own use under operating leases;
goodwill;
other intangible assets;
non-current portion of prepayments; and
investments in subsidiaries in the Company’s statement of financial position.

If any such indication exists, the asset’s recoverable amount is estimated. In addition, for goodwill, the recoverable amount is estimated annually whether or not there is any indication of impairment.

– I-16 –

APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

–

Calculation of recoverable amount

The recoverable amount of an asset is the greater of its fair value less costs of disposal and value in use. 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. Where an asset does not generate cash inflows largely independent of those from other assets, the recoverable amount is determined for the smallest group of assets that generates cash inflows independently (i.e. a cash-generating unit).

–

Recognition of impairment losses

An impairment loss is recognised in profit or loss if the carrying amount of an asset, or the cash-generating unit to which it belongs, exceeds its recoverable amount. Impairment losses recognised in respect of cash-generating units are allocated first to reduce the carrying amount of any goodwill allocated to the cash-generating unit (or group of units) and then, to reduce the carrying amount of the other assets in the unit (or group of units) on a pro rata basis, except that the carrying value of an asset will not be reduced below its individual fair value less costs of disposal (if measurable), or value in use (if determinable).

–

Reversals of impairment losses

In respect of assets other than goodwill, an impairment loss is reversed if there has been a favourable change in the estimates used to determine the recoverable amount. An impairment loss in respect of goodwill is not reversed.

A reversal of an impairment loss is limited to the asset’s carrying amount that would have been determined had no impairment loss been recognised in prior years. Reversals of impairment losses are credited to profit or loss in the year in which the reversals are recognised.

(iii) Interim financial reporting and impairment

Under the Listing Rules, the Group is required to prepare an interim financial report in compliance with HKAS 34, Interim financial reporting , in respect of the first six months of the financial year. At the end of the interim period, the Group applies the same impairment testing, recognition, and reversal criteria as it would at the end of the financial year (see notes 1(m)(i) and (ii)).

Impairment losses recognised in an interim period in respect of goodwill, available-for-sale equity securities and unquoted equity securities carried at cost are not reversed in a subsequent period. This is the case even if no loss, or a smaller loss, would have been recognised had the impairment been assessed only at the end of the financial year to which the interim period relates. Consequently, if the fair value of an available-for-sale equity security increases in the remainder of the annual period, or in any other period subsequently, the increase is recognised in other comprehensive income and not profit or loss.

– I-17 –

APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

(n) Inventories

Inventories are carried at the lower of cost and net realisable value.

Cost is calculated using the weighted average cost formula and comprises all costs of purchase, costs of conversion and other costs incurred in bringing the inventories to their present location and condition.

Net realisable value is the estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated costs necessary to make the sale.

When inventories are sold, the carrying amount of those inventories is recognised as an expense in the period in which the related revenue is recognised. The amount of any write-down of inventories to net realisable value and all losses of inventories are recognised as an expense in the period the write-down or loss occurs. The amount of any reversal of any write-down of inventories is recognised as a reduction in the amount of inventories recognised as an expense in the period in which the reversal occurs.

(o) Construction contracts

Construction contracts are contracts specifically negotiated with a customer for the construction of an asset or a group of assets, where the customer is able to specify the major structural elements of the design. The accounting policy for contract revenue is set out in note 1(w)(iii). When the outcome of a construction contract can be estimated reliably, contract costs are recognised as an expense by reference to the stage of completion of the contract at the end of the reporting period. When it is probable that total contract costs will exceed total contract revenue, the expected loss is recognised as an expense immediately. When the outcome of a construction contract cannot be estimated reliably, contract costs are recognised as an expense in the period in which they are incurred.

Construction contracts in progress at the end of the reporting period are recorded at the net amount of costs incurred plus recognised profit less recognised losses and progress billings, and are presented in the statement of financial position as the “Gross amount due from customers for contract work” (as an asset) or the “Gross amount due to customers for contract work” (as a liability), as applicable. Progress billings not yet paid by the customer are included under “Trade debtors and bills receivable”. Amounts received before the related work is performed are presented as “Advances received” under “Trade and other payables”.

(p) Trade and other receivables, prepayments and gross amount due from customers for contract work

Trade and other receivables, prepayments and gross amount due from customers for contract work are initially recognised at fair value and thereafter stated at amortised cost using the effective interest method, less allowance for impairment of doubtful debts (see note 1(m)(i)), except where the receivables are interest-free loans made to related parties without any fixed repayment terms or the effect of discounting would be immaterial. In such cases, the receivables are stated at cost less allowance for impairment of doubtful debts.

(q) Interest-bearing borrowings

Interest-bearing borrowings are recognised initially at fair value less attributable transaction costs. Subsequent to initial recognition, interest-bearing borrowings are stated at amortised cost with any difference between the amount initially recognised and redemption value being recognised in profit or loss over the period of the borrowings, together with any interest and fees payable, using the effective interest method.

– I-18 –

APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

(r) Trade and other payables

Trade and other payables are initially recognised at fair value. Except for financial guarantee liabilities measured in accordance with note 1(v)(i), trade and other payables are subsequently stated at amortised cost unless the effect of discounting would be immaterial, in which case they are stated at cost.

(s) Cash and cash equivalents

Cash and cash equivalents comprise cash at bank and on hand, demand deposits with banks and other financial institutions, and short-term, highly liquid investments that are readily convertible into known amounts of cash and which are subject to an insignificant risk of changes in value, having been within three months of maturity at acquisition.

(t) Employee benefits

(i) Short-term employee benefits and contributions to defined contribution retirement plans

Salaries, annual bonuses, paid annual leave, contributions to defined contribution retirement plans and the cost of non-monetary benefits are accrued in the year in which the associated services are rendered by employees. Where payment or settlement is deferred and the effect would be material, these amounts are stated at their present values.

(ii) Share-based payments

Share option scheme and share award scheme

The fair value of share options and awarded shares granted to employees is recognised as an employee cost with a corresponding increase in employee share-based compensation reserve within equity. In respect of share options, the fair value is measured at grant date using the binomial model, taking into account the terms and conditions upon which the options were granted. In respect of awarded shares, the fair value is based on the closing price at the grant date. Where the employees have to meet vesting conditions before becoming unconditionally entitled to the share options and awarded shares, the total estimated fair value of the share options and awarded shares is spread over the vesting period, taking into account the probability that the share options and awarded shares will vest.

During the vesting period, the number of share options and awarded shares that is expected to vest is reviewed. Any resulting adjustment to the cumulative fair value recognised in prior years is charged/credited to the profit or loss for the year of the review, unless the original employee expenses qualify for recognition as an asset, with a corresponding adjustment to the employee share-based compensation reserve. On vesting date, the amount recognised as an expense is adjusted to reflect the actual number of share options and awarded shares that vest (with a corresponding adjustment to the employee share-based compensation reserve) except where forfeiture is only due to not achieving vesting conditions that relate to the market price of the Company’s shares.

No expense is recognised for share options or awarded shares that do not ultimately vest, except for equity settled transactions where vesting is conditional upon a market or non-vesting condition, which are treated as vested irrespective of whether or not the market or non-vesting condition is satisfied, provided that all other performance and/or service conditions are satisfied.

– I-19 –

APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

The equity amount for the share options is recognised in the employee share-based compensation reserve until either the option is exercised (when it is transferred to the share premium account) or the option expires (when it is released directly to retained profits).

Shares held for share award scheme

Where the shares of the Company are acquired under the share award scheme, the consideration paid, including any directly attributable incremental costs, is presented as “shares held for share award scheme reserve” and deducted from total equity.

When the awarded shares are transferred to the awardees upon vesting, the related weighted average costs of the awarded shares vested are credited to “shares held for share award scheme reserve” and the related employment costs of the awarded shares vested are debited to the employee share-based compensation reserve. The difference between the related weighted average cost and the related employment costs of the awarded shares is transferred to retained profits.

Where the shares held for share award scheme are revoked and the revoked shares are disposed of, the related gain or loss from disposal of revoked shares is transferred to retained profits and not recognised in profit or loss.

Where cash or non-cash dividend distribution is declared in respect of the shares held for share award scheme, such cash dividend or fair value of the non-cash dividend is transferred to retained profits with no gain or loss recognised in profit or loss.

(u) Income tax

Income tax for the year comprises current tax and movements in deferred tax assets and liabilities. Current tax and movements in deferred tax assets and liabilities are recognised in profit or loss except to the extent that they relate to items recognised in other comprehensive income or directly in equity, in which case the relevant amounts of tax are recognised in other comprehensive income or directly in equity, respectively.

Current tax is the expected tax payable on the taxable income for the year, using tax rates enacted or substantively enacted at the end of the reporting period, and any adjustment to tax payable in respect of previous years.

Deferred tax assets and liabilities arise from deductible and taxable temporary differences respectively, being the differences between the carrying amounts of assets and liabilities for financial reporting purposes and their tax bases. Deferred tax assets also arise from unused tax losses and unused tax credits.

Apart from certain limited exceptions, all deferred tax liabilities, and all deferred tax assets to the extent that it is probable that future taxable profits will be available against which the asset can be utilised, are recognised. Future taxable profits that may support the recognition of deferred tax assets arising from deductible temporary differences include those that will arise from the reversal of existing taxable temporary differences, provided those differences relate to the same taxation authority and the same taxable entity, and are expected to reverse either in the same period as the expected reversal of the deductible temporary difference or in periods into which a tax loss arising from the deferred tax asset can be carried back or forward. The same criteria are adopted when determining whether existing taxable temporary differences support the recognition of deferred tax assets arising from unused tax losses and credits, that is, those differences are taken into account if they relate to the same taxation authority and the same taxable entity, and are expected to reverse in a period, or periods, in which the tax loss or credit can be utilised.

– I-20 –

APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

The limited exceptions to recognition of deferred tax assets and liabilities are those temporary differences arising from goodwill not deductible for tax purposes, the initial recognition of assets or liabilities that affect neither accounting nor taxable profit (provided they are not part of a business combination), and temporary differences relating to investments in subsidiaries to the extent that, in the case of taxable differences, the Group controls the timing of the reversal and it is probable that the differences will not reverse in the foreseeable future, or in the case of deductible differences, unless it is probable that they will reverse in the future.

The amount of deferred tax recognised is measured based on the expected manner of realisation or settlement of the carrying amount of the assets and liabilities, using tax rates enacted or substantively enacted at the end of the reporting period. Deferred tax assets and liabilities are not discounted.

The carrying amount of a deferred tax asset is reviewed at the end of each reporting period and is reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow the related tax benefit to be utilised. Any such reduction is reversed to the extent that it becomes probable that sufficient taxable profits will be available.

Current tax balances and deferred tax balances, and movements therein, are presented separately from each other and are not offset. Current tax assets are offset against current tax liabilities, and deferred tax assets against deferred tax liabilities, if the Company or the Group has the legally enforceable right to set off current tax assets against current tax liabilities and the following additional conditions are met:

in the case of current tax assets and liabilities, the Company or the Group intends either to settle on a net basis, or to realise the asset and settle the liability simultaneously; or
in the case of deferred tax assets and liabilities, if they relate to income taxes levied by the same taxation authority on either:
the same taxable entity; or
different taxable entities, which, in each future period in which significant amounts of deferred tax liabilities or assets are expected to be settled or recovered, intend to realise the current tax assets and settle the current tax liabilities on a net basis or realise and settle simultaneously.

(v) Financial guarantees issued, provisions and contingent liabilities

(i) Financial guarantees issued

Financial guarantees are contracts that require the issuer (i.e. the guarantor) to make specified payments to reimburse the beneficiary to the guarantee (the “ holder ”) for a loss the holder incurs because a specified debtor fails to make payment when due in accordance with the terms of a debt instrument.

Where the Group issues a financial guarantee, the fair value of the guarantee is initially recognised as deferred income within trade and other payables. The fair value of financial guarantees issued at the time of issuance is determined by reference to fees charged in an arm’s length transaction for similar services, when such information is obtainable, or is otherwise estimated by reference to interest rate differentials, by comparing the actual rates charged by lenders when the guarantee is made available with the estimated rates that lenders would have charged, had the guarantees not been available, where reliable estimates of such information can be made. Where consideration is received or receivable for the issuance of the guarantee, the consideration is recognised in accordance with the Group’s policies applicable to that category of asset. Where no such consideration is received or receivable, an immediate expense is recognised in profit or loss on initial recognition of any deferred income.

– I-21 –

APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

The amount of the guarantee initially recognised as deferred income is amortised in profit or loss over the term of the guarantee as income from financial guarantees issued. In addition, provisions are recognised in accordance with note 1(v)(ii) if and when (i) it becomes probable that the holder of the guarantee will call upon the Group under the guarantee, and (ii) the amount of that claim on the Group is expected to exceed the amount currently carried in trade and other payables in respect of that guarantee i.e. the amount initially recognised, less accumulated amortisation.

(ii) Other provisions and contingent liabilities

Provisions are recognised for other liabilities of uncertain timing or amount when the Group or the Company has a legal or constructive obligation arising as a result of a past event, it is probable that an outflow of economic benefits will be required to settle the obligation and a reliable estimate can be made. Where the time value of money is material, provisions are stated at the present value of the expenditure expected to settle the obligation.

Where it is not probable that an outflow of economic benefits will be required, or the amount cannot be estimated reliably, the obligation is disclosed as a contingent liability, unless the probability of outflow of economic benefits is remote. Possible obligations, whose existence will only be confirmed by the occurrence or non-occurrence of one or more future events are also disclosed as contingent liabilities unless the probability of outflow of economic benefits is remote.

A provision for warranties is recognised when the underlying products or services are sold. The provision is based on historical warranty data and a weighting of all possible outcomes against their associated probabilities.

(w) Revenue recognition

Revenue is measured at the fair value of the consideration received or receivable. Provided it is probable that the economic benefits will flow to the Group and the revenue and costs, if applicable, can be measured reliably, revenue is recognised in profit or loss as follows:

(i) Sale of goods

Revenue is recognised when the customer has accepted the goods and the related risks and rewards of ownership. Revenue excludes value added tax or other sales taxes and is after deduction of any trade discounts.

(ii) Engineering services fee income

Engineering services fee income is recognised when the related services are rendered.

(iii) Contract revenue

When the outcome of a construction contract can be estimated reliably, revenue from a fixed price contract is recognised using the percentage of completion method, measured by reference to the percentage of contract costs incurred to date to estimated total contract costs for the contract. When the outcome of a construction contract cannot be estimated reliably, revenue is recognised only to the extent of contract costs incurred that it is probable will be recoverable.

– I-22 –

APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

(iv) Rental income from operating leases

Rental income receivable under operating leases is recognised in profit or loss in equal instalments over the periods covered by the lease term, except where an alternative basis is more representative of the pattern of benefits to be derived from the use of the leased asset. Lease incentives granted are recognised in profit or loss as an integral part of the aggregate net lease payments receivable. Contingent rentals are recognised as income in the accounting period in which they are earned.

(v) Dividends

Dividend income from unlisted investments is recognised when the shareholder’s right to receive payment is established.

(vi) Interest income

Interest income is recognised as it accrues using the effective interest method.

(x) Translation of foreign currencies

Foreign currency transactions during the year are translated at the foreign exchange rates ruling at the transaction dates. Monetary assets and liabilities denominated in foreign currencies are translated at the foreign exchange rates ruling at the end of the reporting period. Exchange gains and losses are recognised in profit or loss.

Non-monetary assets and liabilities that are measured in terms of historical cost in a foreign currency are translated using the foreign exchange rates ruling at the transaction dates.

The results of the foreign operations are translated into United States dollars at the exchange rates approximating the foreign exchange rates ruling at the dates of the transactions. Statement of financial position items, including goodwill arising on consolidation of foreign operations, are translated into United States dollars at the closing exchange rates at the end of the reporting period. The resulting exchange differences are recognised in other comprehensive income and accumulated separately in equity in the exchange reserve.

On disposal of a foreign operation, the cumulative amount of the exchange differences relating to that foreign operation is reclassified from equity to profit or loss when the profit or loss on disposal is recognised.

(y) Borrowing costs

Borrowing costs that are directly attributable to the acquisition, construction or production of an asset which necessarily takes a substantial period of time to get ready for its intended use or sale are capitalised as part of the cost of that asset. Other borrowing costs are expensed in the period in which they are incurred.

The capitalisation of borrowing costs as part of the cost of a qualifying asset commences when expenditure for the asset is being incurred, borrowing costs are being incurred and activities that are necessary to prepare the asset for its intended use or sale are in progress. Capitalisation of borrowing costs is suspended or ceases when substantially all the activities necessary to prepare the qualifying asset for its intended use or sale are interrupted or complete.

– I-23 –

APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

(z) Related parties

(1) A person, or a close member of that person’s family, is related to the Group if that person:
(i) has control or joint control over the Group;
(ii) has significant influence over the Group; or
(iii) is a member of the key management personnel of the Group or the Group’s parent.
(2) An entity is related to the Group if any of the following conditions applies:
(i) The entity and the Group are members of the same group (which means that each parent, subsidiary and fellow subsidiary is related to the others).
(ii) One entity is an associate or joint venture of the other entity (or an associate or joint venture of a member of a group of which the other entity is a member).
(iii) Both entities are joint ventures of the same third party.
(iv) One entity is a joint venture of a third entity and the other entity is an associate of the third entity.
(v) The entity is a post-employment benefit plan for the benefit of employees of either the Group or an entity related to the Group.
(vi) The entity is controlled or jointly controlled by a person identified in (1).
(vii) A person identified in (1)(i) has significant influence over the entity or is a member of the key management personnel of the entity (or of a parent of the entity).
(viii) The entity, or any member of a group of which it is a part, provides key management personnel services to the Group or to the Group’s parent.

Close members of the family of a person are those family members who may be expected to influence, or be influenced by, that person in their dealings with the entity.

(aa) Segment reporting

Operating segments, and the amounts of each segment item reported in the financial statements, are identified from the financial information provided regularly to the Group’s most senior executive management for the purposes of allocating resources to, and assessing the performance of, the Group’s various lines of business and geographical locations.

Individually material operating segments are not aggregated for financial reporting purposes unless the segments have similar economic characteristics and are similar in respect of the nature of products and services, the nature of production processes, the type or class of customers, the methods used to distribute the products or provide the services, and the nature of the regulatory environment. Operating segments which are not individually material may be aggregated if they share a majority of these criteria.

2. ACCOUNTING JUDGEMENTS AND ESTIMATES

Judgements and estimates are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances.

– I-24 –

APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

Notes 13, 27 and 29 contain information about the assumptions and their risk factors relating to goodwill impairment, fair value of share options granted and financial instruments. Other key sources of estimation uncertainty are as follows:

(a) Useful lives of property, plant and equipment, investment properties and intangible assets

The Group determines the estimated useful lives and related depreciation/amortisation charges for the property, plant and equipment, investment properties and other intangible assets. This estimate is based on the historical experience of the actual useful lives of the property, plant and equipment, investment properties and other 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 charge where useful lives are less than previously estimated lives, or it will write-off or write-down technically obsolete or non-strategic assets that have been abandoned or sold.

(b) Impairment losses on trade and other receivables

The Group recognises impairment losses on doubtful debts based on an assessment of the recoverability of trade debtors and other receivables. Impairments are applied to trade debtors and other receivables where events or changes in circumstances indicate that the balances may not be collectible. The identification of doubtful debts requires the use of judgement and estimates. Where the expectation is different from the original estimate, such difference will impact carrying value of receivables and doubtful debts expenses in the period in which such estimate has been changed.

(c) Other impairment losses

If circumstances indicate that the carrying value of investments in subsidiaries, property, plant and equipment, investment properties, property under development, interest in leasehold land held for own use under operating leases, goodwill and other intangible assets may not be recoverable, these assets may be considered impaired, and an impairment loss may be recognised in accordance with HKAS 36, Impairment of assets. The carrying amounts of these assets are reviewed periodically in order to assess whether the recoverable amounts have declined below the carrying amounts. These assets are tested for impairment whenever events or changes in circumstances indicate that their recorded carrying amount may not be recoverable. When such a decline has occurred, the carrying amount is reduced to recoverable amount. The recoverable amount is the greater of the fair value less costs of disposal and the value in use. It is difficult to estimate precisely fair value less costs of disposal because quoted market prices for the Group’s assets are not readily available. In determining the value in use, expected cash flows generated by the asset are discounted to their present value, which requires significant judgement relating to revenue and amount of operating costs. The Group uses all readily available information in determining an amount that is a reasonable approximation of recoverable amount, including estimates based on reasonable and supportable assumptions and projections of revenue and amount of operating costs.

– I-25 –

APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

(d) Net realisable value of inventories

The Group recognises write-down on inventories based on an assessment of the net realisable value of the inventories. Write-down is applied to the inventories where events or changes in circumstances indicate that the net realisable value is less than cost. The determination of net realisable value requires the use of judgement and estimates. Where the expectation is different from the original estimates, such difference will impact carrying value of the inventories and write-down on inventories charged to profit or loss in the period in which such estimate has been changed.

(e) Income taxes

Determining income tax provisions involves judgement on the future tax treatment of certain transactions. The Group carefully evaluates tax implications of transactions and tax provisions are set up accordingly. The tax treatment of such transactions is reconsidered periodically to take into account all changes in tax legislations. Deferred tax assets are recognised for temporary deductible differences. As those deferred tax assets can only be recognised to the extent that it is probable that future taxable profits will be available against which the unused tax credits can be utilised, management’s judgement is required to assess the probability of future taxable profits. Management reassess these estimates at the end of each reporting period. Additional deferred tax assets are recognised if it becomes probable that future taxable profits will allow the deferred tax asset to be recovered.

(f) Construction contracts

As explained in the accounting policy notes 1(o) and 1(w)(iii), revenue and profit recognition on an incompleted project is dependent on estimating the total outcome of the construction contract, as well as the work done to date. Based on the Group’s recent experience and the nature of the construction activity undertaken by the Group, the Group makes estimates of the point at which it considers the work is sufficiently advanced such that the costs to complete and revenue can be reliably estimated.

Based on the latest information available in respect of the market environment, the Group prepares budgets for construction contracts individually and the budget, which is used in the Group’s financial reporting, is reviewed regularly. Foreseeable losses are provided when identified.

Material adjustments to the budgeted costs and the estimated outcome of construction contracts may occur in future if there is a significant change in the market environment.

– I-26 –

APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

3. REVENUE AND SEGMENT REPORTING

(a) Revenue

The principal activities of the Group are the design, manufacture, installation and commissioning of capital equipment and packages on land and offshore rigs and oilfield expendables and supplies and the provision of engineering services.

Revenue represents the invoiced value of goods supplied to customers, revenue from construction contracts and revenue from engineering services. The amount of each significant category of revenue recognised during the year is as follows:

Capital equipment and packages – Sales of capital equipment – Construction contracts revenue – Rig products and technology – Rig turnkey solutions Oilfield expendables and supplies – Sales of expendables and supplies Engineering services – Service fee income	2016 $’000 7,989 32,669 35,409 76,067 60,874 5,590 142,531	2015 $’000 15,260 49,451 57,359
		122,070 58,500 14,329
		194,899

The Group’s customer base is diversified and includes two customers (2015: two customers) with whom transactions have exceeded 10% of the Group’s revenues. In 2016, revenues from sales of capital equipment and packages and oilfield expendables and supplies to these customers, including sales to entities which are known to the Group to be under common control with these customers, amounted to approximately $33 million and $32 million respectively (2015: $53 million and $23 million respectively). Details of concentrations of credit risk arising from this customer are set out in note 29(a).

– I-27 –

APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

(b) Segment reporting

The Group manages its business by divisions, which are organised by a mixture of both business lines (products and services) and geography. In a manner consistent with the way in which information is reported internally to the Group’s most senior executive management for the purposes of resource allocation and performance assessment, the Group has presented the following three reportable segments. No operating segments have been aggregated to form the following reportable segments.

– Capital equipment and packages: the design, manufacturing, installation and commissioning of capital equipment and packages on land and offshore rigs and plug and abandonment equipment – Oilfield expendables and the manufacturing and trading of oilfield supplies: expendables and supplies – Engineering services: the provision of engineering services

–

(i) Segment results, assets and liabilities

For the purposes of assessing segment performance and allocating resources between segments, the Group’s senior executive management monitors the results, assets and liabilities attributable to each reportable segment on the following bases:

Segment assets include all tangible assets, goodwill, intangible assets and current assets with the exception of interest in associate, other financial assets, cash at bank and in hand, pledged bank deposits, tax balances and other unallocated head office and corporate assets. Segment liabilities include trade and other payables and provisions attributable to the activities of the individual segment, with the exception of bank loans and other borrowings, tax balances and other unallocated head office and corporate liabilities.

Revenue and expenses are allocated to the reportable segments with reference to revenue generated by those segments and the expenses incurred by those segments or which otherwise arise from the depreciation or amortisation of assets attributable to those segments.

The measure used for reporting segment profit is “segment results” i.e. “adjusted earnings before finance costs and taxes” of individual segment. To arrive at segment results, the Group’s earnings are further adjusted for finance costs and items not specifically attributed to individual segment, such as share of results of associate, directors’ and auditors’ remuneration and other head office or corporate income and expenses.

In addition to receiving segment information concerning segment results, management is provided with segment information concerning revenue (including inter-segment revenue), depreciation and amortisation and additions to non-current segment assets used by the segments in their operations. Inter-segment revenue is priced with reference to prices charged to external parties for similar orders.

– I-28 –

APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

Information regarding the Group’s reportable segments as provided to the Group’s most senior executive management for the purposes of resource allocation and assessment of segment performance for the years ended 31 December 2016 and 2015 is set out below.

Revenue from external customers Inter-segment revenue Reportable segment revenue Reportable segment results Depreciation and amortisation for the year Reportable segment assets Additions to non-current segment assets during the year Reportable segment liabilities	Capital equipment and packages 2016 2015 $’000 $’000 76,067 122,070 1,675 15,654 77,742 137,724 (51,838) 4,532 4,552 4,926 293,177 426,101 5,258 6,438 (219,446) (258,255)	Oilfield expendables and supplies 2016 2015 $’000 $’000 60,874 58,500 967 6,205 61,841 64,705 (46,084) 1,266 1,947 957 78,984 55,905 2,672 17,407 (37,040) (16,182)	Engineering services 2016 2015 $’000 $’000 5,590 14,329 3,450 1,291 9,040 15,620 (3,894) 2,423 1,181 1,485 11,340 17,657 – 7 (1,844) (3,295)	Total 2016 2015 $’000 $’000 142,531 194,899 6,092 23,150 148,623 218,049 (101,816) 8,221 7,680 7,368 383,501 499,663 7,930 23,852 (258,330) (277,732)	Total 2016 2015 $’000 $’000 142,531 194,899 6,092 23,150 148,623 218,049 (101,816) 8,221 7,680 7,368 383,501 499,663 7,930 23,852 (258,330) (277,732)
					218,049

					8,221

					7,368 499,663 23,852 (277,732)

– I-29 –

APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

(ii) Reconciliation of reportable segment revenue, profit or loss, assets and liabilities

Revenue Reportable segment revenue Elimination of inter-segment revenue Consolidated revenue (note 3(a)) (Loss)/profit Segment results Finance costs Unallocated head office and corporate income and expenses Consolidated (loss)/profit before taxation Assets Reportable segment assets Interest in associate Other financial assets Cash at bank and in hand Pledged bank deposits Deferred tax assets Tax recoverable Unallocated head office and corporate assets Consolidated total assets Liabilities Reportable segment liabilities Bank loans and other borrowings Tax payable Deferred tax liabilities Unallocated head office and corporate liabilities Consolidated total liabilities	2016 $’000 148,623 (6,092) 142,531 (101,816) (4,363) (5,133) (111,312) 383,501 182 2,226 9,952 1,505 13,706 241 1,511 412,824 (258,330) (49,317) (7,835) (131) (1,137) (316,750)	2015 $’000 218,049 (23,150)
		194,899

		8,221 (4,545) (1,641)
		2,035

		499,663 193 4,661 46,505 5,045 12,036 132 1,494
		569,729

		(277,732) (66,910) (5,326) (268) (498)
		(350,734)

– I-30 –

APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

(iii) Geographic information

The following table sets out information about the geographical locations of (i) the Group’s revenue from external customers and (ii) the Group’s property, plant and equipment, investment properties, property under development, interest in leasehold land held for own use under operating leases, goodwill, other intangible assets, interest in associate, other financial asset and non-current portion of prepayments (“specified noncurrent assets”). The geographical location of customers is based on the location of the customers. The geographical location of the specified non-current assets is based on the physical location of the asset, in the case of property, plant and equipment, investment properties, property under development and interest in leasehold land held for own use under operating leases, the location of the operation to which they are allocated, in the case of goodwill and intangible assets, and the location of operations, in the case of interest in associate, other financial asset and non-current portion of prepayments.

Hong Kong Mainland China North America South America Europe Singapore Indonesia Others (other part of Asia, India, Russia etc.)	Revenue from external customers 2016 2015 $’000 $’000 – – 69,230 61,373 13,790 27,483 39,333 26,832 1,500 4,535 4,800 17,446 8,208 56,129 5,670 1,101 142,531 194,899	Specified non-current assets 2016 2015 $’000 $’000 226 195 53,680 58,803 15,056 17,937 50 389 2,267 24,435 48 8 – – 1,024 1,788 72,351 103,555	Specified non-current assets 2016 2015 $’000 $’000 226 195 53,680 58,803 15,056 17,937 50 389 2,267 24,435 48 8 – – 1,024 1,788 72,351 103,555
			103,555

4. OTHER REVENUE AND NET INCOME

Interest income Rental income Net foreign exchange gain Others	2016 $’000 371 251 2,470 2,593 5,685	2015 $’000 186 – 2,279 1,377
		3,842

– I-31 –

APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

5. (LOSS)/PROFIT BEFORE TAXATION

(Loss)/profit before taxation is arrived at after charging/(crediting):

(a) Finance costs Interest on bank loans and other borrowings Less: Interest expense capitalised into property under development (b) Staff costs# Contributions to defined contribution retirement plans Equity-settled share-based payment expenses (note 27) Salaries, wages and other benefits (c) Other items* Amortisation of interest in leasehold land held for own use under operating leases# (note 12) Amortisation of intangible assets (note 14) Depreciation# – property, plant and equipment_(note 10) – investment properties (note 10) Impairment losses on doubtful debts (note 19(b)) Impairment losses on other financial assets (note 17) Impairment losses on goodwill (note 13) Impairment losses on gross amount due from customers for contract work (note 20) Write-off of trade debtors Research and development costs Net foreign exchange gain Loss on disposal of property, plant and equipment Auditors’ remuneration Minimum lease payments under operating leases in respect of land and buildings Cost of inventories# (note 18(b))_	2016 $’000 4,785 (422) 4,363 3,965 72 26,290 30,327 211 2,294 5,628 347 56,864 2,435 19,621 29,916 16 5,662 (2,470) 520 451 2,689 103,437	2015 $’000 5,425 (880)
		4,545

		4,536 323 38,870
		43,729

		226 2,632 5,161 – 1,941 – – – 44 4,328 (2,279) 476 436 4,071 137,663

The borrowing costs have been capitalised at a rate of 5.64% – 7.06% per annum (2015: 6.87% – 7.09% per annum).

Cost of inventories includes $15,462,000 (2015: $26,253,000) relating to staff costs, depreciation and amortisation expenses which amount is also included in the respective total amounts disclosed separately above or in note 5(b) for each of these types of expenses.

– I-32 –

APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

6. INCOME TAX IN THE CONSOLIDATED STATEMENT OF PROFIT OR LOSS

(a) Income tax in the consolidated statement of profit or loss represents:

Current tax Provision for the year – Hong Kong Profits Tax – PRC enterprise income tax – Overseas corporation income tax Over-provision in respect of prior years Withholding tax PRC withholding tax Deferred tax Origination of temporary differences (note 24(b))	2016 $’000 1,159 833 707 2,699 (769) 1,930 492 (2,158) 264	2015 $’000 727 243 1,301
		2,271 (527)
		1,744 – (1,006)
		738

The provision for Hong Kong Profits Tax for 2016 is calculated at 16.5% (2015: 16.5%) of the estimated assessable profits for the year. Taxation for subsidiaries in other jurisdictions is charged at the appropriate current rates of taxation ruling in relevant jurisdictions. During the year, certain PRC subsidiaries are subject to tax at a reduced rate of 15% (2015: 15%) under the relevant PRC tax rules and regulations.

(b) Reconciliation between tax expense and accounting (loss)/profit at applicable tax rates:

(Loss)/profit before taxation Notional tax on (loss)/profit before taxation, calculated at the rates applicable to profits in the jurisdictions concerned Tax effect of non-deductible expenses Tax effect of non-taxable income Tax effect of profits entitled to tax reductions in the PRC Tax effect of unused tax losses not recognised Tax effect of other temporary differences not recognised Over-provision in prior years Withholding tax Actual tax expense	2016 $’000 (111,312) (21,579) 6,254 (902) (1,101) 1,503 16,366 (769) 492 264	2015 $’000 2,035

		509 733 (1,066) (1,119) 2,208 – (527) –
		738

– I-33 –

APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

7. DIRECTORS’ EMOLUMENTS

Directors’ emoluments disclosed pursuant to section 383(1) of the Hong Kong Companies Ordinance and Part 2 of the Companies (Disclosure of Information about Benefits of Directors) Regulation are as follows:

Executive director: Mr Jiang Bing Hua Independent non-executive directors: Mr Bian Junjiang Mr Chan Ngai Sang, Kenny Mr Guan Zhichuan Mr Robert William Fogal Jr. Non-executive directors: Mr Jiang Longsheng Mr Brian Chang Mr Yu Yuqun Mr Zhang Menggui (note) Mr Wang Jianzhong	Directors’ fees 2016 2015 $’000 $’000 – – 15 15 31 31 15 15 15 15 15 15 15 15 8 15 10 – 8 – 132 121	Salaries, allowances and benefits in kind 2016 2015 $’000 $’000 701 398 – – – – – – – – – – – – – – 731 446 – – 1,432 844	Retirement scheme contributions 2016 2015 $’000 $’000 17 8 – – – – – – – – – – – – – – 13 9 – – 30 17	Total 2016 2015 $’000 $’000 718 406 15 15 31 31 15 15 15 15 15 15 15 15 8 15 754 455 8 – 1,594 982	Total 2016 2015 $’000 $’000 718 406 15 15 31 31 15 15 15 15 15 15 15 15 8 15 754 455 8 – 1,594 982
					982

Note: Mr Zhang Menggui was re-designated from executive director to non-executive director on 28 April 2016.

8. INDIVIDUALS WITH HIGHEST EMOLUMENTS

Of the five individuals with the highest emoluments, two (2015: two) are directors whose emoluments are disclosed in note 7. The aggregate of the emoluments in respect of the other three (2015: three) individuals are as follows:

Salaries and other emoluments Share-based payments Retirement scheme contributions	2016 $’000 889 – 68 957	2015 $’000 789 95 20 904

– I-34 –

APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

The emoluments of the three (2015: three) individuals with the highest emoluments are within the following bands:

			2016	2015
			Number of	Number of
			individuals	individuals
HK$1,500,001	–	HK$2,000,000	1	2
HK$2,000,001	–	HK$2,500,000	1	–
HK$3,000,001	–	HK$3,500,000	–	1
HK$3,500,001	–	HK$4,000,000	1	–

9. (LOSS)/EARNINGS PER SHARE

(a) Basic (loss)/earnings per share

The calculation of basic (loss)/earnings per share is based on the loss attributable to ordinary equity shareholders of the Company of $110,450,000 (2015: profit of $2,097,000) and the weighted average number of 702,025,000 (2015: 702,888,000) ordinary shares in issue during the year excluding ordinary shares purchased by the Group, calculated as follows:

Weighted average number of ordinary shares

Issued ordinary shares at 1 January Effect of share options exercised Effect of purchase of shares held for share award scheme Weighted average number of ordinary shares at 31 December	2016 ’000 707,120 – (5,095) 702,025	2015 ’000 704,915 2,072 (4,099)
		702,888

(b) Diluted (loss)/earnings per share

Diluted loss per share equals to basic loss per share for the year ended 31 December 2016 because the potential ordinary shares outstanding were anti-dilutive. The calculation of diluted earnings per share for the year ended 31 December 2015 is based on the profit attributable to ordinary equity shareholders of the Company of $2,097,000 and the weighted average number of 708,594,000 ordinary shares, calculated as follows:

Weighted average number of ordinary shares (diluted)

Weighted average number of ordinary shares at 31 December Effect of deemed issue of shares under the Company’s share option schemes for nil consideration (note 27) Weighted average number of ordinary shares (diluted) at 31 December	2016 ’000 702,025 1,614 703,639	2015 ’000 702,888 5,706
		708,594

– I-35 –

APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

10. PROPERTY, PLANT AND EQUIPMENT AND INVESTMENT PROPERTIES

(a) Reconciliation of carrying amount

Cost: At 1 January 2015 Exchange adjustments Additions Disposals At 31 December 2015 At 1 January 2016 Exchange adjustments Additions Transferred from property under development_(note 11)_ Transferred to investment properties Disposals At 31 December 2016 Accumulated depreciation: At 1 January 2015 Exchange adjustments Charge for the year Written back on disposals At 31 December 2015 At 1 January 2016 Exchange adjustments Charge for the year Transferred to investment properties Written back on disposals At 31 December 2016	Land and buildings held for own use carried at cost $’000 20,792 (1,025) 7,785 – 27,552 - - - - - - 27,552 (1,761) – 20,053 (9,065) (174) 36,605 - - - - - - 4,479 (266) 924 – 5,137 - - - - - - 5,137 (372) 1,317 (361) (64) 5,657 - - - - - -	Office equipment, furniture and fixtures $’000 7,991 (434) 4,419 (329) 11,647 - - - - - - 11,647 (503) 532 238 – (631) 11,283 - - - - - - 3,940 (224) 1,481 (265) 4,932 - - - - - - 4,932 (328) 1,812 – (501) 5,915 - - - - - -	Plant and machinery $’000 22,105 (958) 2,443 (1,839) 21,751 - - - - - - 21,751 (1,237) 185 5,053 – (3,395) 22,357 - - - - - - 9,630 (443) 2,102 (686) 10,603 - - - - - - 10,603 (514) 2,194 – (2,645) 9,638 - - - - - -	Leasehold improvements $’000 1,528 (64) 911 (1) 2,374 - - - - - - 2,374 (48) 178 96 (358) (315) 1,927 - - - - - - 1,023 (46) 211 (1) 1,187 - - - - - - 1,187 (38) 76 (127) (295) 803 - - - - - -	Motor vehicles $’000 3,421 (168) 394 (700) 2,947 - - - - - - 2,947 (126) 13 – – (441) 2,393 - - - - - - 2,275 (119) 443 (587) 2,012 - - - - - - 2,012 (102) 229 – (365) 1,774 - - - - - -	Sub-total $’000 55,837 (2,649) 15,952 (2,869) 66,271 - - - - - - 66,271 (3,675) 908 25,440 (9,423) (4,956) 74,565 - - - - - - 21,347 (1,098) 5,161 (1,539) 23,871 - - - - - - 23,871 (1,354) 5,628 (488) (3,870) 23,787 - - - - - -	Investment properties $’000 – – – – – - - - - - - – (418) – – 9,423 – 9,005 - - - - - - – – – – – - - - - - - – (37) 347 488 – 798 - - - - - -	Total $’000 55,837 (2,649) 15,952 (2,869)
								66,271 - - - - - - 66,271 (4,093) 908 25,440 – (4,956)
								83,570 - - - - - - 21,347 (1,098) 5,161 (1,539)
								23,871 - - - - - -
								23,871 (1,391) 5,975 – (3,870)
								24,585 - - - - - -

Net book value:

At 31 December 2016 At 31 December 2015

30,948 22,415	5,368 6,715	12,719 11,148	1,124 1,187	619 935	50,778 42,400	8,207 –	58,985

							42,400

– I-36 –

APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

The Group has submitted applications for the issue of property ownership certificate in respect of buildings held for own use carried at cost of $2,128,000 to the relevant PRC government authorities. At 31 December 2016, the certificate has not yet been issued.

During the year ended 31 December 2016, the use of certain premises of the Group has been changed from owner-occupation to leasing out for rental income. The premises with carrying amount of $8,935,000 were transferred from property, plant and equipment to investment properties at the date of the end of owner-occupation.

(b) The analysis of the net book value of properties is as follows:

Outside Hong Kong –freehold –medium-term leases	2016 $’000 9,337 29,818 39,155	2015 $’000 8,475 13,940
		22,415

Fair value measurement of investment properties

(i) Fair value hierarchy

The following table presents the fair value of the Group’s properties measured at the end of the reporting period on a recurring basis, categorised into the three-level fair value hierarchy as defined in HKFRS 13, Fair value measurement . The level into which a fair value measurement is classified is determined with reference to the observability and significance of the inputs used in the valuation technique as follows:

Level 1 valuations: Fair value measured using only Level 1 inputs i.e. unadjusted quoted prices in active markets for identical assets or liabilities at the measurement date
Level 2 valuations: Fair value measured using Level 2 inputs i.e. observable inputs which fail to meet Level 1, and not using significant unobservable inputs. Unobservable inputs are inputs for which market data are not available
Level 3 valuations: Fair value measured using significant unobservable inputs

	Fair value at	Fair value at	Fair value measurements as at	Fair value measurements as at
	31	December	31 December 2016 categorised into
		2016	Level 1	Level 2	Level 3
		$’000	$’000	$’000	$’000
Recurring fair value measurement
Investment properties:
– Mainland China		9,442	–	–	9,442

During the year ended 31 December 2016, there were no transfers between Level 1 and Level 2, or transfers into or out of Level 3. The Group’s policy is to recognise transfers between levels of fair value hierarchy as at the end of the reporting period in which they occur.

– I-37 –

APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

(ii) Information about Level 3 fair value measurements

	Valuation	Unobservable
	techniques	input	Rate
Investment properties	Replacement cost	Profit margin	10%
Industrial	method	for construction
– Mainland China		costs
Investment properties	Income approach	Occupancy rate	95%
Commercial
– Mainland China

The fair value of industrial investment properties located in the Mainland China is determined using replacement cost method by reference to construction costs of comparable properties by a construction company on a price per square metre basis, adjusted for a profit margin for such construction costs.

The fair value of commercial investment properties located in the Mainland China is determined using income approach by reference to rental income of comparable properties on a price per square metre basis, adjusted for an occupancy rate for such leases.

Assets leased out under operating leases

The Group leases out investment properties under operating leases. The leases typically run for an initial period of 3 to 4 years, with an option to renew the lease after that date at which time all terms are renegotiated. None of the leases includes contingent rentals.

All properties held under operating leases that would otherwise meet the definition of investment property are classified as investment properties.

Total future minimum lease payments under non-cancellable operating leases are receivable as follows:

Within 1 year After 1 year but within 5 years	2016 $’000 405 1,014 1,419	2015 $’000 – –
		–

– I-38 –

APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

11. PROPERTY UNDER DEVELOPMENT

The Group’s properties under development are situated on two pieces of leasehold lands in Qingdao, the PRC, held under land use rights for a period of 50 years up to 2063.

During the year ended 31 December 2016, completed properties of $25,440,000 were transferred to property, plant and equipment (note 10).

12. INTEREST IN LEASEHOLD LAND HELD FOR OWN USE UNDER OPERATING LEASES

Cost: At 1 January Exchange adjustments At 31 December Accumulated amortisation: At 1 January Exchange adjustments Charge for the year At 31 December Net book value: At 31 December	2016 $’000 9,198 (598) 8,600 - - - - - - - - - 1,135 (85) 211 1,261 - - - - - - - - - 7,339	2015 $’000 9,695 (497)
		9,198 - - - - - - - - - 969 (60) 226
		1,135 - - - - - - - - -
		8,063

The cost of interest in leasehold land held for own use under operating leases located in the PRC is amortised over the lease term of not more than 50 years on a straight-line basis.

– I-39 –

APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

13. GOODWILL

Cost At 1 January Exchange adjustments Impairment losses At 31 December	2016 $’000 22,996 (3,375) (19,621) –	2015 $’000 24,089 (1,093) –
		22,996

Impairment test for cash-generating units containing goodwill

Goodwill is allocated to the Group’s cash generating unit (“ CGU ”) identified according to the reportable segment as follow:

				2016	2015
				$’000	$’000
Capital	equipment	and	packages	–	22,996

The recoverable amount of the CGU is determined based on value-in-use calculations. These calculations use cash flow projections based on financial budgets approved by management covering a five-year period. Cash flows beyond the five-year period are extrapolated using the estimated rate stated below. The growth rate does not exceed the longterm average growth rate for the business in which the CGU operates.

The key assumptions used for value-in-use calculations are as follows, which are based on the past performance, management’s expectation of market development or external sources of information:

		2016	2015
–	Gross margin	25% – 57%	17% – 32%
–	Growth rate	2.5%	2%
–	Discount rate	13%	10%

The profitability of the Group’s capital equipment and packages segment is affected by the extended oil price downturn. The carrying value of the CGU exceeds its recoverable amount by $19,621,000 as at 31 December 2016. Accordingly, an impairment loss of $19,621,000 is recognised relating to the Group’s capital equipment and packages business and has been allocated to reduce the carrying amount of the goodwill. As the carrying amount of the CGU has been reduced to its recoverable amount, any adverse change in the assumptions used in the calculation of recoverable amount would result in further impairment losses on other assets of the CGU.

– I-40 –

APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

14. OTHER INTANGIBLE ASSETS

Cost: At 1 January 2015 Exchange adjustments Additions At 31 December 2015 At 1 January 2016 Exchange adjustments Additions At 31 December 2016 Accumulated amortisation: At 1 January 2015 Exchange adjustments Charge for the year At 31 December 2015 At 1 January 2016 Exchange adjustments Charge for the year At 31 December 2016 Net book value: At 31 December 2016 At 31 December 2015	Technical knowledge Customer relationships $’000 $’000 7,933 11,181 (320) (501) – – 7,613 10,680 - - - - - - - - - - 7,613 10,680 (846) (1,663) – – 6,767 9,017 - - - - - - - - - - 5,612 6,863 (252) (336) 740 1,003 6,100 7,530 - - - - - - - - - - 6,100 7,530 (713) (1,243) 662 894 6,049 7,181 - - - - - - - - - - 718 1,836 1,513 3,150	Order backlog $’000 4,866 (54) – 4,812 - - - - - 4,812 (173) – 4,639 - - - - - 3,847 (54) 610 4,403 - - - - - 4,403 (173) 409 4,639 - - - - - – 409	Patents $’000 2,792 (143) – 2,649 - - - - - 2,649 (172) – 2,477 - - - - - 2,188 (117) 135 2,206 - - - - - 2,206 (149) 127 2,184 - - - - - 293 443	Computer software $’000 704 (41) 203 866 - - - - - 866 (37) 45 874 - - - - - 481 (24) 65 522 - - - - - 522 (17) 123 628 - - - - - 246 344	Brand name $’000 660 – – 660 - - - - - 660 – – 660 - - - - - 143 – 33 176 - - - - - 176 – 33 209 - - - - - 451 484	Cooperation agreement $’000 365 – – 365 - - - - - 365 – – 365 - - - - - 198 – 46 244 - - - - - 244 – 46 290 - - - - - 75 121	Total $’000 28,501 (1,059) 203
							27,645 - - - - - 27,645 (2,891) 45
							24,799 - - - - - 19,332 (783) 2,632
							21,181 - - - - -
							21,181 (2,295) 2,294
							21,180 - - - - -
							3,619

							6,464

The amortisation charge for the year is included in “other operating expenses” in the consolidated statement of profit or loss.

– I-41 –

APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

15. INTEREST IN SUBSIDIARIES

The following list contains only the particulars of subsidiaries which principally affected the results, assets or liabilities of the Group. The class of shares held is ordinary unless otherwise stated.

	Place of	Particulars of	Proportion of	ownership interest
	incorporation/	issued and	Group’s
	establishment	paid up	effective	Held by a
Name of company	and operation	capital	interest	subsidiary	Principal activity
Emer International Limited	Hong Kong	2,000,000	100%	100%	Investment holding,
		shares			trading of rig
					equipment and
					provision of rig
					turnkey solutions
TSC Oil and Gas Services	PRC	190,000,000	100%	100%	Manufacturing and
Group Holdings Ltd.		shares of			trading of oilfield
(“TSC (Qingdao)”) #*		RMB1 each			expendables and
(青島天時油氣裝備服務					supplies
有限公司)
TSC-HHCT (Xian) Control	PRC	RMB17,000,000	100%	100%	Manufacturing and
and Drive Technology Co.					trading of rig
Limited (“TSC-HHCT”) #*					electrical control
(海爾海斯（西安）控制					system
技術有限公司)
TSC Manufacturing and	USA	16,020,966	100%	100%	Trading of rig
Supply, LLC		shares of			equipment and
(“TSC M&S”)		$1 each			oilfield expendables
					and supplies and
					provision of rig
					turnkey solutions
Qingdao TSC Offshore	PRC	$26,000,000	100%	100%	Manufacturing and
Equipment Co., Ltd.					trading of rig
(“TSCOE”) #					equipment and
(青島天時海洋石油裝備					provision of rig
有限公司)					turnkey solutions
Zhengzhou TSC Offshore	PRC	RMB32,400,000	100%	100%	Manufacturing and
Equipment Co., Ltd.					trading of rig
(“ZZOE”) #					equipment
(鄭州天時海洋石油裝備
有限公司)
TSC Offshore China Ltd.	PRC	RMB10,000,000	100%	100%	Trading of rig
(“TSC China”) #*					equipment and
(北京TSC海洋石油裝備					oilfield expendables
有限公司)
Dalian TSC Offshore	PRC	RMB10,000,000	100%	100%	Manufacturing and
Equipment Co., Ltd.					trading of rig
(“TSC Dalian”)^*					equipment
(大連天時海洋石油裝備
有限公司)

– I-42 –

APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

	Place of	Particulars of	Proportion of	ownership interest
	incorporation/	issued and	Group’s
	establishment	paid up	effective	Held by a
Name of company	and operation	capital	interest	subsidiary	Principal activity
NN Petroleum Engineering	Hong Kong	16,450,000	79%	100%	Trading of oilfield
(HK) Co., Limited		shares			expendables and
(“NN Petroleum”)					supplies and
					provision of
					engineering services
TSC Offshore (UK) Limited	United	73,074,952	100%	100%	Investment holding
(“TSCUK”)	Kingdom	shares of
		GBP0.025
		each
TSC Engineering Limited	United	GBP1	100%	100%	Design and manufacture
	Kingdom				of mechanical
					handling equipment,
					trading of oilfield
					expendables and
					supplies and
					provision of
					engineering services
TSC Offshore Pte. Limited	Singapore	2 shares of	100%	100%	Trading of rig
		SG$1 each			equipment and
					oilfield expendables
					and supplies and
					provision of
					engineering services
TSC Offshore Corporation	USA	$6,100	100%	100%	Design and manufacture
					of rig equipment
TSC Offshore Limiteda	Brazil	BRL1,800,000	100%	100%	Trading of oilfield
					expendables and
					supplies and
					provision of
					engineering services
Alliance Offshore Drilling	Singapore	$100,000	100%	100%	Provision of rig turnkey
Pte Limited					solutions

Registered under the laws of the PRC as foreign investment enterprises ^ Registered under the laws of the PRC as a limited liability company * Unofficial English translation

– I-43 –

APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

The following table lists out the information relating to NN Petroleum, the only subsidiary of the Group which has material non-controlling interest (NCI). The summarised financial information presented below represents the amounts before any inter-company elimination.

		2016	2015
		$’000	$’000
	NCI percentage	21%	21%
	Current assets	9,205	20,283
	Non-current assets	2,697	4,397
	Current liabilities	(5,930)	(13,017)
	Non-current liabilities	(132)	(268)
	Net assets	5,840	11,395
	Carrying amount of NCI	1,226	2,393
	Revenue	4,995	6,543
	Loss for the year	(3,312)	(1,972)
	Total comprehensive income	(3,584)	(2,256)
	Loss allocated to NCI	(696)	(414)
	Dividend paid to NCI	(414)	–
	Cash flows from operating activities	700	(1,860)
	Cash flows from investing activities	37	3,384
	Cash flows from financing activities	(2,049)	(1,408)
16.	INTEREST IN ASSOCIATE
		2016	2015
		$’000	$’000
	Share of net assets	182	193

The following list contains only the particulars of the associate, which is unlisted corporate entity whose quoted market price is not available:

				Proportion of	Proportion of
				ownership	interest
		Place of	Particulars of
	Form of	incorporation	issued and	Group’s
	business	and	paid up	effective	Held by a	Principal
Name of associate	structure	business	capital	interest	subsidiary	activity
Guangzhou Interstellar	Establishment	PRC	RMB5,000,000	25%	25%	Professional
Offshore Engineering						technical
Co., Ltd.						services

The associate is accounted for using the equity method in the consolidated financial statements.

– I-44 –

APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

17. OTHER FINANCIAL ASSETS

						2016	2015
						$’000	$’000
Unlisted	available-for-sale	equity	securities,	at	cost	2,226	4,661

Other financial assets represent equity interests in an entity that was in the process of application for an initial public offering during 2016. The investee was successfully listed on The Stock Exchange of Hong Kong Limited (the “ Stock Exchange ”) subsequent to 31 December 2016.

The directors assessed the recoverable amount of the equity investment at 31 December 2016 with reference to the subsequent trading price of the investee on the Stock Exchange. Based on their review, an impairment loss of $2,435,000 (2015: Nil) was recognised in profit or loss during the year ended 31 December 2016.

18. INVENTORIES

(a) Inventories in the consolidated statement of financial position comprise:

Raw materials Work in progress Finished goods	2016 $’000 9,644 6,064 24,006 39,714	2015 $’000 8,049 26,159 24,315
		58,523

(b) The analysis of the amount of inventories recognised as an expense and included in profit or loss is as follows:

Carrying amount of inventories sold Write down of inventories	2016 $’000 93,685 9,752 103,437	2015 $’000 136,764 899
		137,663

– I-45 –

APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

19. TRADE AND OTHER RECEIVABLES

Trade debtors and bills receivable Less: allowance for doubtful debts (note 19(b)) Other receivables, prepayments and deposits Less: Non-current portion of prepayments	2016 $’000 123,958 (62,057) 61,901 14,167 76,068 – 76,068	2015 $’000 99,176 (7,590)
		91,586 15,753
		107,339 (46)
		107,293

(a) Ageing analysis

Included in trade and other receivables are trade debtors and bills receivable (net of allowance for doubtful debts) with the following ageing analysis as of the end of the reporting period:

Current Less than 1 month past due 1 to 3 months past due More than 3 months but within 12 months past due More than 12 months past due Amounts past due	2016 $’000 23,971 - - - - - - - - - 5,540 4,847 15,124 12,419 37,930 - - - - - - - - - 61,901	2015 $’000 28,780 - - - - - - - - - 15,779 7,365 21,660 18,002
		62,806 - - - - - - - - -
		91,586

The credit terms offered by the Group to its customers differ with each product/service. The credit terms offered to customers of oilfield expendables and supplies and engineering services are normally 30 to 90 days. The credit terms offered to customers of capital equipment and packages are negotiated on a case-by-case basis. Deposits ranging from 10% to 30% of the contract sum are usually required. The balance of 60% to 85% would be payable in 1 to 2 months after delivery and acceptance of products. The remaining 5% to 10% of the contract sum represents the retention money and is payable within up to 18 months after delivery of the products or 1 year after completion of the onsite testing, whichever is earlier.

Included in “Trade and other receivables” of the Group are trade debtors and bills receivable of $123,958,000 (2015: $99,176,000) of which $2,566,000 (2015: $3,582,000) are due from subsidiaries of a substantial shareholder of the Group.

– I-46 –

APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

(b) Impairment of trade debtors and bills receivable

Impairment losses in respect of trade debtors and bills receivable are recorded using an allowance account unless the Group is satisfied that recovery of the amount is remote, in which case the impairment loss is written off against trade debtors and bills receivable directly (see note 1(m)(i)).

The movement in the allowance for doubtful debts during the year, including both specific and collective loss components, is as follows:

At 1 January Exchange adjustments Impairment losses recognised Uncollectible amounts written-off At 31 December	2016 $’000 7,590 (2,397) 56,864 – 62,057	2015 $’000 5,767 (108) 1,941 (10)
		7,590

At 31 December 2016, the Group’s trade debtors of $68,916,000 (2015: $8,161,000) were individually determined to be impaired. The individually impaired receivables related to customers that were in financial difficulties and management assessed that only a portion of the receivables is expected to be recovered. Consequently, specific allowances for doubtful debts of $62,057,000 (2015: $7,590,000) were recognised.

(c) Trade debtors and bills receivable that are not impaired

The ageing analysis of trade debtors and bills receivable that are neither individually nor collectively considered to be impaired are as follows:

Neither past due nor impaired Less than 1 month past due 1 to 3 months past due More than 3 months but within 12 months past due More than 12 months past due	2016 $’000 23,843 - - - - - - - - - 5,478 4,729 12,115 8,877 31,199 - - - - - - - - - 55,042	2015 $’000 28,737 - - - - - - - - - 15,759 7,341 21,505 17,673
		62,278 - - - - - - - - -
		91,015

Receivables that were neither past due nor impaired relate to a wide range of customers for whom there was no recent history of default.

Receivables that were past due but not impaired relate to a number of independent customers that have a good track record with the Group. Based on past experience, management believes that no impairment allowance 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.

– I-47 –

APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

20. CONSTRUCTION CONTRACTS

Contract costs incurred plus recognised profits less recognised losses Less: progress billings received and receivable Representing: Gross amount due from customers for contract work Gross amount due to customers for contract work (note 22)	2016 $’000 220,738 (24,116) 196,622 199,186 (2,564) 196,622	2015 $’000 273,202 (36,663)
		236,539

		236,539 –
		236,539

Included in “Gross amount due from customers for contract work” of the Group, there are amounts due from subsidiaries of a substantial shareholder of the Group of $2,035,000 (2015: $11,352,000).

At 31 December 2016, management carried out an assessment of the expected outcome of individual construction contracts. Based on their review, an expected loss on a contract of $29,916,000 (2015: Nil) was recognised as impairment losses on gross amount due from customers for contract work during the year.

21. AMOUNT DUE FROM A RELATED COMPANY

Katy International Inc.: Balance at 1 January Balance at 31 December Maximum balance outstanding during the year	2016 $’000 101 101 101	2015 $’000 101

		101

		101

The amount represents funds advanced and expenses paid on behalf of Katy International Inc. and is unsecured, non-interest-bearing and without pre-determined repayment terms.

Mr Zhang Menggui, Morgan and Mr Jiang Bing Hua are directors of the Company and each of them has a 50% beneficial interest in Katy International Inc.

There was no provision made against the principal amount at 31 December 2015 and 2016.

– I-48 –

APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

22. TRADE AND OTHER PAYABLES

Trade creditors and bills payable Other payables and accrued charges Gross amount due to customers for contract work (note 20)	2016 $’000 217,800 39,103 2,564 259,467	2015 $’000 217,978 60,252 –
		278,230

All of the trade and other payables are expected to be settled or recognised as income within one year or one repayable on demand.

As of the end of the reporting period, the ageing analysis of trade creditors and bills payable (which are included in trade and other payables), based on invoice date, is as follows:

Within 1 month More than 1 month but within 3 months More than 3 months but within 12 months More than 12 months but within 24 months More than 24 months	2016 $’000 192,936 9,044 9,297 3,368 3,155 217,800	2015 $’000 194,669 6,094 13,956 2,414 845
		217,978

23. BANK LOANS AND OTHER BORROWINGS

At 31 December 2016, the bank loans and other borrowings were repayable as follows:

Within 1 year or on demand After 1 year but within 2 years After 2 years but within 5 years After 5 years	2016 $’000 8,057 - - - - - - - - - 30,021 6,620 4,619 41,260 - - - - - - - - - 49,317	2015 $’000 28,725 - - - - - - - - - 2,071 33,542 2,572
		38,185 - - - - - - - - -
		66,910

– I-49 –

APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

At 31 December 2016, the bank loans and other borrowings were secured as follows:

Secured bond Unsecured notes Bank loans – secured – unsecured	2016 $’000 – 26,748 20,433 2,136 49,317	2015 $’000 6,498 25,918 23,566 10,928
		66,910

(a) The bank loans carried interest at rates ranging from 3.75% to 7.21% per annum (2015: 3.50% to 7.21% per annum) and were secured/guaranteed by:
(i) Interest in leasehold land held for own use under operating leases, buildings, inventories, trade receivables and plant and machinery with aggregate net book value of $50,202,000 (2015: $38,158,000).
(ii) Corporate guarantees given by TSCOE, TSC-HHCT, ZZOE, TSC China and TSC (Qingdao) to the extent of banking facilities outstanding of $2,120,000 (2015: $16,314,000) as at 31 December 2016.
(iii) Corporate guarantees given by the Company to the extent of banking facilities outstanding of $721,000 (2015: $2,000,000) as at 31 December 2016.
(iv) Guarantees given by the directors of the Company to the extent of banking facilities outstanding of $314,000 (2015: $352,000) as at 31 December 2016. No guarantee fee was received by the directors during the current and prior years.

Certain bank loans of the Group are subject to the fulfilment of covenants relating to certain of the subsidiaries’ statement of financial position ratios, as are commonly found in lending arrangements with financial institutions. The drawn down loan balances would become payable on demand if the covenants were breached. The Group regularly monitors its compliance with these covenants. Further details of the Group’s management of liquidity risk are set out in note 29(b).

As at 31 December 2016, the Group did not meet certain covenants of a bank loan amounting to $314,000 (2015: Nil), which was fully repaid subsequent to the year end. Other than that, none of the covenants relating to the Group’s bank loans had been breached.

(b) The Company issued two HKD denominated unsecured notes in aggregate principal amounts of HK$144,000,000 and HK$73,000,000 on 3 October 2014 and 25 November 2014 respectively. The unsecured notes bear interest at 5% per annum and are repayable on a quarterly basis in arrears. The maturity dates of the unsecured notes are 3 April 2018 and 25 May 2018 respectively. The effective interest rates of the unsecured notes are 8.6% and 8.5% per annum respectively.

– I-50 –

APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

24. INCOME TAX IN THE STATEMENT OF FINANCIAL POSITION

(a) Current taxation in the consolidated statement of financial position represents:

Provision for the year Provisional income tax paid Balance of income tax provision relating to prior years Reconciliation to the consolidated statement of financial position: Tax recoverable Tax payable	2016 $’000 2,699 (1,056) 1,643 5,951 7,594 2016 $’000 (241) 7,835 7,594	2015 $’000 2,271 (1,107)
		1,164 4,030
		5,194

		2015 $’000 (132) 5,326
		5,194

(b) Deferred tax assets and liabilities recognised:

The components of deferred tax (assets)/liabilities recognised in the consolidated statement of financial position and the movements during the year are as follows:

Depreciation allowances in excess of related depreciation $’000 Deferred tax arising from: At 1 January 2015 74 Exchange adjustments – (Credited)/charged to profit or loss_(note 6(a)) (72) At 31 December 2015 2 At 1 January 2016 2 Exchange adjustments – (Credited)/charged to profit or loss(note 6(a))_ (45) At 31 December 2016 (43)	Impairment losses on doubtful debts $’000 (1,263) 69 (558) (1,752) (1,752) 81 (878) (2,549)	Write- down on inventories $’000 (751) (16) (306) (1,073) (1,073) 76 (768) (1,765)	Intangible assets $’000 1,828 (48) (542) 1,238 1,238 (112) (453) 673	Tax losses $’000 (10,006) 140 167 (9,699) (9,699) 304 15 (9,380)	Unrealised profits on inventories $’000 (770) (19) 305 (484) (484) 2 (29) (511)	Total $’000 (10,888) 126 (1,006)
						(11,768)

						(11,768) 351 (2,158)
						(13,575)

– I-51 –

APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

Reconciliation to the consolidated statement of financial position: Net deferred tax assets recognised in the statement of financial position Net deferred tax liabilities recognised in the statement of financial position	2016 $’000 (13,706) 131 (13,575)	2015 $’000 (12,036) 268
		(11,768)

At 31 December 2016, the Group had temporary differences arising from undistributed profits of subsidiaries of $47,189,000 (2015: $67,827,000). No provision for deferred tax liabilities have been made as the Company controls the dividend policy of these subsidiaries and it has been determined that it is probable that profits will not be distributed in the foreseeable future.

The Group has not recognised deferred tax assets in respect of cumulative tax losses and other temporary differences of $106,955,000 (2015: $28,443,000) as it is not probable that future taxable profits against which the losses can be utilised will be available in the relevant tax jurisdiction and entity. The tax losses do not expire under current tax legislation.

25. EMPLOYEE RETIREMENT BENEFITS

As stipulated by the labour regulations of the PRC, the Group participates in various defined contribution retirement plans organised by the municipal and provincial governments for its employees in the PRC. The Group is required to make contributions to the retirement plans at rates ranging from 20% to 25% of the eligible employees’ salaries.

The Group also operates a Mandatory Provident Fund Scheme (“ the MPF scheme ”) under the Hong Kong Mandatory Provident Fund Schemes Ordinance for employees employed under the jurisdiction of the Hong Kong Employment Ordinance. The MPF scheme is a defined contribution retirement plan administered by an independent trustee. Under the MPF scheme, the employer and its employees are each required to make contributions to the scheme at 5% of the employees’ relevant income, subject to a cap of monthly relevant income of HK$30,000. Contributions to the plan vest immediately.

The Group also operates defined contribution retirement benefits schemes for all qualifying employees in jurisdictions other than the PRC and Hong Kong with contributions to the schemes at 3% – 10% of the gross salaries.

The Group has no other obligation for the payment of the employees’ retirement and other post-retirement benefits other than the contributions described above.

– I-52 –

APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

26. SHARE AWARD SCHEME

(a) Share Award Plan

Pursuant to the resolution passed by the shareholders on 16 January 2015 (“ Adoption Date of Share Award Scheme ”), the Company has adopted a share award scheme (“ Share Award Plan ”).

The purpose of the Share Award Plan is to recognise and reward the contribution of the Eligible Persons (as defined below) to the growth and development of the Group through an award of the Group’s shares.

The Remuneration Committee may, in its absolute discretion, make an award to an employee (whether full time or part time) of the Group (the “ Eligible Person ”). The eligibility of any of the Eligible Persons to an award shall be determined by the Remuneration Committee from time to time on the basis of its opinion as to his contribution to the development and growth of the Group. For the avoidance of doubt, the Eligible Persons shall exclude any Directors and any core connected persons of the Company.

The Remuneration Committee shall notify the Share Award Plan Trustee (which was appointed as the trustee for the purpose of the Share Award Plan) in writing upon the making of an award to an Eligible Person (the “ Selected Person ”) under the Share Award Plan. Upon the receipt of such notice, the Share Award Plan Trustee shall purchase shares on the Stock Exchange and/or shall set aside the appropriate number of awarded shares out of a pool of shares comprising the following:

(a) such shares which remain unvested and revert to the Share Award Plan Trustee by reason of a lapse of an award;
(b) such shares as may be purchased by the Share Award Plan Trustee on the Stock Exchange by utilising the funds allocated by the Directors out of the Company’s resources for fulfilling any award but subject to the limit that the total number of shares held by the Share Award Plan Trustee under the Share Award Plan will not exceed 3% of the total issued Shares at the Adoption Date; and
(c) such shares as may be transferred by any person and accepted by the Share Award Plan Trustee as additions to the trust fund under the Share Award Plan.

No award shall be made or vested by the Remuneration Committee and no instructions to acquire shares shall be made after a price sensitive event has occurred or a price sensitive matter has been the subject of a decision until such price sensitive information has been made available to the public domain in accordance with the requirements under the Rules Governing the Listing of Securities on the Main Board of the Stock Exchange.

Subject to any early termination pursuant to the terms of the Share Award Plan, the Share Award Plan will remain in force for a period commencing on the Adoption Date and ending on 15 January 2025.

In the event that any Selected Person ceases to be an Eligible Person by reason of his death, resignation or summary dismissal for misconduct, committing of a criminal offence or other beach of his term of employment, an award made to such Selected Person shall forthwith lapse and be cancelled.

– I-53 –

APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

The Share Award Plan Trustee will exercise voting right in respect of shares held under the Share Award Plan in accordance with the instructions of the Remuneration Committee, if any.

The Directors may by resolution at any time terminate the operation of the Share Award Plan and in such event no further awards shall be made provided that such termination shall not affect any subsisting rights of any Selected Person in respect of any award made to him prior to such termination. Any surplus shares will be sold with the proceeds returned to the Company.

No purchases of shares were made during the year ended 31 December 2016. The total consideration paid for the purchase of 5,095,000 shares in 2015 was $1,285,000. No shares under Share Award Plan have been granted during the current or prior years.

(b) Share Award Incentive Scheme

Pursuant to the resolutions passed by the shareholders on 27 May 2016 (“ Adoption Date of Share Award Incentive Scheme ”), the Company has adopted a share award incentive scheme (“ Share Award Incentive Scheme ”).

The purpose of the Share Award Incentive Scheme is to align the interests of the Eligible Persons of Share Award Incentive Scheme, which are defined as any individual, being an employee, officer, consultant or advisor of any member of the Group or any affiliate who is not a connected person of the Company and who the Board considers, in its sole discretion, to have contributed or will contribute to the Group, with those of the Group through ownership of shares, dividends and other distributions paid on shares and/or the increase in value of the shares and to encourage and retain Eligible Persons to make contributions to the long-term growth and profits of the Group.

The Share Award Incentive Scheme is a separate scheme from the Share Award Plan adopted by the Company on 16 January 2015, which is specifically for granting share awards sourced from existing shares purchased from the stock market. The Share Award Incentive Scheme will give the Company flexibility in granting awards of new shares. The Share Award Incentive Scheme will be effective for a period until 26 May 2026 (“ the Award Period ”) unless terminated at the discretion of the Board at an earlier date.

On the assumption that all the awards granted under the Share Award Incentive Scheme shall be satisfied by the allotment and issue of new shares by the Company, an ordinary resolution has been proposed at the annual general meeting for the Share Award Incentive Scheme to be adopted by the Company in accordance with the scheme rules and to grant a mandate to the directors to allot and issue up to not more than 3% of the total number of issued shares as at the date of passing such resolution, in connection with the Share Award Incentive Scheme (subject to adjustment in the event of sub-division or consolidation of shares in accordance with the rules of the Share Award Incentive Scheme).

During the Award Period, the Board may, from time to time, at their absolute discretion, select any Eligible Person of Share Award Incentive Scheme (“ the Selected Participant ”) and grant an award to such Selected Participant by way of issuing an award letter. The award letter will specify the grant date, the number of award shares underlying the award, the vesting criteria and conditions, the vesting date and such other details as the Board may consider necessary. Announcements on the allotment and issue of new shares under the Share Award Incentive Scheme will be made in accordance with the applicable requirements of the Listing Rules when the grants are made.

– I-54 –

APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

In the event that any Selected Participant ceases to be an Eligible Person of Share Award Incentive Scheme by reason of his death, resignation, summary dismissal for misconduct, committing of a criminal offence or other beach of his term of employment or becoming a director or a connected person of the Company, the directors may at their absolute discretion determine either that any outstanding award shares and related income not yet vested shall vest in such manner as it thinks fit or that they shall be forfeited.

The directors may by resolution at any time terminate the operation of the Share Award Incentive Scheme and in such event no further awards shall be made provided that such termination shall not affect any subsisting rights of any Selected Participant in respect of any award granted to him prior to such termination.

No issues, purchases or grants of shares under Share Award Incentive Scheme were made for the year ended 31 December 2016.

27. EQUITY SETTLED SHARE-BASED TRANSACTIONS

Share Option Scheme

Pursuant to the resolutions passed by all the shareholders on 20 October 2005 and 20 August 2009, the Company has adopted a share option scheme (“ Share Option Scheme ”).

The purpose of the Share Option Scheme is to provide incentives or rewards to the participants (as defined below) for their contribution to the Group and/or enable the Group to recruit and retain high-caliber employees and to improve the loyalty of the employees.

The directors may, at their discretion, invite any participant (the “ Participants ”) being any employee, executive directors, non-executive directors, certain consultants, suppliers and customers of the Group who, in the sole discretion of the boards, have contributed to the Group. Upon acceptance of the option, the grantee shall pay HK$1 to the Company as consideration for the grant.

The limit on the number of shares which may be issued upon exercise of all outstanding options granted and yet to be exercised under the Share Option Scheme and any other share option schemes in force from time to time must not in aggregate exceed 30% of the shares in issue from time to time (the “ Scheme Limit ”).

Subject to the Scheme Limit, the Company may grant options of up to 10% of the issued share capital of the Company as at the date of adoption of the Share Option Scheme (“ Scheme Mandate Limit ”). Options lapsed in accordance with the terms of the Share Option Scheme will not be counted for the purpose of calculating the 10% limit.

The Company may renew the Scheme Mandate Limit at any time subject to the approval of the shareholders. However, the Scheme Mandate Limit as “refreshed” must not exceed 10% of the shares in issue as at the date of approval of the renewed limit. Options previously granted under the Share Option Scheme (including those outstanding, cancelled, lapsed in accordance with the Share Option Scheme or exercised options) will not be counted for the purpose of calculating the limit as “refreshed”.

– I-55 –

APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

Unless approved by the shareholders, the total number of shares issued and to be issued upon exercise of the options granted to each Participant (including both exercised and outstanding options) in any 12-month period must not exceed 1% of the issued share capital of the Company from time to time. Any further grant of options in excess of the limit must be subject to the shareholders’ approval with such Participant and his associates abstaining from voting.

The exercise price must be at least the highest of: (a) the closing price of the Company’s shares as stated in the daily quotations sheet of the Stock Exchange on the date of grant, which must be a business day; (b) the average closing price of the Company’s shares as stated in the Stock Exchange’s daily quotations sheets for the five business days immediately preceding the date of grant; and (c) the nominal value of the Company’s shares.

An option may be exercised in accordance with the terms of the Share Option Scheme at any time during a period to be determined and notified by the directors of the Company to each grantee of the option which period may commence on a day after the date upon which the option is granted but shall and in any event be not later than ten years from the date of grant. Unless otherwise determined by the directors of the Company at their sole discretion, there is no requirement of a minimum period for which a share option must be held.

Other than the Share Option Scheme as mentioned above, pursuant to written resolutions of all shareholders of the Company on 19 October 2005, the Company adopted a Pre-IPO share option scheme. No share option was outstanding under the Pre-IPO share option scheme.

(a) The terms and conditions of the grants that existed during the current and prior years are as follows, whereby all options are settled by physical delivery of shares:

Options granted to directors:
– on 29 December 2008
Options granted to
employees:
– on 10 May 2007
– on 12 November 2007
– on 15 January 2008
– on 12 August 2008
– on 29 December 2008
– on 18 September 2009
– on 1 September 2010
– on 21 February 2011
– on 4 September 2012
– on 30 August 2013
– on 2 September 2014
– on 24 December 2014
Total share options

Number of
instruments
Vesting
conditions
Contractual
life of
options
1,310,000
Note
10 years
3,982,000
Note
10 years
5,990,000
Note
10 years
2,000,000
Note
10 years
1,700,000
Note
10 years
1,580,000
Note
10 years
8,558,000
Note
10 years
5,245,000
Note
10 years
2,400,000
Note
10 years
7,325,000
Note
10 years
5,080,000
Note
10 years
2,400,000
Note
10 years
1,500,000
Note
10 years
49,070,000

Note: The vesting period of the options is 5 years, starting from the date of grant and becomes vested at stepped semi-annual increments of 10% of the total options originally granted for a period of 5 years from the date of grant.

– I-56 –

APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

(b) The number and weighted average exercise prices of share options are as follows:

		2016		2015
	Weighted		Weighted
	average	Number of	average	Number of
	exercise price	options	exercise price	options
Outstanding at the beginning
of the year	HK$2.56	44,930,000	HK$2.52	49,070,000
Exercised during the year	–	–	HK$0.86	(2,205,000)
Forfeited during the year	HK$2.65	(8,110,000)	HK$3.47	(1,935,000)
Outstanding at the end of
the year	HK$2.54	36,820,000	HK$2.56	44,930,000

Exercisable at the end of
the year	HK$2.55	31,433,000	HK$2.61	35,538,000

The options outstanding at 31 December 2016 had a weighted average remaining contractual life of 3.48 years (2015: 4.59 years) and their exercise prices are set out in note 28(b)(ii).

(c) Fair value of share options and assumptions

The fair value of services received in return for share options granted is measured by reference to the fair value of share options granted. The estimate of the fair value of the share options granted is measured based on the Binomial Model. The contractual life of the share option is used as an input into this model. Expectation of early exercise are incorporated into the Binomial Model.

	24 December	2 September	30 August	4 September	21 February	1 September	18 September	29 December	12 August	15 January	12 November	10 May
Grant date	2014	2014	2013	2012	2011	2010	2009	2008	2008	2008	2007	2007
Fair value at
measurement
date	$0.14	$0.28	$0.24	$0.08	$0.11	$0.07	$0.12	$0.03	$0.12	$0.27	$0.29	$0.13
Share price	HK$2.11	HK$4.16	HK$2.9	HK$1.01	HK$1.9	HK$1.2	HK$2.06	HK$0.54	HK$2.32	HK$5.22	HK$5.6	HK$2.43
Exercise price	HK$2.11	HK$4.16	HK$2.9	HK$1.02	HK$1.97	HK$1.27	HK$2.06	HK$0.54	HK$2.32	HK$5.23	HK$5.6	HK$2.43
Expected
volatility	68%	69%	72%	76%	49%	50%	50%	45%	41%	42%	42%	42%
Option life	10 years	10 years	10 years	10 years	10 years	10 years	10 years	10 years	10 years	10 years	10 years	10 years
Expected
dividends	Nil	Nil	Nil	Nil	Nil	Nil	Nil	Nil	Nil	Nil	Nil	Nil
Risk-free interest
rate (based on
Exchange Fund
Notes)	1.96%	1.96%	2.34%	0.65%	2.86%	1.93%	2.36%	1.235%	3.38%	2.8%	3.45%	4.24%

The expected volatility is based on the historic volatility (calculated based on the weighted average remaining life of the share options), adjusted for any expected changes to future volatility based on public available information. Expected dividends are based on historical dividends. Changes in the subjective input assumptions could materially affect the fair value estimate.

Share options were granted under a service condition. This condition has not been taken into account in the grant date fair value measurement of the services received. There were no market conditions associated with the share option grants.

– I-57 –

APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

28. CAPITAL AND RESERVES

(a) Movements in components of equity

The reconciliation between the opening and closing balances of each component of the Group’s consolidated equity is set out in the consolidated statement of changes in equity. Details of the changes in the Company’s individual components of equity between the beginning and the end of the year are set out below:

Company

Balance at 1 January 2015 Changes in equity in 2015: Total comprehensive income for the year Shares issued under share option schemes Equity-settled share-based transactions Balance at 31 December 2015 and 1 January 2016 Changes in equity in 2016: Total comprehensive income for the year Equity-settled share-based transactions Balance at 31 December 2016	Share capital $’000 9,066 – 28 – 9,094 – – 9,094	Share premium $’000 127,485 – 320 – 127,805 – – 127,805	Exchange reserve Employee share-based compensation reserve Accumulated losses $’000 $’000 $’000 1,161 5,939 (4,653) 107 – (3,513) – (105) – – 323 – 1,268 6,157 (8,166) (109) – (5,086) – (821) 893 1,159 5,336 (12,359)	Total $’000 138,998 (3,406) 243 323
				136,158 (5,195) 72
				131,035

– I-58 –

APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

(b) Share capital

(i) Authorised and issued share capital

Authorised: Ordinary share of HK$0.1 each Ordinary shares, issued and fully paid: At 1 January Shares issued under share option schemes At 31 December	2016 No. of shares Amount ’000 $’000 2,000,000 25,746 707,120 9,094 – – 707,120 9,094	2015 No. of shares Amount ’000 $’000 2,000,000 25,746 704,915 9,066 2,205 28 707,120 9,094	2015 No. of shares Amount ’000 $’000 2,000,000 25,746 704,915 9,066 2,205 28 707,120 9,094

			9,066 28
			9,094

The holders of ordinary shares are entitled to receive dividends as declared from time to time and are entitled to one vote per share at meetings of the Company. All ordinary shares rank equally with regard to the Company’s residual assets.

– I-59 –

APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

(ii) Terms of unexpired and unexercised share options at the end of the reporting period

Exercise period Exercise price 10 November 2007 to 9 May 2017 HK$2.43 12 May 2008 to 11 November 2017 HK$5.60 15 July 2008 to 14 January 2018 HK$5.23 12 February 2009 to 11 August 2018 HK$2.32 29 June 2009 to 28 December 2018 HK$0.54 18 March 2010 to 17 September 2019 HK$2.06 1 March 2011 to 31 August 2020 HK$1.27 21 August 2011 to 20 February 2021 HK$1.97 4 March 2013 to 3 September 2022 HK$1.02 28 February 2014 to 29 August 2023 HK$2.90 2 March 2015 to 1 September 2024 HK$4.16 24 June 2015 to 23 December 2024 HK$2.11	2016 Number 3,982,000 4,780,000 1,000,000 1,700,000 1,730,000 7,288,000 2,320,000 – 7,065,000 4,105,000 2,250,000 600,000 36,820,000	2015 Number 3,982,000 5,410,000 2,000,000 1,700,000 1,730,000 8,058,000 4,430,000 2,400,000 7,065,000 4,255,000 2,400,000 1,500,000
		44,930,000

Each option entitles the holder to subscribe for one ordinary share in the Company. Further details of these options are set out in note 27 to the financial statements.

(c) Nature and purpose of reserves

(i) Share premium

Under the Companies Law (Revised) of the Cayman Islands, the fund in the share premium account of the Company is distributable to the shareholders of the Company provided that immediately following the date on which the dividend is proposed to be distributed, the Company will be in a position to pay off its debts as they fall due in the ordinary course of business.

(ii) Merger reserve

The merger reserve represents the difference between the nominal value of the share capital of the subsidiaries acquired as a result of the restructuring exercise in 2004 and the nominal value of the Company’s shares issued in exchange thereof.

(iii) Exchange reserve

The exchange reserve comprises all foreign exchange differences arising from the translation of the financial statements of foreign subsidiaries. The reserve is dealt with in accordance with the accounting policies set out in note 1(x).

– I-60 –

APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

(iv) Employee share-based compensation reserve

The employee share-based compensation reserve represents the fair value of the actual or estimated number of unexercised share options granted to employees of the Group recognised in accordance with the accounting policy adopted for share-based payments in note 1(t)(ii).

(v) Capital reserve

The capital reserve represents the excess of capital contribution over the nominal value of the registered capital of TSC (Qingdao).

During the year ended 31 December 2016, TSC (Qingdao) was converted into a company limited by shares. As a result, its net assets value in excess of share capital was transferred to capital reserve as a capital contribution.

(vi) Revaluation reserve

The revaluation reserve represents the fair value adjustment to the interest previously held by the Group as an associate upon the acquisition of TSCUK.

(vii) Reserve funds

The Articles of Association of certain PRC subsidiaries require the appropriation of 10% of their profit after tax each year, based on their statutory audited financial statements, to the reserve funds until the balance reaches 50% of the registered capital of the respective PRC subsidiaries. The reserve funds may be capitalised as the paid-in capital of these subsidiaries.

(viii) Shares held for share award scheme reserve

The shares held for share award scheme reserve represents purchase costs of shares held for share award scheme as disclosed in note 26.

(d) Distributability of reserves

The Company’s reserves available for cash distribution and/or distribution in specie to equity shareholders of the Company as at 31 December 2016, as computed in accordance with the Companies Law (Revised) of the Cayman Islands amounted to $115,446,000 (2015: $119,639,000).

(e) Dividend

The directors do not recommend the payment of a dividend for the year ended 31 December 2016 (2015: $Nil).

– I-61 –

APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

(f) Capital management

The Group’s primary objectives when managing capital are to maintain a strong credit rating and healthy capital ratios in order to support its business and maximise shareholders’ value.

The Group manages its capital structure and makes adjustments to it, in light of changes in economic conditions. The Group reviews the capital structure on a regular basis and considers the cost of capital and the associated risks. Based on recommendations of the Board, the Group will balance its overall capital structure through adjusting the amount of dividends payable to shareholders, new shares issues or new debt financing. No changes were made in the objectives, policies or processes during the years ended 31 December 2015 and 2016.

The Group monitors capital with reference to its debt position. The Group’s strategy is to maintain the gearing ratio, being the Group’s total liabilities to total assets, under 100%. The gearing ratio as at 31 December 2016 was 77% (2015: 62%).

Except for the bank loans which require the fulfilment of covenants relating to certain financial ratios as disclosed in note 23 to the financial statements, neither the Company nor any of its subsidiaries is subject to externally imposed capital requirements.

29. FINANCIAL RISK MANAGEMENT AND FAIR VALUES

Exposure to credit, liquidity, interest rate and currency risks arises in the normal course of the Group’s business. The Group’s exposure to these risks and the financial risk management policies and practices used by the Group to manage these risks are described below.

(a) Credit risk

The Group’s credit risk is primarily attributable to trade and other receivables. Management has a credit policy in place and the exposure to this credit risk is monitored on an ongoing basis.

In respect of trade and other receivables, individual credit evaluations are performed on all customers requiring credit over a certain amount. These evaluations focus on the customer’s past history of making payments when due and current ability to pay, and take into account information specific to the customer as well as pertaining to the economic environment in which the customer operates. Credit terms offered by the Group to its customers are set out in note 19(a).

The credit risk on cash at bank and pledged bank deposits is limited as the counterparties are banks with sound credit standing. Given their high credit standing, management does not expect any counterparty fail to meet its obligations.

The Group’s exposure to credit risk is influenced mainly by the individual characteristics of each customer rather than the industry or country in which the customers operate and therefore significant concentrations of credit risk primarily arise when the Group has significant exposure to individual customers. At the end of the reporting period, 4% (2015: 57%) and 78% (2015: 74%) of the total trade debtors and bills receivable and gross amount due from customers for contract work was due from the Group’s largest customer and the five largest customers respectively.

The maximum exposure to credit risk is represented by the carrying amount of each financial asset in the statement of financial position after deducting any impairment allowance. The Group does not provide any guarantees which would expose the Group to credit risk.

Further quantitative disclosure in respect of the Group’s exposure to credit risk arising from trade and other receivables are set out in note 19.

– I-62 –

APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

(b) Liquidity risk

Individual operating entities within the Group are responsible for their own cash management, including the short term investment of cash surpluses and the raising of loans to cover expected cash demands, subject to approval by the Company’s board when the borrowings exceed certain predetermined levels of authority. The Group’s policy is to regularly monitor its liquidity requirements and its compliance with lending covenants, to ensure that it maintains sufficient reserves of cash and adequate committed lines of funding from major financial institutions to meet its liquidity requirements in the short and longer term.

The following tables show the remaining contractual maturities at the end of the reporting period of the Group’s non-derivative financial liabilities, which are based on contractual undiscounted cash flows (including interest payments computed using contractual rates or, if floating, based on rates current at the end of the reporting period) and the earliest date the Group can be required to pay:

Trade and other payables Bank loans Secured bond Unsecured notes	2016 Contractual undiscounted cash outflow Within 1 year or on demand More than 1 year but within 2 years More than 2 years but within 5 years More than 5 years Total Carrying amount at 31 December $’000 $’000 $’000 $’000 $’000 $’000 256,903 – – – 256,903 256,903 9,456 4,153 7,772 5,273 26,654 22,569 – – – – – – 1,399 28,399 – – 29,798 26,748 267,758 32,552 7,772 5,273 313,355 306,220	2016 Contractual undiscounted cash outflow Within 1 year or on demand More than 1 year but within 2 years More than 2 years but within 5 years More than 5 years Total Carrying amount at 31 December $’000 $’000 $’000 $’000 $’000 $’000 256,903 – – – 256,903 256,903 9,456 4,153 7,772 5,273 26,654 22,569 – – – – – – 1,399 28,399 – – 29,798 26,748 267,758 32,552 7,772 5,273 313,355 306,220	2016 Contractual undiscounted cash outflow Within 1 year or on demand More than 1 year but within 2 years More than 2 years but within 5 years More than 5 years Total Carrying amount at 31 December $’000 $’000 $’000 $’000 $’000 $’000 256,903 – – – 256,903 256,903 9,456 4,153 7,772 5,273 26,654 22,569 – – – – – – 1,399 28,399 – – 29,798 26,748 267,758 32,552 7,772 5,273 313,355 306,220	2016 Contractual undiscounted cash outflow Within 1 year or on demand More than 1 year but within 2 years More than 2 years but within 5 years More than 5 years Total Carrying amount at 31 December $’000 $’000 $’000 $’000 $’000 $’000 256,903 – – – 256,903 256,903 9,456 4,153 7,772 5,273 26,654 22,569 – – – – – – 1,399 28,399 – – 29,798 26,748 267,758 32,552 7,772 5,273 313,355 306,220	2015 Contractual undiscounted cash outflow Within 1 year or on demand More than 1 year but within 2 years More than 2 years but within 5 years More than 5 years Total Carrying amount at 31 December $’000 $’000 $’000 $’000 $’000 $’000 278,230 – – – 278,230 278,230 23,808 2,765 8,647 2,692 37,912 34,494 6,524 – – – 6,524 6,498 1,400 1,400 28,417 – 31,217 25,918 309,962 4,165 37,064 2,692 353,883 345,140	2015 Contractual undiscounted cash outflow Within 1 year or on demand More than 1 year but within 2 years More than 2 years but within 5 years More than 5 years Total Carrying amount at 31 December $’000 $’000 $’000 $’000 $’000 $’000 278,230 – – – 278,230 278,230 23,808 2,765 8,647 2,692 37,912 34,494 6,524 – – – 6,524 6,498 1,400 1,400 28,417 – 31,217 25,918 309,962 4,165 37,064 2,692 353,883 345,140	2015 Contractual undiscounted cash outflow Within 1 year or on demand More than 1 year but within 2 years More than 2 years but within 5 years More than 5 years Total Carrying amount at 31 December $’000 $’000 $’000 $’000 $’000 $’000 278,230 – – – 278,230 278,230 23,808 2,765 8,647 2,692 37,912 34,494 6,524 – – – 6,524 6,498 1,400 1,400 28,417 – 31,217 25,918 309,962 4,165 37,064 2,692 353,883 345,140	2015 Contractual undiscounted cash outflow Within 1 year or on demand More than 1 year but within 2 years More than 2 years but within 5 years More than 5 years Total Carrying amount at 31 December $’000 $’000 $’000 $’000 $’000 $’000 278,230 – – – 278,230 278,230 23,808 2,765 8,647 2,692 37,912 34,494 6,524 – – – 6,524 6,498 1,400 1,400 28,417 – 31,217 25,918 309,962 4,165 37,064 2,692 353,883 345,140	2015 Contractual undiscounted cash outflow Within 1 year or on demand More than 1 year but within 2 years More than 2 years but within 5 years More than 5 years Total Carrying amount at 31 December $’000 $’000 $’000 $’000 $’000 $’000 278,230 – – – 278,230 278,230 23,808 2,765 8,647 2,692 37,912 34,494 6,524 – – – 6,524 6,498 1,400 1,400 28,417 – 31,217 25,918 309,962 4,165 37,064 2,692 353,883 345,140
	Within 1 year or on demand $’000 256,903 9,456 – 1,399 267,758	More than 1 year but within 2 years $’000 – 4,153 – 28,399 32,552	More than 2 years but within 5 years $’000 – 7,772 – – 7,772	More than 5 years $’000 – 5,273 – – 5,273	Within 1 year or on demand $’000 278,230 23,808 6,524 1,400 309,962	More than 1 year but within 2 years $’000 – 2,765 – 1,400 4,165	More than 2 years but within 5 years $’000 – 8,647 – 28,417 37,064	More than 5 years $’000 – 2,692 – – 2,692
									345,140

(c) Interest rate risk

The Group’s interest rate risk arises primarily from the Group’s cash at bank and in hand, pledged bank deposits, bank loans and other borrowings. Borrowings issued at variable rates and at fixed rates expose the Group to cash flow interest rate risk and fair value interest rate risk respectively. The Group does not use financial derivatives to hedge against the interest rate risk. The Group’s interest rate profile as monitored by management is set out in (i) below.

– I-63 –

APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

(i) Interest rate profile

The following table details the interest rate profile of the Group’s net borrowings (being interest-bearing financial liabilities less cash at bank and in hand and pledged bank deposits) at the end of the reporting period.

2016 Effective interest rate Fixed rate borrowings: Bank loans 3.75% – 5.66% Secured bond – Unsecured notes 8.5% – 8.6% Variable rate borrowings/ (deposits): Bank loans 4.0 % – 7.21% Less: Pledged bank deposits 0.35 % – 2.55% Cash at bank and in hand 0.1 % – 1.55% Total net borrowings	$’000 8,485 – 26,748 35,233 - - - - - - - 14,084 (1,505) (9,952) 2,627 - - - - - - - 37,860	2015 Effective interest rate 4.25% – 6.70% 9.71% 8.5% – 8.6% - - - - - - - - 3.5% – 7.21% 0.35% – 2.55% 0.01% – 1.55% - - - - - - - -	$’000 19,891 6,498 25,918
			52,307 - - - - - - - 14,603 (5,045) (46,505)
			(36,947) - - - - - - -
			15,360

(ii) Sensitivity analysis

At 31 December 2016, it is estimated that a general increase of one percentage point in interest rates, with all other variables held constant, would have increased the Group’s loss before tax by approximately $26,000 (2015: increased the profit before tax by $369,000). A general decrease of one percentage point in interest rates would had the equal amount but opposite effect, on the basis that all other variables remain constant.

The sensitivity analysis above indicates the instantaneous change in the Group’s loss/profit before tax that would arise assuming that the change in interest rates had occurred at the end of the reporting period. In respect of the exposure to cash flow interest rate risk arising from floating rate non-derivative instruments held by the Group at the end of the reporting period, the impact on the Group’s loss/profit before tax is estimated as an annualised impact on interest expense or income of such a change interest rates. The analysis is performed on the same basis for 2015.

– I-64 –

APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

(d) Currency risk

(i) Forecast transactions

The Group is exposed to currency risk primarily through sales and purchases which give rise to receivables, payables and cash balances that are denominated in a foreign currency, i.e. a currency other than the functional currency of the operations to which they relate. Most of the Group’s subsidiaries in the PRC carried out production locally with RMB as functional currency while over 50% of the Group’s revenue was denominated in United States dollars. At 31 December 2016 and 2015, no related hedges were made by the Group.

RMB is not freely convertible into foreign currencies. All foreign exchange transactions involving RMB take place through the People’s Bank of China or other institutions authorised to buy and sell foreign currencies. The exchange rate adopted for the foreign exchange transactions are the rates of exchange quoted by the People’s Bank of China that are determined largely by supply and demand.

(ii) Exposure to currency risk

The following table details the Group’s exposure at the end of the reporting period to currency risk arising from recognised assets or liabilities denominated in a currency other than the functional currency of the entity to which they relate. For presentation purposes, the amounts of the exposure are shown in United States dollars, translated using the spot rate at the year end date. Differences resulting from the translation of the financial statements of foreign operations into the Group’s presentation currency are excluded.

Trade and other receivables Cash at bank and in hand Trade and other payables Net exposure arising from recognised assets and liabilities	Exposure to United States dollars (expressed in United States dollars) 2016 2015 $’000 $’000 9,263 22,511 1,545 1,162 (253) (258) 10,555 23,415	Exposure to United States dollars (expressed in United States dollars) 2016 2015 $’000 $’000 9,263 22,511 1,545 1,162 (253) (258) 10,555 23,415
		23,415

– I-65 –

APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

(iii) Sensitivity analysis

The following table indicates the instantaneous change in the Group’s loss/profit before tax that would arise if foreign exchange rates to which the Group has significant exposure at the end of the reporting period had changed at that date, assuming all other risk variables remained constant.

			2016		2015
			Increase/		Increase/
			(decrease) in		(decrease) in
			foreign	Effect on	foreign	Effect on
			exchange	loss before	exchange	profit
			rates	tax	rates	before tax
				$’000		$’000
United	States	dollars	5%	(528)	5%	1,171
			(5)%	528	(5)%	(1,171)

Results of the analysis as presented in the above table represent an aggregation of the instantaneous effects on each of the Group entities’ loss/profit before tax measured in the respective functional currencies, translated into United States dollars at the exchange rate ruling at the end of the reporting period for presentation purposes.

The sensitivity analysis assumes that the change in foreign exchange rates had been applied to re-measure those financial instruments held by the Group which expose the Group to foreign currency risk at the end of the reporting period, including inter-company payables and receivables within the Group which are denominated in a currency other than the functional currencies of the lender or the borrower. The analysis excludes differences that would result from the translation of the financial statements of foreign operations into the Group’s presentation currency. The analysis is performed on the same basis for 2015.

(e) Estimation of fair values

The carrying amounts of the Group’s financial instruments carried at cost or amortised cost are not materially different from their fair values as at 31 December 2015 and 2016.

30. COMMITMENTS

(a) Capital commitments outstanding at 31 December 2016 not provided for in the financial statements were as follows:

		The
		2016	2015
		$’000	$’000
Contracted	for	625	4,856

– I-66 –

APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

(b) At 31 December 2016, the total future minimum lease payments under non-cancellable operating leases are payable as follows:

Within 1 year After 1 year but within 5 years After 5 years	The Group 2016 2015 $’000 $’000 969 2,206 3,032 5,219 162 8,573 4,163 15,998	The Group 2016 2015 $’000 $’000 969 2,206 3,032 5,219 162 8,573 4,163 15,998
		15,998

The Group is the lessee in respect of certain properties under operating leases. The leases run for an initial period of one to fifteen years, with an option to renew the lease when all terms are renegotiated. None of the leases includes contingent rentals.

31. MATERIAL RELATED PARTY TRANSACTIONS

In addition to the transactions and balances disclosed elsewhere in these financial statements, the Group entered into the following related party transactions.

(a) Key management personnel remuneration

Remuneration for key management personnel of the Group, including amounts paid to the Company’s directors as disclosed in note 7 and certain of the highest paid employees as disclosed in note 8, is as follows:

Salaries and other emoluments Share-based payments Retirement scheme contributions	2016 $’000 3,178 – 158 3,336	2015 $’000 2,508 210 89
		2,807

Total remuneration is included in “staff costs” (see note 5(b)).

(b) Transactions with related companies

The Group entered into the following related party transactions with subsidiaries of a substantial shareholder of the Group:

						2016	2015
						$’000	$’000
Sales	of	capital	equipment	and	packages	5,262	14,651

In the opinion of the Company’s directors, the above transactions were carried out on normal commercial terms and in the ordinary course of business.

– I-67 –

APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

(c) Applicability of the Listing Rules relating to connected transactions

The related party transactions in respect of note 31(b) above constitute connected transactions or continuing connected transactions as defined in Chapter 14A of the Listing Rules. The amounts of connected transactions and continuing connected transactions were $3,485,000 (2015: $683,000) and $1,777,000 (2015: $13,968,000) respectively. The disclosures of continuing connected transactions required by Chapter 14A of the Listing Rules are provided in section “Related Party Transactions” of the Report of the Directors and details of the connected transactions were announced on 16 July 2007 and included in the circular dated 7 August 2007.

32. COMPANY-LEVEL STATEMENT OF FINANCIAL POSITION

Note Non-current assets Property, plant and equipment Interest in subsidiaries Current assets Other receivables, prepayments and deposits Cash at bank and in hand Current liabilities Other payables and accrued charges Amounts due to subsidiaries Net current liabilities Total asset less current liabilities Non-current liability Other borrowings NET ASSETS CAPITAL AND RESERVES 28(a) Share capital Reserves TOTAL EQUITY	2016 $’000 – 158,762 158,762 - - - - - - - - - 35 75 110 - - - - - - - - - 661 428 1,089 - - - - - - - - - (979) - - - - - - - - - 157,783 - - - - - - - - - 26,748 - - - - - - - - - 131,035 9,094 121,941 131,035	2015 $’000 – 162,661
		162,661 - - - - - - - - - 20 326
		346 - - - - - - - - - 668 263
		931 - - - - - - - - -
		(585) - - - - - - - - -
		162,076 - - - - - - - - - 25,918 - - - - - - - - -
		136,158

		9,094 127,064
		136,158

– I-68 –

APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

33. COMPARATIVE FIGURES

Certain comparative figures have been reclassified to conform with the current year’s presentation.

34. POSSIBLE IMPACT OF AMENDMENTS, NEW STANDARDS AND INTERPRETATIONS ISSUED BUT NOT YET EFFECTIVE FOR THE YEAR ENDED 31 DECEMBER 2016

Up to the date of issue of these financial statements, the HKICPA has issued a number of amendments and new standards which are not yet effective for the year ended 31 December 2016 and which have not been adopted in these financial statements. These include the following which may be relevant to the Group.

	Effective for
	accounting periods
	beginning on or after
Amendments to HKAS 7, Statement of cash flows: Disclosure initiative	1 January 2017
Amendments to HKAS 12, Income taxes: Recognition of deferred tax	1 January 2017
assets for unrealised losses
HKFRS 9, Financial instruments	1 January 2018
HKFRS 15, Revenue from contracts with customers	1 January 2018
Amendments to HKFRS 2, Share-based payment: Classification and	1 January 2018
measurement of share-based payment transactions
HKFRS 16, Leases	1 January 2019

The Group is in the process of making an assessment of what the impact of these amendments and new standards is expected to be in the period of initial application. So far the Group has identified some aspects of the new standards which may have a significant impact on the consolidated financial statements. Further details of the expected impacts are discussed below. As the Group has not completed its assessment, further impacts may be identified in due course and will be taken into consideration when determining whether to adopt any of these new requirements before their effective date and which transitional approach to take, where there are alternative approaches allowed under the new standards.

HKFRS 15, Revenue from contracts with customers

HKFRS 15 establishes a comprehensive framework for recognising revenue from contracts with customers. HKFRS 15 will replace the existing revenue standards, HKAS 18, Revenue, which covers revenue arising from sale of goods and rendering of services, and HKAS 11, Construction contracts, which specifies the accounting for revenue from construction contracts. The Group is currently assessing the impacts of adopting HKFRS 15 on its financial statements. Based on the preliminary assessment, the Group has identified the following areas which are likely to be affected:

– I-69 –

APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

(a) Timing of revenue recognition

The Group’s revenue recognition policies are disclosed in note 1(w). Currently, revenue arising from construction contracts and the provision of services is recognised over time, whereas revenue from the sale of goods is generally recognised when the risks and rewards of ownership have passed to the customers.

Under HKFRS 15, revenue is recognised when the customer obtains control of the promised good or service in the contract. HKFRS 15 identifies 3 situations in which control of the promised good or service is regarded as being transferred over time:

(i) When the customer simultaneously receives and consumes the benefits provided by the entity’s performance, as the entity performs;
(ii) When the entity’s performance creates or enhances an asset (for example work in progress) that the customer controls as the asset is created or enhanced;
(iii) When the entity’s performance does not create an asset with an alternative use to the entity and the entity has an enforceable right to payment for performance completed to date.

If the contract terms and the entity’s activities do not fall into any of these 3 situations, then under HKFRS 15 the entity recognises revenue for the sale of that good or service at a single point in time, being when control has passed. Transfer of risks and rewards of ownership is only one of the indicators that will be considered in determining when the transfer of control occurs.

As a result of this change from the risk-and-reward approach to the contract-by-contract transfer-of-control approach, it is possible that once the Group adopts HKFRS 15 some of the Group’s contract manufacturing activities that are currently recognised at a point in time may meet the HKFRS 15 criteria for revenue recognition over time. This will depend on the terms of the sales contract and the enforceability of any specific performance clauses in that contract, which may vary depending on the jurisdiction in which the contract would be enforced. It is also possible that for the remainder of the Group’s contracts the point in time when revenue is recognised may be earlier or later than under the current accounting policy. However, further analysis is required to determine whether this change in accounting policy may have a material impact on the amounts reported in any given financial reporting period.

(b) Significant financing component

HKFRS 15 requires an entity to adjust the transaction price for the time value of money when a contract contains a significant financing component, regardless of whether the payments from customers are received significantly in advance or in arrears.

The Group is in the process of assessing whether this component in the Group’s advance payment schemes would be significant to the contract and therefore whether, once HKFRS 15 is adopted, the transaction price would need to be adjusted for the purposes of recognising revenue. Any adjustment to the transaction price under HKFRS 15, if considered necessary, would result in interest expense being recognised while the construction work is still in progress to reflect the effect of the financing benefit obtained from the customers, with a corresponding increase to revenue on sale of properties recognised when control of the completed property is transferred to the customer.

– I-70 –

APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

HKFRS 16, Leases

As disclosed in note 1(l), currently the Group classifies leases into finance leases and operating leases and accounts for the lease arrangements differently, depending on the classification of the lease. The Group enters into some leases as the lessor and others as the lessee.

HKFRS 16 is not expected to impact significantly on the way that lessors account for their rights and obligations under a lease. However, once HKFRS 16 is adopted, lessees will no longer distinguish between finance leases and operating leases. Instead, subject to practical expedients, lessees will account for all leases in a similar way to current finance lease accounting, i.e. at the commencement date of the lease the lessee will recognise and measure a lease liability at the present value of the minimum future lease payments and will recognise a corresponding “right-of-use” asset. After initial recognition of this asset and liability, the lessee will recognise interest expense accrued on the outstanding balance of the lease liability, and the depreciation of the right-of-use asset, instead of the current policy of recognising rental expenses incurred under operating leases on a systematic basis over the lease term. As a practical expedient, the lessee can elect not to apply this accounting model to short-term leases (i.e. where the lease term is 12 months or less) and to leases of low-value assets, in which case the rental expenses would continue to be recognised on a systematic basis over the lease term.

HKFRS 16 will primarily affect the Group’s accounting as a lessee of leases for properties, plant and equipment which are currently classified as operating leases. The application of the new accounting model is expected to lead to an increase in both assets and liabilities and to impact on the timing of the expense recognition in the statement of profit or loss over the period of the lease. The Group will need to perform a more detailed analysis to determine the amounts of new assets and liabilities arising from operating lease commitments on adoption of HKFRS 16, after taking into account the applicability of the practical expedient and adjusting for any leases entered into or terminated between now and the adoption of HKFRS 16 and the effects of discounting.

The Group is considering whether to adopt HKFRS 16 before its effective date of 1 January 2019. However, early adoption of HKFRS 16 is only permitted if this is no earlier than the adoption of HKFRS 15. It is therefore unlikely that HKFRS 16 will be adopted before the effective date of HKFRS 15, being 1 January 2018.

– I-71 –

APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

3. FINANCIAL INFORMATION OF THE GROUP FOR THE SIX MONTHS ENDED 30 JUNE 2017

The following financial information is extracted from the full text of the unaudited interim report of the Group for the six months ended 30 June 2017. The Company has no exceptional or extraordinary items during the period.

Condensed consolidated income statement

for the period ended 30 June 2017 (Expressed in United States dollars)

Notes
Revenue
3, 4
Cost of sales
Gross profit
Other revenue and net income
5
Selling and distribution expenses
General and administrative expenses
Other operating expenses
(Loss)/profit from operations
Finance costs
6
Share of results of associate
(Loss)/profit before taxation
6
Income tax
7
(Loss)/profit for the period
Attributable to:
Equity shareholders of the Company
Non-controlling interests
(Loss)/profit for the period
(Loss)/earnings per share
Basic
9(a)
Diluted
9(b)

For the six months
ended 30 June
2017
2016
(unaudited)
(unaudited)
$’000
$’000
45,881
75,471
(31,803)
(50,500)
14,078
24,971
831
2,681
(4,085)
(3,939)
(10,465)
(16,248)
(4,126)
(2,865)
(3,767)
4,600
(1,807)
(1,769)
–
1
(5,574)
2,832
1,853
(571)
(3,721)
2,261
(3,748)
2,415
27
(154)
(3,721)
2,261
(0.54) cent
0.35 cent
(0.54) cent
0.34 cent

– I-72 –

APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

Condensed consolidated statement of profit or loss and other comprehensive income for the period ended 30 June 2017 (Expressed in United States dollars)

(Loss)/profit for the year
Other comprehensive income for the period:
Items that may be reclassified subsequently to
profit or loss:
Exchange differences on translation of
financial statements of subsidiaries and
associate (with nil tax effect)
Total comprehensive income for the period
Attributable to:
Equity shareholders of the Company
Non-controlling interests
Total comprehensive income for the period

For the six months
ended 30 June
2017
2016
(unaudited)
(unaudited)
$’000
$’000
(3,721)
2,261
(1,469)
(113)
(2,252)
2,148
(2,280)
(2,267)
28
(119)
(2,252)
2,148

– I-73 –

APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

Condensed consolidated statement of financial position

at 30 June 2017 (Expressed in United States dollars)

Notes Non-current assets Property, plant and equipment 10 Investment properties Interest in leasehold land held for own use under operating leases Other intangible assets Interest in associate Other financial assets Deferred tax assets Current assets Inventories Trade and other receivables 11 Gross amount due from customers for contract work Amount due from a related company Tax recoverable Pledged bank deposits Cash at bank and in hand Current liabilities Trade and other payables 12 Bank loans and other borrowings Tax payable Net current assets Total assets less current liabilities	As at 30 June 2017 (unaudited) $’000 49,890 8,126 7,347 2,881 185 1,318 15,033 84,780 - - - - - - - - - - - - 37,055 71,102 201,746 101 918 1,852 12,110 324,884 - - - - - - - - - - - - 252,774 41,186 5,556 299,516 - - - - - - - - - - - - 25,368 - - - - - - - - - - - - 110,148 - - - - - - - - - - - -	As at 31 December 2016 (audited) $’000 50,778 8,207 7,339 3,619 182 2,226 13,706
		86,057 - - - - - - - - - - - - 39,714 76,068 199,186 101 241 1,505 9,952
		326,767 - - - - - - - - - - - - 259,467 8,057 7,835
		275,359 - - - - - - - - - - - -
		51,408 - - - - - - - - - - - -
		137,465 - - - - - - - - - - - -

– I-74 –

APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

Notes Non-current liabilities Bank loans and other borrowings Deferred tax liabilities NET ASSETS CAPITAL AND RESERVES Share capital Reserves Total equity attributable to equity shareholders of the Company Non-controlling interests TOTAL EQUITY	As at 30 June 2017 (unaudited) $’000 16,670 130 16,800 - - - - - - - - - - - - 93,348 9,094 84,000 93,094 254 93,348	As at 31 December 2016 (audited) $’000 41,260 131
		41,391 - - - - - - - - - - - -
		96,074

		9,094 86,202
		95,296 778
		96,076

– I-75 –

APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

Attributable to equity shareholders of the Company	Shares held	Employee for share Retained	share-based award profits/ Non-	Share Share Merger Exchange compensation scheme Capital Revaluation Reserve (accumulated controlling	capital premium reserve reserve reserve reserve reserve reserve funds losses) Total interests Total equity	$’000 $’000 $’000 $’000 $’000 $’000 $’000 $’000 $’000 $’000 $’000 $’000 $’000	Balance at 1 January 2016 (audited) 9,094 127,805 2,161 (3,015) 6,157 (1,285) 512 627 8,815 65,753 216,624 2,371 218,995	Changes in equity for the six months ended	30 June 2016:	Profit for the period – – – – – – – – – 2,415 2,415 (154) 2,261	Other comprehensive income – – – (148) – – – – – – (148) 35 (113)	Total comprehensive income – – – (148) – – – – – 2,415 2,267 (119) 2,148 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -	Equity-settled share-based transactions – – – – (121) – – – – – (121) – (121)	Dividend paid to non-controlling shareholder – – – – – – – – – – – (965) (965)	Transferred to reserve funds – – – – – – – – 267 (267) – – –	Balance at 30 June 2016 (unaudited) 9,094 127,805 2,161 (3,163) 6,036 (1,285) 512 627 9,082 67,901 218,770 1,287 220,057		Balance at 1 January 2017 (audited) 9,094 127,805 2,161 (13,965) 5,336 (1,285) 5,482 627 8,295 (48,254) 95,296 778 96,074	Changes in equity for the six months ended	30 June 2017:	Loss for the period – – – – – – – – – (3,748) (3,748) 27 (3,721)	Other comprehensive income – – – 1,479 – – – – (11) – 1,468 1 1,469	Total comprehensive income – – – 1,479 – – – – (11) (3,748) (2,280) 28 (2,252) - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -	Equity-settled share-based transactions – – – – 78 – – – – – 78 – 78	Dividends paid to non-controlling interests – – – – – – – – – – – (552) (552)	Transferred to capital reserve – – – – – – – – (104) 104 – – –	Balance at 30 June 2017 (unaudited) 9,094 127,805 2,161 (12,486) 5,414 (1,285) 5,482 627 8,180 (51,898) 93,094 254 93,348

– I-76 –

APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

Condensed consolidated cash flow statement

for the six months ended 30 June 2017 (Expressed in United States dollars)

Operating activities
Cash used in operations
People’s Republic of China (“PRC”) enterprise
income tax and oversea tax paid
Net cash used in operating activities
Investing activities
Payment for purchase of property, plant and
equipment
Interest received
Construction expenditure on property under
development
(Increase)/decrease in pledged bank deposits
Other cash flows generated from investing
activities
Net cash used in investing activities
Financing activities
Proceeds from/(repayment of) bank loans and
other borrowings
Interest paid
Dividends paid to non-controlling
shareholders
Net cash generated from/(used in)
financing activities
Net increase/(decrease) in cash and
cash equivalents
Cash and cash equivalents at 1 January
Effect of foreign exchanges rate changes
Cash and cash equivalents at 30 June

For the six months
ended 30 June
2017
2016
(unaudited)
(unaudited)
$’000
$’000
(3,188)
(9,511)
(1,354)
(1,193)
(4,542)
(10,704)
- - - - - - - - - - - -
- - - - - - - - - - - -
(335)
(638)
32
436
–
(3,617)
(324)
3,242
–
5
(627)
(572)
- - - - - - - - - - - -
- - - - - - - - - - - -
9,120
(4,857)
(1,318)
(1,769)
(551)
(965)
7,251
(7,591)
- - - - - - - - - - - -
- - - - - - - - - - - -
2,082
(18,867)
9,952
46,505
76
(155)
12,110
27,483

– I-77 –

APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

Notes to the financial statements

(Expressed in United States dollars unless otherwise indicated)

1. CORPORATE INFORMATION

The Company was incorporated in the Cayman Islands as an exempted company with limited liability on 22 February 2005 under the Companies Law, Cap 22 (Law 3 of 1961, as consolidated and revised) of the Cayman Islands and was listed on the Main Board (the “ Main Board ”) of the Stock Exchange of Hong Kong Limited (the “ Stock Exchange ”) on 5 June 2009.

The condensed consolidated financial statements for the six months ended 30 June 2017 have not been audited by the Company’s auditors, but have been reviewed by the Company’s audit committee. The Company’s audit committee has no disagreement with the accounting treatment which had been adopted by the Group.

2. SIGNIFICANT ACCOUNTING POLICIES

The unaudited condensed consolidated financial statements have been prepared in accordance with the applicable disclosure requirements of the Rules Governing the Listing of Securities (the “ Listing Rules ”) on the Stock Exchange, the Hong Kong Accounting Standard (“ HKAS ”) 34 “ Interim Financial Reporting ” and other relevant HKASs and Interpretations and the Hong Kong Financial Reporting Standards (“ HKFRSs ”) issued by the Hong Kong Institute of Certified Public Accountants (“ HKICPA ”).

The unaudited condensed consolidated financial statements have been prepared on the historical cost basis.

The accounting policies used in the condensed consolidated financial statements are consistent with those followed in the preparation of the Group’s annual financial statements for the year ended 31 December 2016.

In the current period, the HKICPA has issued several amendments to HKFRSs that are first effective for the current accounting period of the Group. The adoption of these new and revised HKFRSs had no significant financial impact on these unaudited condensed consolidated financial statements.

The Group has not applied any new or revised HKFRSs that have been issued but are not yet effective for the current accounting period.

3. REVENUE

The principal activities of the Group are the design, manufacturing, installation and commissioning of capital equipment and packages on land and offshore rigs, oilfield expendables and supplies and the provision of engineering services.

– I-78 –

APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

Capital equipment and packages – Sales of capital equipment – Construction contracts revenue Oilfield expendables and supplies – Sales of expendables and supplies Engineering services – Service fee income	Unaudited For the six months ended 30 June 2017 30 June 2016 $’000 $’000 11,767 11,193 4,505 31,472 16,272 42,665 26,747 30,067 2,862 2,739 45,881 75,471	Unaudited For the six months ended 30 June 2017 30 June 2016 $’000 $’000 11,767 11,193 4,505 31,472 16,272 42,665 26,747 30,067 2,862 2,739 45,881 75,471
		42,665 30,067 2,739
		75,471

4. REVENUE AND SEGMENT REPORTING

The Group manages its business by divisions, which are organised by a mixture of both business units (products and services) and geography. In a manner consistent with the way in which information is reported internally to the Group’s most senior executive management for the purposes of resource allocation and performance assessment, the Group has presented the following three reportable segments. No operating segments have been aggregated to form the following reportable segments.

Capital equipment and packages:	the design, manufacturing, installation and commissioning
	of capital equipment and packages on land and offshore rigs
Oilfield expendables and	the manufacturing and trading of oilfield expendables and
supplies:	supplies
Engineering services:	the provision of engineering services

(a) Segment results, assets and liabilities

Segment assets include all tangible assets, intangible assets and current assets with the exception of interest in associate, other financial assets, cash at bank and in hand, pledged bank deposits, tax recoverable and other unallocated head office and corporate assets. Segment liabilities include trade and other payables attributable to the activities of the individual segment, with the exception of bank loans and other borrowings, tax payable and other unallocated head office and corporate liabilities.

– I-79 –

APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

The measure used for reporting segment profit/(loss) is “segment results” i.e. “adjusted earnings before finance costs and taxes” of individual segment. To arrive at segment results, the Group’s earnings are further adjusted for share of results of associate, finance costs and items not specifically attributed to individual segment, such as Directors’ and auditors’ remuneration and other head office or corporate income and expenses.

In addition to receiving segment information concerning segment results, management is provided with segment information concerning revenue (including inter-segment revenue), depreciation and amortisation. Inter-segment revenue is priced with reference to prices charged to external parties for similar orders.

Information regarding the Group’s reportable segments as provided to the Group’s most senior executive management for the purposes of resource allocation and assessment of segment performance.

The segment results for the periods ended 30 June 2017 and 2016 is set out below.

Revenue from external customers Inter-segment revenue Reportable segment revenue Reportable segment results	Capital equipment and packages Unaudited For the period ended 30 June 2017 30 June 2016 $’000 $’000 16,272 42,665 87 102 16,359 42,767 (2,708) 3,687	Oilfield expendables and supplies Unaudited For the period ended 30 June 2017 30 June 2016 $’000 $’000 26,747 30,067 1,279 1,200 28,026 31,267 136 3,123	Engineering services Unaudited For the period ended 30 June 2017 30 June 2016 $’000 $’000 2,862 2,739 – 382 2,862 3,121 (412) (846)	Total Unaudited For the period ended 30 June 2017 30 June 2016 $’000 $’000 45,881 75,471 1,366 1,684 47,247 77,155 (2,984) 5,964	Total Unaudited For the period ended 30 June 2017 30 June 2016 $’000 $’000 45,881 75,471 1,366 1,684 47,247 77,155 (2,984) 5,964
					77,155

					5,964

The segment assets and liabilities as at 30 June 2017 and 31 December 2016 is set out below:

	Capital equipment and	Capital equipment and	Oilfield expendables and	Oilfield expendables and
	packages		supplies		Engineering services		Total
	As at	As at	As at	As at	As at	As at	As at		As at
	30 June	31 December	30 June	31 December	30 June	31 December	30 June	31	December
	2017	2016	2017	2016	2017	2016	2017		2016
	(unaudited)	(audited)	(unaudited)	(audited)	(unaudited)	(audited)	(unaudited)		(audited)
	$’000	$’000	$’000	$’000	$’000	$’000	$’000		$’000
Reportable segment assets	292,637	293,177	74,612	78,984	9,979	11,340	377,228		383,501
Reportable segment liabilities	(219,330)	(219,446)	(30,891)	(37,040)	(1,452)	(1,844)	(251,673)		(258,330)

– I-80 –

APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

(b) Reconciliation of reportable segment revenue, profit or loss, assets and liabilities

Revenue Reportable segment revenue Elimination of inter-segment revenue Condensed consolidated revenue (Loss)/profit Segment results Finance costs Share of results of associate Unallocated head office and corporate income and expenses Condensed consolidated (loss)/profit before taxation Assets Reportable segment assets Interest in associate Deferred tax assets Other financial assets Tax recoverable Pledged bank deposits Cash at bank and in hand Unallocated head office and corporate assets Condensed consolidated total assets Liabilities Reportable segment liabilities Bank loans and other borrowings Tax payable Deferred tax liabilities Unallocated head office and corporate liabilities Consolidated total liabilities	Unaudited For the six months ended 30 June 2017 2016 $’000 $’000 47,247 77,155 (1,366) (1,684) 45,881 75,471 (2,984) 5,964 (1,807) (1,769) – 1 (783) (1,364) (5,574) 2,832 As at 30 June 2017 As at 31 December 2016 (unaudited) (audited) $’000 $’000 377,228 383,501 185 182 15,033 13,706 1,318 2,226 918 241 1,852 1,505 12,110 9,952 1,020 1,511 409,664 412,824 (251,673) (258,330) (57,856) (49,317) (5,556) (7,835) (130) (131) (1,101) (1,137) (316,316) (316,750)	Unaudited For the six months ended 30 June 2017 2016 $’000 $’000 47,247 77,155 (1,366) (1,684) 45,881 75,471 (2,984) 5,964 (1,807) (1,769) – 1 (783) (1,364) (5,574) 2,832 As at 30 June 2017 As at 31 December 2016 (unaudited) (audited) $’000 $’000 377,228 383,501 185 182 15,033 13,706 1,318 2,226 918 241 1,852 1,505 12,110 9,952 1,020 1,511 409,664 412,824 (251,673) (258,330) (57,856) (49,317) (5,556) (7,835) (130) (131) (1,101) (1,137) (316,316) (316,750)
		75,471

		5,964 (1,769) 1 (1,364)
		2,832

		As at 31 December 2016 (audited) $’000 383,501 182 13,706 2,226 241 1,505 9,952 1,511
		412,824

		(258,330) (49,317) (7,835) (131) (1,137)
		(316,750)

– I-81 –

APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

(c) Geographic information

The following table sets out information about the geographical locations of (i) the Group’s revenue from external customers and (ii) the Group’s property, plant and equipment, investment properties, interest in leasehold land held for own use under operating lease, other intangible assets, interest in associate and other financial assets (“ specified non-current assets ”). The geographical location of customers is based on the location of the customers. The geographical location of the specified non-current assets is based on the physical location of the assets, in the case of property, plant and equipment, investment properties and interest in leasehold land held for own use under operating leases, the location of the operations to which they are allocated, in the case of intangible assets and the location of operations, in the case of interest in associate.

Hong Kong Mainland China North America South America Europe Indonesia Singapore Others (other part of Asia, India etc.)	Revenue from external customers For the six months ended 30 June 2017 For the six months ended 30 June 2016 (unaudited) (unaudited) $’000 $’000 – – 7,804 38,509 22,183 14,451 11,493 18,550 1,721 1,133 927 1,719 65 542 1,688 567 45,881 75,471	Specified non-current assets As at 30 June 2017 As at 31 December 2016 (unaudited) (audited) $’000 $’000 224 226 52,974 53,680 13,545 15,056 67 50 1,914 2,267 – – 29 48 994 1,024 69,747 72,351	Specified non-current assets As at 30 June 2017 As at 31 December 2016 (unaudited) (audited) $’000 $’000 224 226 52,974 53,680 13,545 15,056 67 50 1,914 2,267 – – 29 48 994 1,024 69,747 72,351
			72,351

5. OTHER REVENUE AND NET INCOME

Interest income Net foreign exchange gain Government subsidies Others	Unaudited For the six months ended 30 June 2017 30 June 2016 $’000 $’000 32 436 – 929 336 766 463 550 831 2,681	Unaudited For the six months ended 30 June 2017 30 June 2016 $’000 $’000 32 436 – 929 336 766 463 550 831 2,681
		2,681

– I-82 –

APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

6. (LOSS)/PROFIT BEFORE TAXATION

(Loss)/profit before taxation is arrived at after charging/(crediting):

(a) Finance costs Interest on bank loans and other borrowings Less: Interest expense capitalised into property under development The borrowing costs have been capitalised at a rate of 6.87% (b) Other items Amortisation of interest in leasehold land held for own use under operating leases and intangible assets Depreciation Research and development costs Impairment losses on inventories Impairment losses on doubtful debts Net foreign exchange loss/(gain) Gain on disposal of property, plant and equipment Auditors’ remuneration	Unaudited For the six months ended 30 June 2017 30 June 2016 $’000 $’000 1,807 2,190 – (421) 1,807 1,769 – 7.09% per annum. 1,064 1,497 2,043 1,736 – 477 389 153 (170) 1,105 1,569 (929) (103) (5) 251 419	Unaudited For the six months ended 30 June 2017 30 June 2016 $’000 $’000 1,807 2,190 – (421) 1,807 1,769 – 7.09% per annum. 1,064 1,497 2,043 1,736 – 477 389 153 (170) 1,105 1,569 (929) (103) (5) 251 419
		1,769

		m. 1,497 1,736 477 153 1,105 (929) (5) 419

7. INCOME TAX

Current tax Provision for the year – Hong Kong Profits Tax – PRC enterprise income tax – Overseas corporation income tax – Over-provision in respect of prior years Deferred tax Origination of temporary differences	Unaudited For the six months ended 30 June 2017 30 June 2016 $’000 $’000 – 744 72 155 236 273 308 1,172 (1,886) – (1,578) 1,172 (275) (601) (1,853) 571	Unaudited For the six months ended 30 June 2017 30 June 2016 $’000 $’000 – 744 72 155 236 273 308 1,172 (1,886) – (1,578) 1,172 (275) (601) (1,853) 571
		1,172 –
		1,172 (601)
		571

– I-83 –

APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

The provision for Hong Kong profits tax is calculated at 16.5% of the estimated assessable profits for the six months ended 30 June 2017. Taxation for subsidiaries in other jurisdictions is charged at the corresponding current rates of taxation ruling in the relevant jurisdictions. During both periods, certain PRC subsidiaries subject to tax at reduced rates of 15% under the relevant PRC tax rules and regulations.

8. DIVIDENDS

The Board does not recommend the payment of any interim dividend for the six months ended 30 June 2017 (six months ended 30 June 2016: Nil).

9. (LOSS)/EARNINGS PER SHARE

(a) Basic (loss)/earnings per share

The calculation of the basic (loss)/earnings per share for the six months ended 30 June 2017 are based on the loss attributable to ordinary equity shareholders of the Company of approximately US$3,748,000 (profit attributable to ordinary equity shareholder of the Company for the six months ended 30 June 2016: US$2,415,000) and the weighted average number of 702,025,204 (six months ended 30 June 2016: 699,820,000) ordinary shares in issue during the period.

(b) Diluted (loss)/earnings per share

Diluted loss per share equals to basic loss per share for the six months period ended 30 June 2017 because the potential ordinary shares outstanding were anti-dilutive. The calculation of diluted earnings per share for the six months period ended 30 June 2016 was based on the profit attributable to ordinary equity shareholders of the Company of US$2,415,000 and the weighted average number of 701,550,000 ordinary shares.

10. PROPERTY, PLANT AND EQUIPMENT

During the period, additions to property, plant and equipment amounted to approximately US$335,000 (six months ended 30 June 2016: US$638,000).

11. TRADE AND OTHER RECEIVABLES

Trade debtors and bills receivable Less: impairment losses recognised on doubtful debts Other receivables, prepayments and deposits	As at 30 June 2017 $’000 117,278 (64,954) 52,324 18,778 71,102	As at 31 December 2016 $’000 123,958 (62,057)
		61,901 14,167
		76,068

The credit terms offered by the Group to its customers differ with each product/service. The credit terms offered to customers of oilfield expendables and supplies and engineering services are normally 30 to 90 days. The credit terms offered to customers of capital equipment and packages are negotiated on a case-by-case basis. Deposits ranging from 10% to 30% of the contract sum are usually required. The balance of 60% to 85% would be payable upon contract milestones being completed. The remaining 5% to 10% of the contract sum represents the retention money and is payable within up to 18 months after delivery of the products or 1 year after completion of the onsite testing, whichever is earlier.

– I-84 –

APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

Included in trade and other receivables are trade debtors and bills receivable (net of impairment loss recognised for doubtful debts) with the following ageing analysis as of the end of the reporting period:

Current Less than 1 month past due 1 to 3 months past due More than 3 months but within 12 months past due More than 12 months past due Amounts past due 12. TRADE AND OTHER PAYABLES Trade creditors and bills payable Other payables and accrued charges Gross amount due to customers for contract work	As at 30 June 2017 $’000 18,941 - - - - - - - - - 3,998 4,422 14,132 10,831 33,383 - - - - - - - - - 52,324 As at 30 June 2017 $’000 204,722 48,052 – 252,774	As at 31 December 2016 $’000 23,971 - - - - - - - - - 5,540 4,847 15,124 12,419
		37,930 - - - - - - - - -
		61,901

		As at 31 December 2016 $’000 217,800 39,103 2,564
		259,467

Included in trade and other payables are trade creditors and bills payable with the following ageing analysis as of the end of the reporting period:

Within 1 month More than 1 month but within 3 months More than 3 months but within 12 months More than 12 months but within 24 months More than 24 months	As at 30 June 2017 $’000 154,014 6,827 9,099 33,376 1,406 204,722	As at 31 December 2016 $’000 192,936 9,044 9,297 3,368 3,155
		217,800

– I-85 –

APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

13. MATERIAL RELATED PARTY TRANSACTIONS

In addition to the transactions and balances disclosed elsewhere in these condensed consolidated financial statements, the Group entered into the following related party transactions with subsidiaries of a substantial shareholder of the Group.

						Unaudited	Unaudited
						For the six	months ended
						30 June 2017	30 June 2016
						$’000	$’000
Sales	of	capital	equipment	and	package	797	944

14. EMPLOYEE SHARE-BASED ARRANGEMENT

The Group operates a share award plan as part of the benefits of its employees. Under the share award plan, the Board is allowed to make awards as long-term incentives for selected senior executives of the Group in addition to share option plan which they may be eligible to receive under the share award plan.

The employee share-based compensation expenses in relation to the options and share awards are charged to profit or loss under staff costs over the relevant vesting periods with a corresponding increase in employee share-based compensation reserve.

During the six months ended 30 June 2017, no share options were granted under the share award

plan.

15. COMPARATIVE FIGURES

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

– I-86 –

APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

4. INDEBTEDNESS

At the close of business on 30 November 2017, being the latest practicable date for the purpose of this indebtedness statement prior to the printing of this circular, the Group had outstanding borrowings of approximately US$62,660,000, comprising:

(i) Secured bank borrowings of approximately US$20,261,000 of which approximately US$3,720,000 was guaranteed;
(ii) Unsecured bank borrowings of approximately US$14,956,000 of which approximately US$11,054,000 was guaranteed; and
(iii) Unsecured and unguaranteed bond of approximately US$27,443,000.

The Group’s secured bank borrowings were secured by a legal charge on the Group’s property, plant and equipment, land use rights and trade receivables.

Save as aforesaid and apart from normal trade payables in the ordinary course of business, as at the close of business on 30 November 2017, the Group did not have any outstanding debt securities issued and outstanding or authorised or otherwise created but unissued, term loans, other borrowings or indebtedness in the nature of borrowing including bank overdrafts, loans, liabilities under acceptances (other than normal trade bills), acceptance credits, hire purchase commitments, mortgages and charges, material contingent liabilities or guarantees outstanding.

5. MATERIAL CHANGE

Save and except the followings, the Directors confirm that there was no material change in the financial or trading position or outlook of the Group since 31 December 2016, being the date to which the latest published audited consolidated financial statements of the Group were prepared, up to and including the Latest Practicable Date.

The Group recorded a decrease in revenue for the 11 months ended 30 November 2017 as compared to that of the year ended 31 December 2016 on a pro-rata basis mainly due to the prevailing depressed drilling market which resulted in low rig day rates and capital expenditure investment by oil and gas companies leading to a decrease in revenue in the Capital Equipment and Packages segment.

6. BUSINESS TREND AND FINANCIAL AND TRADING PROSPECTS

Business trend

The Group’s key value proposition is in its engineering capabilities to integrate and manufacture a wide range of equipment and to deliver innovative solutions to rig operators to improve operational efficiency.

The Group’s business is affected by global oil supply which has increased dramatically since 2007 to mid-2014 from unconventional resources, deep-water

– I-87 –

APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

resources and other new discoveries or resources. New technology combined with relatively high prices and the growing demand then led to increase in global drilling activity. This was the main growth driver for the Company’s main business of delivering engineering solutions and equipment related mainly to drilling operations. However, the strong demand and price momentum eventually led to global supply catching up to demand. In the latter half of 2014, demand growth in Asia, Europe and the U.S. was weakened. As global inventories of crude and refined products grew, the price of oil declined significantly in 2015 and remaining depressed throughout 2015 and 2016. Since the previous audited financial year end 31 December 2016, oil prices recovered to approximate US$60 per barrel but the oversupply and excess production capacity continues to undermine the Company’s intake of new orders.

The focus of the Company during 2017 has been to significantly reduce costs and to transform its core business from drilling related products to other segments such as decommissioning and new application of rigs for production and other non-drilling related operations.

Competitiveness

In terms of competition, the Company operates in a competitive environment of two main groups of suppliers: domestic and international.

The domestic suppliers are characterised as relatively small, with a narrow focus on one or very few products. Such suppliers lack the reputation and track record that is necessary to expand significantly but can operate on low prices but are not known for good quality. The international suppliers, by contrast, are large, integrated and have a full range of products capable of providing full-service solutions across the range of equipment and services from exploration to downhole services and have greater technological depth in their products.

As a result of a consistent and multi-year strategy, the Group has expanded its range of products and services through several mergers and acquisitions over the years to now enable it to supply high quality integrated drilling package solutions and is now positioned as an integrated oil services company. In this regard, the Group deliberately adopted the integrated strategy of international competitors with an emphasis of operating from the PRC where the highest growth and demand is expected.

– I-88 –

APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

For the year ended 31 December 2016, the percentages of the Group’s turnover attributable to its largest customer and five largest customers were 9.8% and 36.8% respectively. The aggregate amount of purchases attributable to the Group’s five largest suppliers accounted for approximately 67.3% of the Group’s total purchases and the amount of purchases attributable to the Group’s largest supplier was approximately 36.2% of the Group’s total purchases. None of the Directors, their associates or any Shareholders (which to the knowledge of the Directors owns more than 5% of the Company’s issued share capital) has any interest in any of the Group’s five largest customers or suppliers.

Financial and Trading Prospects

The Group expects that its manufacture and sales of drilling related equipment and products will encounter sluggish market demand as the oil and gas market remains at current levels. It is expected that the market adjustment of supply and demand balance will continue into 2018. New products in the decommissioning new business segment and alternative application of rigs will not contribute significant to the Group’s business yet for the current financial year. However, the main emphasis is to continue with the strategy to standardize and simplify products, service business processes and sharing cost competitiveness with customers to gain more market share in this low oil price and cost environment. The Group will continuously control and further reduce costs, strengthen customer relationships, broaden customer base, develop innovative engineering solutions to improve profitability. Upon completion, the Group will be more favourably positioned in the procurement and supply chain of domestic and international operators. The Group will also seek opportunities to improve cash flow, reduce working capital requirements to improve the Group’s financial position.

Upon Completion, the Subscriber Nominee will become the controlling Shareholder and has control of the Company. They will not only provide additional funding to the Company and improve its financial position but also introduce new business opportunities and provide long-term shareholder support to the Company, which is beneficial to Shareholders and the Company as a whole. Please refer to the section headed “Reasons for and Benefits of the Subscription” in the “Letter from the Board” contained in this circular for further details.

– I-89 –

APPENDIX II

GENERAL INFORMATION

1. RESPONSIBILITY STATEMENT

This circular, for which the Directors collectively and individually accept full responsibility, includes particulars given in compliance with the Listing Rules 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 circular is accurate and complete in all material respects and is not misleading or deceptive, and there are no other matters the omission of which would make any statement herein or this circular misleading.

This circular includes particulars given in compliance with the Takeovers Code. The Directors jointly and severally 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, opinions expressed in this circular have been arrived at after due and careful consideration and there are no other facts not contained in this circular, the omission of which would make any statement herein or this circular misleading.

The directors of the Subscriber Nominee, namely Mr. Wang Hongyuan and Mr. Huang Xiaohua accept full responsibility for the accuracy of the information (other than that relating to the Group) contained in this circular and confirm, having made all reasonable enquiries, that to the best of their knowledge, opinions expressed in this circular (other than those expressed by the Group) has been arrived at after due and careful consideration, and there are no other facts not contained in this circular the omission of which would make any statement in this circular misleading.

The directors of Fund GP, namely, Mr. Zhang Rizhong, Mr. Wang Hongyuan, Mr. Chen Anhua, Mr. Huang Xiaohua and Mr. Wu Sichuan, accept full responsibility for the accuracy of the information (other than that relating to the Group) contained in this circular and confirm, having made all reasonable enquiries, that to the best of their knowledge, opinions expressed in this circular (other than those expressed by the Group) have been arrived at after due and careful consideration, and there are no other facts not contained in this circular the omission of which would make any statement in this circular misleading.

The directors of Fund Manager, namely, Mr. Zhang Rizhong, Mr. Wang Hongyuan, Mr. Chen Anhua, Mr. Huang Xiaohua, Mr. Wu Sichuan, Mr. Tian Jiong and Mr. Kang Dong, accept full responsibility for the accuracy of the information (other than that relating to the Group) contained in this circular and confirm, having made all reasonable enquiries, that to the best of their knowledge, opinions expressed in this circular (other than those expressed by the Group) have been arrived at after due and careful consideration, and there are no other facts not contained in this circular the omission of which would make any statement in this circular misleading.

– II-1 –

APPENDIX II

GENERAL INFORMATION

2. SHARE CAPITAL AND SHARE OPTIONS

Share Capital

The authorized and issued share capital of the Company as at the Latest Practicable Date are as follows:

Authorised 2,000,000,000 Shares of HK$0.10 each Issued and fully paid 707,120,204 Shares of HK$0.10 each	HK$ 200,000,000.00

	70,712,020.40

Immediately after completion of Subscription (assuming no Share Options have been exercised)

Authorised 2,000,000,000 Shares of HK$0.10 each Issued and fully paid 707,120,204 Shares at the Latest Practicable Date 765,186,000 Subscription Shares to be issued pursuant to Subscription 1,472,306,204 Shares upon completion of Subscription	HK$ 200,000,000.00

	70,712,020.40

	76,518,600.00

	147,230,620.40

– II-2 –

APPENDIX II

GENERAL INFORMATION

Immediately after completion of Subscription (assuming all Share Options have been exercised)

Authorised 2,000,000,000 Shares of HK$0.10 each Issued and fully paid 707,120,204 Shares at the Latest Practicable Date 765,186,000 Subscription Shares to be issued pursuant to Subscription 27,058,000 Shares to be issued upon exercise in full of all Share Options 1,499,364,204 Shares upon Completion of Subscription	HK$ 200,000,000.00

	70,712,020.40

	76,518,600.00

	2,705,800.00

	149,936,420.4

All the existing Shares in issue are listed on the Stock Exchange and rank pari passu in all respect with each other including rights to dividends, voting and return of capital.

When issued and fully paid, the Subscription Shares will rank pari passu in all respect with each other including rights to dividends, voting and return of capital. Holders of the fully-paid Subscription Shares will be entitled to receive all dividends and distributions which are declared, made or paid after the date of allotment of the Subscription Shares.

Since 31 December 2016 (the date to which the latest published audited financial statements of the Company were made up), and up to the Latest Practicable Date, the Company has not issued nor agreed to issue any new Shares (other than under the Subscription Agreement).

– II-3 –

APPENDIX II

GENERAL INFORMATION

Options, warrants and convertible securities

The Company adopted a share option scheme on 20 October 2005 (the “Post-IPO Scheme”), pursuant to which the Directors granted (i) 7,280,000 share options at HK$2.43 each to 14 employees of the Group on 10 May 2007, (ii) 9,700,000 share options at HK$5.60 each to 51 employees and 2 consultants of the Group on 12 November 2007, (iii) 2,000,000 share options at HK$5.23 each to 3 employees of the Group on 15 January 2008, (iv) 5,000,000 share options at HK$2.32 each to 6 employees of the Group on 12 August 2008 and (v) 16,050,000 share options at HK$0.54 each to 8 Directors and 38 employees of the Group on 29 December 2008. On 4 November 2008, the refreshed scheme mandate limit of 54,890,800 Shares in respect of the granting of share options under the Post-IPO Scheme (the “Refreshment”) was approved at the extraordinary general meeting duly convened and held. The Post-IPO Scheme including the Refreshment, was conditionally terminated by the Board on 6 May 2009. Upon the transfer of the listing of shares of the Company from the GEM to the Main Board on 5 June 2009, the termination of the Post-IPO Scheme became effective. Thereafter, no further option had been offered or granted under the Post-IPO Scheme. Pursuant to the Post-IPO Scheme, options previously granted but unexercised under the Post-IPO Scheme will remain valid and exercisable in accordance with their terms of issue, of which a total of 3,430,000 share options, representing 0.49% of the issued share capital of the Company, remain valid and outstanding as at the Latest Practicable Date.

The Company adopted another share option scheme (the “New Scheme”) on 5 August 2009 for granting up to 56,254,040 share options. The New Scheme will expire on 5 August 2019. Pursuant to the New Scheme, the Directors granted (i) 20,295,000 share options at HK$2.06 each to 82 employees of the Group on 18 September 2009, (ii) 9,070,000 share options at HK$1.27 each to 29 employees of the Group on 1 September 2010, (iii) 2,400,000 share options at HK$1.97 each to 2 employees of the Group on 21 February 2011, (iv) 10,780,000 share options at HK$1.02 each to 18 employees of the Group on 4 September 2012, (v) 6,025,000 share options at HK$2.9 each to 23 employees of the Group on 30 August 2013, (vi) 2,400,000 share options at HK$4.16 each to 6 employees of the Group on 2 September 2014, and (vii) 1,500,000 share options at HK$2.11 each to 9 employees of the Group on 24 December 2014. Pursuant to the New Scheme, options previously granted but unexercised under the New Scheme will remain valid and exercisable in accordance with their terms of issue, of which a total of 23,628,000 share options, representing 3.34 % of the issued share capital of the Company, remain valid and outstanding as at the Latest Practicable Date.

– II-4 –

APPENDIX II

GENERAL INFORMATION

Details of options under the Post-IPO Scheme including the Refreshment as at the Latest Practicable Date were as follows:

Name or category of participant Date of grant Exercisable period Exercise price per share HK$ (i) Employees 10.05.2007 10.11.2007 to 09.05.2017 2.43 (ii) Employees 12.11.2007 12.05.2008 to 11.11.2017 5.60 (iii) Employees 15.01.2008 15.07.2008 to 14.01.2018 5.23 (iv) Employees 12.08.2008 12.02.2009 to 11.08.2018 2.32 (v) Directors: Mr. Zhang Menggui 29.12.2008 29.06.2009 to 28.12.2018 0.54 Mr. Jiang Bing Hua 29.12.2008 29.06.2009 to 28.12.2018 0.54 Mr. Jiang Longsheng 29.12.2008 29.06.2009 to 28.12.2018 0.54 Mr. Chan Ngai Sang, Kenny 29.12.2008 29.06.2009 to 28.12.2018 0.54 Mr. Bian Junijang 29.12.2008 29.06.2009 to 28.12.2018 0.54 Mr. Guan Zhichuan 29.12.2008 29.06.2009 to 28.12.2018 0.54 Employees and other 29.12.2008 29.06.2009 to 28.12.2018 0.54 Sub-total Total	Number of share options Balance as at 01.01.2017 Balance as at the Latest Practicable Date 3,982,000 − 4,780,000 − 1,000,000 − 1,700,000 1,700,000 – – – – 400,000 400,000 – – 350,000 350,000 – – 980,000 980,000 1,730,000 1,730,000 13,192,000 3,430,000	Number of share options Balance as at 01.01.2017 Balance as at the Latest Practicable Date 3,982,000 − 4,780,000 − 1,000,000 − 1,700,000 1,700,000 – – – – 400,000 400,000 – – 350,000 350,000 – – 980,000 980,000 1,730,000 1,730,000 13,192,000 3,430,000
		1,730,000
		3,430,000

Details of options under the New Scheme as at the Latest Practicable Date were as follows:

Name or category of participant Date of grant Exercisable period Exercise price per share HK$ (i) Employees 18.09.2009 18.03.2010 to 17.09.2019 2.06 (ii) Employees 01.09.2010 01.03.2011 to 31.08.2020 1.27 (iii) Employees 21.02.2011 21.08.2011 to 20.02.2021 1.97 (iv) Director: Mr. Wang Yong 04.09.2012 04.02.2013 to 03.09.2022 1.02 Employees 04.09.2012 04.03.2013 to 03.09.2022 1.02 Sub-total (v) Employees 30.08.2013 28.02.2014 to 29.08.2023 2.9 (vi) Employees 02.09.2014 02.03.2015 to 01.09.2024 4.16 (vii) Employees 24.12.2014 24.06.2015 to 23.12.2024 2.1 Total	Number of share options Balance as at 01.01.2017 Balance as at the Latest Practicable Date 7,288,000 7,288,000 2,320,000 2,320,000 − − 3,000,000 3,000,000 4,065,000 4,065,000 7,065,000 7,065,000 4,105,000 4,105,000 2,250,000 2,250,000 1600,000 600,000 23,628,000 23,628,000	Number of share options Balance as at 01.01.2017 Balance as at the Latest Practicable Date 7,288,000 7,288,000 2,320,000 2,320,000 − − 3,000,000 3,000,000 4,065,000 4,065,000 7,065,000 7,065,000 4,105,000 4,105,000 2,250,000 2,250,000 1600,000 600,000 23,628,000 23,628,000
		7,065,000
		4,105,000 2,250,000 600,000
		23,628,000

– II-5 –

APPENDIX II

GENERAL INFORMATION

As at the Latest Practicable Date, the Company has the 27,058,000 outstanding Options.

As at the Latest Practicable Date, save as disclosed above, the Company did not have any derivatives, options, warrants and conversion rights or similar rights which are convertible or exchangeable into Shares as at the Latest Practicable Date. Save as set out above, no share or loan capital of the Group had been put under option or agreed conditionally or unconditionally to be put under option as at the Latest Practicable Date.

3. MARKET PRICE

The table below shows the closing price per Share as quoted by the Stock Exchange on (i) the last trading day of each of the calendar months during the Relevant Period; (ii) the last business day immediately preceding the date of the Last Trading Day; (iii) the Last Trading Day; and (iv) on the Latest Practicable Date:

	Closing Price
Date	per Share
	HK$
30 June 2017	0.68
31 July 2017	0.69
31 August 2017	0.56
29 September 2017	0.81
31 October 2017	0.79
30 November 2017	0.80
13 December 2017	0.83
14 December 2017 (the Last Trading Day)	0.96
29 December 2017	0.85
16 January 2018 (the Latest Practicable Date)	0.90

The highest and lowest closing prices per Share recorded on the Stock Exchange during the Relevant Period were HK$1.17 on 25 January 2017 and 2 February 2017, and HK$0.52 on 25 August 2017, respectively.

– II-6 –

APPENDIX II

GENERAL INFORMATION

4. DISCLOSURE OF INTERESTS

Interest in the Company

Directors’ interests in the Company

As at the Latest Practicable Date, the interests and short positions of the directors, proposed directors and chief executives of the Company in the shares, underlying shares and debentures of the Company or any of its associated corporations (within the meaning of Part XV of the SFO), which were required to be (i) notified to the Company and the Stock Exchange pursuant to Divisions 7 and 8 of Part XV of the SFO (including interest and short positions which were taken or deemed to have been taken under such provisions of the SFO); (ii) recorded in the register maintained by the Company pursuant to Section 352 of the SFO; (iii) notified to the Company and the Stock Exchange pursuant to the Model Code for Securities Transactions by Directors of the Listed Issuers (the “Model Code”) set out in Appendix 10 to the Listing Rules as adopted by the Company, or (iv) disclosed in this circular pursuant to the requirements of the Takeovers Code, were as follows:

						Approximate %
	Long					of issued
	Position/				No. of	share capital
	Short	Personal	Corporate		underlying	of the
Name of Director	Position	interests	interests	Total	Shares	Company
Mr. Zhang Menggui,	Long Position	4,656,000	120,046,200	124,702,200	–	17.64%
Morgan_(Note 1)_
Mr. Jiang Bing Hua	Long Position	4,656,000	120,046,200	124,702,200	–	17.64%
(Note 1)
Mr. Wang Yong	Long Position	–	–	–	3,000,000	0.42%
Mr. Jiang Longsheng	Long Position	–	–	–	400,000	0.06%
Mr. Brian Chang	Long Position	–	66,072,800	66,072,800	–	9.34%
(Note 2)
Mr. Chan Ngai Sang,	Long Position	500,000	–	500,000	–	0.07%
Kenny
Mr. Guan Zhichuan	Long Position	300,000	–	300,000	–	0.04%

– II-7 –

APPENDIX II

GENERAL INFORMATION

Notes:

Global Energy Investors, LLC. is the beneficial owner of 120,046,200 Shares. The entire share capital of Global Energy Investors, LLC. is beneficially owned as to 50% each by Mr. Zhang Menggui, Morgan and Mr. Jiang Bing Hua, both are the executive Directors of the Company. Accordingly, both Mr. Zhang Menggui, Morgan and Mr. Jiang Bing Hua are deemed to be interested in the 120,046,200 Shares beneficially owned by Global Energy Investors, LLC. under Part XV of the SFO.
Mr. Brian Chang indirectly holds 66,072,800 shares through Windmere International Limited which is his wholly-owned company. Accordingly, he is deemed to be interested in the shares held by Windmere International Limited under Part XV of the SFO.
The percentage is calculated on the basis of 707,120,204 Shares in issue as at the Latest Practicable Date.

Save as disclosed above, as at the Latest Practicable Date, none of the directors, proposed directors and chief executives of the Company had any interests or short positions in the shares, underlying shares or debentures of the Company and any of its associated corporations which were required to be (i) notified to the Company and the Stock Exchange pursuant to Divisions 7 and 8 of Part XV of the SFO (including interests and short positions which were taken or deemed to have been taken under such provisions of the SFO) or the Model Code adopted by the Company; (ii) entered in the register required to be kept under Section 352 of the SFO; or (iii) disclosed in this circular pursuant to the requirements of the Takeovers Code.

Substantial shareholders’ and other persons’ interests in the shares and underlying shares of the Company

As at the Latest Practicable Date, so far as was known to the Directors or chief executive of the Company based on the register maintained by the Company pursuant to Part XV of the SFO, other than the interests of the directors, proposed directors and chief executives of the Company as disclosed above, shareholders who had interests or short positions in the shares or underlying shares of the Company of 5% or more which need to be disclosed to the Company under the provisions of Divisions 2 and 3 of part XV of the SFO, or which were recorded in the register to be kept by the Company under Section 336 of the SFO, were as follows:

				Approximate %
				of issued share
		Long Position/	Number of	capital of the
Name of Shareholder	Capacity	Short Position	Shares	Company
				(Note 11)
Madam Chen Fengying_(Note 1)_	Interest of	Long Position	124,702,200	17.64%
	the spouse
Madam Zhang Jiuli_(Note 2)_	Interest of	Long Position	124,702,200	17.64%
	the spouse

– II-8 –

APPENDIX II

GENERAL INFORMATION

				Approximate %
				of issued share
		Long Position/	Number of	capital of the
Name of Shareholder	Capacity	Short Position	Shares	Company
				(Note 11)
Global Energy Investors, LLC_(Note 3)_	Corporate	Long Position	120,046,200	16.98%
Windmere International Limited_(Note 4)_	Corporate	Long Position	66,072,800	9.34%
China International Marine Containers	Corporate	Long Position	92,800,000	13.12%
(Group) Company Limited_(Note 5)_
China International Marine Containers	Corporate	Long Position	92,800,000	13.12%
(Hong Kong) Limited_(Note 5)_
Harmony Master Fund_(Note 6)_	Corporate	Long Position	70,687,800	10.00%
China Great Wall AMC (International)	Corporate	Long Position	765,186,000	108.21%
Holdings Company Limited_(Note 7)_
China Great Wall Asset Management	Corporate	Long Position	765,186,000	108.21%
Co., Ltd.(Note 7)
China Merchants & Great Wall Ocean	Corporate	Long Position	765,186,000	108.21%
Strategy & Technology Fund (L.P.)
China Merchants Great-Wall GP Limited	Corporate	Long Position	765,186,000	108.21%
(Note 8)
Great Wall International Investment V	Corporate	Long Position	765,186,000	108.21%
Limited_(Note 9)_
China Merchants Group Limited	Corporate	Long Position	765,186,000	108.21%
(Note 10)
China Merchants Steam Navigation	Corporate	Long Position	765,186,000	108.21%
Company Limited_(Note 10)_
China Merchants Capital Investment	Corporate	Long Position	765,186,000	108.21%
Co., Ltd.*(Note 10)
China Merchants Holdings (Hong Kong)	Corporate	Long Position	765,186,000	108.21%
Company Limited_(Note 10)_
China Merchants Capital Management	Corporate	Long Position	765,186,000	108.21%
Co., Ltd.*(Note 10)
China Merchants Capital Holdings	Corporate	Long Position	765,186,000	108.21%
Co., Ltd.*(Note 10)
China Merchants Capital Management	Corporate	Long Position	765,186,000	108.21%
(International) Limited_(Note 10)_
China Merchants Capital Holdings	Corporate	Long Position	765,186,000	108.21%
(International) Limited_(Note 10)_
China Merchants Industry Holdings	Corporate	Long Position	765,186,000	108.21%
Company Limited_(Note 10)_

* For identification purpose only

– II-9 –

APPENDIX II

GENERAL INFORMATION

Notes:

These interests represent the same block of Shares and share options held by Mr. Zhang Menggui, Morgan as shown in the above section headed “Director’s Interest in the Company”. Since Madam Chen Fengying is the spouse of Mr. Zhang Menggui, Morgan, she is deemed to be interested in the Shares and share options held by him under Part XV of the SFO.
These interests represent the same block of Shares and share options held by Mr. Jiang Bing Hua as shown in the above section headed “Director’s Interest in the Company”. Since Madam Zhang Jiuli is the spouse of Mr. Jiang Bing Hua, she is deemed to be interested in the Shares and share options held by him under Part XV of the SFO.
This interest represents the same block of corporate interest held by Mr. Zhang Menggui, Morgan and Mr. Jiang Bing Hua as shown in the above section headed “Director’s Interest in the Company”.
Saved as disclosed above, as at the Latest Practicable Date, the Company had not been notified by any person (other than the directors and chief executives of the Company) who had interests or short position in the shares and underlying shares of the Company which fell to be disclosed to the Company under Part XV of the SFO or which were recorded in the register required to be kept by the Company under section 336 of the SFO.
Mr. Brian Chang indirectly holds 66,072,800 Shares through Windmere International Limited which is his wholly-owned company. Mr. Brian Chang’s interest is shown in the above section headed “Director’s Interest in the Company”. Accordingly, he is deemed to be interested in the Shares held by Windmere International Limited under Part XV of the SFO.
China International Marine Containers (Hong Kong) Limited (“ CIMC HK ”) is the beneficial owner of 92,800,000 Shares. CIMC HK is a wholly-owned subsidiary of China International Marine Containers (Group) Company Limited (“ CIMC Group ”). Therefore, CIMC Group is deemed to be interested in the 92,800,000 Shares held by CIMC HK under Part XV of the SFO.
Harmony Master Fund (“ Harmony Fund ”) is a long-only equity fund registered in Cayman Islands. Harmony Fund is managed by DM Fund Management Limited, a company registered in Cayman Islands and a subsidiary of DM Capital Limited, a company incorporated in British Virgin Islands. Harmony Fund primarily holds long equity positions in small capitalization stocks that derive a majority of their revenues within the Greater China region.
China Great Wall AMC (International) Holdings Company Limited holds 25% of the equity interest in Fund GP and is a wholly owned subsidiary of China Great Wall Asset Management Co., Ltd. Therefore, both GWAMC International and GW Asset Management are both deemed to be interested in the 765,186,000 Shares that the Subscriber are interested in under Part XV of the SFO.
China Merchants Great-Wall GP Limited is the general partner of the Subscriber and there is deemed to be interested in the 765,186,000 Shares that the Subscriber are interested in under Part XV of the SFO.
Great Wall International Investment V Limited holds approximately 39.986% of the limited partnership interests in the Subscriber and is therefore deemed to be interested in the 765,186,000 Shares that the Subscriber are interested in under Part XV of the SFO.

– II-10 –

APPENDIX II

GENERAL INFORMATION

China Merchants Capital Management (International) Limited holds 45% of the equity interest in Fund GP and is a wholly owned subsidiary of China Merchants Capital Management Co. Ltd., which in turn is wholly owned by China Merchants Capital Investment Co., Ltd..

China Merchants Capital Holdings (International) Limited holds approximately 9.996% of the limited partnership interests in the Subscriber and is a wholly owned subsidiary of China Merchants Capital Holdings Co. Ltd., which in turn is wholly owned by China Merchants Capital Investment Co., Ltd..

CM Industry holds 30% of the equity interest in Fund GP and approximately 29.989% of the limited partnership interests in the Subscriber and is a wholly owned subsidiary of China Merchants Holdings (Hong Kong) Company Ltd..

Both China Merchants Capital Investment Co., Ltd. and China Merchants Holdings (Hong Kong) Company Ltd. are wholly owned subsidiaries of China Merchants Steam Navigation Company Limited, which is the wholly owned subsidiary of CM Group.

Therefore, each of China Merchants Capital Management (International) Limited, China Merchants Capital Management Co. Ltd., China Merchants Capital Investment Co., Ltd., China Merchants Capital Holdings (International) Limited, China Merchants Capital Holdings Co. Ltd., China Merchants Industry Holdings Co., Ltd., China Merchants Holdings (Hong Kong) Company Ltd., China Merchants Steam Navigation Company Limited and CM Group are deemed to be interested in the 765,186,000 Shares that the Subscriber are interested in under Part XV of the SFO.

The Subscriber Nominee shall take up the 765,186,000 Subscription Shares upon Completion.
The percentage is calculated on the basis of 707,120,204 Shares in issue as at the Latest Practicable Date.

5. ADDITIONAL DISCLOSURE OF INTERESTS AND DEALINGS IN SECURITIES

As at the Latest Practicable Date:

(i) save for the Subscription and save that the shareholding interests set out in the section headed “Effect of the Subscription on the shareholding structure of the Company” in this circular, the Subscriber, the Subscriber Nominee and parties acting in concert with them did not hold, control or have direction over any outstanding options, warrants, or any securities that are convertible into Shares or any derivatives in respect of securities in the Company, or hold any relevant securities (as defined in Note 4 to Rule 22 of the Takeovers Code) in the Company;
(ii) save for the Subscription and save that the shareholding interests set out in the section headed “Effect of the Subscription on the shareholding structure of the Company” in this circular, the directors of the Subscriber and the Subscriber Nominee were not interested in any relevant securities (as defined in Note 4 to Rule 22 of the Takeovers Code) of the Company;
(iii) no person had any arrangement of the kind referred to in Note 8 to Rule 22 of the Takeovers Code with the Subscriber, the Subscriber Nominee or parties acting in concert with them;

– II-11 –

APPENDIX II

GENERAL INFORMATION

(iv) save for (i) the appointment of persons to be nominated by the Subscriber as Directors representing a majority of the Board immediately following such appointment; and (ii) the Company procuring (a) the shareholders to vote in favor of such appointment and (b) five (5) existing Directors to resign as Directors as agreed between the Company and the Subscriber pursuant to the Subscription Agreement, no agreement, arrangement or understanding (including any compensation arrangement) existed between (A) the Subscriber, the Subscriber Nominee or any parties acting in concert with them, and (B) any Directors, recent Directors, Shareholders or recent Shareholders having any connection with or dependence upon the Subscription and/or the Whitewash Waiver;
(v) no person had irrevocably committed themselves to vote for or against the resolutions to be proposed at the EGM to approve the Subscription and/or the Whitewash Waiver;
(vi) no Shares acquired by the Subscriber, the Subscriber Nominee or parties acting in concert with them pursuant to the Subscription will be transferred, charged or pledged to any other persons;
(vii) the Subscriber, the Subscriber Nominee and parties acting in concert with them have not borrowed or lent any relevant securities (as defined in Note 4 to Rule 22 of the Takeovers Code) in the Company;
(viii) the Company did not have any interest in the relevant securities (as defined in Note 4 to Rule 22 of the Takeovers Code) of the Subscriber (or the Subscriber Nominee);
(ix) none of the Directors had any interest in the relevant securities (as defined in Note 4 to Rule 22 of the Takeovers Code) of the Subscriber (or the Subscriber Nominee);
(x) no relevant securities (as defined in Note 4 to Rule 22 of the Takeovers Code) of the Company had been borrowed or lent by any of the Directors or by the Company;
(xi) none of (i) the subsidiaries of the Company; (ii) the pension fund of the Company or its subsidiaries; nor (iii) any adviser to the Company as specified in class (2) of the definition of “associate” under the Takeovers Code (but excluding exempt principal traders), owned or controlled any relevant securities (as defined in Note 4 to Rule 22 of the Takeovers Code) of the Company.

– II-12 –

APPENDIX II

GENERAL INFORMATION

During the Relevant Period:

(i) save for the Subscription and save that the shareholding interests set out in the section headed “Effect of the Subscription on the shareholding structure of the Company” in this circular, the directors of the Subscriber and the Subscriber Nominee had not dealt for value in any relevant securities (as defined in Note 4 to Rule 22 of the Takeovers Code) of the Company;
(ii) no person had any arrangement of the kind referred to in Note 8 to Rule 22 of the Takeovers Code with the Subscriber or the Subscriber Nominee or parties acting in concert with them;
(iii) no person had irrevocably committed themselves to vote for or against the resolutions to be proposed at the EGM to approve the Subscription and/or the Whitewash Waiver;
(iv) the Subscriber, the Subscriber Nominee and parties acting in concert with them have not borrowed or lent any relevant securities (as defined in Note 4 to Rule 22 of the Takeovers Code) in the Company;
(v) the Company had not dealt for value in the relevant securities (as defined in Note 4 to Rule 22 of the Takeovers Code) of the Subscriber or the Subscriber Nominee;
(vi) none of the Directors had dealt for value in the relevant securities (as defined in Note 4 to Rule 22 of the Takeovers Code) of the Subscriber or the Subscriber Nominee; and
(vii) no relevant securities (as defined in Note 4 to Rule 22 of the Takeovers Code) of the Company had been borrowed or lent by any of the Directors or by the Company.

From the Last Trading Day to the Latest Practicable Date:

(i) save for the Subscription Agreement, no person had any arrangement of the kind referred to in Note 8 to Rule 22 of the Takeovers Code with the Company or with any person who is an associate of the Company by virtue of classes (1), (2), (3) and (4) of the definition of “associate” under the Takeovers Code;

– II-13 –

APPENDIX II

GENERAL INFORMATION

(ii) no fund which was managed on a discretionary basis by any fund manager (other than exempt fund managers) connected with the Company had any interest in the relevant securities (as defined in Note 4 to Rule 22 of the Takeovers Code) of the Company;
(iii) none of (i) the subsidiaries of the Company; (ii) the pension fund of the Company or its subsidiaries; nor (iii) any adviser to the Company as specified in class (2) of the definition of “associate” under the Takeovers Code (but excluding exempt principal traders) had dealt in the relevant securities (as defined in Note 4 to Rule 22 of the Takeovers Code) of the Company;

Save for the Subscription Agreement (as described under the section headed “Subscription Agreement” in the letter from the Board), there was no agreement or arrangement between any of the Directors and any other person which was conditional or dependent on the outcome of the Subscription and/or the Whitewash Waiver or otherwise connected with the Subscription and/or the Whitewash Waiver;

No benefit had been given or will be given to any Directors as compensation for loss of office or otherwise in connection with the Subscription and/or the Whitewash Waiver;

There was no material contract entered into by the Subscriber in which any Director had a material personal interest; and

Mr. Zhang Mengui, Morgan and Mr. Jiang Bing Hua and parties acting in concert with any of them and all other Shareholders who are interested in or involved in the Subscription and the Whitewash Waiver will abstain from voting on the relevant ordinary resolutions to be proposed at the EGM to approve the Subscription and the Whitewash Waiver.

6. DIRECTORS’ SERVICE CONTRACTS

As at the Latest Practicable Date, the following contracts have been entered into between the Company and the Directors:

Mr. Jiang Bing Hua has entered into a service contract with the Company for a term of three years commencing from 28 November 2005 and expiring on 27 November 2008, renewable automatically for successive terms of three years from 28 November 2008, 28 November 2011, 28 November 2014 and 28 November 2017 and respectively unless terminated by giving either party to the other not less than three months’ prior written notice. Mr. Jiang Bing Hua is entitled to an annual remuneration of US$250,000. Mr. Jiang Bing Hua is entitled to variable remuneration comprising of ex-gratia annual bonus, which is subject to his performance and the performance of the Company and the approval of the Remuneration Committee.

– II-14 –

APPENDIX II

GENERAL INFORMATION

Mr. Zhang Menggui, Morgan has entered into a letter of appointment with the Company for a term of 3 years commencing on 22 June 2017 subject to retirement by rotation and re-election in accordance with the Articles of Association, unless and until terminated by not less than 3 months’ prior notice in writing served by either party to the other. Mr. Zhang Menggui, Morgan is entitled to an annual remuneration of US$250,000. Mr. Zhang Menggui, Morgan is entitled to variable remuneration comprising of ex-gratia annual bonus, which is subject to his performance and the performance of the Company and the approval of the Remuneration Committee.

Mr. Wang Yong has entered into a letter of appointment with the Company for a term of 3 years commencing on 22 June 2017 subject to retirement by rotation and re-election in accordance with the Articles of Association, unless and until terminated by not less than 3 months’ prior notice in writing served by either party to the other. Mr. Wang Yong is entitled to an annual remuneration of US$260,000. Mr. Wang Yong is entitled to variable remuneration comprising of ex-gratia annual bonus, which is subject to his performance and the performance of the Company and the approval of the Remuneration Committee.

Mr. Jiang Longsheng has entered into a service contract with the Company for a term of three years commencing from 1 May 2006 and expiring on 30 April 2009, renewable automatically for successive terms of three years from 1 May 2009, 1 May 2012 and 1 May 2015 respectively subject to retirement by rotation and re-election in accordance with the Articles of Association, unless terminated by giving either party to the other not less than three months’ prior written notice. Mr. Jiang Longsheng is entitled to an annual remuneration of HK$120,000.

Mr. Brian Chang has entered into a letter of appointment with the Company for a term of three years commencing from 10 July 2009 and expiring on 9 July 2012, renewable automatically for successive terms of three years from 10 July 2012 and 10 July 2015 respectively subject to retirement by rotation and re-election in accordance with the Articles of Association, unless terminated by giving either party to the other not less than three months’ prior written notice. Mr. Brian Chang is entitled to an annual remuneration of HK$120,000.

Mr. Wang Jianzhong has entered into a letter of appointment with the Company for a term of three years commencing from 4 July 2016 and expiring on 3 July 2019 subject to retirement by rotation and re-election in accordance with the Articles of Association, unless terminated by giving either party to the other not less than three months’ prior written notice. Mr. Wang Jianzhong is entitled to receive emoluments of HK$120,000 per annum.

Each of Mr. Chan Ngai Sang Kenny and Mr. Guan Zhichuan has entered into a service contract with the Company for a term of three years commencing from 20 October 2005 and expiring on 19 October 2008, renewable automatically for successive terms of three years from 20 October 2008, 20 October 2011, 20 October 2014 and 20 October 2017 respectively subject to retirement by rotation and re-election in accordance with the Articles of Association, unless terminated by giving either party to the other not less than one month’ prior written notice. Each of Mr. Chan Ngai Sang Kenny and Mr. Guan Zhichuan is entitled to receive emoluments of HK$240,000 and HK$120,000 respectively.

Dr. Lu Xiaoming has entered into a letter of appointment with the Company for a term of three years commencing from 22 June 2017 and expiring on 21 June 2020 subject to retirement by rotation and re-election in accordance with the Articles of Association, unless terminated by giving either party to the other not less than three months’ prior written notice. Dr. Lu Xiaoming is entitled to an annual remuneration of HK$120,000.

– II-15 –

APPENDIX II

GENERAL INFORMATION

Except for Mr. Jiang Bing Hua, Mr. Zhang Menggui and Mr. Wang Yong, no other Directors are entited to any variable remuneration.

As at the Latest Practicable Date, save as disclosed above, none of the Directors had entered into service contract with the Company, or any of its subsidiaries or associated companies which:

(i) (including both continuous and fixed term contracts) had been entered into or amended within six months before the date of the Announcement;
(ii) was a continuous contract with a notice period of twelve months or more; or
(iii) was a fixed term contract with more than twelve months to run irrespective of the notice period.

7. OTHER INTERESTS OF THE DIRECTORS

As at the Latest Practicable Date:

none of the Directors or proposed Directors had any direct or indirect interest in any assets which have, since 31 December 2016, being the date of the latest published audited consolidated financial statements of the Group were made up, been acquired or disposed of by, or leased to, or are proposed to be acquired or disposed of by, or leased to any member of the Group;
none of the Directors were materially interested in any contract or arrangement entered into by any member of the Group which contract or arrangement is subsisting and which is significant in relation to the business of the Group as a whole; and
there were no material contracts entered into by any of the Subscribers in which any Director had a material personal interest.

8. COMPETING INTERESTS

As at the Latest Practicable Date, so far as the Directors are aware, none of the Directors, proposed Directors or their respective close associates had any interests in a business which competes or may compete, either directly or indirectly, with the business of the Group or any other conflicts of interests with the Group.

9. LITIGATION

As at the Latest Practicable Date and so far as the Directors are aware, no member of the Group was engaged in any litigation or arbitration of material importance and there was no litigation or claim of material importance known to the Directors to be pending or threatened by or against the Company or any of its subsidiaries.

– II-16 –

APPENDIX II

GENERAL INFORMATION

10. MATERIAL CONTRACTS

The following contracts, not being contracts entered in the ordinary course of business of the Group, have been entered into by the members of the Group within two years preceding the date of the Announcement and the Latest Practicable Date and which are, or may be, material:

‧ the Subscription Agreement, details of which are disclosed under the section headed “Subscription Agreement” in this circular.
‧ agreement between the Company and Beijing He Ju Tian Yang Investment Management Centre* (北京合聚天揚投資管理中心（有限合伙）) dated 21 July 2017, upon which the Company will transfer 40,000,000 ordinary shares of RMB1.00 (One) each, which is equivalent to 21.05% of TSC Oil and Gas Services Group Holdings Ltd. (青島天時油氣裝備服務集團股份有限公司) at a consideration of RMB25,684,000. The parties to this agreement have mutually agreed to defer completion of this transfer until after Completion of the Subscription Agreement.
‧ agreement between the Company and Zheng Yuan Heng Tong (Tianjin) Petroleum Technology Limited* (正源恆通（天津）石油科技有限合伙公司) dated 21 July 2017, upon which the Company will transfer 53,200,000 ordinary shares of RMB1.00 (One) each, which is equivalent to 28.00% of TSC Oil and Gas Services Group Holdings Ltd. (青島天時油氣裝備服務集團股份有限公司) at a consideration of RMB34,159,720. The parties to this agreement have mutually agreed to defer completion of this transfer until after Completion of the Subscription Agreement.

11. EXPERT’S QUALIFICATIONS AND CONSENT

The following are the qualifications of the expert who has given its opinions and advice which are included in this circular:

Name Qualification Lego Corporate Finance Limited a corporation licensed to carry out Type 1 (dealing in securities) and Type 6 (advising on corporate finance) regulated activities under the SFO and the independent financial adviser appointed to advise the Independent Board Committee and the Independent Shareholders with regard to the Subscription and the Whitewash Waiver to be considered and approved at the EGM

The above expert has given and has not withdrawn its written consent to the issue of this circular with the inclusion of its letter and/or opinion (as the case may be) in the form and context in which it is included and all references to its name in the form and context in which they appear.

* For identification purpose only

– II-17 –

APPENDIX II

GENERAL INFORMATION

As at the Latest Practicable Date, the above expert was not beneficially interested in the share capital of any member of the Group nor did it 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 nor did it have any interest, either direct or indirect, in any assets which have been, since 31 December 2016, the date to which the latest published audited consolidated financial statements of the Group were made up, acquired, disposed of by or leased to or are proposed to be acquired or disposed of by or leased to any member of the Group.

12. CORPORATE AND OTHER INFORMATION

The registered office of the Company is located at Cricket Square Hutchins Drive, P.O. Box 2681, Grand Cayman KY1-1111, Cayman Islands.

The head office and principal place of business of the Company in Hong Kong is located at Unit 03, 19/F, Bangkok Bank Building, 18 Bonham Strand West, Sheung Wan, Hong Kong.

The registered address of the Subscriber is located at Harneys Fiduciary (Cayman) Limited, 4th Floor, Harbour Place, 103 South Church Street, P.O. Box 10240, Grand Cayman KY1-1002, Cayman Islands.

The registered address of the Fund GP is located at Harneys Fiduciary (Cayman) Limited, 4th Floor, Harbour Place, 103 South Church Street, P.O. Box 10240, Grand Cayman KY1-1002, Cayman Islands.

The registered address of the Fund Manager is located at Harneys Fiduciary (Cayman) Limited, 4th Floor, Harbour Place, 103 South Church Street, P.O. Box 10240, Grand Cayman KY1-1002, Cayman Islands.

The registered address of the Subscriber’s Nominee is located at OMC Chambers, Wickhams Cay 1, Road Town, Tortola, British Virgin Islands.

The company secretary of the Company is Ms. CHEUNG Wai Sze, Candy.

The Company’s principal share registrar and transfer office is Conyers Trust Company (Cayman) Limited, whose address is Cricket Square Hutchins Drive, P.O. Box 2681, Crand Cayman KY1-1111, Cayman Islands.

The Company’s branch share registrar and transfer office in Hong Kong is Tricor Investor Services Limited, whose address is Level 22, Hopewell Centre, 183 Queen’s Road East, Hong Kong.

The Independent Financial Adviser, Lego Corporate Finance Limited, is located at Room 1601, 16/F, China Building, 29 Queen’s Road Central, Hong Kong.

The Financial Adviser to the Subscriber, Great Wall Pan Asia Corporate Finance Limited, is located at Units 03, 05-06, 65/F, The Center, 99 Queen’s Road Central, Hong Kong.

The auditor of the Company, KPMG, as Certified Public Accountants, is located at 8th Floor, Prince’s Building, 10 Chater Road, Central, Hong Kong.

– II-18 –

APPENDIX II

GENERAL INFORMATION

The principal bankers of the Company are as below:

‧ Industrial and Commercial Bank of China, Qingdao Branch, located at No. 205, Zhengyang Middle Road, Chengyang District, Qingdao City, Shandong Province, China, 266000;
‧ China CITIC Bank International Ltd., located at The Chinese Bank Building, 61-65 Des Voeux Road Central, Hong Kong;
‧ Standard Chartered Bank, located at 3/F, Standard Chartered Bank Building, 4-4A Des Voeux Road Central, Hong Kong;
‧ Industrial and Commercial Bank of China (Asia) Limited, located at 34/F, ICBC Tower, 3 Garden Road, Central, Hong Kong;
‧ China Construction Bank, Qingdao Branch, located at No. 156, Zhenhua Road, Licang District, Qingdao City, Shandong Province, China, 266000;
‧ China Construction Bank, Shaanxi Branch Hi-Tech Development Zone Sub-branch, located at No. 42, Gaoxin Road, Xian City, Shaanxi Province, China, 710075;
‧ Bank of Communications, Qingdao Branch, located at No. 99, Renmin Road, Shibei District, Qingdao City, Shandong Province, China, 266000;
‧ Agricultural Bank of China, Qingdao Branch, located at No. 6, Anting Road, Chengyang District, Qingdao City, Shandong Province, China, 266000;
‧ East West Bank, located at 9090 Katy Freeway, Houston, Texas 77024, U.S.A.; and
‧ The Royal Bank of Scotland, located at 45-47 Bank Street, Bradford, BD1 1TS.

The authorised representatives of the Company are Mr. Zhang Menggui, Morgan and Mr. Jiang Bing Hua, with each correspondence address at Unit 03, 19/F., Bangkok Bank Building, 18 Bonham Strand West, Sheung Wan, Hong Kong.

Legal advisers to the Company is Jeffrey Mak Law Firm, situated in 1309, Prince’s Building, 10 Chater Road, Central, Hong Kong.

The directors of the Subscriber Nominee, namely, Mr. Wang Hongyuan and Mr. Huang Xiaohua. The directors of Fund GP, namely, Mr. Zhang Rizhong, Mr. Wang Hongyuan, Mr. Chen Anhua, Mr. Huang Xiaohua and Mr. Wu Sichuan. The directors of Fund Manager, namely, Mr. Zhang Rizhong, Mr. Wang Hongyuan, Mr. Chen Anhua, Mr. Huang Xiaohua, Mr. Wu Sichuan, Mr. Tian Jiong and Mr. Kang Dong.

– II-19 –

APPENDIX II

GENERAL INFORMATION

13. DOCUMENTS AVAILABLE FOR INSPECTION

Copies of the following documents will be available for inspection during normal business hours from 9:30 a.m. to 5:00 p.m. (except Saturdays and public holidays) at the principal place of business of the Company in Hong Kong at Unit 03, 19/F Bangkok Bank Building 18 Bonham Strand West Sheung Wan Hong Kong from the date of this circular up to and including the date of the EGM:

(i) this circular;
(ii) the memorandum and articles of association of the Company;
(iii) the memorandum of articles of association of the Fund GP;
(iv) the memorandum of articles of association of the Subscriber Nominee;
(v) the published annual reports of the Company containing audited consolidated financial statements of the Company for the year ended 31 December 2015 and 2016;
(vi) the published interim report of the Company for the six months ended 30 June 2017;
(vii) the letter from the Board, the text of which is set out in the section headed “Letter from the Board” in this circular;
(viii) the letter from the Independent Board Committee, the text of which is set out in the section headed “Letter from the Independent Board Committee” in this circular;
(ix) the letter from the Independent Financial Adviser containing its advice to the Independent Board Committee and the Independent Shareholders, the text of which is set out in the section headed “Letter from the Independent Financial Adviser” in this circular;
(x) the written consents referred to in the paragraph headed “Experts’ Qualifications and Consents” in this appendix;
(xi) the material contracts referred to in the paragraph headed “Material Contracts” in this appendix; and
(xii) the directors' service contracts referred to in the paragraph headed "Directors' Service Contracts" in this appendix.

The above documents (except this circular) will be uploaded to the website of the SFC at www.sfc.hk and the Company’s website at www.t-s-c.com from the date of this circular up to (and including) the date of the EGM in accordance with Notes 1 and 2 to rule 8 of the Takeovers Code.

– II-20 –

NOTICE OF EGM

==> picture [115 x 60] intentionally omitted <==

TSC Group Holdings Limited

(Incorporated in the Cayman Islands with limited liability)

(Stock code: 206)

NOTICE IS HEREBY GIVEN that an extraordinary general meeting (the “ EGM ”) of TSC Group Holdings Limited (the “ Company ”) will be held at 2/F, Pacific Room, Island Pacific Hotel, 152 Connaught Road West, Hong Kong at 10:00 a.m. on Monday, 5 February 2018, for the purposes of considering and, if thought fit, passing with or without amendment, the following resolutions of the Company as ordinary resolutions:

ORDINARY RESOLUTIONS

“ THAT :
(a) the entering into of the conditional subscription agreement (the “ Subscription Agreement ”, a copy of which is tabled at the meeting and marked “A” and initialed by the chairman of the meeting for the purpose of identification) entered into between the Company as issuer and China Merchants & Great Wall Ocean Strategy & Technology Fund (L.P.) as subscriber (the “ Subscriber ”) dated 14 December 2017 in relation to the subscription by the Subscriber (or the Subscriber Nominee) of an aggregate of 765,186,000 shares in the Company (the “ Subscription Shares ”) at the subscription price of HK$0.67 per Subscription Share to be issued by the Company and the transactions contemplated thereunder be and hereby confirmed, approved and ratified;
(b) all the transactions contemplated under the Subscription Agreement including but not limited to the Specific Mandate to allot and issue the Subscription Shares by the Company to the Subscriber Nominee pursuant to the Subscription Agreement be and is hereby approved, and the director(s) of the Company (the “ Director(s) ”) be and are hereby authorised to allot and issue the Subscription Shares to the Subscriber Nominee pursuant to the Subscription Agreement; and
(c) the Directors (or a duly authorised committee thereof) be and are hereby authorised to do all such further acts and things and to sign and execute all such other or further documents and to take all such steps which, in the opinion of the Directors (or a duly authorised committee thereof), may be necessary, appropriate, desirable or expedient to implement and/or give effect to the terms of, or the transactions contemplated by, the Subscription Agreement and to agree to such variation, amendments or waiver of matters relating thereto as are, in the opinion of the Directors (or a duly authorised committee thereof), in the interests of the Company.”

– EGM-1 –

NOTICE OF EGM

“ THAT , subject to the passing of the ordinary resolution numbered 1, the waiver (the “ Whitewash Waiver ”) granted or to be granted to the Subscriber Nominee and persons acting in concert with it by the Executive (or any delegate of the Executive) of the Corporate Finance Division of the Securities and Futures Commission pursuant to Note 1 to the Notes on dispensation from Rule 26 of the Hong Kong Code on Takeovers and Mergers from any obligation on the part of the Subscriber Nominee to make a mandatory general offer for all the issued ordinary shares and other securities of the Company not already owned or agreed to be acquired by the Subscriber, the Subscriber Nominee and the parties acting in concert with them which would otherwise arise as a result of the Subscriber Nominee subscribing for the Subscription Shares and the issue of the Subscription Shares to the Subscriber Nominee pursuant to the Subscription Agreement be and is hereby approved, and that any one or more of the Directors be and is hereby authorised to do all such acts and things and execute all such documents as he/she considers necessary, desirable or expedient for the purpose of, or in connection with, the implementation of and giving effect to any of the matters relating to, or incidental to, the Whitewash Waiver.”
“ THAT subject to and conditional on the passing of the ordinary resolutions numbered 1 and 2, the appointment of Mr. Wang Hongyuan to serve as an executive Director with effect from the completion of the Subscription Agreement be and is hereby approved and the Directors be authorised to fix his remuneration.”
“ THAT subject to and conditional on the passing of the ordinary resolutions numbered 1 and 2, the appointment of Mr. Yang Guohui to serve as an executive Director with effect from the completion of the Subscription Agreement be and is hereby approved and the Directors be authorised to fix his remuneration.”
“ THAT subject to and conditional on the passing of the ordinary resolutions numbered 1 and 2, the appointment of Ms. Li Rong to serve as a non-executive Director with effect from the completion of the Subscription Agreement be and is hereby approved and the Directors be authorised to fix her remuneration.”

By Order of the Board TSC Group Holdings Limited Jiang Bing Hua Executive Chairman

Hong Kong, 19 January 2018

– EGM-2 –

NOTICE OF EGM

Notes:

(a) The register of members of the Company will be closed from Wednesday, 31 January 2018 to Monday, 5 February 2018, both days inclusive, during which period no transfer of shares can be registered. In order to qualify for the entitlement to attend and vote at the meeting, all transfer documents, accompanied by the relevant share certificates, must be duly completed and lodged with the Hong Kong branch share registrar and transfer office of the Company, Tricor Investor Services Limited, at Level 22, Hopewell Centre, 183 Queen’s Road East, Hong Kong not later than 4:30 p.m. on 30 January 2018.
(b) Any member of the Company entitled to attend and vote at the meeting is entitled to appoint another person as his proxy to attend and vote in his stead. A member who is the holder of two or more shares may appoint more than one proxy to attend and vote on his behalf. If more than one proxy is so appointed, the appointment shall specify the number and class of shares in respect of which each such proxy is so appointed. A proxy need not be a member of the Company, but must attend the meeting in person to represent you.
(c) To be valid, a form of proxy, together with the power of attorney or other authority (if any) under which it is signed, or a notarially certified copy thereof, must be deposited at the principal place of business of the Company in Hong Kong at Unit 03, 19/F, Bangkok Bank Building, No. 18 Bonham Strand West, Sheung Wan, Hong Kong not less than 48 hours before the time appointed for the holding of the meeting (i.e. at 10 a.m. on 3 February 2018) or any adjourned meeting. The proxy form is published on the websites of Hong Kong Exchanges and Clearing Limited at www.hkexnews.hk and the Company at www.t-s-c.com.
(d) Completion and delivery of the form of proxy will not preclude a member from attending and voting in person at the meeting if the member so desires and in such event, the instrument appointing a proxy shall be deemed to be revoked.
(e) Where there are joint holders of any share, any one of such persons may vote at any meeting, either in person or by proxy, in respect of such share as if he was solely entitled thereto; but if more than one of such joint holders be present at any meeting the vote of the senior who tenders a vote, whether in person or by proxy, shall be accepted to the exclusion of the votes of the other joint holders, and for this purpose seniority shall be determined by the order in which the names stand in the register of members in respect of the joint holding.
(f) Pursuant to Rule 13.39(4) of the Listing Rules, any vote of shareholders at a general meeting must be taken by poll. Therefore, all resolutions proposed at the meeting shall be voted by poll.

– EGM-3 –

AI assistant

CM Energy Tech Co., Ltd. — Proxy Solicitation & Information Statement 2018

49033_rns_2018-01-18_04660bc4-7943-4291-824e-7dd904fdf988.pdf

TSC Group Holdings Limited

(Stock code: 206)

(1) PROPOSED SUBSCRIPTION OF SUBSCRIPTION SHARES UNDER SPECIFIC MANDATE (2) APPLICATION FOR WHITEWASH WAIVER (3) RESIGNATION OF DIRECTORS AND PROPOSED APPOINTMENT OF DIRECTORS AND (4) NOTICE OF EGM

Financial Adviser to the Subscriber

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

DEFINITIONS

TSC Group Holdings Limited

(1) PROPOSED SUBSCRIPTION OF SUBSCRIPTION SHARES UNDER SPECIFIC MANDATE;

(2) APPLICATION FOR WHITEWASH WAIVER; (3) RESIGNATION OF DIRECTORS AND PROPOSED APPOINTMENT OF DIRECTORS; AND (4) NOTICE OF EGM

INTRODUCTION

SUBSCRIPTION AGREEMENT

Parties

The Subscription

The Subscription Price

Ranking

Mandates to issue the Subscription Shares

Listing Application

Conditions of the Subscription

Completion

Board Composition

Undertaking by Mr. Zhang Menggui, Morgan, Mr. Jiang Bing Hua and Global Energy Investors, LLC.

Lock-up

EFFECT OF THE SUBSCRIPTION ON THE SHAREHOLDING STRUCTURE OF THE COMPANY

LETTER FROM THE BOARD

INFORMATION ON THE GROUP

INFORMATION ON THE SUBSCRIBER

DEALING AND INTEREST OF THE SUBSCRIBER, THE SUBSCRIBER NOMINEE AND PARTIES ACTING IN CONCERT WITH THEM IN THE SECURITIES OF THE COMPANY

CONFIRMATION OF NO DISQUALIFYING TRANSACTIONS

FUTURE INTENTIONS OF THE SUBSCRIBER AND THE SUBSCRIBER NOMINEE REGARDING THE GROUP

PROPOSED CHANGE IN COMPOSITION OF THE BOARD

Resignation of Directors

Proposed appointment of Directors

Executive Directors

Non-executive Director

Announcement in relation to the Resignation of the Directors and the Appointment of the Proposed Directors

REASONS FOR AND BENEFITS OF THE SUBSCRIPTION

USE OF PROCEEDS

LETTER FROM THE BOARD

FUND RAISING EXERCISE FOR THE PAST 12 MONTHS

IMPLICATIONS UNDER THE TAKEOVERS CODE AND THE APPLICATION FOR WHITEWASH WAIVER

INDEPENDENT BOARD COMMITTEE AND INDEPENDENT FINANCIAL ADVISER

THE EGM

RECOMMENDATION

GENERAL

TSC Group Holdings Limited

(Stock code: 206)

(1) PROPOSED SUBSCRIPTION OF SUBSCRIPTION SHARES UNDER SPECIFIC MANDATE; AND (2) APPLICATION FOR WHITEWASH WAIVER

Yours faithfully,

Dr. Lu Xiaoming

(I) ISSUE AND SUBSCRIPTION OF NEW SHARES UNDER SPECIFIC MANDATE; AND (II) APPLICATION FOR WHITEWASH WAIVER

INTRODUCTION

Issue and subscription of new Shares under specific mandate

Application for Whitewash Waiver

BASIS OF OUR OPINION

PRINCIPAL FACTORS AND REASONS CONSIDERED

1. Background information of the Group

For the six months ended 30 June 2016 and 2017

1.3. Overview of the offshore drilling business and P&A and decommissioning businesses

Offshore drilling business

P&A and decommissioning businesses

2. Background information of the Subscriber

2.1. The Subscriber

3. Reasons for and benefits of the Subscription

3.1. Intended use of net proceeds from the Subscription

3.4. Financing alternatives of the Group

(a) Debt financing

(b) Placement of new Shares to independent investors

(c) Other form of equity financing

3.5. Proposed change of board composition of the Company

4. Principal terms of the Subscription Agreement

4.1. Review on Share price performance

4.2. Review on trading liquidity of the Shares

4.3. Market comparable analysis

5. Possible dilution effect on the shareholding interests of Shareholders

6. Financial effects of the Subscription to the Group

6.1. Liquidity

6.2. Gearing ratio

CM Energy Tech Co., Ltd. Proxy Solicitation & Information Statement 2018