Dufu Liquor Group Limited — Proxy Solicitation & Information Statement 2011

Sep 22, 2011

THIS CIRCULAR IS IMPORTANT AND REQUIRES YOUR IMMEDIATE ATTENTION

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

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

Hong Kong Exchanges and Clearing Limited, The Stock Exchange of Hong Kong Limited and Hong Kong Securities Clearing Company 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 the securities of the Company.

China Environmental Energy Investment Limited

(Incorporated in Bermuda with limited liability)

(Stock Code: 986)

VERY SUBSTANTIAL ACQUISITION ACQUISITION OF RECYCLING BUSINESS AND NOTICE OF SPECIAL GENERAL MEETING

A letter from the board of directors of the Company is set out on pages 7 to 67 of this circular.

A notice convening the special general meeting of the Company to be held at Falcon Room II, Gloucester Luk Kwok Hong Kong, 72 Gloucester Road, Wanchai, Hong Kong on Thursday, 13 October 2011 at 10:00 a.m. or any adjournment thereof is set out on pages 243 to 245 of this circular. Whether or not you are able to attend the meeting in person, you are requested to complete and return the accompanying form of proxy to the Company’s branch share registrar in Hong Kong, Tricor Tengis Limited, at 26/F, Tesbury Centre, 28 Queen’s Road East, Wanchai, Hong Kong as soon as possible and in any event not less than 48 hours before the time appointed for the holding of the special general meeting of the Company. Completion and return of the form of proxy shall not preclude you from attending and voting at the special general meeting of the Company should you so wish.

23 September 2011

• For identification purposes only

CONTENTS

	Page
Definitions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	1
Letter from the Board
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	7
Sale and Purchase Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	9
Information on the Target Group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	23
Information on the Project Companies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	24
Overview of the legal and regulatory requirements . . . . . . . . . . . . . . . . . . . . . . . . . . .	37
Shareholding structure of the Target Group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	41
Changes in the shareholding structure of the Company . . . . . . . . . . . . . . . . . . . . . . . .	43
Risk factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	45
Industry overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	56
Reasons for the Acquisition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	62
Information on the Group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	64
Effect of the Acquisition on the earnings and assets and liabilities
of the Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	64
Financial and trading prospects of the Enlarged Group . . . . . . . . . . . . . . . . . . . . . . . .	65
Reconciliation of appraised property values with net book values . . . . . . . . . . . . . . .	66
Listing Rules implications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	67
SGM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	67
Recommendation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	67
Additional information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	67
Appendix I – Financial information of the Group. . . . . . . . . . . . . . . . . . . . . . . . . .	68
Appendix II – Accountants’ report of the Target Group. . . . . . . . . . . . . . . . . . . . .	70
Appendix III – Management discussion and analysis
on the Group and the Target Group. . . . . . . . . . . . . . . . . . . . . . . .	115
Appendix IV – Unaudited pro forma financial information
of the Enlarged Group. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	139
Appendix V – Valuation report of the Target Group. . . . . . . . . . . . . . . . . . . . . . . .	165
Appendix VI – Property valuation report of the Enlarged Group. . . . . . . . . . . . . . .	178
Appendix VIIA – Principal terms of the Convertible Notes. . . . . . . . . . . . . . . . . . . . . .	195
Appendix VIIB – Principal terms of the Promissory Notes. . . . . . . . . . . . . . . . . . . . . . .	220
Appendix VIII – General information. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	233
Notice of the SGM. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	243

– i –

DEFINITIONS

In this circular, unless the context otherwise requires, capitalized terms used shall have the following meanings:

“Acquisition”	the proposed acquisition of the Sale Shares and the Sale
	Loans by the Company pursuant to the Sale and Purchase
	Agreement and the Supplemental Agreement
“Announcements”	the announcements of the Company dated 19 November
	2010, 30 November 2010, 4 January 2011, 22 February
	2011, 16 May 2011, 15 July 2011, 31 August 2011 and 14
	September 2011 in relation to the Acquisition
“associate(s)”	shall have the meaning ascribed to it under the Listing
	Rules
“Baina Yancheng”	蘇州百納再生資源鹽城有限公司(Suzhou Baina
	Renewable Resources Yancheng Company Limited*), a
	limited liability company established in the PRC
“Bai Run”	淮安百潤再生資源有限公司(Huaian Bai Run Renewable
	Resources Co. Ltd.*), a limited liability company
	established in the PRC
“Board”	the board of Directors
“Business Day”	a day (excluding Saturday, Sunday and public holidays) on
	which banks are generally open for business in Hong Kong
“BVI”	the British Virgin Islands
“CAGR”	an acronym for compound annual growth rate
“Company”	China Environmental Energy Investment Limited, a
	company incorporated in Bermuda and the Shares of which
	are listed on the main board of the Stock Exchange
“Completion”	completion of the Acquisition pursuant to the Sale and
	Purchase Agreement
“Completion Date”	the date on which Completion takes place in accordance
	with the Sale and Purchase Agreement

– 1 –

DEFINITIONS

“Consideration”	HK$850 million (subject to the possible adjustment to the
	Consideration as a result of the Profit Guarantee), being the
	consideration payable for the Acquisition
“Contingency Note”	the convertible note in the principal amount of HK$52
	million forming part of the Convertible Notes
“Conversion Price”	the conversion price of the Conversion Shares under the
	Convertible Notes which shall be the average closing price
	of the Shares for the five (5) consecutive trading days prior
	to the Completion Date plus a premium of 30%, provided
	that the Conversion Price shall not in any event be more
	than HK$0.68 or less than HK$0.227 per Conversion Share,
	subject to adjustments in accordance with the terms and
	conditions of the Sale and Purchase Agreement and the
	terms of the Convertible Notes
“Conversion Shares”	Shares to be issued by the Company upon exercise of the
	conversion rights attaching to the Convertible Notes
“Convertible Notes”	the redeemable convertible notes in the principal amount
	of HK$290 million to be issued by the Company to the
	Vendors (or theirs nominee(s)) in accordance with the
	terms and conditions of the Sale and Purchase Agreement,
	including the Contingency Note
“Director(s)”	the director(s) of the Company
“Earnest Money”	HK$96 million cash payment paid by the Company to the
	Vendors as earnest money under the Framework Agreement
“Enlarged Group”	the Group immediately after Completion
“Framework Agreement”	the framework agreement dated 19 November 2010 entered
	into by the Company and the Vendors in relation to the
	Acquisition
“GAAP”	the Generally Accepted Accounting Principles
“Group”	the Company and its subsidiaries

– 2 –

DEFINITIONS

“Guarantors”	Mr. Lu Weikang（陸衛康）, Mr. Tang, Ms. Ng Hiu Ying
	（吳曉瑛）and Mr. Hue Kwok Chiu（許國釗）
“Guoyuan”	淮安國源再生資源有限公司(Huaian Guo Yuan Renewable
	Resources Co. Ltd.*), a limited liability company
	established in the PRC
“HK$”	Hong Kong dollars, the lawful currency of Hong Kong
“HK Company”	Topbright International Group Holdings Limited（高明國
	際控股有限公司）, a limited liability company incorporated
	under the laws of Hong Kong
“Hong Kong”	the Hong Kong Special Administrative Region of the PRC
“Independent Third Parties”	third parties who are independent of, and not connected
	with, the Company and its connected persons
“Last Trading Day”	6 May 2011, being the last day on which the Shares were
	traded on the Stock Exchange prior to the suspension
	of trading in the Shares pending the publication of the
	announcement dated 16 May 2011 regarding the Sale and
	Purchase Agreement
“Latest Practicable Date”	20 September 2011, being the latest practicable date
	for ascertaining certain information for inclusion in this
	circular
“Listing Committee”	the listing sub-committee of the board of the Stock
	Exchange
“Listing Rules”	the Rules Governing the Listing of Securities on the Stock
	Exchange
“Long Stop Date”	31 October 2011, or such later date as the relevant parties
	to the Sale and Purchase Agreement may agree in writing
“Mr. Tang”	Mr. Tang Guoming（唐國明）
“PRC”	the People’s Republic of China

– 3 –

DEFINITIONS

“Profit Guarantee”	the guarantee by the Vendors that the audited net profit
	after tax of the Project Company as prepared in accordance
	with the Hong Kong Financial Reporting Standards for
	the period from 1 April 2011 to 31 March 2012 shall not
	be less than RMB55 million, further details of which
	are set out in the section headed “Adjustment to the
	Consideration” of the letter from the Board of this circular
“Project Companies”	collectively the Project Company and its subsidiaries,
	namely Baina Yancheng, Guoyuan and Bai Run
“Project Company”	蘇州百納再生資源有限公司(Suzhou Baina Renewable
	Resources Co., Ltd.*), a limited liability company
	established in the PRC
“Promissory Notes”	the promissory notes in the principal amount of HK$260
	million which shall be issued by the Company to the
	Vendors in part payment of the Consideration pursuant to
	the Sale and Purchase Agreement
“Reorganization”	the acquisition by the Project Company from Mr. Hue
	Kwok Chiu of his 46.8% equity interest in Baina Yancheng,
	upon completion of which, Baina Yancheng has become a
	wholly owned subsidiary of the Project Company
“RMB”	Renminbi, the lawful currency of the PRC
“Sale and Purchase Agreement”	the conditional sale and purchase agreement in relation
	to the Acquisition entered into between the Company, the
	Vendors and the Guarantors on 9 May 2011, as varied and
	supplemented by the Supplemental Agreement
“Sale Share(s)”	240 share(s) of US$1.00 each in the issued share capital of
	the Target Company, representing 80% of the entire issued
	share capital of the Target Company as at the date of the
	Sale and Purchase Agreement

– 4 –

DEFINITIONS

“Sale Loans”	all indebtedness, obligations and liabilities due, owing or
	incurred by the Target Group to the Vendors
“SFO”	the Securities and Futures Ordinance (Chapter 571 of
	the Laws of Hong Kong), as amended, supplemented or
	otherwise modified from time to time
“SGM”	the special general meeting of the Company to be convened
	on 13 October 2011 to consider and, if thought fit, approve
	the Sale and Purchase Agreement, the Supplemental
	Agreement and the transactions contemplated thereunder
“Share(s)”	ordinary share(s) of HK$0.01 each in the share capital
	of the Company after the Share Consolidation became
	effective
“Share Consolidation”	the consolidation of every 10 shares of HK$0.001 each
	in the share capital of the Company into one (1) Share of
	HK$0.01 each which has become effective on 30 June 2011
“Shareholder(s)”	holder(s) of the Shares
“Stock Exchange”	The Stock Exchange of Hong Kong Limited
“Supplemental Agreement”	the supplemental agreement entered into amongst the
	Company, the Vendors and the Guarantors dated 14
	September 2011 to vary certain terms of the Sale and
	Purchase Agreement
“Takeovers Code”	The Codes on Takeovers and Mergers and Share
	Repurchases of the Securities and Futures Commission of
	Hong Kong
“Target Company”	Ideal Market Holdings Limited, a company incorporated in
	the BVI with limited liability, with 300 shares being issued
	and fully paid up as at the date of the Sale and Purchase
	Agreement
“Target Group”	Target Company and its subsidiaries

– 5 –

DEFINITIONS

“Valuer” “Vendors”

Roma Appraisals Limited, an independent valuer

collectively Lucky Start Holdings Limited, All Prosper Group Limited, Triumph Return Holdings Limited and Jia Sheng Holdings Limited

“WFOE” 象山高銘環保科技有限公司 (Xiangshan Gaoming Environmental Protection Technology Limited*), a wholly foreign owned enterprise established under the laws of the PRC “%” per cent.

In the event of any inconsistency, the English text of this circular shall prevail over the Chinese text.

The English names of the PRC entities, PRC laws or regulations or the PRC government authorities mentioned in this circular and marked with “*” are translation from their Chinese names and are for identification purposes only. If there is any in consistency, the Chinese names shall prevail.

• For identification purposes only

– 6 –

LETTER FROM THE BOARD

China Environmental Energy Investment Limited

(Incorporated in Bermuda with limited liability)

(Stock Code: 986)

Executive Directors: Ms. Chen Tong (Chairman) Ms. Deng Hong Mei Ms. Chan Ching Ho, Kitty Mr. Xiang Liang Mr. Lau Chung Yim

Non-executive Directors:

Ms. Yao Zhengwei Mr. Wang Zhenghua

Registered office: Clarendon House 2 Church Street Hamilton HM 11 Bermuda

Head office and principal place of business:

Room 2211, 22/F., Tower Two, Lippo Centre, 89 Queensway Hong Kong

Independent non-executive Directors:

Mr. Chan Ying Kay Mr. Tse Kwong Chan Ms. Zhou Jue

23 September 2011

To the Shareholders

Dear Sir or Madam,

VERY SUBSTANTIAL ACQUISITION AND NOTICE OF SPECIAL GENERAL MEETING

INTRODUCTION

References are made to the Announcements regarding the Sale and Purchase Agreement, the Supplemental Agreement and the Acquisition.

• For identification purposes only

– 7 –

LETTER FROM THE BOARD

On 19 November 2010, the Company (as the purchaser) entered into the Framework Agreement with the Vendors regarding the Acquisition. Pursuant to the Framework Agreement, the Company has paid the Earnest Money in the total amount of HK$96 million (which will be applied in part payment of the Consideration upon Completion, but will be refunded to the Company by the Vendors without interest if the Company does not proceed to Completion) to the Vendors.

On 22 February 2011, both the Company and the Vendors agreed to extend the validity of the Framework Agreement and the period of exclusivity thereunder for three months up to 19 May 2011.

After the preliminary due diligence works conducted by the Group, on 9 May 2011, the Company entered into the Sale and Purchase Agreement with the Vendors and the Guarantors, pursuant to which the Company, as the purchaser, has conditionally agreed to acquire, and the Vendors have conditionally agreed to sell, the Sale Shares and the Sale Loans at the Consideration of HK$850 million. On 14 September 2011, the Company, the Vendors and the Guarantors entered into the Supplemental Agreement to vary certain terms of the Sale and Purchase Agreement, such that the portion of the Consideration to be settled by cash or promissory note shall be reduced by HK$50 million to HK$260 million and shall be settled entirely by means of the Promissory Notes, and that the portion of the Consideration to be settled by the issuance of the Convertible Notes shall correspondingly increase by HK$50 million to HK$290 million. The terms of the Promissory Notes are further amended, details of which are set out in Appendix VIIB to this circular. The parties have also agreed to amend the initial Conversion Price from HK$0.068 per Conversion Share to that equal to the average closing price of the Shares for the five (5) consecutive trading days prior to the Completion Date plus a premium of 30% provided that such Conversion Price shall not in any event be more than HK$0.68 and shall not be less than HK$0.227 per Conversion Share. The parties also confirmed under the Supplemental Agreement that the Project Company, apart from holding the entire equity interests in Baina Yancheng and Guoyuan, is also holding the entire equity interest in Bai Run, a company established in the PRC with limited liability on 12 May 2011 and engaged in the business of recycling and processing of waste paper.

The Sale Shares represent 80% of the issued share capital of the Target Company. Upon completion of the Reorganization in June 2011, the Target Company, through the HK Company and the WFOE, owns the entire equity capital in the Project Company and its subsidiaries, which are principally engaged in the business of waste paper recycling in the PRC.

Upon Completion, the Company will, through the Target Company, own 80% of the equity interests in the Project Companies.

The purpose of this circular is to provide you with, among other things, (i) further details of the Acquisition; and (ii) a notice of the SGM, which will be despatched to the Shareholders.

– 8 –

LETTER FROM THE BOARD

SALE AND PURCHASE AGREEMENT

Date

9 May 2011 (as supplemented by the Supplemental Agreement on 14 September 2011)

Parties

• (i) the Company

• (ii) the Vendors: Lucky Start Holdings Limited, a limited liability company incorporated in the BVI which is wholly beneficially owned by Ms. Zhao Zhenzhen.

All Prosper Group Limited, a limited liability company incorporated in the BVI which is wholly beneficially owned by Mr. Wong Sze Chung, Armstrong.

Triumph Return Holdings Limited, a limited liability company incorporated in the BVI which is wholly owned by Ms. Ng Hiu Ying and beneficially owned by Mr. Hue Kwok Chiu.

Jia Sheng Holdings Limited, a limited liability company incorporated in the BVI which is wholly owned by Mr. Lu Weikang and beneficially owned by Mr. Tang and his associates.

The principal activities of the Vendors are investment holding.

To the best of the Directors’ knowledge, information and belief and having made all reasonable enquiries,

• (a) the Vendors and their respective ultimate beneficial owner(s) are Independent Third Parties;

• (b) each of the Vendors, their respective ultimate beneficial owners and associates do not hold any Shares or other convertible securities in the Company; and

• (c) there were no previous transactions or business relationship between the Company and each of the Vendors, their respective ultimate beneficial owners and associates which would result in aggregation under Rule 14.22 of the Listing Rules.

• (iii) the Guarantors

To the best of the Directors’ knowledge, information and belief and having made all reasonable enquiries, the Guarantors are Independent Third Parties.

– 9 –

LETTER FROM THE BOARD

Assets to be acquired

• (i) The Sale Shares, representing 80% of the issued share capital of the Target Company, will be sold by the Vendors in the following proportions:

Lucky Start Holdings Limited All Prosper Group Limited Triumph Return Holdings Limited Jia Sheng Holdings Limited Total:	Number of Sale Shares 144 36 20 40 240	Shareholding in the Target Company 48% 12% Approximately 6.7% Approximately 13.3% 80%

As at the Latest Practicable Date, the principal asset of the Target Company is the entire issued share capital of HK Company, which, through the WFOE, owns the entire equity interest in the Project Company. The Project Company in turn owns the entire equity interests in each of Guoyuan, Bai Run and Baina Yancheng (following the completion of the Reorganization in June 2011).

Upon Completion, the Company will, through the Target Company, own 80% of the equity interests in the Project Companies.

• (ii) The Sale Loans as at the Completion Date. As at 31 December 2010, the Sale Loans amounted to approximately RMB10.67 million.

The Sale Shares and the Sale Loans will be acquired by, and assigned to, the Company free of any liens, encumbrances and other third party rights or claims and together with all rights attaching thereto as at the date of the Sale and Purchase Agreement, including the right to receive dividends and distributions declared, made or paid after the date of the Sale and Purchase Agreement.

Upon Completion, the Target Company will become a non wholly-owned subsidiary of the Company and the financial results of the Target Group will be consolidated into the financial statements of the Group.

– 10 –

LETTER FROM THE BOARD

Consideration

Pursuant to the Sale and Purchase Agreement, the Consideration payable to the Vendors will be satisfied in the following manner:

• (i) HK$300 million as refundable deposit, payable on or before Completion, of which a total of HK$270 million has been paid by the Company to the Vendors as at the Latest Practicable Date;

• (ii) HK$260 million by means of the Promissory Notes to be repaid within 12 months after Completion; and

• (iii) HK$290 million by means of the Convertible Notes in the aggregate principal amount of HK$290 million to be issued by the Company to the Vendors upon Completion, of which a Contingency Note in the principal amount of HK$52 million will be held in escrow by an escrow agent and shall only be released to the Vendors according to the terms of the Profit Guarantee set forth in the section headed “Sale and Purchase Agreement-Adjustments to the Consideration” of this letter.

In light of the Company’s latest financial position, cash position and the rights issue completed in April 2011 (the “ Rights Issue ”), the Company will consider financing the settlement of the Promissory Notes in the principal amount of HK$260 million by means of project financing after Completion, which may include equity and/or debt financing method(s). Please refer the future financing plan of the Group set forth in the section headed “Working capital statement” in Appendix I to this circular.

– 11 –

LETTER FROM THE BOARD

Basis of determination of the Consideration

The Consideration was arrived at after arm’s length negotiations amongst the Vendors and the Company after taking into account the following factors:

• (i) the preliminary valuation of the entire equity interest of the Target Group (on the assumption that the Reorganization has been completed) of not less than HK$1,080 million as at 30 April 2011 as appraised by the Valuer using the market-based approach;

• (ii) the historical financial information of the Target Group for the three years ended 31 December 2010;

• (iii) the future prospects of the recycling industry in the PRC; and

• (iv) the price to earnings ratio of listed comparable companies in Hong Kong and the PRC, details of which are set forth in the paragraph headed “Comparable companies” below.

Valuation on the Target Group

For the updated valuation report on the Target Group, please refer to Appendix V to this circular. There has been no material change in the valuation of the Target Group since the preliminary valuation conducted as of 30 April 2011. The Board has reviewed and made enquiries with respect to the updated valuation report prepared by the Valuer regarding the methodology of, and basis and assumptions adopted for, the valuation of the entire equity interest of the Target Group. As advised by the Valuer, there are three classical appraisal approaches available for determining the value of companies, namely the asset approach, the income approach and the market approach. The Valuer has principally adopted the market approach for the valuation by reference to comparable listed companies. The Valuer confirmed that the market approach was preferred to the asset approach and the income approach as the market approach involved less assumptions and uncertainty in the valuation process and there were sufficient comparable companies available for the adoption of the market approach and such methodology was also consistent with normal market practice. During the discussion with the Valuer, the Valuer confirmed that the methodology of the valuation was in accordance with the relevant valuation standards and the Board was not aware of, and has not identified, any major factors which would cause the Board to doubt the fairness and reasonableness of the methodology of, and the basis and assumptions adopted for, the valuation set forth in Appendix V.

Comparable companies

In negotiating for the Consideration, the Company has considered the price to earning ratios of the comparable companies listed on stock exchanges in Hong Kong and the PRC, which are entirely or partially engaged in the recycling of waste paper and/or waste scrap metals related businesses, similar in nature to the business of the Project Companies. To the best of the Directors’ knowledge and so far as the Directors are aware, the comparable companies listed below meet the said selection criteria and such list is exhaustive.

– 12 –

LETTER FROM THE BOARD

In Hong Kong

		Price to
Name of company	Stock exchange	earnings ratio
		(Note)
Fook Woo Group Holdings Ltd.	Hong Kong	18.49
China Metal Recycling (Holdings) Ltd.	Hong Kong	13.21
Chiho-Tiande Group Ltd.	Hong Kong	18.70
Average		16.80
PRC
		Price to
Name of company	Stock exchange	earnings ratio
		(Note)
Shenzhen Green Eco-manufacture Hi-tech Co., Ltd.	Shenzhen	66.19
Shandong Chenming Paper Holdings Limited	Shenzhen	12.58
China Baoan Group Co., Ltd.	Shenzhen	45.40
Tongling Nonferrous Metals Group Co., Ltd	Shenzhen	28.80
Henan Yuguang Gold & Lead Co., Ltd.	Shanghai	51.92
Anhui Jingcheng Copper Share Co., Ltd.	Shenzhen	67.51
Average		45.40

In the PRC

Note: Based on the closing price on the Last Trading Day and the respective financial information published on the relevant stock exchanges in Hong Kong, Shanghai and Shenzhen.

The Consideration represented a historical price to earnings ratio of approximately 32.86 times based on 80% of the net profits after taxation of the Target Group of approximately RMB27.16 million (equivalent to approximately HK$32.33 million) for the year ended 31 December 2010, which is higher than the average price to earnings ratio of 16.80 of the listed comparable companies in Hong Kong but lower than the average price to earnings ratio of 45.40 of the listed comparable companies in the PRC. The Consideration also represented a forward price to earnings ratio of approximately 16.35 times based on the 80% of the Profit Guarantee, which is lower than the average of such listed comparable companies in Hong Kong and the PRC. Although the historical price to earnings ratio of the Consideration is higher than the average of other listed comparable companies in Hong Kong, as the Target Group has demonstrated an upward trend on its financial performance as detailed in the section headed “Information on the Project Companies – Financial information of the Target Group” of this letter, and the Consideration represents a discount of approximately 1.6% to the valuation of the Target Group attributable to the Sale Shares, amounting to approximately HK$864 million, the Board considers that the Consideration is fair and reasonable and is in the interests of the Company and the Shareholders as a whole.

– 13 –

LETTER FROM THE BOARD

Adjustments to the Consideration

Pursuant to the Sale and Purchase Agreement, the Vendors have provided the Company with the Profit Guarantee, such that the net profits after taxation of the Project Company for the period from 1 April 2011 to 31 March 2012, as shown in the accountants’ reports of the Project Company to be prepared by the auditors of the Company in accordance with Hong Kong Financial Reporting Standards, shall not be less than RMB55 million. As the Sale Shares represent 80% of the issued share capital of the Target Company, the parties have agreed that the Contingency Note in the principal amount of HK$52 million, equivalent to 80% of the Profit Guarantee based on the exchange rate of HK$1:RMB0.84, will be deposited with, and held in escrow by, an escrow agent to be appointed by the Company (which is currently expected to be the Company’s legal adviser) as security for the Profit Guarantee.

The Contingency Note will only be released to the Vendors in the following manner:

• (i) in the event that the actual amount of net profits after taxation of the Project Company for the 12-month period ending 31 March 2012 as shown in the said accountants’ reports equals to or exceeds the Profit Guarantee, the entire Contingency Note will be released to the Vendors; or

• (ii) in the event that the actual amount of net profits after taxation of the Project Company for the 12-month period ending 31 March 2012 as shown in the said accountants’ reports is less than the Profit Guarantee, the Company will be entitled to redeem or repurchase at HK$1 such part of the Contingency Note with a principal amount equivalent to the shortfall in the Profit Guarantee on a dollar to dollar basis and the balance of the Contingency Note will be released to the Vendors; or

• (iii) in the event that the Project Company records net losses after taxation for the 12-month period ending 31 March 2012 as shown in the said accountants’ reports, the Company will be entitled to redeem or repurchase at HK$1 the entire Contingency Note.

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LETTER FROM THE BOARD

The Profit Guarantee was determined after arm’s length negotiations amongst the Vendors and the Company with reference to the estimated business growth of the Target Group. The Profit Guarantee and the corresponding adjustment mechanism to the Consideration were on normal commercial terms and the inclusion of such terms in the Sale and Purchase Agreement would provide compensation to the Group in the event that the business result of the Target Group for the relevant period is underperformed. Since the historical and forward price to earning ratios of the Consideration were only one of the factors that the parties have considered in negotiating and arriving at the Consideration, the Directors consider that the abovementioned price adjustment mechanism without regard to the price to earnings ratio is fair and reasonable.

Conditions precedent to the Sale and Purchase Agreement

Completion of the Sale and Purchase Agreement is conditional upon all of the following conditions being fulfilled (or waived in writing, where applicable):

• (i) the Company having obtained a PRC legal opinion (in such a form and substance satisfactory to the Company) from a qualified PRC legal adviser appointed by the Company, confirming, among other things, the legality of Completion of the Acquisition pursuant to the Sale and Purchase Agreement under the PRC laws and regulations and the due incorporation of the Project Companies;

• (ii) the Vendors having provided to the Company a certificate of good standing and a certificate of incumbency of the Target Company, both in such forms and substance satisfactory to the Company;

• (iii) the Project Companies having obtained all relevant licences and consent or renewals thereof in relation to the business of recycling waster paper and such licences being valid and subsisting;

• (iv) completion of the Reorganization by the Target Group;

• (v) the senior management of the Project Company, namely Mr. Tang, Mr. Pan Zhonghua, Mr. Zhu Xuejun and Mr. Tang Xunbin having executed, and performed, the service agreements in the form attached to the Sale and Purchase Agreement;

• (vi) the Company, its agent or professional advisers being satisfied with the results of the due diligence review of the Target Group (in relation to legal, accounting, finance, operation or any other matters, which, in the Company’s opinion, are important);

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LETTER FROM THE BOARD

• (vii) the Vendors having obtained all approvals, confirmations, waivers or consents in respect of the Sale and Purchase Agreement and all transactions contemplated thereunder under any applicable laws and regulations from the relevant authorities having jurisdiction over the Vendors or other relevant third parties (if so required by the relevant legislations);

• (viii) the Shareholders having approved at the SGM the Sale and Purchase Agreement and all transactions contemplated thereunder, including but without limitation the issue of the Promissory Notes, the issue of the Convertible Notes, the allotment and issue of the Conversion Shares upon exercise of the conversion rights attached to the Convertible Notes in accordance with the memorandum of association and bye-laws of the Company and the Listing Rules;

• (ix) the Listing Committee of the Stock Exchange having granted or agreed to grant the listing of, and permission to deal in, the Conversion Shares whether subject to condition(s) or not;

• (x) the Company being satisfied, from the date of the Sale and Purchase Agreement and at any time before Completion, that the representations, warranties and undertakings given by the Vendors under the Sale and Purchase Agreement remain true, accurate, not misleading or being breached in any material respect and that no event has occurred which suggests that there have been material changes in such representations, warranties and undertakings; and

• (xi) the Company not having discovered or known that from the date of the Sale and Purchase Agreement and up to Completion, there being any abnormal operations or any material adverse change in the business, circumstances (including assets, financial and legal status), operations, performance or assets, or any undisclosed material potential risks in respect of the Target Group.

As at the Latest Practicable Date, only condition (iv) above has been satisfied by the Company.

The Vendors have undertaken to use their respective reasonable endeavours to co-operate with the Company in complying with conditions (i) to (vii), (x) and (xi) above within the time stipulated above (where applicable) including but not limited to making all necessary applications and submitting relevant information to the Stock Exchange and the Securities and Futures Commission on time. The Company has undertaken to use its reasonable endeavours to cause conditions (viii) and (ix) above to be complied with within the time stipulated (where applicable) (including but not limited to making all necessary applications and submitting the relevant information to the Stock Exchange and the Securities and Futures Commission on time).

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LETTER FROM THE BOARD

The Company shall have the right to waive in writing the conditions as mentioned above (save as and except for conditions (viii) and (ix)). As at the Latest Practicable Date, none of the conditions are waived or intended to be waived by the Company. Save as aforesaid, if any of the conditions set out in the Sale and Purchase Agreement have not been fulfilled (or, where applicable, waived by the Company in writing) on or before the Long Stop Date, the Company will be entitled to terminate the Sale and Purchase Agreement by giving notice in writing to the Vendors.

Save as in the case where the Company is in breach, if the Sale and Purchase Agreement is terminated as aforementioned, the Vendors shall repay the Earnest Money (without interest) and any amount previously paid by the Company to the Vendors within 10 Business Days of the despatch of the aforesaid termination notice by the Company.

Completion of the Sale and Purchase Agreement

Where all the conditions precedent to the Sale and Purchase Agreement set out above have been satisfied or waived (where applicable), the Company will issue to the Vendors a written notice of Completion. Completion shall then take place within 10 Business Days (or such later date as agreed by the Company and the Vendors in writing) from the date of the written notice of Completion issued by the Company.

The Convertible Notes

Pursuant to the Sale and Purchase Agreement, for part payment of the Consideration, the Company will issue to the Vendors the Convertible Notes in the aggregate principal amount of HK$290 million upon Completion.

The principal terms of the Convertible Notes are summarized as follows:

Issuer: The Company Noteholder(s): The Vendors (or their nominee(s)) Principal amount: HK$290 million Interest: Nil Maturity: 24 months from the date of issue of the Convertible Notes. Early redemption: The Convertible Notes may be redeemed at 100% of the outstanding principal amount of the Convertible Notes (in whole or in part) at any time and from time to time at the option of the Company prior to the maturity date of the Convertible Notes.

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LETTER FROM THE BOARD

Conversion Price:

The Conversion Price shall be the average closing price of the Shares for the five (5) consecutive trading days prior to the Completion Date plus a premium of 30%, provided that the Conversion Price shall not in any event be more than HK$0.68 or less than HK$0.227 per Conversion Share.

The minimum Conversion Price of HK$0.227 represents:

• i. a premium of approximately 43.67% over the closing price of HK$0.158 per Share as quoted on the Latest Practicable Date;

• ii. a discount of approximately 57.17% to the closing price of HK$0.53 per Share as quoted on the Stock Exchange on the Last Trading Day (on the assumption that the Share Consolidation had become effective on that day); and

• iii. a discount of approximately 57.17% to the average closing price of HK$0.53 per Share as quoted on the Stock Exchange for the five (5) consecutive trading days up to and including the Last Trading Day (on the assumption that the Share Consolidation had become effective on that day).

The maximum Conversion Price of HK$0.68 represents:

• i. a premium of approximately 330.38% over the closing price of HK$0.158 per Share as quoted on the Latest Practicable Date;

• ii. a premium of approximately 28.30% over the closing price of HK$0.53 per Share as quoted on the Stock Exchange on the Last Trading Day (on the assumption that the Share Consolidation had become effective on that day); and

• iii. a premium of approximately 28.30% over the average closing price of HK$0.53 per Share as quoted on the Stock Exchange for the five (5) consecutive trading days up to and including the Last Trading Day (on the assumption that the Share Consolidation had become effective on that day).

The Conversation Price was agreed after arm’s length negotiations between the Company and the Vendors, with reference to, among other things, the recent trading price of the Shares on the Stock Exchange and the market sentiment of the global stock markets.

– 18 –

LETTER FROM THE BOARD

Since the Sale and Purchase Agreement was signed on 5 May 2011, the price of the Shares decreased from HK$0.53 as at the Last Trading Day (on the assumption that the Share Consolidation had become effective on that day), to HK$0.154 as at the date of the Supplemental Agreement, which was far below the original initial Conversion Price of HK$0.68 (being the adjusted initial Conversion Price upon the Share Consolidation becoming effective). The Vendors have expressed their concerns over the price of the Shares and given that part of the Consideration will be settled by the issue of the Convertible Notes and such Convertible Notes will be mandatorily converted upon their maturity, the Vendors indicated to the Company that they may not be able to proceed with the Acquisition pursuant to the original terms of the Sale and Purchase Agreement as their potential interest under the Convertible Notes has been materially and adversely affected. In view of the prospect and potential of the Project Companies (as demonstrated in the latter sections of this letter), the Company has tried its best endeavour to negotiate with the Vendors to proceed with the Acquisition and after arms’ length negotiations, pursuant to the Supplemental Agreement, the parties agreed to amend and supplement the Sale and Purchase Agreement, in particular the Conversion Price such that the Conversion Price shall be determined at the time before Completion to minimize the effect due to the fluctuation of the price of the Shares during the period before Completion.

While the maximum Conversion Price of HK$0.68 represents the original initial Conversion Price (being the adjusted initial Conversion Price upon the Share Consolidation becoming effective), the minimum Conversation Price of HK$0.227 is the negotiated price determined by the Company and the Vendors after arm’s length negotiations with reference to the 5-days average closing price of the Shares of approximately HK$0.172 for the period from 25 August 2011 to 31 August 2011 (being the period during which the parties negotiated for the minimum Conversion Price) plus a premium of approximately 30%. The maximum and minimum Conversion Price of HK$0.68 and HK$0.227 respectively are set with a view to fix the minimum and maximum number of Conversion shares that the Company may be required to allot and issue under the Convertible Notes and thus to limit the potential dilution impact that the Convertible Notes may cause to the existing Shareholders. The Directors consider that the aforementioned amendments to the Conversion Price are fair and reasonable and are in the interests of the Company and the Shareholders as a whole.

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LETTER FROM THE BOARD

Conversion right:

Subject to the conversion restriction mentioned below, the Convertible Notes may be converted into Shares at any time from the date of issuance up to the date immediately prior to the maturity date of the Convertible Notes and shall be mandatorily converted upon maturity.

Subject to the conversion restrictions set forth below, all the Convertible Notes outstanding on their expiry shall be converted into Shares at the then Conversion Price.

Conversion restrictions:

• The Convertible Notes may not be converted to the extent that, following such conversion, (i) the Company will be in breach of the minimum public shareholding requirement stipulated under Rule 8.08 of the Listing Rules or other relevant requirements under the Listing Rules; or (ii) holder(s) of the Convertible Notes and any parties acting in concert with it/them will become obliged to make a mandatory offer under Rule 26 of the Takeovers Code; or (iii) holder(s) of the Convertible Notes and any parties acting in concert with it/them will hold 20% or more of the issued share capital of the Company.

Transferability:

The Convertible Notes will be freely transferable or assigned (in integral multiple of HK$500,000 or such lesser amount representing the entire outstanding principal amount of the Convertible Notes) to a transferee other than a connected person of the Company, which is subject to the consent of the Company and compliance with the Listing Rules.

Voting rights: The noteholder(s) is/are not entitled to attend or vote at any meetings of the Company.

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LETTER FROM THE BOARD

Conversion Shares:

The Conversion Shares will rank pari passu in all respects with the Shares in issue on the date of allotment and issue of such Shares. Assuming the issue of the Convertible Notes is completed and (i) based on the maximum Conversion Price of HK$0.68 per Conversion Share, a minimum number of 426,470,588 Conversion Shares will be allotted and issued if the conversion rights attaching to the Convertible Notes are exercised in full, representing approximately 135.51% of the issued share capital of the Company as at the Latest Practicable Date and approximately 57.54% of the Company’s issued share capital as enlarged by the allotment and issue of the Conversion Shares in full; and (ii) based on the minimum Conversion Price of HK$0.227 per Conversion Share, a maximum number of 1,277,533,039 Conversion Shares will be allotted and issued if the conversion rights attaching to the Convertible Notes are exercised in full, representing approximately 405.95% of the issued share capital of the Company as at the Latest Practicable Date and approximately 80.23% of the Company’s issued share capital as enlarged by the allotment and issue of the Conversion Shares in full.

The Conversion Shares will be issued and allotted under the specific mandate of the Company. The Directors proposed to seek approval from the Shareholders at the SGM to issue the Conversion Shares.

Listing:

No application will be made for the listing of, or the permission to deal in, the Convertible Notes on the Stock Exchange or any other stock exchange. An application will be made to the Stock Exchange for the listing of, and the permission to deal in, the Conversion Shares.

Further details of the terms of the Convertible Notes are set out in Appendix VIIA to this circular.

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LETTER FROM THE BOARD

The Promissory Notes

Under the Sale and Purchase Agreement, the Promissory Notes in the aggregate principal amount of HK$260 million will be issued by the Company in part payment of the Consideration with the following terms and conditions:

• Principal amount: HK$260 million

• Interest: Interest shall accrue at an interest rate of 5.25% per annum commencing from the issue of the Promissory Notes.

Maturity: The Promissory Notes will be repaid in one lump sum together with all accrued interest on the day which is 12 months from the date of issue of the Promissory Notes.

Transferability: The Promissory Notes will be freely transferable or assigned (in integral multiple of HK$500,000 or such lesser amount representing the entire outstanding principal amount of the Promissory Notes) to a transferee other than a connected person of the Company, which is subject to the prior written consent of the Company.

• Early repayment: (a) The holder(s) of the Promissory Notes has/have the right to demand repayment of the entire outstanding principal amount of the Promissory Notes upon the occurrence of any events of default as stated in the terms of the Promissory Notes.

• (b) The Promissory Notes can be repaid in whole or in part before the maturity date pursuant to any agreement to be reached between the Company and the holder(s) of the Promissory Notes.

Further details of the terms of the Promissory Notes are set out in Appendix VIIB to this circular.

– 22 –

LETTER FROM THE BOARD

Non-competition undertaking

Under the Sale and Purchase Agreement, each of the Vendors has undertaken to the Company that it will not, and will procure that, its associates and affiliates and the management team of the Target Group will not, directly or indirectly engage in business and/or investments which would compete with the businesses of the Target Group in the PRC within 5 years from the date of the Sale and Purchase Agreement.

Other obligations of the Vendors

Pursuant to the Sale and Purchase Agreement, the Vendors and the Guarantors have further undertaken to repay to the Project Company the sum of RMB6,190,203.73, being the sum owed by Mr. Tang to the Project Company after setting off the sum owed by the Project Company to Ms. Tang Linmei, on or before Completion.

Guarantee by the Guarantors

Each of the Guarantors has unconditionally and irrevocably agreed to guarantee to the Company as a continuing obligation that the Vendors will comply properly and punctually with their obligations under the Sale and Purchase Agreement and other relevant transaction documents.

INFORMATION ON THE TARGET GROUP

The following sets out the information relating to the Target Group:

The Target Company

The Target Company was incorporated in the BVI with limited liability on 18 August 2010, with 300 shares being issued and fully paid up. As at the Latest Practicable Date, its principal asset was the entire issued share capital in HK Company.

The Target Company is owned (i) as to 48% (being 144 shares) by Lucky Start Holdings Limited; (ii) as to 12% (being 36 shares) by All Prosper Group Limited; (iii) as to approximately 6.7% (being 20 shares) by Triumph Return Holdings Limited; (iv) as to approximately 13.3% (being 40 shares) by Jia Sheng Holdings Limited; and (v) as to the remaining 20% (being 60 shares) beneficially owned by Mr. Hue Kwok Chiu, Mr. Tang and Ms. Tang Linmei, through two investment holding companies.

– 23 –

LETTER FROM THE BOARD

Upon Completion of the Acquisition, the shareholders of the remaining 20% shareholding in the Target Company are two investment holding companies ultimately and beneficially owned by Mr. Hue Kwok Chiu, Mr. Tang and Ms. Tang Linmei (the “ Remaining Shareholders ”) respectively. As confirmed by the Remaining Shareholders, each of them is an Independent Third Party and has no relationship with the vendors of the Company’s previous acquisitions in the past 24 months.

HK Company

HK Company is an investment holding company incorporated in Hong Kong on 13 September 2010 with limited liability and is wholly-owned by the Target Company. The principal asset of HK Company is the entire equity interest in the WFOE.

WFOE

The WFOE was established in the PRC on 25 October 2010 with limited liability and is wholly owned by HK Company. The principal asset of the WFOE is the entire equity interest in the Project Company.

INFORMATION ON THE PROJECT COMPANIES

Project Company

The Project Company was established in the PRC on 8 May 2007 with limited liability and is wholly-owned by the WFOE.

Baina Yancheng

Baina Yancheng was established in the PRC on 25 November 2009 with limited liability. Baina Yancheng is wholly-owned by the Project Company following completion of the Reorganization in June 2011.

Guoyuan

Guoyuan was established in the PRC on 11 May 2010 with limited liability and is whollyowned by the Project Company.

Bai Run

Bai Run was established in the PRC on 12 May 2011 with limited liability and is whollyowned by the Project Company.

– 24 –

LETTER FROM THE BOARD

Business model of the Project Companies

The Project Companies are engaged in the business of waste paper recycling in the PRC. As at the Latest Practicable Date, the Project Companies had a trading centre in Jiangsu, the PRC and 23 waste paper collection stations located in Jiangsu, Anhui and Shanghai, the PRC. Each of the waste paper collection stations is equipped with advanced waste paper packaging, loading, weighing and logistics management systems.

Processing cycle

The Project Companies collect waste paper through their 23 waste paper collection stations continuously throughout the day and at the same time, the staff will sort the waste paper into different categories. After sorting, packing and quality control processes will begin immediately and the packed end product will then be delivered to the customers.

Set out below is a simplified flow chart of the processing cycle:

==> picture [119 x 349] intentionally omitted <==

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

Waste paper collected
by waste paper
collection stations
Sorting
Packing
Quality control
Delivery to customers
----- End of picture text -----

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LETTER FROM THE BOARD

• Waste paper collected by waste paper collection stations: waste paper purchased from the suppliers is stockpiled and collected at the waste paper collection station.

• Sorting: waste paper is sorted manually into different product categories. The product categories are mainly classified by the quality of waste paper.

• Packing: the sorted waste paper is then separately packed into bundles using a baler machine and stored in the waste paper collection station awaiting delivery to the customers.

• Quality control: before delivery to the customers, quality inspection will be conducted at the waste paper collection station.

• Delivery to customers: the trading centre will consolidate sale orders and contracts from the customers and arrange delivery either by using the Project Companies’ own delivery team or contracting a third-party logistic company for delivery.

The operating flow of each waste paper collection station is the same. Each collection station is equipped with advanced waste paper packing, loading, weighing machines and logistics management system (which allows the Project Companies to control the forward and reverse flow and storage of the packed waste paper, and related information between the point of collection and the point of consumption in order to meet their customers’ requirements). Each waste paper collection station also has a warehouse for storage of the raw waste paper collected from the suppliers and the packed waste paper pending delivery to customers. The trading centre of the Project Companies is responsible for consolidating the sales orders and contracts and arranging for the delivery of the packed waste papers to the customers based on the geographical location of each waste paper collection station and their respective recycling volumes, place of delivery and order size.

– 26 –

LETTER FROM THE BOARD

Sales and distribution

The Project Companies operate their sales network for sorted & packed waste paper from their 23 waste paper collection stations and the trading centre. The trading centre focuses on consolidating the sales orders and contracts and arranges the distribution of the packed waste papers to the customers based on the geographical location of each of the waste paper collection stations and their respective recycling volumes, place of delivery and order size. After the determination of the shortest path to transport the packed waste paper to the customers from the waste paper collection stations, the Project Companies will either arrange transportation by themselves or engage a third-party logistics company to commence the delivery.

The Project Companies have their own sales and marketing workforce, which has continuously sought to promote the business and attract potential customers in the PRC. The Project Companies prepare tailor-made contract for each of their customers to satisfy their different needs, and may, in addition to sale of waste paper, provide other ancillary services such as storage and logistics services. Generally, the Project Companies enter into sales contracts with their customers on a short term basis for about one to six months to avoid the fluctuation of the market price for waste paper. The terms of the contracts will be re-negotiated before the contracts end. In order to maintain a good relationship with the customers so as to ensure that the sales contracts can be renewed upon expiry and to understand the needs of the customers on a timely basis, the Project Companies have set up a customer service department to look after each of their customers.

As at the Latest Practicable Date, there were approximately 9 employees in the sales department and 1 employee in the customer service department at the trading centre of the Project Companies, and around 11 general employees in each of the waste paper collection stations. The staff in the sales department is in charge of all the documentary and managerial work including drafting of different tailor made contracts with customers and maintaining good relationship with both new and existing customers. The staff in the customer service department is in charge of aftersale services such as follow up with customers to ensure their satisfaction. The sales department will also share the workload of the customer service department for cost control and their familiarity with the customers.

Pricing strategy

The Project Companies price the sorted and packed waste paper with reference to a number of factors, including but not limited to the international market prices for waste paper, the local supply of, and demand for, the waster paper, the cost for the raw waste paper, operating and administrative expenses, the quality of the waste paper and the relevant weights. In the past few years, as the demand for the waste paper was increasing in the global market, including the PRC market, the selling price of waste paper of the Project Companies has been positively affected. Please refer to the section headed “Industry overview” of this letter for further details.

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LETTER FROM THE BOARD

Quality control on the raw waste paper

Before raw waste paper is accepted for processing, the raw waste paper is physically inspected by the general staff in the collection station for dangerous or suspicious materials such as small metal pieces. The raw waste paper will then be sorted into different categories. Raw waste paper with significant chemical residuals or other pollutants will be taken out and disposed.

After the completion of the sorting process, the general staff will take a final review on the sorted and packed waste paper before arranging delivery to its customers.

Production facilities and capacity

Each of the waste paper collection stations is equipped with advanced waste paper packing, loading, weighting machines and logistics management systems.

The following is a brief introduction of the two machines installed at, and used by, the Project Companies at each waste paper collection station:

Automatic packing machine

==> picture [103 x 73] intentionally omitted <==

The automatic packing machines are used to compress and pack the waste paper into cube shape for easy handling and space-saving.

Loading cart

==> picture [103 x 75] intentionally omitted <==

The loading carts are used to move the packed waste paper within the station.

The annual handling capacity of each waste paper collection station ranges between approximately 10,000 tonnes to approximately 15,000 tonnes depending on the vacant areas available at the warehouse(s) at each waste paper collection station and the stock turnover rate. The total annual handling capacity of the Project Companies is approximately 300,000 tonnes of waste paper.

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LETTER FROM THE BOARD

Customers

The Project Companies have a high concentration of customers who are paper manufacturers in the PRC. Sales to the largest customer accounted for approximately 49.05%, 42.95% and 57.14% of the total revenue of the Project Companies for the three years ended 31 December 2008, 2009 and 2010 respectively. The revenue from the top five customers of the Project Companies for the year ended 31 December 2010 accounted for approximately 92.55% of the total revenue. The top five customers for the year ended 31 December 2010 were:

Jiangsu Lee & Man Paper Manufacturing Co., Ltd

（江蘇理文造紙有限公司）

Nine Dragons Paper (Taicang) Limited*

（玖龍紙業（太倉）有限公司）

Zhejiang Jing Xing Paperboard Limited*

（浙江景興板紙有限公司）

Jiaxing Dahua Paper Industry Co., Limited*

（嘉興大華紙業有限公司）

Zhejiang Jing Xing Paper Co., Limited*

（浙江景興紙業股份有限公司）

The Project Companies enter into short term contracts ranging from one to six months with its major customers to supply waste paper to avoid the fluctuation of the market price for the waste paper. The contracts will be renewed upon expiry and the selling price will be adjusted with reference to the then current market price and the type and grade of the waste paper required by the customers.

As the major customers accounted for a significant portion of revenue of the Project Companies, the Project Companies have focused on maintaining good business relationship with them. For recycling business, it is common practice for both packed waste paper providers and the customers to enter into short term contract to minimize the risks involved due to any changes in international price of waste paper. To maintain a good business relationship with their customers, the sales department and the customer service department of the Project Companies will closely monitor the trend of the market, the needs of the customers and follow up with the quality of packed waste paper delivered to the customers. Before the expiry of the existing sales contracts, the sales department will contact the customers for the quantities of packed waste paper required by them for the subsequent term. In the meantime, the Project Companies will focus on serving their existing customers as their existing capacity of their waste collection stations cannot fulfil all the purchasing needs of the existing customers and further expansion is required to fulfil such demands. The Project Companies will actively source new customers in the future when the business scale of the Project Companies is enhanced.

As advised by the management of the Project Companies, the Project Companies have a policy of allowing credit period ranging from 1 to 3 months to their customers.

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LETTER FROM THE BOARD

According to the accountants’ report of the Target Group set out in Appendix II to this circular, the Project Companies did not have any past due trade receivables as at 31 December 2009 and 2010 and 31 March 2011 respectively; and trade receivables due from their top five customers were settled within the allowed credit period ranging from 1 to 3 months.

Raw materials suppliers

Raw materials for the Project Companies’ production are primarily raw waste paper purchased from individual collectors, local factories and supermarkets. The Project Companies mainly purchase raw waste paper from individual collectors, who usually reclaim and gather raw waste paper from local residents and the Project Companies pay those individual collectors immediately at the time when the raw waste paper is received from the individual collectors at the collection stations. As the volume of the raw waste paper purchased from each of these suppliers is relatively small and only accounts for a small portion of the total purchased raw waste paper, the Project Companies have a large number of individual collectors, factories and supermarkets acting as their suppliers and the Project Companies do not rely heavily on any single, or single group of, suppliers.

With a view to obtain a stable supply of raw waste paper and to expand the scale of production, from 2010 onwards, the Project Companies has started building a waste paper procurement network in the nearby provinces by entering into purchase contracts with sizable enterprises and business organizations, such as Daikin Chemical (China) Co., Ltd.（大金氟化工 （中國）有限公司）, UPM-Kymmene (Changshu) Paper Limited（芬歐匯川（常熟）紙業有限公 司）, and Sharp Office Equipment (Changshu) Co., Ltd.*（夏普辦公設備（常熟）有限公司）.

The Project Companies assess their corporate raw waste paper suppliers every year in accordance with specified criteria on pricing, quality of raw materials supplied, source of raw waste paper and quality of services. Before commencing a relationship with a new corporate supplier, the Project Companies assess and verify the supplier’s background through meetings and interviews to determine whether it is suitable to be a new supplier of the Project Companies.

The terms of the purchase contracts with these corporate suppliers are not standardized, and the Project Companies will take into consideration the following factors when negotiating and entering into a purchase contract with any of such suppliers: (i) the capacity of the supplier; (ii) the average quality of the raw waste paper the supplier provides; (iii) the then market demand; and (iv) the international waste paper price. Accordingly, the contract period may vary from several months to two years. The Project Companies usually purchase all the raw waste paper and the related wastes generated in the production process of the suppliers and arrange the delivery at their own expenses. The purchase price is determined and adjusted from time to time during the contract period with reference to (i) the international waste paper price; (ii) the then supply of and demand for the waste paper; and (iii) the cost and expense incurred in the purchase process (i.e. the transportation cost). Normally, the purchase contracts will be renewed with the same terms automatically upon expiry unless the Project Companies have any specific requirements on the new orders.

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LETTER FROM THE BOARD

Working capital management policy

Given that the Project Companies are required to pay their suppliers who are individual collectors upon delivery of the raw waste papers but grant to their customers credit period ranging from 1 to 3 months, the Project Companies have been using a combination of policies and techniques to manage their working capital to avoid any negative operating cash flow and to ensure that they have sufficient funds to satisfy both maturing short-term debt and upcoming operating expenses. The working capital management policies of the Project Companies involve the following:

• (i) Cash management. The Project Companies will identify and monitor the cash balance available for the Project Companies to meet their day to day expenses;

• (ii) Inventory management. The Project Companies will identify and monitor the level of inventory which allows uninterrupted processing flows but reduces purchase of raw waste paper and minimizes purchase costs and hence optimizes cash flow;

• (iii) Debtors management. The Project Companies have identified their current credit terms offered to their customers, which range from 1 to 3 months, as the optimal and appropriate credit policy, i.e. credit terms which are commercially attractive to customers, so that any impact on cash flows and the cash conversion cycle can be offset by increased revenue; and

• (iv) Financing. If credit term is not available from suppliers, the Project Companies may utilize a bank loan (or overdraft) to finance their short term requirements for working capital.

Key members of the existing management team of the Project Companies

As the Acquisition will involve a diversification into a new business, the Company proposes to retain the current management team of the Project Companies for their future management. The Company has no present intention to change the composition of the Board upon Completion. Under the Sale and Purchase Agreement, the Vendors will not be conferred any right to nominate any director to the Board. Hence, it is not expected that, upon Completion of the Acquisition, any of the ultimate beneficial owners or any other nominees of the Vendors will have any management involvement in the Company or be appointed as Directors.

The Project Companies are led by an experienced and dedicated management team, with strong industry knowledge and execution capabilities. All members of the management team have at least 5 years of experience in their respective fields. The areas of expertise include strategic planning in recycling industry, logistics management and financial planning.

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LETTER FROM THE BOARD

The followings sets out briefly the biographical details of the management team of the Project Companies:

• (i) Mr. Tang, aged 35, has been the general manager of the Project Company since 2004. Mr. Tang graduated from HeFei University of Technology（合肥工業大學）with a bachelor degree in intelligent instrument in 1999. Mr. Tang has about 11 years of experience in business management and has over 6 years of experience in waste paper recycling business operations since 2004.

• (ii) Mr. Pan Zhonghua, aged 42, has been the deputy general manager of the Project Company since 2008. Mr. Pan graduated from Heilongjiang Institute of Technology

• （黑龍江工程學院）with a bachelor degree in management of business finance in 1989 and has over 22 years of experience in business finance. Mr. Pan has about 14 years of experience in business management and has over 3 years of experience in waste paper recycling business operations since 2008.

• (iii) Mr. Zhu Xuejun, aged 35, has been the assistant manager of the Project Company since 2006. Mr. Zhu graduated from HeFei University of Technology（合肥工業大學） with a bachelor degree in intelligent instrument in 1999. Mr. Zhu has over 11 years of experience in management and has over 5 years of experience in waste paper recycling business operations and management since 2006.

• (iv) Mr. Tang Xunbin, aged 39, has been the manager of the production department of the Project Company since 2010. Mr. Tang Xunbin graduated from Chengdu University of Technology（成都理工大學）with a bachelor degree in electronic in 1992. Mr. Tang Xunbin has over 15 years of experience in technological development and has about 1 year of experience in waste paper recycling business operations and management since 2010.

Under the leadership of the senior management team, the Project Companies have experienced steady growth in the past, and the Company believes they will continue to deliver sustainable growth to the Project Companies in the future. Under the Sale and Purchase Agreement, it is a condition precedent to Completion that each of them shall enter into a service agreement with the Project Company and remain in their present positions in the Project Companies for 3 years commencing from the Completion Date.

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LETTER FROM THE BOARD

Apart from the senior management of the Project Companies, two Directors of the Company also possess experiences in business management, namely (i) Ms. Chen Tong (“ Ms. Chen ”), aged 47, has been the executive Director and Chairman of the Company since 15 December 2010. Ms. Chen, graduated from Tongji University in 2002 with a bachelor degree in administrative management. She is currently the vice general manager of a logistic company in the PRC; and (ii) Ms. Deng Hong Mei (“ Ms. Deng ”), aged 39, is an executive Director and a member of the executive committee of the Company. Ms. Deng joined the Group in November 2009. Prior to joining the Group, she served as a project manager in a private company in Hong Kong for about 9 years and has extensive experience in the field of business and project management. Both executive Directors will monitor this new business of the Company closely after Completion of the Acquisition.

The Directors consider that given the proven performance record of the existing management team of the Project Companies, the continuity of their services and leadership in the Project Companies will help consolidate and develop this new business for the Group. The existing management team of the Project Companies, together with the Board, will monitor and manage the operation of the Project Companies after Completion of the Acquisition. The Company will consider recruiting additional qualified persons to monitor and operate the Project Companies’ business if and when required.

Competitive strengths of the Project Companies

The Directors believe that the Project Companies possess the following competitive strengths that allow them to achieve the sustainable growth in their business.

Strategic locations of the collection stations

The Project Companies’ collection stations are strategically located in areas with high demand for waste paper, strong supply of raw waste paper and convenient access to road transportation.

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LETTER FROM THE BOARD

Currently, the Project Companies’ waste paper collection stations are located in Jiangsu Province, Anhui Province and Shanghai, the PRC, supplying products to meet the high demand for waste paper from large PRC paper manufacturers. By August 2011, the Project Companies have opened four new collection stations. With the opening of these new collection stations, the Project Companies altogether have 23 collection stations with a total annual processing capacity of approximately 300,000 tonnes. The Project Companies are in the process of opening 6 new collection stations in Jiangsu Province, Anhui Province and Shanghai, the PRC which will further increase the annual processing capacity by approximately 70,000 tonnes. It is currently expected that the building of these 6 new stations will complete in the next 12 month. These new collection stations, like the existing ones, will be strategically located in areas where demand for waste paper is high and supply of raw waste paper is strong. The locations of the Project Companies’ current collection stations are illustrated in the map below:

==> picture [382 x 230] intentionally omitted <==

• •: the city on which the Project Companies’s waste paper collection stations are located

For highlights on the high demand for the waste paper, please refer to the section headed “Industry overview” of this letter.

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LETTER FROM THE BOARD

The Project Companies have a clientele of quality customers

Large paper manufacturers in China generally prefer to purchase from sizable packed waste paper providers like the Project Companies to ensure a stable long-term supply of quality packed waste paper. After years of operation, the Project Companies have established a clientele of quality customers. These customers are in close proximity to the Project Companies’ collection stations in Jiangsu Province, Anhui Province and Shanghai, the PRC, which enables the Project Companies to deliver the products to them promptly and also lowers the transportation costs. The average years of relationship with the customers are around 2 to 3 years.

In recent years, the Project Companies have expanded their customer base to include a number of large paper manufacturers in the PRC, including Jiangsu Lee & Man Paper Manufacturing Co., Limited（江蘇理文造紙有限公司）, a subsidiary of Lee & Man Paper Manufacturing Limited, a listed company in Hong Kong, Nine Dragons Paper (Taicang) Limited （玖龍紙業（太倉）有限公司）, a subsidiary of Nine Dragons Paper (Holdings) Limited, a listed Company in Hong Kong, and Zhejiang Jing Xing Paper Co., Ltd.*（浙江景興紙業股份有限公司）, a listed company in the PRC.

The Project Companies are efficient packed waste paper producers and utilize advanced equipment to produce quality packed waste paper

The Project Companies have equipped each waste paper collection station with advanced waste paper packing, loading, weighing and logistics management system. The management of the Project Companies believes such automated equipment has significantly enhanced the Project Companies’ operating efficiency and increased the Project Companies’ production capacities, enabling them to keep pace with rising demand for waste paper in recent years. The Project Companies plan to install similar equipment at the new waste paper collection stations. For details of the equipment installed and used at each collection station, please see the section headed “Information on the Project Companies – Production facilities and capacity” of this letter.

Experienced management team

The Project Companies are led by an experienced and dedicated management team with strong industry knowledge and execution capabilities. All members of the management team have at least 5 years of experience in their respective fields. The areas of expertise include market strategic planning in recycling industry, logistics management and financial planning.

Under the leadership of the senior management team, the Project Companies have experienced steady growth in the past, and the Company believes they will continue to deliver the sustainable growth to the Project Companies in the future.

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LETTER FROM THE BOARD

Future business plan of the Project Companies

The Project Companies aim to grow into one of the leading waste paper recycling companies with advanced facilities, efficient operation and effective management in the PRC. Under the original expansion plan of the Project Companies, ten new collection stations were expected to open by the end of 2011. As advised by the management of the Project Companies, four new collection stations were opened by August 2011 and the total number of the collection stations owned by the Project Companies has thereby increased to twenty three. The expansion plan is behind the original schedule due to the Acquisition and the remaining six new collection stations are expected to open in the next 12 months. These six new collection stations are planned to be located in Jiangsu Province, Anhui Province and Shanghai, the PRC. The new collection stations are and will be equipped with advanced waste paper packing, loading, weighing machines and logistics management system. The Project Companies currently estimated that the capital expenditure for the expansion will be approximately RMB37 million. The working capital for the operation of the new collection stations will be approximately RMB30 million per annum. The Project Companies currently plan to finance the aforesaid funding requirements by means of shareholders loans, bank borrowings or other suitable financing source then available to the Project Companies, if and when such financing needs arise.

The Project Companies will also improve their sorted & packed waste paper storage and distribution ability, and enhance their comprehensive distribution ability. The Project Companies will expedite the construction process of the new collection stations, improve their storage function, maximize the geographical positions and recycling capacity, strengthen the distribution channels and ability gradually to cope with the increase in demand in the future. The Project Companies will also co-operate with the local governments in developing and organizing renewable resources management to improve the Project Companies’ social influence.

The Company has conducted due diligence on the Project Companies, including but not limited to their legal and financial affairs and positions and no material adverse finding has been reported. As the Project Companies are in operation and recorded an improvement on their historical financials, the Directors are of the view that a feasibility study on the Project Companies’s business is not necessary. The Board will however review the current expansion plan of the Project Companies and discuss with the senior management of the Project Companies to assess whether the current expansion plan is feasible and whether it needs to be modified to maximize the profitability of the Project Companies.

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LETTER FROM THE BOARD

Financial information of the Target Group

Set out below is a summary of the audited financial information of the Target Group (as extracted from the accountants’ report of the Target Group contained in Appendix II to this circular) for the three years ended 31 December 2008, 2009 and 2010 and for the three months ended 31 March 2010 and 2011 prepared in accordance with the relevant HK GAAP:

				For the	For the
	For the	For the	For The	three months	three months
	year ended	year ended	year ended	ended	ended
Consolidated statement of	31 December	31 December	31 December	31 March	31 March
comprehensive income	2008	2009	2010	2010	2011
	RMB’million	RMB’million	RMB’million	RMB’million	RMB’million
Turnover	18.97	237.06	296.02	61.18	92.11
Net profit/(loss) before taxation	(2.40)	16.29	36.39	2.49	10.25
Net profit/(loss) after taxation	(2.40)	13.15	27.60	2.48	7.69
					As at
Combined statement of					31 March
financial position					2011
					RMB’million
Total assets					130.19
Total liabilities					93.47
Net assets					36.73

OVERVIEW OF THE LEGAL AND REGULATORY REQUIREMENTS

Set forth below is a summary of the PRC laws and regulations applicable to waste paper recycling business in the PRC.

• (i) Investment in the PRC conducted by foreign investors and foreign-owned enterprises is governed by 《外商投資產業指導目錄》(The Catalogue of Industries for Guiding Foreign Investment) (the “ Guidance ”), which was amended and promulgated by 中 華人民共和國商務部 (the Ministry of Commerce of the PRC) and 中華人民共和 國國家發展和改革委員會 (the National Development and Reform Commission of the PRC*) on 31 October 2007, and took effect from 1 December 2007. The Guidance contains specific provisions guiding market access of foreign capital, stipulating in detail the rules of entry according to the categories of encouraged industries, restricted industries and prohibited industries. Industries not listed in the Guidance are generally open to foreign investment unless specifically barred by other PRC laws and regulations.

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• (ii) 《中華人民共和國環境影響評價法》(the Law of the PRC on Appraising Environmental Impacts) has come into effect on 1st September 2003 and 《建 設項目環境影響評價分類管理目錄》(the Regulations on the Administration of Construction Project Environmental Protection) has become effective from 1 October 2008. According to the aforementioned regulations, the Project Companies are required to conduct environmental impact assessments in relation to the construction of their collection stations and accept the supervision and management of the relevant environmental administration.

• (iii) Pursuant to《中華人民共和國勞動合同法》(the PRC Labour Contract Law*), which was adopted by the Standing Committee of the National People’s Congress on 29 June 2007 and took effect from 1 January 2008, to establish a labour relationship, a written labour contract should be concluded. In the event that no written labour contract is concluded at the time when a labour relationship is established, such a written contract should be concluded within one month from the date when the employer employs the employee. Where the employer fails to conclude a written labour contract with the employee for more than one month but less than a year from the date it starts employing him, it shall pay the employee two times his salary for each month. In addition, if the employer fails to conclude a written labour contract with the employee within one year as of the date when it employs the employee, it shall be deemed to have concluded an open-ended contract with the employee.

• (iv) Pursuant to the provisions as stipulated in《財政部國家稅務總局關於再生資源 增值稅政策的通知》財稅[2008] 157號(the Notice of the Ministry of Finance and the State Administration of Taxation on Value-Added Tax (the “ VAT ”) Policies on Renewable Resources (2008-157)), the Project Companies are required to pay VAT as per the relevant laws and to process the rebates for VAT on renewable resources according to《財政監察專員辦事處一般增值稅退稅行政審批管理程序暫行規定》 的通知（財監[2003] 110號）(the Notice on Implementation of Interim Provisions on Administrative Approval and Management Procedures for Rebates of Common VAT by the Financial Supervisory Commissioner Officer (CJ-2003-110)), and to comply with 《財政部下發補充通知進一步明確辦理再生資源增值稅退稅程式》（財監[2009] 7號）(the Supplementary Notice on Definition of Procedures for Rebate of VAT on Renewable Resources (CJ-2009-007) by the Ministry of Finance) and 江蘇省政府辦 公廳關於加強管理促進再生資源回收行業健康發展的通知（蘇政辦發[2010] 123 號）(the Notice on Enhancement of Management to Promote Sound Development of Renewable Resources Recycling Industry (SZBF-2010-123) as issued by the General Office of Jiangsu Provincial Government).

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LETTER FROM THE BOARD

• (v) According to the spirit of《中共中央關於制定國民經濟和社會發展第十二個五 年規劃的建設》(the Comments of the Central Committee of the Communist Party of China on Stipulation of the 12th Five-Year Plan for National Economic and Social Development*) issued on 18 October 2010, the Project Companies shall optimize renewable resources recovery system and categorize refuse recovery system, promote industrialized recycling of resources and enhance environmental protection.

• (vi) According to the overall objectives as stipulated in《商務部關於加強再生資源 回收體系的指導意見》(the Guiding Provisions on Enhancement of Renewable Resources Recovery System*) by the Ministry of Commerce, the Project Companies shall continuously form renewable resources recovery promotion system, establish occupational training system for recycling enterprises and individuals to ensure regulated management of personnel engaged in urban recycling and practically settle such problems as environmental pollution by the recycling industry, pilferage and disposal of booties, evasion of supervision and disorderly competition through optimization of legal systems and enhancement of supervision and management.

Compliance with Relevant Laws in the PRC

The business conducted by the Project Companies does not fall under the encouraged, restricted or prohibited categories of foreign investment under the Guidance. As confirmed by the PRC legal adviser engaged by the Company, the waste paper recycling business is open to foreign investment and there is no specific permit or licence required by the Project Companies for the operation of the business activities being conducted by them. The only necessary permit or licence required by the Project Companies is the business licence for the operation of the recycling business. All the Project Companies have obtained their respective business licences and for those collection stations which have not yet obtained their business licences, as advised by the PRC legal adviser engaged by the Company, there will not be any legal impediment in their applications for such business licences.

As further confirmed by the PRC legal adviser engaged by the Company,

• (i) the Project Companies have, in accordance with the Law of the PRC on Appraising Environmental Impacts and the Regulations on the Administration of Construction Project Environmental Protection, submitted all registration reports required under these regulations and passed the approval of both the Changshu Municipal Environmental Protection Bureau and the Lianshui County Environmental Protection Agency in accordance with the laws of the PRC;

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LETTER FROM THE BOARD

• (ii) the Project Companies have also complied with the Labour Law and the Labour Contract Law of the PRC since they came into force and have had no material labour disputes with their workforce since commencing operations;

• (iii) the Project Companies have applied for tax registration and complied with all its fiscal and tax obligations, and have paid VAT in accordance with the law;

• (iv) the Project Companies are not in breach of any applicable laws or policies of the PRC, especially those impacting on the recycling industry. Moreover, they will establish occupational training for their employees to ensure their proper management and to practically settle problems caused by the recycling business; and

• (v) there is no material non-compliance with any rules, regulations or laws of the PRC to which the business of the Project Companies is subject.

Furthermore, as confirmed by the Vendors, the Project Companies have not received, and are not aware of, any findings being made or notified by any regulatory authority in the PRC against any of the Project Companies for any material non-compliance with any rules, regulations or laws to which their business is subject, or any material irregularities as a result of periodic visits and audits since their respective dates of incorporation and up to the Latest Practicable Date; the Project Companies have not experienced any material labour disputes since their respective dates of incorporation and up to the Latest Practicable Date and they have complied in all material respects with the labour laws of the PRC.

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LETTER FROM THE BOARD

SHAREHOLDING STRUCTURE OF THE TARGET GROUP

The following charts show the simplified shareholding structure of Target Group (i) as at the Latest Practicable Date following the completion of the Reorganization in June 2011; and (ii) immediately after Completion of the Acquisition:

• (i) As at the Latest Practicable Date following the completion of the Reorganization in June 2011:

==> picture [97 x 283] intentionally omitted <==

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

Vendors
80%
Target Company
100%
HK Company
100%
WFOE
100%
Project Company
----- End of picture text -----

==> picture [365 x 88] intentionally omitted <==

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

100% 100% 100%
Baina Yancheng Guoyuan Bai Run
----- End of picture text -----

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LETTER FROM THE BOARD

• (ii) immediately after Completion of the Acquisition:

==> picture [365 x 370] intentionally omitted <==

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

The Company
80%
Target Company
100%
HK Company
100%
WFOE
100%
Project Company
100% 100% 100%
Baina Yancheng Guoyuan Bai Run
----- End of picture text -----

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LETTER FROM THE BOARD

CHANGES IN THE SHAREHOLDING STRUCTURE OF THE COMPANY

For illustrative purpose only, set out below is a summary of the shareholdings in the Company (i) as at the Latest Practicable Date; (ii) after allotment of the maximum number of Conversion Shares upon full conversion of the Convertible Notes, while the Vendors or their nominee(s) do not hold more than 19.9% of the issued share capital of the Company; (iii) after allotment of the maximum number of Conversion Shares upon full conversion of the Convertible Notes (excluding the Contingency Note); and (iv) after allotment of the maximum number of Conversion Shares upon full conversion of the Convertible Notes (including the Contingency Note). Given the conversion restrictions to be imposed upon the holder(s) of the Convertible Notes (see the section headed “Sale and Purchase Agreement – the Convertible Notes” of this letter), the aforementioned scenarios (iii) and (iv) are set forth below for illustrative purpose only and will never occur.

I. At the minimum Conversion Price of HK$0.227 per Conversion Share)

Shareholders Lau Chung Yim (Director) The Vendors or its nominee(s) Public Shareholders Total	As at the Latest Practicable Date Number of Shares % 3,412 0.00 – – 314,705,642 100.00 314,709,054 100.00	After allotment of the maximum number of Conversion Shares upon full conversion of the Convertible Notes, while the Vendors or their nominees do not hold more than 19.9% of the issued share capital of the Company Number of Shares % 3,412 0.00 78,186,144 19.90 314,705,642 80.10 392,895,198 100.00	After allotment of the maximum number of Conversion Shares upon full conversion of the Convertible Notes (excluding the Contingency Note) Number of Shares % 3,412 0.00 1,048,458,149 76.91 314,705,642 23.09 1,363,167,203 100.00	After allotment of the maximum number of Conversion Shares upon full conversion of the Convertible Notes (including the Contingency Note) Number of Shares % 3,412 0.00 1,277,533,039 80.23 314,705,642 19.77 1,592,242,093 100.00	After allotment of the maximum number of Conversion Shares upon full conversion of the Convertible Notes (including the Contingency Note) Number of Shares % 3,412 0.00 1,277,533,039 80.23 314,705,642 19.77 1,592,242,093 100.00
					100.00

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LETTER FROM THE BOARD

II. At the maximum Conversion Price of HK$0.68 per Conversion Share

Shareholders Lau Chung Yim (Director) The Vendors or its nominee(s) Public Shareholders Total	As at the Latest Practicable Date Number of Shares % 3,412 0.00 – – 314,705,642 100.00 314,709,054 100.00	After allotment of the maximum number of Conversion Shares upon full conversion of the Convertible Notes, while the Vendors or their nominees do not hold more than 19.9% of the issued share capital of the Company Number of Shares % 3,412 0.00 78,186,144 19.90 314,705,642 80.10 392,895,198 100.00	After allotment of the maximum number of Conversion Shares upon full conversion of the Convertible Notes (excluding the Contingency Note) Number of Shares % 3,412 0.00 350,000,000 52.65 314,705,642 47.35 664,709,054 100.00	After allotment of the maximum number of Conversion Shares upon full conversion of the Convertible Notes (including the Contingency Note) Number of Shares % 3,412 0.00 426,470,588 57.54 314,705,642 42.46 741,179,642 100.00	After allotment of the maximum number of Conversion Shares upon full conversion of the Convertible Notes (including the Contingency Note) Number of Shares % 3,412 0.00 426,470,588 57.54 314,705,642 42.46 741,179,642 100.00
					100.00

Given the terms and conditions of the Sale and Purchase Agreement and the terms of the Convertible Notes as mentioned above, there will not be any change in control of the Company as a result of the Acquisition.

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LETTER FROM THE BOARD

RISK FACTORS

Summary

The Group considers that there are several risks involved in the business and operations of the Project Companies and in connection with the Acquisition. Such risks can be categorised into (i) risks relating to the business; (ii) risks relating to the industry; (iii) risks relating to the PRC; and (iv) risks relating to the Acquisition.

(i) Risks relating to the business

• New business segment of the Group.

• The Project Companies may be adversely affected by the global financial crisis and disruptions in the financial markets.

• The Project Companies require a high level of working capital to sustain the operations and overall growth.

• The Project Companies’ expansion plans may not be successful.

• The Project Companies’ business and prospects depend heavily on the performance of the paper and waste paper consumption industries in the PRC.

• The Project Companies’ operations are heavily dependent on the key management.

• The Project Companies rely on a few major customers.

• The Project Companies rely on the major suppliers.

• A material disruption of the Project Companies’ operations could adversely affect the business.

• The Project Companies may experience difficulties in recruiting or retaining key personnel.

• Other risks relating to the Project Companies.

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LETTER FROM THE BOARD

(ii) Risks relating to the industry

• Pricing of waste paper.

• Huge demand for labour.

• The Project Companies operate in a highly competitive industry.

(iii) Risks relating to the PRC

• The economic, political and social conditions in the PRC, as well as government policies, laws and regulations, could affect the Project Companies’ business.

• Legal and regulatory issues.

(iv) Risks relating to the Acquisition

• The Shareholders’ interest in the Company may be diluted as a result potential ongoing fund raising activities.

• Failure to conduct a timely fund raising exercises to fulfill the capital needs of the Enlarged Group may adversely affect its liquidity and operating cash flow.

The following is a detailed discussion of the risk factors.

Risks relating to the business

New business segment of the Group

Waste paper recycling constitutes a new business sector to the Group. Such new business, which operates in a different regulatory environment, may pose significant challenges to the Group, including but not limited to the administrative, financial and operational aspects of the business. Since the Board does not have any significant experience in the new business, it is difficult to ascertain whether and when the new business will bring in any return or benefits. If the proposed business plan which the Project Companies attempt to develop does not progress as planned, the Company may not recover the funds and resources invested in the Acquisition and this may adversely affect the Enlarged Group’s financial position and prospects.

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LETTER FROM THE BOARD

The Project Companies may be adversely affected by the global financial crisis and disruptions in the financial markets

Market demand for waste paper in the PRC may be adversely affected by recent downturns in the United States and other major economies and the slowdown in the PRC economy, as well as the disruptions in the credit markets. The business and prospects of the Project Companies depend heavily on the performance of the paper industry in China and the industries that consume paper in China, including paper manufacturers, printing houses, and packaging plants. A significant slowdown in the PRC economy, or in any of these industries, could significantly reduce the demand for waste paper, which could depress prices for the Project Companies’ products, sales volume and profitability.

In addition, some customers may experience difficulty in obtaining credit as a result of disruptions in the credit markets, which may adversely affect the sales volume and increase the risk of customers defaulting on their payment obligations to the Project Companies.

In addition to the potential impact of these developments on the financial condition and results of operations, they may affect the Project Companies’ expansion plan and have a negative impact on the Enlarged Group’s results of operations and financial performance.

The Project Companies require a high level of working capital to sustain the operations and overall growth

As the purchase of raw waste paper from individual collectors typically requires instant payment whereas the Project Companies normally grant credit periods ranging from 1 to 3 months to their customers, the Project Companies require a high level of working capital to sustain the operations and maintain the overall growth. It is currently estimated that the working capital for the operation of this new business is approximately RMB30 million per annum. Historically, the Project Companies financed the working capital through cash from operations derived from customer payments, loans from financial institutions and loans and capital contributions from the shareholders. Accordingly, the liquidity and financial condition of the Project Companies could be materially and adversely affected if they do not receive payments from their customers on a timely basis to satisfy payments to their suppliers and other working capital requirements, or if they are unable to obtain financing on satisfactory terms.

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LETTER FROM THE BOARD

Furthermore, the business of the Project Companies may require significant and continuous capital investment, and any further expansion of their business may require further increase in capital expenditures and commitments. As mentioned in the section headed “Information on the Project Companies – Future business plan of the Project Companies” of this letter, the Project Companies currently estimated that the capital expenditure for the expansion plan will amount to approximately RMB37 million. By August 2011, the Project Companies have opened 4 new collection stations. The Project Companies are in the process of opening 6 new collection stations in Jiangsu Province, Anhui Province and Shanghai, the PRC, which the Project Companies currently expect to complete in the next 12 months. Original budgets may be exceeded and the intended economic results may not be achieved. Should the actual capital investment for the operation and development of the Project Companies exceed the Enlarged Group’s budget due to factors beyond the Company’s control, this will siphon off the internally generated cash resources of the Enlarged Group. In the event that the Enlarged Group were unable to obtain adequate third party finance on acceptable terms, or at all, to fund the recycling business of the Project Companies, the Enlarged Group’s business and results of operations may be materially and adversely affected.

The Project Companies’ expansion plan may not be successful

The Project Companies are in the process of opening 6 new collection stations in Jiangsu Province, Anhui Province and Shanghai, the PRC, which is currently expected to complete in the next 12 months. The Project Companies expect to incur significant costs in connection with the expansion of the business, and any failure to successfully implement the expansion plan may materially and adversely affect the business, financial condition and results of operations of the Enlarged Group.

The expansion plan of the Project Companies involves significant risks and uncertainties, including:

• (a) the Project Companies may be unable to complete or implement the expansion plan at the expected costs or within the anticipated timeframe;

• (b) the Project Companies may be unable to obtain required governmental approvals and certificates (including, but not limited to, land use or title documents, favourable environmental assessments, and construction permits) relating to the construction and operation of the new collection stations in a timely manner. Any delays in receiving the required regulatory approvals and certificates may delay the completion of, or increase the cost of, the expansion plan;

• (c) the Project Companies may be unable to establish and maintain new customer and supplier relationships to ensure sufficient utilisation of the expanded collection stations, or at all;

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LETTER FROM THE BOARD

• (d) the Project Companies may not be able to obtain adequate financing to complete the construction of, and to commence commercial operations at, the new collection stations, or at all;

• (e) the Project Companies may encounter difficulties in obtaining adequate staffing and maintaining an experienced team of management and skilled work force for the new collection stations;

• (f) growth of the business may strain management resources and operational and financial systems and controls;

• (g) the Project Companies may be unable to complete the expansion plan on schedule, or at all, in the event that the construction works of any of the new collection stations are delayed or any equipment for the new collection stations fails to meet the specifications, fails to arrive on time, is lost or damaged during shipment or experiences difficulties during installation and testing;

• (h) delays in completion and commercial operation of the new collection stations could increase financing and other costs associated with the expansion plan; and

• (i) the new collection stations may not operate at the designed capacity or may cost more to operate than expected.

The Project Companies’ business and prospects depend heavily on the performance of the paper and waste paper consuming industries in the PRC

The Project Companies’ business and prospects depend heavily on the performance of the paper and waste paper consumption industries in the PRC, particularly the paper manufacturing industry. The PRC economy has experienced rapid growth in recent years, which has contributed to the strong demand for paper and paper related products. This, in turn, has resulted in strong demand for waste paper. For example, from 2004 to 2010, paper consumption grew at a CAGR of approximately 11.02%. A significant slowdown in the Chinese economy or a downturn in the paper manufacturing sectors in the PRC would adversely affect demand for waste paper in the PRC.

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LETTER FROM THE BOARD

As a result, the Company cannot assure that there will be continued or growing demand for waste paper in the PRC. If demand for waste paper in the PRC does not continue to grow or grows at a slower pace than expected, waste paper prices may decline and the Enlarged Group’s business, financial condition and results of operations would be materially and adversely affected.

The Project Companies’ operations are heavily dependent on the key management

The Project Companies’ continued success depends, to a significant extent, on the continued services and the performance of the key management members. This is exacerbated by the fact that the Acquisition constitutes an investment in a new business sector for the Company, making it susceptible to the continued contribution of experienced personnel to manage the business of the Project Companies. In particular, the Project Companies are dependent on the continued service of Mr. Tang, the general manager, Mr. Pan Zhonghua, the deputy general manager, and Mr. Zhu Xuejun, the assistant manager, as well as Mr. Tang Xunbin, the manager of production department. These key management members, whose particulars are set out in the section headed “Information on the Project Companies – Key members of the existing management team of the Project Companies” of this letter, have substantial experience in the waste paper industry. If one or more of the members of the senior management were unable or unwilling to continue in their present positions, the Project Companies may not be able to find a suitable replacement or at all, and the business may be disrupted and the financial condition and results of operations of the Enlarged Group may be materially and adversely affected. Competition for senior management team and key personnel is intense, the pool of qualified candidates is limited, and the Company may not be able to retain the services of the existing management team or the key personnel of the Project Companies, or attract and retain high-quality personnel in the future.

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LETTER FROM THE BOARD

The Project Companies rely on a few major customers

During the years ended 31 December 2008, 2009 and 2010, sales to the five largest customers in the aggregate accounted for approximately 85.68%, 89.23% and 92.55% of the total revenue, respectively of the Project Companies. The largest customer accounted for approximately 49.05%, 42.95% and 57.14% of the total revenue for the years ended 31 December 2008, 2009 and 2010, respectively. Jiangsu Lee & Man Paper Manufacturing Co., Limited*（江蘇理文造紙 有限公司）was the largest customer in the years ended 31 December 2009 and 2010. The Project Companies’ business with the existing customers has been, and they expect it will continue to be, conducted on the basis of actual purchase orders received from time to time. Many of the major customers only began to purchase waste paper from the Project Companies in the last few years. The Company cannot assure that the major customers will continue to do business with the Project Companies at the same or increased levels or at all. If one or more major customers were to cease to conduct business with the Project Companies and the Project Companies were unable to expand the business with existing customers or attract new customers, the business, financial condition and results of operations of the Enlarged Group would be materially and adversely affected. The Company cannot assume that the Project Companies will be able to retain their existing customers or add new customers at the desired levels or at all. A decision made by a major customer, whether motivated by competitive considerations, economic conditions or otherwise, to reduce its purchases from the Project Companies or any other adverse change in the business relationship with the customer could have a material adverse effect on the Enlarged Group’s business, financial condition and results of operations. Further, any significant changes in the operations or financial condition of a significant customer, including liquidity problems, changes in ownership, restructuring, bankruptcy or liquidation could cause the Project Companies to limit or discontinue business with that customer, or require them to assume more credit risk relating to receivables from that customer, which could have a material adverse effect on the business, financial condition and results of operations of the Enlarged Group.

The Project Companies rely on the major suppliers

Raw waste paper is the raw material for the Project Companies’ products. The Project Companies purchase raw waste paper from various suppliers, and they do not own or control any source of raw waste paper.

– 51 –

LETTER FROM THE BOARD

Since 2010, the Project Companies have started building a procurement network in the nearby provinces and entered into purchase contracts with sizable enterprises and business organizations. The Project Companies’ business with the suppliers has been, and they expect it will continue to be, conducted on the basis of actual purchase orders placed by them from time to time. If any of the major suppliers fails to meet the purchase orders or terminates the business relationship with the Project Companies and the Project Companies are unable to source raw waste paper from alternative suppliers on a timely basis and on acceptable terms, the business, financial condition and results of operations of the Enlarged Group could be materially and adversely affected. In addition, the Project Companies intend to expand the supplier network in connection with the planned opening of new collection stations, and the Company cannot assure that the Project Companies will be successful in expanding the supplier network. If the Project Companies are unable to obtain sufficient quantities of raw waste paper, or if there are increases in the price of raw waste paper, the Project Companies may be unable to maintain the production schedules and meet the commitments to the customers, or the Project Companies may incur significant additional costs which the Project Companies may be unable to pass on to the customers. Any such developments could have a material adverse effect on the Enlarged Group’s business, financial condition and results of operations.

A material disruption of the Project Companies’ operations could adversely affect the business

The Project Companies’ operations are subject to uncertainties and contingencies beyond the control of the Company that could result in material disruptions in the operations and adversely affect the business and the results of operations of the Enlarged Group. These include industrial accidents, fires, floods, droughts, storms, earthquakes, natural disasters and other catastrophes, equipment failures or other operational problems, strikes or other labour difficulties and disruptions of public infrastructure such as roads and ports. The Project Companies rely in part on advanced equipment for the processing of waste paper, including, among others, packing, loading and weighing machines. Any breakdown or malfunction of any of such equipment could cause a material disruption to the operations. Any of such disruption in the operations could cause the Project Companies to reduce or halt the production of waste paper, prevent the Project Companies from meeting customer orders, adversely affect the business reputation, increase the costs of production or require them to make unplanned capital expenditures, any one of which could materially and adversely affect the Enlarged Group’s business, financial condition and results of operations.

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LETTER FROM THE BOARD

The Project Companies may experience difficulties in recruiting or retaining key personnel

The Project Companies are in the process of opening 6 new collection stations within the next 12 months. To support the growth of the business, the Project Companies will need to increase the work force of experienced management, skilled labour and other employees to implement the expansion plan and enhance the operating efficiency of the existing collection stations. The Project Companies anticipate that the staffing requirements can be satisfied through internal transfers and local hiring. However, the Company cannot assure that the Project Companies will not experience difficulty in recruiting or retaining personnel at the existing or new collection stations. Nor can the Company assure that any personnel changes in the existing collection stations of the Project Companies in connection with the expansion plans will not adversely affect the business and operations of the existing collection stations.

Other risks relating to the Project Companies

The operating history of the Project Companies is limited which may not serve as an adequate basis to judge the future prospects and results of operation of the Enlarged Group.

There is no assurance that growth in revenue and net profit of the Project Companies will sustain in the coming years or that the business of the Project Companies will remain profitable in the coming years.

The Project Companies do not enter into long-term contracts with their customers, which expose them to uncertainty and potential volatility with respect to their revenue from period to period.

Risks relating to the industry

Pricing of waste paper

The pricing of waste paper in the PRC basically follows the movements of the international market prices of waste paper. When deciding the transaction prices, buyers and sellers will take the quoted international price of waste paper into account. According to the historical price records, the international market prices of waste paper are cyclical and volatile in nature. Under this circumstance, the purchase prices and sale prices are subject to fluctuations, and the supply of waste paper may be adversely affected, which may in turn affect the Project Companies’ financial performance.

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LETTER FROM THE BOARD

Besides, any increase in raw waste paper price will increase the need for working capital and financing, which may not be available on favourable terms, or at all. Increases in raw waste paper price may also increase the customers’ working capital requirements, which could result in delays in payments by the customers and increases in the trade receivables and bills receivable. The profit margin would also be affected if the Project Companies are unable to pass on the increased costs to the customers. Decreases in raw waste paper prices may result in a decrease in the value of the inventory, which would adversely affect the net asset value of the Project Companies. In addition, decreases in raw waste paper price may result in decreases in the price of the packed waste paper, which may adversely affect the revenue and profit of the Project Companies. In the event that the Project Companies are unable to obtain a sufficient quantity of raw waste paper at reasonable prices, or to pass on higher raw waste paper costs to the customers, the business, financial condition and results of operations of the Enlarged Group could be materially and adversely affected.

Huge demand for labour

The recycling industry has a huge demand for labour for work, such as collection and classification of wastes. Due to the fluctuation in supply of labour, the salary of workers fluctuates during different seasons. In some cases, the salary of workers may be unreasonably high when there is lack of supply of labour in the market. As a result, the financial performance and profitability of the Enlarged Group may be adversely affected by the lack of labour.

The Project Companies operate in a highly competitive industry

The waste paper recycling industry in the PRC is highly fragmented and competitive, with a large number of providers throughout the country. The Project Companies compete primarily with local waste paper recycling companies and new entrants to the market, some of which may have a lower cost structure than the Project Companies’ due to lower capital expenditures or lower labour costs resulting from being located in other regions of the PRC. The barriers to entry in the paper recycling industry are relatively low. Some of the competitors may have greater financial and other resources than the Project Companies do. The Project Companies’ products also compete with imported packed waste paper. Any further appreciation of the Renminbi, which may have the effect of lowering the cost of imported packed waste paper, may intensify such competition. The Company cannot assure that the Project Companies will be able to compete successfully in the existing markets. Any increase in competition may adversely affect the Enlarged Group’s business, financial condition and results of operations.

– 54 –

LETTER FROM THE BOARD

Risks relating to the PRC

The economic, political and social conditions in the PRC, as well as government policies, laws and regulations, could affect the Project Companies’ business

A majority of the Project Companies’ assets are located in the PRC and they derive substantially all of their revenue from the operations in the PRC. Accordingly, the results of operations and prospects are, to a significant degree, subject to economic, political and legal developments in the PRC. The economy of the PRC differs from the economies of most developed countries in many aspects, including the extent of government involvement, its level of development, its growth rate and its control over foreign exchange. The PRC economy has been transitioning from a planned economy to a more market-oriented economy. In recent years, the PRC government has implemented measures emphasizing market forces for economic reform, the reduction of State ownership of productive assets and the establishment of sound corporate governance in business enterprises. However, a portion of productive assets in the PRC is still owned by the PRC government. The PRC government continues to play a significant role in regulating industrial development. It also exercises significant control over the PRC’s economic growth through the allocation of resources, controlling payment of foreign currency-denominated obligations, setting monetary policies and providing preferential treatments to particular industries or companies.

All of these factors could affect the economic conditions in the PRC and, in turn, the Project Companies’ business. While the PRC economy has experienced significant growth in the past 20 years, growth has been uneven across both geographical regions and various sectors of the economy. The PRC government has implemented various measures to influence growth rates and to guide the allocation of resources. Some of these measures benefit the overall economy of the PRC but may have a negative effect on the Project Companies. For example, the Project Companies’ results of operations and financial condition could be materially and adversely affected by governmental monetary policies, foreign exchange policies, changes in interest rate policies, tax regulations or policies and regulations affecting the waste paper recycling industries.

Legal and regulatory issues

Law and regulations related to recycling business in the PRC are either absent or subject to change. There can be no assurance that the relevant government will not change such laws and regulations or impose additional or more stringent laws or regulations. Such changes may have materially affected the Project Companies. In particular, the PRC legal system is based on a statutory law system. Unlike the common law system, prior legal decisions and judgments are relevant for guidance only and of no precedential value. Despite the PRC government’s development of a commercial law system since 1979, these regulations are relatively new and the availability of public cases as well as the judicial interpretation of them are limited in number. Interpretation of these laws is uncertain in many areas and there is a risk that some of the Project Companies’ existing and future contractual rights may not be fully enforceable under the PRC legal system. This could affect the Enlarged Group’s businesses.

– 55 –

LETTER FROM THE BOARD

Risks relating to the Acquisition

The Shareholders’ interest in the Company may be diluted as a result potential on-going fund raising activities

As mentioned in the section headed “Working capital statement” in Appendix I to this circular, the Company will consider using appropriate equity financing methods, including but not limited to the issue of convertible notes, warrants, new Shares under specific mandate and rights issue/open offer to satisfy the Consideration in the future. Shareholders should be aware of the potential dilution effects to his/her/its existing shareholding interests in the Company as a result of such potential fund raising exercises. As at the Latest Practicable Date, the Company has not carried out any formal discussion with any financial institutions in relation to any concrete fund raising plan, or any timetable thereof. The Company will take a prudent approach to raise sufficient cash for the settlement of the Consideration and the future development of the Enlarged Group as well as to improve the financial position of the Enlarged Group (including but not limited to the debt to equity ratio) in the event that any suitable fund raising opportunities arise.

Failure to conduct a timely fund raising exercises to fulfill the capital needs of the Enlarged Group may adversely affect its liquidity and operating cash flow

As mentioned in the section headed “Working capital statement” in Appendix I to this circular, the Company is required to raise funds for settlement of the Consideration and its future development. However, the Company’s ability to raise sufficient capital for the aforesaid purposes will depend on a number of factors, including but without limitation, the Enlarged Group’s results of operations, the Company’s Share price performance and general market conditions. The Company can give no assurance that it will be able to conduct the fund raising exercises successfully, or at all. In the event that the fund raising exercises cannot be carried out timely, or on reasonable terms, or at all, the Company may encounter liquidity risk and will not have sufficient working capital for the next 12 months from the date of this circular, and the Enlarged Group’s business and financial position and prospect may be adversely affected.

INDUSTRY OVERVIEW

Paper is the largest and fastest growing portion of waste streams and is the major target for recovery and recycling. Driven by a growing demand for paper and boards, there is now a greater appetite for secondary fibres from waste paper, with an increasing demand in seeking more virgin pulp substitutes to reduce raw material costs. Waste paper comes in different types and grades depending on the recovery source. The basic “upstream” recovery steps from collection to storage involve primarily decontamination, sorting and segregation of the waste paper to raise materialtype purity. Upstream sorting and segregation play an important role in maximizing the efficiency of recycling process, starting from an efficient collection and sorting of waste paper by grades and types.

– 56 –

LETTER FROM THE BOARD

Increasing awareness of climate change has resulted in global efforts to accelerate the promotion of recycling and reusing, which is aimed at reducing the final volumes of waste for disposal. On a global basis, paper is the single most abundant source of recyclable solid waste and its proportion to total recyclable solid waste continues to grow. Efforts by governments around the world to minimize the use of landfills and incinerators have resulted in increasing ecologically motivated policies and regulations which have driven up costs for landfill and incineration methods. The costs and environmental factors have thus led to a bias towards waste paper recovery globally as waste paper recovery become more cost effective.

In the middle of 2010, there was a continual increase on the international price of paper raw material (e.g. pulp) under the influence of different factors such as earthquake in Chile, working strike, severe cold weather in Europe etc.. The high price of pulp leads to high production costs of paper and paper-made products (e.g. magazines, packaging paper, containerboard etc.). In order to reduce the production costs of paper, paper manufacturers are seeking waste paper provider to collect waste paper within the country and rely less on the imports.

Market in the PRC

Economy in the PRC

Economic growth is one of the key drivers to the waste paper recycling industry. There is a clear positive relationship between GDP and both paper consumption and waste paper collection in terms of weight per capita. Developed countries typically have a higher per capita consumption of paper as well as higher waste paper recovery rates. This is due to the inter-dependent relationship between rising consumer affluence and the correlated increase in paper consumption, thereby causing a corresponding rise in recovery rates to meet the demand for more paper products.

The PRC’s national economy has been experiencing sustainable, rapid development. During the periods from 2003 to 2010, the PRC’s GDP grew at an annual average rate of more than 8%. This creates many opportunities for domestic recycling enterprises seeking to expand their business. Double-digit growth, insufficient self-supply of waste paper, raising price of imported waste paper, and the absence of large domestic competitors are indicators of tremendous potential.

Set out below are the PRC’s GDP from 2005 to 2010:

							CAGR
		As of and for the year		ended December 31			(2007
	2005	2006	2007	2008	2009	2010	-2010)
Nominal GDP
(RMB billions)	18,494	21,631	26,581	31,405	34,051	39,798	14.40%
GDP per capita (RMB)	14,185	16,500	20,169	23,708	25,575	29,678	13.74%

Source: National Bureau of Statistics of the PRC

– 57 –

LETTER FROM THE BOARD

Waste paper recycling industry in the PRC

According to the China Paper Association, there are around 3,700 paper manufacturers in the PRC. In 2010, the PRC’s total paper production was approximately 92.70 million tonnes. Consumption was approximately 91.73 million tonnes. Paper consumption grew at a CAGR of approximately 11.02% during 2004-2010.

==> picture [272 x 167] intentionally omitted <==

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

100
80
60
40
20
0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
----- End of picture text -----

==> picture [159 x 10] intentionally omitted <==

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

Paper consumption in PRC (million tonnes)
----- End of picture text -----

Source: China Paper Association

The PRC has become the focus of the global waste paper market. In the past 19 years, the PRC’s paper consumption has grown from around 4.3 million tonnes in 1990 to around 91.73 million tonnes in 2010. However, the majority of mills in the PRC tend to be smaller in scale, which utilize a combination of vegetable fibers and recovered paper. Over the years, thousands of these smaller sized mills have been forced to cease operation due to lack of sufficient supply of recovered paper, making improved recovery of domestic waste paper a critical necessity. The paper mills have grown increasingly dependent on waste paper as secondary raw materials.

– 58 –

LETTER FROM THE BOARD

Set out below is the statistics on the domestic pulp consumption from 2000 to 2010:

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

8,000
7,000
6,000
5,000
4,000
3,000
2,000
1,000
0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Wood pulp Non-wood pulp Waste paper pulp
Domestic pulp consumption (ten thousand tonnes)
----- End of picture text -----

Source: China Paper Association

The waste paper pulp plays a more and more important role in being the raw materials for the paper industry. In 2000, the PRC consumed approximately 11.4 million tonnes domestic waste paper pulp, representing approximately 46.44% of the total domestic pulp consumption. In 2010, the percentage has increased to 72.57% and the amount of the domestic waste paper pulp has increased substantially, over 4 times of that in 2000. Nevertheless, the market concentration is pretty low and there is no big supplier domestically and the market is highly competitive. Due to the insufficient supply of domestic waste paper, the PRC has relied heavily on imported waste paper for its paper industry.

– 59 –

LETTER FROM THE BOARD

Set out below is the statistics on imports of waste paper of the PRC from 2003 to 2010:

==> picture [277 x 190] intentionally omitted <==

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

4,000
3,000
2,000
1,000
0
2003 2004 2005 2006 2007 2008 2009 2010
Amount of imported waste paper in PRC (ten thousand tonnes)
----- End of picture text -----

Source: China Paper Association

The import of waste paper by the PRC has increased from around 10 million tonnes in 2003 to around 24.35 million tonnes in 2010, representing a CAGR of approximately 13.56%. Although there is an economic downturn during 2008, the import volumes for waste paper to the PRC have not been adversely affected, which shows a huge potential in the waste paper recycling industry of the PRC.

Since the international price of paper and the transportation cost are increasing while the production costs of paper in the PRC can be reduced by using domestic waste paper, paper-made products manufacturers are able to generate larger profit by buying domestic waste paper as raw materials rather than importing raw materials from other countries. Thus, the domestic paper manufacturers turn to supply themselves with the local waste paper. This hugely increases the demand of waste paper within the PRC.

Further statistics of the recycling of waste paper industry have been set out in the valuation report of the Target Group contained in Appendix V to this circular.

– 60 –

LETTER FROM THE BOARD

Competition in the waste paper recycling industry in the PRC

The waste paper recycling industry in the PRC is highly fragmented and competitive, with a large number of suppliers throughout the country. The Project Companies compete primarily with local waste paper recycling companies and new entrants to the market, some of which may have a lower cost structure than the Project Companies’ due to lower capital expenditures or lower labour costs resulting from being located in other regions of the PRC. The barriers to entry in the paper recycling industry are relatively low. Some of the competitors may have greater financial and other resources than the Project Companies do.

The Project Companies represent a mere fraction of the overall waste paper recycling industry of the PRC with their annual processing capacity of approximately 300,000 tonnes, representing only approximately 0.45% of the total domestic waste paper consumed in 2009 of approximately 66.31 million tonnes (According to the report of China Paper Association, the amount of waste paper pulp = amount of waste paper x 0.8. The domestic waste paper pulp consumption amounted to approximately 53.05 million tonnes in 2010, correspondingly, the domestic waste paper consumption amounted to approximately 66.31 million tonnes in 2009). Nevertheless, there is no big supplier in the PRC market that is capable of dominating the industry given such a high fragmentation rate within the waste paper recycling industry in the PRC and the market is highly competitive.

International price trend of waste paper

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

43484.17 Waste Paper For the Past 2 Years
41790.281
40096.392
38402.510
36708.614
35014.725
33320.036
31626.947
29933.158
28239.169
24545.28
Day
Composite Index
Jul 28, 2009 Aug 28, 2009 Sep 28, 2009 Oct 28, 2009 Nov 28, 2009 Dec 28, 2009 Jan 28, 2010 Feb 28, 2010 Mar 28, 2010 Apr 28, 2010 May 28, 2010 Jun 28, 2010 Jul 28, 2010 Aug 28, 2010 Sep 28, 2010 Oct 28, 2010 Nov 28, 2010 Dec 28, 2010 Jan 28, 2011 Feb 28, 2011 Mar 28, 2011 Apr 28, 2011 May 28, 2011 Jun 28, 2011
----- End of picture text -----

Source: Paper Fiber Network

– 61 –

LETTER FROM THE BOARD

The waste paper composite index in the above figure tracks the changing market prices in the paper recycling and recovered paper fiber markets. The index consists of a weighted basket of specific benchmark grades of waste paper. For the past years, as the demand of the waste paper has increased in the global market, including the PRC, both the international market price of waste paper and the selling price of waste paper of the Project Companies have increased gradually.

REASONS FOR THE ACQUISITION

The Group is currently engaged in the trading and manufacturing of printed circuit board (the “ PCB Business ”) and investment in electric vehicle battery business.

As disclosed in the past annual reports of the Group, the Group has suffered net losses since 2006 due to the unfavourable operating environment, in particular for its laminate division. It is the current intention of the Board to continue the PCB Business. The financial results of the PCB Business since 2009 are as follows:

	For the year ended 31 March	For the year ended 31 March	(HK$’000)
	2009	2010	2011
Revenue	129,394	69,042	53,455
Profit/(loss) before tax	(82,138)	(39,591)	25,837
Profit/(loss) for the year	(82,405)	(39,963)	(3,444)

The Board is of the view that the unfavourable performance of the PCB Business was attributable to decrease in market demand and increase in raw material costs arising from the global economic downturn during the years. With a view to turnaround the loss position and streamline the business structure of the Group, as disclosed in the circular dated 24 December 2010 of the Company, the Company entered into agreements with a connected person for the disposal (the “ Connected Disposal ”) of the business of manufacture of laminate, and copper foil. With the implementation of measures including a more conservative approach in the procurement of resources to reduce the operating costs and the disposal of certain non-productive facilities, properties and assets, as in the case of Connected Disposal, and gradual improvement in the external operating environment, the Directors expect that in the coming years the business performance of the PCB Business will gradually pick up and contribute to the revenue and profits of the Group. Otherwise, the Directors may consider disposing of the PCB Business in the event that no improvement has been demonstrated.

The Board believes it is in the interests of the Company and its Shareholders as a whole to divert the management attention and the Group’s financial resources to more promising and lucrative business. Having considered various proposals, the Board is eager to expand the business of the Group into the environmental industry which is expected to provide a more favourable and sustainable development opportunity for the Group.

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LETTER FROM THE BOARD

On 16 July 2010, the Company entered into an agreement to acquire 9.9% interest in the entire issued share capital in Swift Profit International Limited (“ Swift Profit ”), the principal asset of which is an exclusive license in relation to the patent and technology of electric vehicle battery manufacturing. The acquisition represented the first step of the Group to participate in the environmental industry, which is highly supported by the PRC government. The Acquisition represents another strategic move of the Group to increase its investment in the “green industry”. The Project Companies are currently in production and have recorded profits during the two years ended 31 December 2010. The Board believes that the Acquisition will allow the Group to be transformed into an environmental enterprise and enjoy an immediate positive cash flow. To better reflect the new corporate objective of the Group, the Company has changed its name to “China Environmental Energy Investment Limited” with effect from 26 April 2011.

The Company has identified the Acquisition as having abundant potential and the Board considers that the business overview for the environmental industry to be favourable under the support of the PRC government. The Company views the Acquisition as providing the opportunity for the Group to pioneer further into the promising “green industry” and to diversify from its PCB Business, with the aim of broadening the income base of the Group. The Board strongly believes that the Acquisition will be in the interests of the Company and the Shareholders as a whole.

As the Acquisition will involve a diversification into a new business, the Company proposes to retain the current management team of the Project Companies for their future management. The Company has no present intention to change the composition of the Board upon Completion. Under the Sale and Purchase Agreement, the Vendors will not be conferred any right to nominate any director to the Board. Hence, it is not expected that, upon Completion of the Acquisition, any of the ultimate beneficial owners or any other nominees of the Vendors will have any management involvement in the Company or be appointed as Directors.

The terms and conditions of the Sale and Purchase Agreement and the Supplemental Agreement were arrived at after arm’s length negotiations between the parties. Nevertheless, the Directors consider that the Enlarged Group may be posed with certain inevitable risks due to the Acquisition as set forth in the section headed “Risk factors” in this letter. Having balanced the risks associated with the Acquisition and the outlook of the waste paper recycling business and prospects of the Project Companies, the Board is of the view that the terms of the Sale and Purchase Agreement and the Supplemental Agreement are fair and reasonable and the Acquisition is in the interests of the Company and the Shareholders as a whole.

– 63 –

LETTER FROM THE BOARD

INFORMATION ON THE GROUP

The principal activities of the Group are (i) the manufacturing of laminate mainly for use in the manufacturing of tele-communications, computer related products, audio and visual household products; (ii) the manufacturing of printed-circuit board mainly for use in the manufacturing of audio and visual household products; and (iii) the manufacturing of copper foil mainly for use in the manufacturing of laminate and printed circuit board. Upon completion of the proposed disposal as announced on 28 June 2010 and the acquisition as announced on 16 July 2010, the Group is now principally engaged in trading and manufacturing of printed circuit board and investment in the electronic car battery related business.

EFFECT OF THE ACQUISITION ON THE EARNINGS AND ASSETS AND LIABILITIES OF THE COMPANY

Effect on assets/liabilities

As disclosed in the 2011 annual report of the Company (the “ 2011 Annual Report ”) for the year ended 31 March 2011, the audited consolidated total assets and total liabilities of the Group was approximately HK$374,622,000 and HK$97,432,000 respectively as at 31 March 2011. According to the unaudited pro-forma financial information of the Enlarged Group as contained in Appendix IV to this circular. Upon Completion, the Enlarged Group’s total assets and liabilities would be (i) approximately HK$1,031,820,000 and HK$726,541,000 respectively, assuming the Conversion Price equals to the maximum Conversion Price of HK$0.68; and (ii) approximately HK$1,035,465,000 and HK$726,541,000 respectively, assuming the Conversion Price equals to the minimum Conversion Price of HK$0.227.

Effect on earnings

In light of the future prospects of the Target Group, the Directors are of the view that the Acquisition will be likely to have a positive impact on the future earnings of the Enlarged Group.

Effect on gearing and working capital

According to the 2011 Annual Report, the Group’s gearing ratio (being calculated as net debt divided by the total capital and net debt) was approximately 0.25 as at 31 March 2011. Upon Completion, according to the unaudited pro-forma financial information of the Enlarged Group as contained in Appendix IV to this circular, the Enlarged Group’s gearing ratio would be (i) approximately 0.52 assuming the Conversion Price equals to the maximum Conversion Price of HK$0.68; and (ii) approximately 0.52 assuming the Conversion Price equals to the minimum Conversion Price of HK$0.227.

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LETTER FROM THE BOARD

According to the 2011 Annual Report, the Group’s cash and bank balances were approximately HK$1,237,000 as at 31 March 2011. Upon Completion, according to the unaudited pro-forma financial information of the Enlarged Group as contained in Appendix IV to this circular, the Enlarged Group’s cash and bank balances would be HK$(182,162,000). However, the said Enlarged Group’s cash and bank balances have not taken into account the net proceeds from the Rights Issue of approximately HK$198.26 million. In case if there is any cash deficit of the Enlarged Group after Completion, the Company will consider implementing the measures as disclosed in the section headed “Working capital statement” as contained in Appendix I to this circular.

FINANCIAL AND TRADING PROSPECTS OF THE ENLARGED GROUP

Your attention is drawn to (i) the 2011 Annual Report; and (ii) the circular issued by the Company on 24 December 2010 in relation to the disposal of the industrial laminates and copper foils manufacturing business. In 2010, the Group has conducted a series of business restructuring including (i) disposal of manufacturing plants and facilities for manufacturing industrial laminates and copper foils and relevant connected transactions as announced by the Company on 28 June 2010; (ii) acquisition of 9.9% of the issued share capital of Swift Profit as announced by the Company on 16 July 2010; (iii) disposal of the Suzhou property as announced by the Company on 4 November 2010; and (iv) the Acquisition. The Directors believe that it is in the interests of the Company and the Shareholders as a whole to re-allocate the management and the Group’s financial resources to more promising business.

The management discussion and analysis on the Group’s businesses is as follows:

PCB Business

The PCB Business recorded an unfavorable performance during the last few years due to decrease in market demand and increase in raw material costs arising from the global economic downturn, details of which please refer to the section headed “Reasons for the Acquisition” of this letter. During the year ended 31 March 2011, the Directors had placed more focus on the PCB Business and implemented a more conservative approach in the procurement of resources to reduce the operating costs. As published in the 2011 Annual Report, for the year ended 31 March 2011, the PCB Business recorded a turnover of HK$49,860,000 (2010: HK$44,844,000). Although the PCB market was not picking up generally, the Group had still achieved an increase in turnover. With attendance at trade shows and launch of more aggressive marketing and promotion campaigns, the Group was able to secure new customers. With the increase in turnover, the profitability of the Group’s PCB Business is expected to improve. Otherwise, the Directors may consider disposing of the PCB Business in the event that no improvement is shown. As at the Latest Practicable Date, the Directors had no agreement, arrangement, understanding or negotiation about the disposal of the PCB Business.

– 65 –

LETTER FROM THE BOARD

Investment in electric car battery business

On 16 July 2010, the Company entered into an agreement pursuant to which the Company conditionally agreed to acquire 9.9% of the issued share capital of Swift Profit at a consideration of HK$170 million. Swift Profit has been granted an exclusive licence to apply the patent and the related technology of manufacturing of electric car battery. Completion of the acquisition took place on 29 December 2010 and the consideration was settled as to HK$99 million by convertible notes and the balance by cash. There is no variation in the aggregate of the remuneration payable to and benefits in kind receivable by the Directors as a consequence of the acquisition of Swift Profit.

Under the business model of Swift Profit, it will receive a royalty fee of 12% from Zhongsheng Dongli New Energy Investment Limited (“ Zhongsheng ”) on sale of multielement polymer battery to the market without bearing any production cost and capital expenditure. Zhongsheng has already secured orders from the automotive manufacturers for 200 electric vehicles. Based on the secured orders from the automotive manufacturers, it is estimated that 3,000 sets of the multi-element polymer battery will be sold to the automotive manufacturers in 2012. It is expected that the electric car battery business will generate revenue of approximately HK$25 million to Swift Profit in the first quarter of 2011. The Board is of the view that the electric car battery business will be developed into a sustainable income source for the Group.

As at the Latest Practicable Date, the Directors had no further development plan for the investment in electric car battery business except for that disclosed in the circular dated 15 November 2010 in relation to the acquisition of the electric car battery business.

RECONCILIATION OF APPRAISED PROPERTY VALUES WITH NET BOOK VALUES

The table below shows the reconciliation of the property interests of the Group from the 2011 Annual Report as at 31 March 2011 to the date of property valuation as at 31 July 2011:

The Group Audited carrying amount of property interests of the Group as at 31 March 2011 (Note) Valuation surplus Valuation as at 31 July 2011	HK$ 13,801,000 6,099,000
	19,900,000

Note:

According to the 2011 Annual Report, the carrying values of the buildings and the investment property were HK$4,421,000 and HK$9,380,000, respectively.

– 66 –

LETTER FROM THE BOARD

LISTING RULES IMPLICATIONS

As the applicable percentage ratios (as defined under the Listing Rules) of the Acquisition exceed 100%, the Acquisition constitutes a very substantial acquisition under Chapter 14 of the Listing Rules and is therefore subject to the reporting, announcement, circular and shareholders’ approval requirements under Chapter 14 of the Listing Rules.

The SGM will be held for the Shareholders to consider and, if thought fit, approve the ordinary resolution in respect of the Sale and Purchase Agreement and the transactions contemplated thereunder. As no Shareholder has any material interest in the Sale and Purchase Agreement, no Shareholder is required to abstain from voting at the SGM in respect of the Sale and Purchase Agreement and the transactions contemplated thereunder.

SGM

A notice convening the SGM to be held at Falcon Room II, Gloucester Luk Kwok Hong Kong, 72 Gloucester Road, Wanchai, Hong Kong on Thursday, 13 October 2011 at 10:00 a.m. is set out on pages 243 to 245 of this circular.

RECOMMENDATION

The Board considers that the terms of the Sale and Purchase Agreement and the transaction contemplated thereunder, including the issue of the Promissory Notes, the issue of the Convertible Notes as well as the terms of the Supplemental Agreement, are on normal commercial terms and are fair and reasonable so far as the Shareholders are concerned. In addition, the Board considers that the Acquisition is in the interests of the Company and the Shareholders as a whole. Accordingly, the Board recommends the Shareholders to vote in favour of the ordinary resolution to be proposed at the SGM.

ADDITIONAL INFORMATION

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

Yours faithfully,

By order of the Board China Environmental Energy Investment Limited Deng Hong Mei

Director

– 67 –

APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

FINANCIAL INFORMATION OF THE GROUP

The financial information of the Group (i) for the year ended 31 March 2011 has been disclosed on pages 36 to 128 of the annual report of the Company for the year ended 31 March 2011 published on 28 July 2011; (ii) for the year ended 31 March 2010 has been disclosed on pages 35 to 112 of the annual report of the Company for the year ended 31 March 2011 published on 14 October 2010; and (iii) for the year ended 31 March 2009 has been disclosed on pages 37 to 102 of the annual report of the Company for the year ended 31 March 2009 published on 4 September 2009. All the above annual reports of the Company have been published on the website of the Stock Exchange (www.hkexnews.hk) and the website of the Company (http://www.986.com.hk/).

STATEMENT OF INDEBTEDNESS OF THE ENLARGED GROUP

As at 31 July 2011, being the latest practicable date for the purpose of this indebtedness statement prior to the printing of this circular, the Enlarged Group had outstanding borrowings of approximately HK$109.67 million. The borrowings comprised (i) secured bank loans of the Enlarged Group of approximately HK$54 million; (ii) unsecured other borrowing of the Enlarged Group of approximately HK$25 million; (iii) partial consideration payable for acquisition of subsidiaries of Enlarged Group of HK$30 million; and (iv) obligation under a finance lease of approximately HK$0.67 million. At 31 July 2011, the Enlarged Group did not have any financial guarantees provided to third parties for bank loans of aggregate principal amount of approximately nil and pledged the properties and cash deposits against the bank loans.

Save as disclosed above and apart from intra-group liabilities, the Enlarged Group did not have any other outstanding bank or other borrowings, mortgages, charges, debentures or other loan capital, bank overdrafts, loans or other similar indebtedness, guarantee, liabilities under acceptances (other than normal trade bills), acceptance credits, hire purchase or other finance lease commitments or other contingent liabilities.

For the purpose of the above statement of indebtedness, foreign currency amounts have been translated into Hong Kong dollars at the approximate exchange rates prevailing at HK$1:RMB0.826.

Saved as disclosed above, the Directors have confirmed that there has been no material change in the indebtedness and contingent liabilities of the Enlarged Group since 31 July 2011.

WORKING CAPITAL STATEMENT

The Directors, are of the opinion that, taking into account its internal resources and the present available credit facilities of the Enlarged Group and the Completion of the Acquisition, the Enlarged Group will not have sufficient working capital for its present requirements, that is for at least the next twelve months from the date of this circular.

– 68 –

APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

In view of the foregoing, the Company will consider using appropriate equity financing methods, including but not limited to the issue of convertible notes, warrants, new Shares under specific mandate and rights issue/open offer to satisfy the Consideration in the future. As at the Latest Practicable Date, the Company has not carried out any formal discussion with any financial institutions in relation to any concrete fund raising plan, or any timetable thereof. The Company will take a prudent approach to raise sufficient cash for the settlement of the Consideration (i.e repayment of the Promissory Notes and the Convertible Notes) and future development of the Group as well as to improve the financial position of the Enlarged Group in the event that any suitable fund raising opportunities arise.

Based on the financing methods currently available to the Group as at the Latest Practicable Date, the Board is of the view that to allot and issue up to 62,941,810 Shares under the general mandate granted to the Board on 30 August 2011 (the “ General Mandate ”), representing approximately 20% of the issued share capital of the Company, is currently the most feasible fund raising method available to the Company. Based on the closing price of the Shares of HK$0.158 as at the Latest Practicable Date, the Company could raise around HK$9.94 million by fully utilizing the General Mandate, subject to the result of negotiations with the placing agent on the terms of such fund raising, including but not limited to (i) the size of the share placement and (ii) the pricing of the new Shares. In the event that the Company issues new Shares pursuant to the General Mandate, the proceeds from such fund raising will be applied for (i) the general working capital of the Enlarged Group; (ii) financing the remaining portion of the Consideration, including but not limited to, the repayment of the Promissory Notes and the Convertible Notes; and (iii) funding other acquisition opportunities that may be identified by the Company as the Company has from time to time been approached by investors for potential investment projects. As the proceeds from any issue of new Shares under the General Mandate may not be able to satisfy in full the future financing needs of the Company, the Directors currently expect that any issue of Shares under the General Mandate will probably be followed by a rights issue/open offer exercise to fulfill the future financing needs of the Company and in general to improve the financial position of the Group (such as improving the debt to equity ratio). As such, the Directors consider a rights issue/open offer exercise is likely to be conducted to further strengthen the financial resources of the Company in the future.

The Directors are aware that the Enlarged Group’s liquidity position would depend largely on the prospect of the Target Group and the fund raising activities to be conducted in the future.

– 69 –

ACCOUNTANT’S REPORT OF THE TARGET GROUP

APPENDIX II

The following is the text of an accountants’ report on the Target Group received from the independent reporting accountants, Cheng & Cheng Limited, Certified Public Accountants, Hong Kong, for inclusion in this circular.

==> picture [227 x 34] intentionally omitted <==

10/F., Allied Kajima Building, 138 Gloucester Road, Wanchai, Hong Kong

23 September 2011

The Board of Directors

China Environmental Energy Investment Limited

Room 2211, 22/F, Tower 2, Lippo Centre, 89 Queensway, Hong Kong

Dear Sirs,

We set out below our report on the financial information relating to Ideal Market Holdings Limited (the “ Target Company ”) and its subsidiaries (collectively referred to as the “ Target Group ”), including the combined statements of financial position of the Target Group as at 31 December 2008, 2009, 2010 and 31 March 2011, statement of financial position of the Target Company as at 31 December 2010 and 31 March 2011, the combined statements of comprehensive income, the combined statements of changes in equity and the combined statements of cash flows of the Target Group for the years ended 31 December 2008, 2009, 2010 and the period from 1 January to 31 March 2011 (collectively the “ Relevant Period ”), together with the notes thereto (the “ Financial Information ”), for inclusion in the circular of China Environmental Energy Investment Limited (the “ Company ”) to its shareholders dated 23 September 2011 in connection with the proposed very substantial acquisition of the entire equity interest in the Target Group (the “ Circular ”).

The Target Company was incorporated in the British Virgin Islands (the “ BVI ”) with limited liability on 18 August 2010 and became the holding company of the Target Group on 9 November 2010. The Target Company was principally engaged in investment holding and the principal activity of its major operating subsidiary is the recycling of waste paper and consumable wastes in the People’s Republic of China (the “ PRC ”).

– 70 –

APPENDIX II ACCOUNTANT’S REPORT OF THE TARGET GROUP

As at the date of this report, the Target Company has interests in subsidiaries as set out in Note 19 of Section II below. All companies comprising the Target Group have adopted 31 December as their financial year end date.

No audited statutory financial statements have been prepared for the Target Company since its date of incorporation as it was incorporated in a country where there is no statutory audit requirement.

For the purpose of this report, the director of the Target Company has prepared the Financial Information of the Target Group for the Relevant Period (the “ Underlying Financial Statements ”), in accordance with Hong Kong Financial Reporting Standards (“ HKFRSs ”) issued by the Hong Kong Institute of Certified Public Accountants (the “ HKICPA ”) after making such adjustments as are appropriate for the purpose of preparing the Financial Information for inclusion in the Circular.

The director of Target Company is responsible for the preparation and the true and fair presentation of the Underlying Financial Statements and the Financial Information in accordance with HKFRSs. This responsibility includes selecting and applying appropriate accounting policies and making accounting estimates that are reasonable in the circumstances.

For the purpose of this report, we have examined the Underlying Financial Statements and carried out such additional procedures as we considered necessary in accordance with Auditing Guideline No. 3.340 “Prospectuses and the Reporting Accountant” issued by the HKICPA.

The Financial Information of Target Company and the Target Group for the Relevant Periods set out in this report has been prepared based on the Underlying Financial Statements for the purpose of preparing our report for inclusion in the Circular. No adjustments were considered necessary to adjust the Underlying Financial Statements in preparing our report for inclusion in the Circular.

In our opinion, the Financial Information gives, for the purpose of this report, a true and fair view of the state of affairs of the Target Company and of the Target Group as at 31 December 2008, 2009, 2010 and 31 March 2011 and of the Target Group’s results and cash flows for each of the Relevant Periods then ended.

– 71 –

ACCOUNTANT’S REPORT OF THE TARGET GROUP

APPENDIX II

I. FINANCIAL INFORMATION

(a) Combined statement of comprehensive income

Notes Turnover 8 Cost of sales Gross profit Other income 10 Selling and distribution expenses Administrative expenses Finance costs 11 Profit (Loss) before taxation 12 Taxation 14 Profit (Loss) for the year Profit (Loss) attributable to: Owners of the Target Group Non-controlling interests	Year 2008 RMB 18,971,012 (17,329,640) 1,641,372 82,912 (3,710,828) (409,426) – (2,395,970) – (2,395,970) (2,395,970) – (2,395,970)	ended 31 December 2009 2010 RMB RMB 237,058,991 296,019,634 (202,166,669) (240,499,716) 34,892,322 55,519,918 24,139 47,583 (15,593,054) (14,692,230) (2,969,741) (3,734,424) (65,230) (746,646) 16,288,436 36,394,201 (3,146,892) (8,792,834) 13,141,544 27,601,367 13,141,544 18,069,954 – 9,531,413 13,141,544 27,601,367	Three months ended 31 March 2010 2011 RMB RMB (unaudited) 61,175,851 92,108,256 (54,794,906) (76,843,053) 6,380,945 15,265,203 1,891 26,120 (3,305,474) (3,755,214) (582,554) (907,084) (7,644) (375,455) 2,487,164 10,253,570 (5,021) (2,562,349) 2,482,143 7,691,221 2,482,143 7,691,221 – – 2,482,143 7,691,221	Three months ended 31 March 2010 2011 RMB RMB (unaudited) 61,175,851 92,108,256 (54,794,906) (76,843,053) 6,380,945 15,265,203 1,891 26,120 (3,305,474) (3,755,214) (582,554) (907,084) (7,644) (375,455) 2,487,164 10,253,570 (5,021) (2,562,349) 2,482,143 7,691,221 2,482,143 7,691,221 – – 2,482,143 7,691,221
				15,265,203 26,120 (3,755,214) (907,084) (375,455)
				10,253,570 (2,562,349)
				7,691,221
				7,691,221 –
				7,691,221

– 72 –

ACCOUNTANT’S REPORT OF THE TARGET GROUP

APPENDIX II

(b) Combined statement of financial position

Notes NON-CURRENT ASSETS Property, plant and equipment 17 Construction in progress 18 CURRENT ASSETS Inventories 20 Trade and bills receivables 21 Other receivables, prepayments and deposits paid 22 Amounts due from shareholders 23 Bank balances and cash 24 CURRENT LIABILITIES Trade and bills payables 25 Other payables and accruals 26 Bank borrowings 27 Obligations under finance leases 28 Amounts due to shareholders 23 Tax payables NET CURRENT ASSETS/ (LIABILITIES) CAPITAL AND RESERVES Share capital 29 Reserves 29 Equity attributable to the Target Group’s owners Non-controlling interests Total equity NON-CURRENT LIABILITIES Obligations under finance leases 28	Year 2008 RMB 7,198,094 – 7,198,094 5,950 2,509,682 324,617 – 1,004,700 3,844,949 1,087,426 587,707 – – 12,064,294 1,203 13,740,630 (9,895,681) (2,697,587) – (2,697,587) (2,697,587) – (2,697,587) – (2,697,587)	ended 31 December 2009 2010 RMB RMB 12,378,576 19,621,490 – 667,834 12,378,576 20,289,324 4,597,698 35,616,121 3,556,587 24,702,769 2,886,622 6,384,599 4,717,073 10,155,204 3,262,430 11,500,935 19,020,410 88,359,628 306,186 536,933 8,313,983 15,532,514 1,400,000 16,950,000 – 279,996 3,965,000 17,633,820 15,469,860 27,340,723 29,455,029 78,273,986 (10,434,619) 10,085,642 1,943,957 30,374,966 – 1,986 1,943,957 19,013,911 1,943,957 19,015,897 – 10,892,409 1,943,957 29,908,306 – 466,660 1,943,957 30,374,966	As at 31 March 2011 RMB 20,751,604 –
			20,751,604
			22,636,169 39,944,743 8,636,151 11,254,002 26,969,418
			109,440,483
			7,500,707 2,559,949 37,500,000 279,996 14,282,948 30,946,427
			93,070,027
			16,370,456
			37,122,060
			1,986 36,723,413
			36,725,399 –
			36,725,399 396,661
			37,122,060

– 73 –

APPENDIX II

ACCOUNTANT’S REPORT OF THE TARGET GROUP

(c) Statement of financial position

Notes CURRENT ASSETS Investment in subsidiaries 19 Bank balances and cash 24 NON-CURRENT LIABILITIES Amounts due to a shareholder 23 NET ASSETS CAPITAL AND RESERVES Share capital 29	2010 RMB 1 1,986 1,987 1 1,986 1,986	As at 31 March 2011 RMB 1 1,986 1,987 1 1,986 1,986

– 74 –

ACCOUNTANT’S REPORT OF THE TARGET GROUP

APPENDIX II

(d) Combined statement of changes in equity

Attributable to owners of the Target Group Share Capital Statutory Retained capital reserve reserve profits RMB RMB RMB RMB At 1 January 2008 – 1,000,000 – (1,301,617) Loss for the year – – – (2,395,970) At 31 December 2008 – 1,000,000 – (3,697,587) At 1 January 2009 – 1,000,000 – (3,697,587) Profit for the year – – – 13,141,544 Transfer to statutory reserve – – 500,000 (500,000) Interim dividend – – – (8,500,000) At 31 December 2009 – 1,000,000 500,000 443,957 At 1 January 2010 – 1,000,000 500,000 443,957 Issue of share capital 1,986 – – – Injection from non-controlling interests of allotment of registered capital – – – – Reorganization of the Target Group – (1,000,000) – – Profit for the year – – – 18,069,954 At 31 December 2010 1,986 – 500,000 18,513,911 At 1 January 2011 1,986 – 500,000 18,513,911 Additional interests acquired from non-controlling interest – – – 10,018,281 Profit for the year – – – 7,691,221 At 31 March 2011 1,986 – 500,000 36,223,413 For the three months ended 31 March 2010 (unaudited) At 1 January 2010 – 1,000,000 500,000 443,957 Profit for the year – – – – At 31 March 2010 – 1,000,000 500,000 443,957		Attributable to owners of the Target Group	Attributable to owners of the Target Group	Attributable to owners of the Target Group	Total RMB (301,617) (2,395,970) (2,697,587) (2,697,587) 13,141,544 – (8,500,000) 1,943,957 1,943,957 1,986 – (1,000,000) 18,069,954 19,015,897 19,015,897 10,018,281 7,691,221 37,599,527 1,943,957 2,482,143 4,426,100	Non- controlling interests RMB – – – – – – – – – – 1,360,996 – 9,531,413 10,892,409 10,892,409 (10,892,409) – – – – –	Total equity RMB (301.617) (2,395,970)
			Statutory reserve RMB – – – – – 500,000 – 500,000 500,000 – – – – 500,000 500,000 – – 500,000 500,000 – 500,000	Retained profits RMB (1,301,617) (2,395,970) (3,697,587) (3,697,587) 13,141,544 (500,000) (8,500,000) 443,957 443,957 – – – 18,069,954 18,513,911 18,513,911 10,018,281 7,691,221 36,223,413 443,957 – 443,957
							(2,697,587)
							(2,697,587) 13,141,544 – (8,500,000)
							1,943,957
							1,943,957 1,986 1,360,996 (1,000,000) 27,601,367
							29,908,306
							29,908,306 (874,128) 7,691,221
							36,725,399
							1,943,957 2,482,143
							4,426,100

– 75 –

ACCOUNTANT’S REPORT OF THE TARGET GROUP

APPENDIX II

(e) Combined cash flow statement

Operating activities Profit/(Loss) before taxation Adjustments for: Bank interest income Finance costs Depreciation of property, plant and equipment Operating profits/(loss) before movement in working capital (Increase)/Decrease in inventories Increase in trade and bills receivables Increase in other receivables, prepayment and deposit paid (Decrease)/Increase in amount due to shareholders (Decrease)/Increase in trade payables (Decrease)/Increase in other payables and accruals Cash from operations Income tax paid Net cash from/(used in) operating activities Investing activities Purchases of property, plant and equipment Payment for construction in progress Acquisition of the Project Company Interest income Net cash used in investing activities	Year ended 31 December 2008 2009 2010 RMB RMB RMB (2,395,970) 16,288,436 36,394,201 (740) (1,095) (3,913) – 65,230 746,646 736,540 1,330,118 2,214,433 (1,660,170) 17,682,689 39,351,367 444,510 (4,591,748) (31,018,423) (2,486,099) (1,046,905) (21,146,182) (403,759) (2,562,005) (3,497,977) 6,152,433 (8,099,294) 13,668,820 737,426 (781,240) 230,747 588,596 20,048,041 10,379,774 3,372,937 20,649,538 7,968,126 – – (83,214) 3,372,937 20,649,538 7,884,912 (2,456,222) (6,510,600) (9,457,347) – – (667,834) – – (1,000,000) 740 1,095 3,913 (2,455,482) (6,509,505) (11,121,268)	Three months ended 31 March 2010 2011 RMB RMB (unaudited) 2,487,164 10,253,570 (1,033) (1,872) 7,644 375,455 391,155 612,304 2,884,930 11,239,457 (3,302,795) 12,979,952 (10,631,388) (15,241,974) (1,367,203) (2,251,552) (3,965,000) (3,550,872) 22,251,913 6,963,774 (1,517,592) (11,745,994) 4,352,865 (1,407,209) (9,702) (183,216) 4,343,163 (1,590,425) (6,506,292) (1,074,584) – – – – 1,033 1,872 (6,505,259) (1,072,712)	Three months ended 31 March 2010 2011 RMB RMB (unaudited) 2,487,164 10,253,570 (1,033) (1,872) 7,644 375,455 391,155 612,304 2,884,930 11,239,457 (3,302,795) 12,979,952 (10,631,388) (15,241,974) (1,367,203) (2,251,552) (3,965,000) (3,550,872) 22,251,913 6,963,774 (1,517,592) (11,745,994) 4,352,865 (1,407,209) (9,702) (183,216) 4,343,163 (1,590,425) (6,506,292) (1,074,584) – – – – 1,033 1,872 (6,505,259) (1,072,712)
			11,239,457 12,979,952 (15,241,974) (2,251,552) (3,550,872) 6,963,774 (11,745,994)
			(1,407,209) (183,216)
			(1,590,425)
			(1,074,584) – – 1,872
			(1,072,712)

– 76 –

ACCOUNTANT’S REPORT OF THE TARGET GROUP

APPENDIX II

Financing activities Proceeds from issue of ordinary shares New bank borrowings raised Repayment of bank loans Interim dividends paid Interest paid Proceeds from obligations under finance leases Increase in amount due from shareholders Increase in pledged bank deposits Repayment of obligation under finance leases Injection from non-controlling interests of allotment of registered capital Payment for additional interests acquired from non-controlling interest Net cash from/(used in) financing activities Net increase/(decrease) in cash and cash equivalents Cash and cash equivalents at beginning of the year Cash and cash equivalents at the end of year/period Cash and cash equivalents at the end of the year, represented by: Bank balances and cash (Note 24)	Year ended 31 December 2008 2009 2010 RMB RMB RMB – – 1,986 – 1,400,000 15,550,000 – – – – (8,500,000) – – (65,230) (746,646) – – 746,656 – (4,717,073) (5,438,131) – – – – – – – – 1,360,996 – – – – (11,882,303) 11,474,861 917,455 2,257,730 8,238,505 87,245 1,004,700 3,262,430 1,004,700 3,262,430 11,500,935 1,004,700 3,262,430 11,500,935	Three months ended 31 March 2010 2011 RMB RMB (unaudited) – – 3,050,000 24,500,000 – (3,950,000) – – (7,644) (375,455) – – (2,630,427) (1,098,798) – (9,500,000) – (69,999) – – – (874,128) 411,929 8,631,620 (1,750,167) 5,968,483 3,262,430 11,500,935 1,512,263 17,469,418 1,512,263 17,469,418	Three months ended 31 March 2010 2011 RMB RMB (unaudited) – – 3,050,000 24,500,000 – (3,950,000) – – (7,644) (375,455) – – (2,630,427) (1,098,798) – (9,500,000) – (69,999) – – – (874,128) 411,929 8,631,620 (1,750,167) 5,968,483 3,262,430 11,500,935 1,512,263 17,469,418 1,512,263 17,469,418
			8,631,620
			5,968,483 11,500,935
			17,469,418
			17,469,418

– 77 –

ACCOUNTANT’S REPORT OF THE TARGET GROUP

APPENDIX II

II. NOTES TO THE FINANCIAL INFORMATION

1. General information

Ideal Market Holdings Limited (the “ Target Company ”) is a company incorporated in the British Virgin Islands (the “ BVI ”). The address of its registered office is P.O. Box 957, Offshore Incorporations Centre, Road Town, Tortola, British Virgin Islands.

The principal activities of the Target Company is investment holding. Its subsidiaries are principally engaged in the recycling of waste paper and consumable wastes business in the PRC.

2. Corporate reorganisation

Prior to its proposed acquisition by the Company, Ideal Market Holdings Limited (the “ Target Company ”) underwent a corporate reorganisation which included the following steps:

• (a) On 18 August 2010, the Target Company was incorporated and controlled by Lucky Start Holdings Limited, All Prosper Group, Triumph Return Holdings Limited and Jia Sheng Holdings Limited (the “ Vendors ”), which are mainly controlled by Ms. Zhao Zhenzhen.

• (b) On 9 November 2010, Target Company, through a wholly owned subsidiary, acquired the entire equity interest of Suzhou Baina Renewable Resources Co., Ltd., a company beneficially controlled by Ms. Zhao Zhenzhen and Mr. Wong Sze Chung, Armstrong for a cash consideration of RMB10,000,000.

Accordingly, for the purpose of the preparation of the Financial Information, the Target Company is considered as the holding company of the companies now comprising the Target Group throughout the Relevant Periods. The Target Group comprising the Target Company and its subsidiaries resulting from the corporate reorganisation is regarded as a continuing entity. The Target Group is under the control of Ms. Zhao Zhenzhen and Mr. Wong Sze Chung, Armstrong prior to and after the corporate reorganisation. The combined statements of comprehensive income, combined statements of changes in equity and combined statements of cash flows for the Relevant Periods which include the results, changes in equity and cash flows of the companies comprising the Target Group have been prepared as if the current group structure had been in existence throughout the Relevant Periods, or since their respective dates of incorporation/establishment where it is a shorter period. The combined statements of financial position as at 31 December 2008, 2009, 2010 and 31 March 2011 have been prepared to present the assets and liabilities of the companies comprising the Target Group as at the respective dates as if the current group structure had been in existence at those dates.

– 78 –

ACCOUNTANT’S REPORT OF THE TARGET GROUP

APPENDIX II

3. Basis of preparation

3.1 Basis of preparation

The combined financial statements have been prepared in accordance with Hong Kong Financial Reporting Standards issued by the HKICPA. In addition, the combined financial statements include applicable disclosures required by the Rules Governing the Listing of Securities on the Stock Exchange of Hong Kong Limited and by the Hong Kong Companies Ordinance.

The combined financial statements have been prepared on the historical cost basis, except for certain financial instruments, which are measured at fair values, as explained in the accounting policies set out below.

4. Summary of significant accounting policies

4.1 Basis of consolidation

Subsidiaries are combined from the date on which control is transferred to the Target Group. They are excluded from consolidation from the date that control ceases.

The Group has applied merger accounting as prescribed in Hong Kong Accounting Guideline 5 “Merger Accounting for Common Control Combinations” issued by HKICPA to account for the purchase of the equity interests in the Target business under common control (the “ Target business ”), as if the acquisitions had been occurred and the Target business had been combined from 1 January 2008, the beginning of the earliest financial period presented.

The net assets of the combining entities or businesses are combined using the existing book values from the controlling parties’ perspective. No amount is recognised in respect of goodwill or excess of acquirer’s interest in the net fair value of acquiree’s identifiable assets, liabilities and contingent liabilities over cost at the time of common control combination, to the extent of the continuation of the controlling party’s interest. The combined statements of comprehensive income includes the results of each of the combining entities or businesses from the earliest date presented or since the date when the combining entities or businesses first came under the common control, where this is a shorter period, regardless of the date of the common control combination.

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ACCOUNTANT’S REPORT OF THE TARGET GROUP

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The comparative amounts in the Financial Information are restated and presented as if the Target business had been combined at the end of previous reporting period or when they first came under common control, whichever is shorter.

Transaction costs incurred in relation to business combinations under common control that is accounted for by using merger accounting is recognized as an expense in the year in which it is incurred.

Intra-group transactions, balances and unrealized gains and losses on transactions between group companies are eliminated in preparing the Financial Information. Where unrealized losses on intra-group asset sales are reversed on consolidation, the underlying asset is also tested for impairment from the Target Group’s perspective. Amounts reported in the Financial Information of subsidiaries have been adjusted where necessary to ensure consistency with the accounting policies adopted by the Target Group.

4.2 Subsidiaries and controlling interests

Subsidiaries are entities controlled by the Target Group. Control exists when the Target Group has the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities. In assessing control, potential voting rights that presently are exercisable are taken into account.

Non-controlling interests represent the equity in a subsidiary not attributable directly or indirectly to the Target Company, and in respect of which the Target Group has not agreed any additional terms with the holders of those interests which would result in the Target 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 Target Group can elect to measure any non-controlling interests either at fair value or at their proportionate share of the subsidiary’s net identifiable assets.

Non-controlling interests are presented in the combined statement of financial position within equity, separately from equity attributable to the owners of the Target Company, Non-controlling interests in the results of the Target Group are presented on the face of the combined statement of comprehensive income as an allocation of the total profit or loss. Loans from holders of non-controlling interests and other contractual obligations towards these holders are presented as financial liabilities in the combined statement of financial position.

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4.3 Revenue recognition

Revenue is measured at the fair value of the consideration received or receivable and represents amounts received and receivable for goods sold provided in the normal course of business, net of discounts and sales related taxes.

Revenue from the sales of goods is recognised when all the following conditions are satisfied:

• the Group has transferred to the buyer the significant risks and rewards of ownership of all goods;

• the Group retains neither continuing managerial involvement to the degree usually associated with ownership nor effective control over the goods sold;

• the amount of revenue can be measured reliably;

• it is probable that the economic benefits associated with the transaction will flow to the group; and

• the costs incurred or to be incurred in respect of the transaction can be measured reliably.

Specifically, revenue from the sale of goods is recognized when the goods are delivered and title has passed.

Interest income is accrued on a time basis by reference to the principal outstanding and at the interest rate applicable.

4.4 Property, plant and equipment

Property, plant and equipment (other than construction in progress) are stated at cost less subsequent accumulated depreciation and accumulated impairment losses.

Depreciation is provided to write off the cost of items of property, plant and equipment other than construction in progress over their estimated useful lives and after taking into account of their estimated residual value, using the straightline method. The estimated useful lives, residual values and depreciation method are reviewed at the end of each reporting period, with the effect of any changes in estimate accounted for on a prospective basis.

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Construction in progress includes property, plant and equipment in the course of construction for production or for its own use purposes. Construction in progress is carried at cost less any recognised impairment loss. Construction in progress is classified to the appropriate category of property, plant and equipment when completed and ready for intended use. Depreciation of these assets, on the same basis as other property assets, commences when the assets are ready for their intended use.

Assets held under finance leases are depreciated over their expected useful lives on the same basis as owned assets or, where shorter, the term of the relevant lease.

An item of property, plant and equipment is derecognised upon disposal or when no future economic benefits are expected to arise from the continued use of the asset. Any gain or loss arising on derecognition of the asset (calculated as the difference between the net disposal proceeds and the carrying amount of the item) is included in profit or loss in the period in which the item is derecognised.

4.5 Leases

Leases are classified as finance leases whenever the terms of the lease transfer substantially all the risks and rewards of ownership to the lessee. All other leases are classified as operating leases.

The Group as lessee

Assets held under finance leases are recognised as assets of the Group at their fair value at the inception of the lease or, if lower, at the present value of the minimum lease payments. The corresponding liability to the lesser is included in the combined statement of financial position as a finance lease obligation. Lease payments are apportioned between finance charges and reduction of the lease obligation so as to achieve a constant rate of interest on the remaining balance of the liability. Finance charges are charged directly to profit or loss.

Operating lease payments are recognised as an expense on a straightline basis over the relevant lease term, except where another systematic basis is more representative of the time pattern in which economic benefits from the leased asset are consumed. Contingent rentals are recognised as an expense in the period in which they are incurred.

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4.6 Taxation

Income tax expenses represents the sum of the tax currently payable and deferred tax.

The tax currently payable is based on taxable profit for the year. Taxable profit differs from profit as reported in the combined statement of comprehensive income because it excludes items of income or expense that are taxable or deductible in other years and it further excludes items that are never taxable or deductible. The Target Group’s liability for current tax is calculated using tax rates that have been enacted or substantively enacted by the end of the reporting period.

Deferred tax is recognised on temporary differences between the carrying amounts of assets and liabilities in the combined financial statements and the corresponding tax base used in the computation of taxable profit. Deferred tax liabilities are generally recognised for all taxable temporary differences. Deferred tax assets are generally recognised for all deductible temporary difference to the extent that it is probable that taxable profits will be available against which those deductible temporary differences can be utilised. Such deferred tax assets and liabilities are not recognised if the temporary difference arises from goodwill or from the initial recognition (other than in a business combination) of other assets and liabilities in a transaction that affects neither the taxable profit nor the accounting profit.

Deferred tax liabilities are recognised for taxable temporary differences associated with investments in subsidiaries, except where the Target Group is able to control the reversal of the temporary difference and it is probable that the temporary difference will not reverse in the foreseeable future.

Deferred tax assets and liabilities are measured at the tax rates that are expected to apply in the period in which the liability is settled or the asset is realised, based on tax rates (and tax laws) that have been enacted or substantively enacted by the end of the reporting period. The measurement of deferred tax liabilities and assets reflects the tax consequences that would follow from the manner in which the Target Group expects, at the end of the reporting period, to recover or settle the carrying amount of its assets and liabilities.

The carrying amount of deferred tax assets is reviewed at the end of each reporting period and reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow all or part of the asset to be recovered.

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4.7 Borrowing costs

All borrowing costs are recognised in profit or loss in the period in which they are incurred.

4.8 Retirement benefit costs

Payments to state-managed retirement benefit plans are recognised as an expense when employees have rendered service entitling them to the contributions.

4.9 Inventories

Inventories are stated at the lower of cost and net realizable value. Cost is calculated using the weighted average method.

4.10 Impairment of investment in subsidiaries and non-financial assets

Investment in subsidiaries and non-financial assets are subject to impairment testing. An impairment loss is recognised as an expense immediately for the amount by which the asset’s carrying amount exceeds its recoverable amount unless the relevant asset is carried at a revalued amount under the Target Group’s accounting policy, in which case the impairment loss is treated as a revaluation decrease according to that policy. Recoverable amount is the higher of fair value, reflecting market conditions less costs to sell, 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 assessment of time value of money and the risk specific to the asset.

For the purposes of assessing impairment, where an asset does not generate cash inflows largely independent from those from other assets, the recoverable amount is determined for the smallest group of assets that generate cash inflows independently (i.e. a cash-generating unit). As a result, some assets are tested individually for impairment and some are tested at cash-generating unit level.

4.11 Bank balances and cash

Bank balances and cash include cash at bank and on hand, demand deposits with banks and short-term highly liquid investments with original maturities of three months or less that are readily convertible into known amounts of cash and which are subject to an insignificant risk of changes in value.

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4.12 Financial instruments

Financial assets and financial liabilities are recognised on the combined statement of financial position when a group entity becomes a party to the contractual provisions of the instrument. Financial assets and financial liabilities are initially measured at fair value. Transaction costs that are directly attributable to the acquisition or issue of financial assets and financial liabilities (other than financial assets or financial liabilities at fair value through profit or loss) are added to or deducted from the fair value of the financial assets or financial liabilities, as appropriate, on initial recognition. Transaction costs directly attributable to the acquisition of financial assets or financial liabilities at fair value through profit or loss are recognised immediately in profit or loss.

Financial assets

The Target Group’s financial assets comprise of loans and receivables. All regular way purchases or sales of financial assets are recognized and derecognised on a trade date basis. Regular way purchases or sales are purchases or sales of financial assets that require delivery of assets within the time frame established by regulation or convention in the marketplace.

Effective interest method

The effective interest method is a method of calculating the amortised cost of a financial asset and of allocating interest income over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash receipts (including all fees paid or received that form an integral part of the effective interest rate, transaction costs and other premiums or discounts) through the expected life of the financial assets, or, where appropriate, a shorter period to the net carrying amount on initial recognition.

Interest income is recognised on an effective interest basis for debt instruments.

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Loans and receivables

Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. Subsequent to initial recognition, loans and receivables (including trade and bills receivables, other receivables and deposits paid, pledged fixed deposits and bank balances and cash) are carried at amortised cost using the effective interest method, less any identified impairment losses (see accounting policy on impairment loss on financial assets below).

Impairment loss on financial assets

Financial assets are assessed for indicators of impairment at the end of each reporting period. Financial assets are impaired where there is objective evidence that, as a result of one or more events that occurred after the initial recognition of the financial asset, the estimated future cash flows of the financial assets have been affected.

For financial assets, objective evidence of impairment could include:

• significant financial difficulty of the issuer or counterparty; or

• default or delinquency in interest or principal payments; or

• it becoming probable that the borrower will enter bankruptcy or financial re-organisation

For certain categories of financial asset, such as trade and bills receivables, assets that are assessed not to be impaired individually are subsequently assessed for impairment on a collective basis. Objective evidence of impairment for a portfolio of receivables could include the Target Group’s past experience of collecting payments, an increase in the number of delayed payments in the portfolio past the average credit period, as well as observable changes in national or local economic conditions that correlate with default on receivables.

For financial assets carried at amortised cost, an impairment loss is recognised in profit or loss when there is objective evidence that the asset is impaired, and is measured as the difference between the asset’s carrying amount and the present value of the estimated future cash flows discounted at the original effective interest rate.

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The carrying amount of the financial asset is reduced by the impairment loss directly for all financial assets with the exception of trade and bills receivables, where the carrying amount is reduced through the use of an allowance account. Changes in the carrying amount of the allowance account are recognised in profit or loss. When a trade and bills receivables is considered uncollectible, it is written off against the allowance account. Subsequent recoveries of amounts previously written off are credited to profit or loss.

For financial assets measured at amortised cost, if, in a subsequent period, the amount of impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment losses was recognised, the previously recognised impairment loss is reversed through profit or loss to the extent that the carrying amount of the asset at the date the impairment is reversed does not exceed what the amortised cost would have been had the impairment not been recognised.

Financial liabilities and equity instruments

Financial liabilities and equity instruments issued by a group entity are classified according to the substance of the contractual arrangements entered into and the definitions of a financial liability and an equity instrument.

An equity instrument is any contract that evidences a residual interest in the assets of the Target Group after deducting all of its liabilities. The Target Group’s financial liabilities are generally classified as other financial liabilities.

Effective interest method

The effective interest method is a method of calculating the amortised cost of a financial liability and of allocating interest expense over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash payments through the expected life of the financial liability, or, where appropriate, the shorter period.

Interest expense is recognised on an effective interest basis.

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Other financial liabilities

Other financial liabilities (including trade and bills payables, other payables and accruals, bank and other borrowings and obligations under finance leases) are subsequently measured at amortised cost, using the effective interest method.

Equity instruments

Equity instruments issued by the Target Company are recorded at the proceeds received, net of direct issue costs.

Derecognition

Financial assets are derecognised when the rights to receive cash flows from the assets expire or, the financial assets are transferred and the Target Group has transferred substantially all the risks and rewards of ownership of the financial assets. On derecognition of a financial asset, the difference between the asset’s carrying amount and the sum of the consideration received and receivable and the cumulative gain or loss that had been recognised in other comprehensive income is recognised in profit or loss.

Financial liabilities are derecognised when the obligation specified in the relevant contract is discharged, cancelled or expires. The difference between the carrying amount of the financial liability derecognised and the consideration paid and payable is recognised in profit or loss.

4.13 Related parties

For the purposes of these financial statements, a party is considered to be related to the Target Group if:

• (i) the party has the ability, directly or indirectly through one or more intermediaries, to control the Target Group or exercise significant influence over the Target Group in making financial operating policy decisions, or has joint control over the Target Group;

• (ii) the Target Group and the related party are subject to common control;

• (iii) the party is an associate of the Target Group or a joint venture in which the Target Group is a venturer;

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• (iv) the party is a member of key management personnel of the Target Group or the Target Group’s parent, or a close family member of such an individual, or is an entity under the control, joint control or significant influence of such individuals;

• (v) the party is a closing family member of a party referred to in (i) or is an entity under the control, joint control or significant influence of such individuals; or

• (vi) the party is a post-employment benefit plan which is for the benefit of employees of the Target Group or of any entity that is a related party of the Target Group.

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

4.14 Segment reporting

The Target Group identifies operating segments and prepares segment information based on the regular internal financial information reported to the executive directors for their decisions about resources allocation to the Target Group’s business components and for their review of the performance of those components.

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.

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APPENDIX II ACCOUNTANT’S REPORT OF THE TARGET GROUP

5. Application of new and revised Hong Kong Financial Reporting Standards (“HKFRSs”)

New and revised Standards, Amendments and Interpretations applied in the current year

The following new and amended HKFRSs are effective on 1 January 2009, 1 July 2009 and 1 January 2010. The Target Group has applied these new and amended HKFRSs issued by Hong Kong Institute of Certified Public Accountants (“HKICPA”), when it prepared its financial statements for the three years ended 31 December 2008, 2009, 2010 and the period from 1 January 2011 to 31 March 2011.

HKFRS 3 (as revised	Business Combinations
in 2008)
HKAS 27 (as revised	Consolidated and Separate Financial
in 2008)	Statements
HK (IFRIC) – INT 5	Presentation of Financial Statements –
	Classification by the Borrower of a
	Term Loan that Contains a Repayment on
	Demand Clause
HKFRSs (Amendments)	Improvements to HKFRSs issued in 2009
HKFRSs (Amendments)	Amendments to HKFRS 5 as part of
	Improvements to HKFRSs issued in 2008

Except as described below, the application of the new and revised standards, amendments and interpretations in the current year has had no material effect on the amounts reported and/or disclosures set out in the Group’s combined financial statements and the Company’s statement of financial position.

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Hong Kong Interpretation 5 “Presentation of Financial Statements – Classification by the Borrower of a Term Loan that Contains a Repayment on Demand Clause”

Hong Kong Interpretation 5 “Presentation of Financial Statements – Classification by the Borrower of a Term Loan that Contains a Repayment on Demand Clause” (“ HK – Int 5 ”) clarifies that term loans that include a clause that gives the lender the unconditional right to call the loans at any time (“ repayment on demand clause ”) should be classified by the borrower as current liabilities. The Target Group has applied HK – Int 5 for the first time in the current year. HK – Int 5 requires retrospective application.

In order to comply with the requirements set out in HK – Int 5, the Group has changed its accounting policy on classification of term loans with a repayment on demand clause. In the past, the classification of such term loans were determined based on the agreed scheduled repayment dates set out in the loan agreements. Under HK – Int 5, term loans with a repayment on demand clause are classified as current liabilities.

The application of HK – Int 5 has had no impact on the reported profit or loss for the current and prior years.

HKAS 27 – Consolidated and Separate Financial Statements

HKAS 27 (revised) provides that changes in a parent’s ownership interest in a subsidiary company that do not result in a loss of control are accounted for as equity transactions and these transactions shall no longer result in goodwill or gains and losses. When control is lost, any remaining interest in the subsidiary company is remeasured to fair value and the difference between the fair value and the carrying value is recognized in the profit and loss accounts.

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The Target Group has not early applied the following new and revised standards, amendments or interpretations that have been issued but are not yet effective.

HKFRSs (Amendments)	Improvements to HKFRSs Issued in 20101
HKFRS 7 (Amendments)	Disclosures – Transfers of financial assets4
HKFRS 9	Financial Instruments6
HKFRS 10	Consolidated Financial Statements6
HKFRS 11	Joint Arrangements6
HKFRS 12	Disclosure of interests in Other Entities6
HKFRS 13	Fair Value Measurement6
HKAS 12 (Amendments)	Deferred Tax: Recovery of Underlying Assets5
HKAS 24 (as revised	Related Party Disclosures3
in 2009)
HKFRS 27 (2011)	Separate Financial Statements6
HKFRS 28 (2011)	Investments In Associates and Joint Ventures6
HK (IFRIC) – INT 14	Prepayments of a Minimum Funding
(Amendments)	Requirement3
HK (IFRIC) – INT 19	Extinguishing Financial Liabilities with
	Equity Instruments2

1 Amendments that are effective for annual periods beginning on or after 1 July 2010 and 1 January 2011, as appropriate.

2 Effective for annual periods beginning on or after 1 July 2010

3 Effective for annual periods beginning on or after 1 January 2011

4 Effective for annual periods beginning on or after 1 July 2011

5 Effective for annual periods beginning on or after 1 January 2012

6 Effective for annual periods beginning on or after 1 January 2013

HKFRS 9 “Financial instruments” (as issued in November 2009) introduces new requirements for the classification and measurement of financial assets. HKFRS 9 “Financial instruments” (as revised in November 2010) adds requirements for financial liabilities and for derecognition.

The directors anticipate that the application of those new and revised standards, amendments or interpretations will have no material impact on the Target Group’s combined financial statements and the Company’s statement of financial position.

The new accounting policy has been applied prospectively as required by these amendments to HKAS 27 and therefore no comparatives have been restated.

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6. Capital risk management

The Target Group

The Target Group manages its capital to ensure that entities in the Target Group will be able to continue as a going concern while maximising the return to shareholders through the optimisation of debt and equity balance. The Target Group’s overall strategy remains unchanged from prior year.

The capital structure of the Target Group consists of debt, which includes bank borrowings, obligations under finance leases, trade and bills payables, other payables and accruals, bank balances and cash and equity attributable to owners of the Target Company, comprising issued share capital and reserves.

The Target Group reviews the capital structure on a regular basis and manages its capital structure and makes adjustments to it, in light of changes in economic conditions.

The Target Group monitors capital using a gearing ratio, which is net debt divided by the total capital plus net debt. Based on the recommendation of the directors of the Target Group, its policy is to maintain the gearing ratio not exceeding 85%. Net debt includes obligation under finance leases, bank borrowings, trade and bills payables, other payables and accruals, less bank balances and cash. Capital includes equity attributable to the Target Group.

Obligations under finance leases Bank borrowings Trade and bills payables Other payables and accruals Less: bank balances and cash Net debt Equity attributable to the Target Group Capital and net debt Gearing ratio	31/12/2008 RMB – – 1,087,426 587,707 (1,004,700) 670,433 (2,697,587) (2,027,154) N/A	31/12/2009 RMB – 1,400,000 306,186 8,313,983 (3,262,430) 6,757,739 1,943,957 8,701,696 78%	31/12/2010 RMB 746,656 16,950,000 536,933 15,532,514 (11,500,935) 22,265,168 19,013,911 41,279,079 54%	31/03/2011 RMB 676,657 37,500,000 7,500,707 2,559,949 (17,469,418)
				30,767,895 36,723,413
				67,491,308
				46%

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APPENDIX II ACCOUNTANT’S REPORT OF THE TARGET GROUP

7. Financial risk management and fair value measurements

The Target Group

Financial risk management objectives and policy

As at the reporting date, the Target Group’s financial instruments mainly consisted of bank balance and cash, trade and bills receivables, other receivables, prepayment and deposits paid, amounts due from shareholders, trade and bills payables, other payables and accruals, bank borrowings, obligations under finance leases and amounts due to shareholders.

The Target Group is exposed to financial risk through its use of financial instruments in its ordinary course of operations and in its investment activities, the financial risks include market risk (including currency risk and interest rate risk), credit risk and liquidity risk.

(a) Market risk

The Target Group has no significant exposure to foreign currency risk as substantially most of the Target Group’s transactions are denominated in its functional currency, Renminbi.

• (b) Fair value and cash flow interest rate risk

Interest rate risk relates to the risk that the fair value or cash flows of a financial instrument will fluctuate because of changes in market interest rates.

The Target Group currently does not have any interest rate hedging policy in relation to fair value and cash flow interest rate risks. The directors monitor the Target Group’s exposure on ongoing basis and will consider hedging the interest rate should the need arise.

(1) Exposure to fair value and cash flow interest rate risk

The Target Group’s fair value interest rate risk relates primarily to bank loans carrying at floating interest rates. The directors consider the Target Group’s exposure to fair value interest rate risk is not significant.

The Target Group manages its interest rate exposure based on interest rate level and outlook as well as potential impact on the Target Group’s financial position arising from floating volatility.

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(2) Sensitivity analysis

At 31 March 2011, it is estimated that a general increase/decrease of 100 basis points in interest rates, with all other variables held constant, would have decreased/increased the Group’s profit after tax and retained profits by approximately RMB75,000 (2008 and 2009: Nil, 2010 RMB75,000). Other components of consolidated equity would not be affected (2008, 2009 and 2010: Nil) in response to the general increase/ decrease in interest rates.

The Target Group has not used any financial instrument to hedge potential fluctuations in interest rates.

(c) Credit risk

Credit risk refers to the risk that the counterparty to a financial instrument would fail to discharge its obligation under the terms of the financial instrument and cause a financial loss to the Target Group.

The carrying amounts of trade and bills receivables, other receivables, prepayments and deposits paid and bank balance and cash included in the face of the combined statement of financial position represent the Target Group’s maximum exposure to credit risk in relation to its financial assets.

As at 31 March 2011, the Group has certain concentration of credit risk as 31.97% (2010: 57.14%, 2009: 42.95% and 2008: 49.04%) and 88.87% (2010: 92.54%, 2009: 89.23% and 2008: 85.68%) of the total trade and bills receivables were due from the Group’s largest and the five largest customers respectively. In order to minimize the credit risk of the Group, the management has implemented internal control procedures to ensure that follow-up action is taken to recover overdue debts. In addition, the Target Group reviews the recoverable amount of each individual trade debtor at each end of the reporting period to ensure that adequate impairment losses are made for irrecoverable amounts.

Based on the Group’s historical experience in collection of trade and other receivables and amounts due from related parties, the directors and the management are of opinion that adequate provision has been made for uncollectible receivables.

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(d) Liquidity risk

Liquidity risk relates to the risk that the Target Group will not be able to meet its obligations associated with its financial liabilities that are settled by delivering cash or another financial assets. The Target Group is exposed to liquidity risk in respect of settlement of trade and bills payables, other payables and accruals, bank borrowings, obligations under finance leases and amounts due to shareholders and also in respect of its cash flow management. The Target Group’s objective is to maintain an appropriate level of liquid assets and committed lines of funding to meet its liquidity requirements in the short and long term.

The Target Group’s liquidity is mainly dependent upon the cash received from its trade customers and available financing, including short term bank loans. The directors of the Target Group are satisfied that the Target Group will be able to meet in full its financial obligations as and when they fall due in the foreseeable future. The liquidity policies have been followed by the Target Group since prior years and are considered to have been effective in managing liquidity risks.

The following tables detail the remaining contractual maturities at the end of each reporting date of the Target Group’s non-derivative financial liabilities, which are based on contractual undiscounted cash flows and the earliest date the Target Group are required to pay:

At 31 December 2008 Trade and bills payables Other payable and accruals Amounts due to shareholders Total At 31 December 2009 Trade and bills payables Other payable and accruals Bank borrowings Amounts due to shareholders Total	Within one year or on demand RMB 1,087,426 587,707 12,064,294 13,739,427 306,186 8,313,983 1,400,000 3,965,000 13,985,169	Undiscounted Cash flows RMB 1,087,426 587,707 12,064,294 13,739,427 306,186 8,313,983 1,400,000 3,965,000 13,985,169	Carrying amounts RMB 1,087,426 587,707 12,064,294
			13,739,427
			306,186 8,313,983 1,400,000 3,965,000
			13,985,169

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ACCOUNTANT’S REPORT OF THE TARGET GROUP

At 31 December 2010 Trade and bills payables Other payable and accruals Bank borrowings Obligations under finance leases Amounts due to shareholders Total At 31 March 2011 Trade and bills payables Other payable and accruals Bank borrowings Obligations under finance leases Amounts due to shareholders Total	536,933 15,532,514 16,950,000 279,996 17,633,820 50,933,263 7,500,707 2,559,949 37,500,000 279,996 14,282,948 62,123,600 Within one year or on demand RMB	536,933 15,532,514 16,950,000 279,996 17,633,820 50,933,263 7,500,707 2,559,949 37,500,000 279,996 14,282,948 62,123,600 Undiscounted Cash flows RMB	536,933 15,532,514 16,950,000 279,996 17,633,820 50,933,263 7,500,707 2,559,949 37,500,000 279,996 14,282,948 62,123,600 Carrying amounts RMB

• (e) Fair values

The fair value of financial assets and financial liabilities are determined as follows:

• the fair value of financial assets with standard terms and conditions and traded in active liquid markets is determined with reference to quoted market bid prices and ask prices, respectively; and

• the fair value of other financial assets and financial liabilities is determined in accordance with generally accepted pricing models based on discounted cash flow analysis using prices from observable current market transactions.

The directors consider that the carrying amounts of financial assets and financial liabilities at amortised cost in the combined financial statements approximate to their fair values.

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Fair value measurements recognized in the combined statement of financial position

The following table provides an analysis of financial instruments that are measured subsequent to initial recognition at fair value, grouped into Levels 1 to 3 based on the degree to which the fair value is observable.

• Level 1 fair value measurements are those derived from quoted prices (unadjusted) in active market for identical assets or liabilities.

• Level 2 fair value measurements are those derived from inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices).

• Level 3 fair value measurements are those derived from valuation techniques that include inputs for the assets or liability that are based on observable market data (unobservable inputs).

The fair values of the financial assets and liabilities are not materially different from their carrying amounts because of the immediate or short term maturity of these financial instruments.

8. Turnover

Turnover of the Target Group represent revenue from the Target Group’s principal activities recognized during the Relevant Periods is as follow:

				Three months ended	Three months ended
	Year	ended 31 December		31 March
	2008	2009	2010	2010	2011
	RMB	RMB	RMB	RMB	RMB
				(unaudited)
Sales	18,971,012	237,058,991	296,019,634	61,175,851	92,108,256

9. Segment reporting

The Target Group is principally engaged in the recycling of waste paper and consumable wastes. No segment accounts were prepared as the Target Group is only operating one single line of products and the market is located only in the Yangtze River Delta at present.

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APPENDIX II

10. Other income

Bank interest income Others	Year ended 31 December 2008 2009 2010 RMB RMB RMB 740 1,095 3,913 82,172 23,044 43,670 82,912 24,139 47,583	Three months ended 31 March 2010 2011 RMB RMB (unaudited) 1,033 1,872 858 24,248 1,891 26,120	Three months ended 31 March 2010 2011 RMB RMB (unaudited) 1,033 1,872 858 24,248 1,891 26,120
			26,120

11. Finance costs

Interest expenses on: Bank borrowings wholly repayable within five years	Year ended 31 December 2008 2009 2010 RMB RMB RMB – 65,230 746,646	Three months ended 31 March 2010 2011 RMB RMB (unaudited) 7,644 375,455

12. Profit/(loss) before income tax

				Three months ended	Three months ended
	Year	ended 31 December		31 March
	2008	2009	2010	2010	2011
	RMB	RMB	RMB	RMB	RMB
				(unaudited)
Profit (Loss) before taxation
is arrived at after charging:
Auditors’ remuneration	–	–	–	–	–
Cost of inventories
recognised as an expense	17,329,640	202,166,669	240,499,716	54,794,906	76,843,053
Operating lease rentals paid
in respect of rented
premises	2,039,760	2,131,470	2,750,728	39,500	953,025
Depreciation of property,
plant and equipment	736,540	1,330,118	2,214,433	391,155	612,304
Staff costs
– Directors’ remuneration	16,800	180,000	216,000	54,000	54,000
– staff costs	561,500	2,993,274	3,515,727	791,146	1,232,857

– 99 –

ACCOUNTANT’S REPORT OF THE TARGET GROUP

APPENDIX II

13. Employee’ emoluments

Of the five highest paid individuals of the Group for the Relevant Periods are as follows:

Directors Employees	Year ended 31 December 2008 2009 2010 RMB RMB RMB 16,800 180,000 216,000 – 516,000 624,000 16,800 696,000 840,000	Three months ended 31 March 2010 2011 RMB RMB (unaudited) 54,000 54,000 156,000 72,000 210,000 126,000	Three months ended 31 March 2010 2011 RMB RMB (unaudited) 54,000 54,000 156,000 72,000 210,000 126,000
			126,000

The remuneration of the five highest paid individuals for the Relevant Periods are as follows:

Salaries and other allowances Retirement benefit scheme contributions	Year ended 31 December 2008 2009 2010 RMB RMB RMB 16,800 696,000 840,000 5,576 30,714 34,894 12,376 726,714 874,894	Three months ended 31 March 2010 2011 RMB RMB (unaudited) 210,000 126,000 8,724 8,724 218,724 134,724	Three months ended 31 March 2010 2011 RMB RMB (unaudited) 210,000 126,000 8,724 8,724 218,724 134,724
			134,724

14. Taxation

Current tax PRC Enterprises income tax Tax charge for the year	Year ended 31 December 2008 2009 2010 RMB RMB RMB – 3,146,892 8,792,834 – 3,146,892 8,792,834	Three months ended 31 March 2010 2011 RMB RMB (unaudited) 5,021 2,562,349 5,021 2,562,349	Three months ended 31 March 2010 2011 RMB RMB (unaudited) 5,021 2,562,349 5,021 2,562,349
			2,562,349

– 100 –

ACCOUNTANT’S REPORT OF THE TARGET GROUP

APPENDIX II

Reconciliation between tax expenses and accounting profit and loss at applicable tax

rates:

Profit (Loss) before taxation Income tax at applicable tax rate Tax effect of unused tax losses not recognised Tax effect of prior year’s tax losses utilized in this year Other Total charge for the year	Year ended 31 December 2008 2009 2010 RMB RMB RMB (2,395,970) 16,288,436 36,394,201 (598,993) 4,072,109 9,098,550 598,993 – – – (924,558) – – (659) (305,716) – 3,146,892 8,792,834	Three months ended 31 March 2010 2011 RMB RMB (unaudited) 2,487,164 10,253,570 621,791 2,563,393 – – – – (616,770) (1,044) 5,021 2,562,349	Three months ended 31 March 2010 2011 RMB RMB (unaudited) 2,487,164 10,253,570 621,791 2,563,393 – – – – (616,770) (1,044) 5,021 2,562,349
			2,563,393 – – (1,044)
			2,562,349

PRC income tax

Under the Law of the PRC on Enterprise Income Tax (the “ EIT Law ”) and Implementation Regulation of the “EIT Law”, the tax rate of subsidiaries of the Target Group in the PRC is 25% for year 2008 to 2011.

15. Loss attributable to equity holders of the target company

The loss attributable to the owners of the parent includes a loss of RMB Nil which has been dealt with in the financial statements of the Target Company for the years ended 31 December 2008 and 2009 and a loss of RMBNil for the year ended 31 December 2010 respectively.

16. Earnings/(loss) per share

Earnings/(loss) per share have not been presented as such information is not meaningful having regard to the purpose of this report.

– 101 –

ACCOUNTANT’S REPORT OF THE TARGET GROUP

APPENDIX II

17. Plant and equipment

The Target Group

COST At 1 January 2008 Additions At 31 December 2008 At 1 January 2009 Additions At 31 December 2009 At 1 January 2010 Additions At 31 December 2010 At 1 January 2011 Additions At 31 March 2011 ACCUMULATED DEPRECIATION At 1 January 2008 Provided for the year At 31 December 2008 At 1 January 2009 Provided for the year At 31 December 2009 At 1 January 2010 Provided for the year At 31 December 2010 At 1 January 2011 Provided for the year At 31 March 2011	Furniture and equipment RMB 209,740 111,800 321,540 321,540 681,030 1,002,570 1,002,570 144,781 1,147,351 1,147,351 28,517 1,175,868 16,530 42,546 59,076 59,076 134,957 194,033 194,033 206,009 400,042 400,042 54,536 454,578	Motor vehicles RMB 1,752,126 325,177 2,077,303 2,077,303 9,980 2,087,283 2,087,283 2,128,030 4,215,313 4,215,313 136,108 4,351,421 85,104 192,030 277,134 277,134 198,406 475,540 475,540 257,961 733,501 733,501 88,617 822,118	Plant and machinery RMB 3,232,600 1,322,500 4,555,100 4,555,100 2,424,900 6,980,000 6,980,000 7,073,656 14,053,656 14,053,656 655,812 14,709,468 139,734 359,629 499,363 499,363 565,419 1,064,782 1,064,782 1,248,469 2,313,251 2,313,251 342,377 2,655,628	Leasehold improvement RMB 553,963 696,745 1,250,708 1,250,708 3,394,690 4,645,398 4,645,398 110,880 4,756,278 4,756,278 921,981 5,678,259 28,649 142,335 170,984 170,984 431,336 602,320 602,320 501,994 1,104,314 1,104,314 126,774 1,231,088	Total RMB 5,748,429 2,456,222
					8,204,651
					8,204,651 6,510,600
					14,715,251
					14,715,251 9,457,347
					24,172,598
					24,172,598 1,742,418
					25,915,016
					270,017 736,540
					1,006,557
					1,006,557 1,330,118
					2,336,675
					2,336,675 2,214,433
					4,551,108
					4,551,108 612,304
					5,163,412

– 102 –

APPENDIX II

ACCOUNTANT’S REPORT OF THE TARGET GROUP

CARRYING VALUE At 31 March 2011 At 31 December 2010 At 31 December 2009 At 31 December 2008	721,290 747,309 808,537 262,464 Furniture and equipment RMB	3,529,303 3,481,812 1,611,743 1,800,169 Motor vehicles RMB	12,053,840 11,740,405 5,915,218 4,055,737 Plant and machinery RMB	4,447,171 3,651,964 4,043,078 1,079,724 Leasehold improvement RMB	20,751,604 Total RMB
					19,621,490
					12,378,576
					7,198,094

The net carrying values of Motor vehicle held under finance leases as at 31 March 2011 amounted to approximately RMB1,361,662 (31 December 2008 and 2009: Nil, 31 December 2010: RMB1,396,038).

The above items of property, plant and equipment are depreciated on a straightline basis at the following rates per annum:

Furniture and equipment	19%
Motor vehicles	19%
Plant and machinery	9.5%
Leasehold improvement	5% – 20%

18. Construction in progress

The Target Group

Addition and at the end of the year	As at 31 December 2008 2009 2010 RMB RMB RMB – – 667,834	As at 31 March 2011 RMB –

– 103 –

ACCOUNTANT’S REPORT OF THE TARGET GROUP

APPENDIX II

19. Investment in subsidiaries

The Target Group

								As at
			As at		31 December			31 March
			2008		2009		2010 2011
			RMB		RMB		RMB RMB
Unlisted share at cost			–		–			1 1
	Place/country of
	incorporation/		Fully paid	up/	Percentages of
Company name	registration		registered		attributable equity		interest
(Name of statutory auditors)	and operation		capital		Direct		Indirect	Principal activities
Topbright Int’l Group Holdings Ltd.	Hong Kong			1	100%		–	Investment holding
Xiangshan Gaoming Environmental	PRC		661,810		–		100%	Investment holding
Protection Technology Limited
Suzhou Baina Renewable Resources	PRC		10,000,000		–		100%	Recycling business
Co., Ltd.								of waste paper and
（廣東誠安信會計師事務所								consumable waste
有限公司東莞分所）
Suzhou Baina Renewable Resources	PRC		1,000,000		–		53.2%	Recycling business
Yancheng Company Limited								of waste paper and
（廣東誠安信會計師事務所								consumable waste
有限公司東莞分所）
Huaian Guo Yuan Renewable Resources	PRC		1,000,000		–		100%	Recycling business
Co. Ltd.								of waste paper and
（廣東誠安信會計師事務所								consumable waste
有限公司東莞分所）

The names of certain companies referred in the combined financial statements represent management’s best effort in translation of the Chinese names of these companies as no English names have been reported or available.

– 104 –

ACCOUNTANT’S REPORT OF THE TARGET GROUP

APPENDIX II

20. Inventories

The Target Group

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

				As at
	As at	31 December		31 March
	2008	2009	2010	2011
	RMB	RMB	RMB	RMB
Finished goods	5,950	4,597,698	35,616,121	22,636,169

• (b) The analysis of the amount of inventories recognized as an expenses is as follows:

				As at
	As	at 31 December		31 March
	2008	2009	2010	2011
	RMB	RMB	RMB	RMB
Carrying amount of
inventories sold	17,329,640	202,166,669	240,499,716	76,843,053

21. Trade and bills receivables

The Target Group

Trade receivables Bills receivables	As 2008 RMB 2,509,682 – 2,509,682	at 31 December 2009 2010 RMB RMB 3,370,263 19,919,529 186,324 4,783,240 3,556,587 24,702,769	As at 31 March 2011 RMB 28,299,146 11,645,597 39,944,743

The Group has a policy of allowing credit period ranging from 1 to 3 months to its trade customers. In addition, for certain customers with long-established relationship and good past repayment history, a longer credit period may be granted. The Group does not hold any collateral over the balances.

– 105 –

ACCOUNTANT’S REPORT OF THE TARGET GROUP

APPENDIX II

An aged analysis of trade and bills receivables net of impairment loss recognised at the end of reporting period, based on the invoice date, is as follows:

				As at
	As at 31 December			31 March
	2008	2009	2010	2011
	RMB	RMB	RMB	RMB
0 – 30 days	2,458,587	3,556,587	24,702,769	39,944,743
31 – 60 days	51,095	–	–	–

The ageing analysis of Target Group’s trade and bills receivables that were past due as at the end of each reporting date but not impaired is as follow:

0 – 30 days	As at 31 December 2008 2009 2010 RMB RMB RMB 51,095 – –	As at 31 March 2011 RMB –

As at 31 March 2011, 31 December 2010, 31 December 2009 and 31 December 2008, trade and bills receivables were neither past due nor impaired. These related to a number of independent customers for whom there is no recent history of default.

22. Other receivables, prepayments and deposits paid

The Target Group

Other receivables Prepayments Deposits Paid	As 2008 RMB 324,617 – – 324,617	at 31 December 2009 2010 RMB RMB 2,323,024 3,340,800 – 27,849 563,598 3,015,950 2,886,622 6,384,599	As at 31 March 2011 RMB 1,168,250 4,224,216 3,243,685 8,636,151

– 106 –

ACCOUNTANT’S REPORT OF THE TARGET GROUP

APPENDIX II

23. Amounts due from/to shareholders

The Target Group

The amounts due from/to shareholders are unsecured, interest free and have no fixed repayment terms.

24. Bank balances and cash

The Target Group

Bank balance and cash include the following components:

Pledged bank deposits Cash and bank balances Cash and cash equivalents for the purpose of the combined statement of financial position Cash and cash equivalents for the purpose of the combined statement of cash flow	As 2008 RMB – 1,004,700 1,004,700 1,004,700	at 31 December 2009 2010 RMB RMB – – 3,262,430 11,500,935 3,262,430 11,500,935 3,262,430 11,500,935	As at 31 March 2011 RMB 9,500,000 17,469,418
			26,969,418
			17,469,418

Cash at banks earns interest at floating daily bank deposit rates and were denominated in Renminbi (“RMB”).

The Target Company

Bank balance and cash include the following components:

	31/12/2010	31/03/2011
	RMB	RMB
Cash on hand	1,986	1,986

– 107 –

ACCOUNTANT’S REPORT OF THE TARGET GROUP

APPENDIX II

25. Trade and bills payables

The Target Group

				As at
	As at	31 December		31 March
	2008	2009	2010	2011
	RMB	RMB	RMB	RMB
Trade payables	1,087,426	306,186	536,933	7,500,707

The ageing analysis of trade payables of the Target Group as follows:

0 – 30 days 31 – 60 days 61 – 90 days Over 90 days	As 2008 RMB – – – – –	at 31 December 2009 2010 RMB RMB – 3,626 – 112,700 – 100,000 306,186 320,607 306,186 536,933	As at 31 March 2011 RMB 7,059,394 – 211,803 229,510 7,500,707

All amounts are short term and hence the carrying values of trade payables are considered to be reasonable approximation of their fair values.

26. Other payables and accruals

The Target Group

Accruals Other payables	As 2008 RMB 37,707 550,000 587,707	at 31 December 2009 2010 RMB RMB 496,165 2,609,188 7,817,818 12,923,326 8,313,983 15,532,514	As at 31 March 2011 RMB 12,178 2,547,771 2,559,949

– 108 –

ACCOUNTANT’S REPORT OF THE TARGET GROUP

APPENDIX II

27. Bank borrowings

The Target Group

				As at
	As at	31 December		31 March
	2008	2009	2010	2011
	RMB	RMB	RMB	RMB
Bank loans	–	1,400,000	16,950,000	37,500,000

As at 31 December 2008, 31 December 2009, 31 December 2010 and 31 March 2011, the Target Group’s bank loans were all denominated in RMB which is the same as the functional currency.

Certain bank loans as at 31 March 2011 were secured by pledged bank deposits as disclosed in note 24.

28. Obligations under finance leases

The Target Group

Amounts payable under finance leases: – within 1 year – in the 2nd to 5th years inclusive Present value of lease obligations Deduct: Portion classified under current liabilities Non-current portion	31/12/2008 RMB – – –	Minimum lease payments 31/12/2009 31/12/2010 RMB RMB – 279,996 – 466,660 – 746,656	31/03/2011 RMB 279,996 396,661 676,657	31/12/2008 RMB – – – – –	Present value of minimum lease payments 31/12/2009 31/12/2010 RMB RMB – 279,996 – 466,660 – 746,656 – (279,996) – 466,660	31/03/2011 RMB 279,996 396,661
						676,657 (279,996)
						396,661

– 109 –

ACCOUNTANT’S REPORT OF THE TARGET GROUP

APPENDIX II

29. Capital and reserves

(a) Movements in components of equity

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

The Target Company

Note At 1 January 2010 Issue of share (b) At 31 December 2010 and 31 March 2011 (b) Share capital The Target Company Authorised: Ordinary share of USD 1 each Ordinary share, issued and fully paid: At 1 January 2010 Issue of share At 31 December 2010 and 31 March 2011	Share capital Total equity RMB RMB – – 1,986 1,986 1,986 1,986 2010 No. of share RMB 50,000 331,000 – – 300 1,986 300 1,986	Total equity RMB – 1,986
		1,986
		– 1,986
		1,986

– 110 –

ACCOUNTANT’S REPORT OF THE TARGET GROUP

APPENDIX II

As at 18 August 2010, an initial share capital was contributed by equity holder, for cash of USD300 (equivalent to approximately of RMB 1,986) to provide initial working capital.

(c) Nature and purpose of reserves

(i) Capital reserve

The capital reserve of the Target Group represents the differences between the consideration and the nominal value of the shares of the Project Company (after eliminating intra-group investments and share capital) acquired by the company pursuant to the Reorganisation.

(ii) Statutory reserve

The PRC laws and regulations require companies registered in the PRC to provide for certain statutory reserves, which are to be appropriated from the net profit (after offsetting accumulated losses from prior years) as reported in their respective statutory financial statements, before profit distribution to equity holder. All statutory reserves are created for specific purposes. PRC companies are in Target Group required to appropriate 10% of statutory net profits to statutory surplus reserves, upon distribution of its post-tax profits of the current year. They discontinue the contribution when the aggregate sum of the statutory reserve is more than 50% of its registered capital. The statutory reserves shall only be used to make up losses of the companies, to expand the companies’ production operations, or to increase the capital of the companies. In addition, a company may make further contribution to the discretional statutory reserve using its post-tax profits in accordance with resolutions of the board of directors.

– 111 –

ACCOUNTANT’S REPORT OF THE TARGET GROUP

APPENDIX II

30. Operating lease commitments

The Target Group

At 31 December 2008, 31 December 2009, 31 December 2010 and 31 March 2011, the total future minimum lease payments under non-cancellable operating leases are payable by the Target Group as follow:

As Lessee Land and building Within one year In the second to fifth years inclusive	As 2008 RMB 1,600,000 729,000 2,329,000	at 31 December 2009 2010 RMB RMB 1,465,607 1,738,833 1,300,520 4,466,997 2,766,127 6,205,830	As at 31 March 2011 RMB 3,336,968 5,177,170 8,514,138

31. Banking facilities

The Target Group

The banking facilities of certain subsidiaries in Target Group were secured by guarantee from one of the directors and independent third party. Such banking facilities amounted to RMB NIL, RMB1,400,000, RMB16,950,000 and RMB37,500,000 as at 31 December 2008, 2009, 2010 and 31 March 2011 respectively. The facilities were fully utilized at each of the end of the reporting period.

32. Financial guarantees and contingent liabilities

The Target Group

The Target Group, through the Project Company, has entered into a contract with bank in the PRC to guarantee a loan to a independent third party. Under which, the maximum contingent liabilities, that the Project Company would be liable to HK$6 million (RMB5 million). However, the borrower has repaid the guaranteed loan in March 2011.

– 112 –

ACCOUNTANT’S REPORT OF THE TARGET GROUP

APPENDIX II

As at 31 March 2011, except for those disclosed above, the board of directors was not aware of any possible material contingent liabilities.

33. Related party transactions

The Target Group

As at 31 December 2008, 31 December 2009, 31 December 2010 and 31 March 2011, the Target Group had the following significant non-trade balances with related parties:

					As at
		As at 31 December			31 March
		2008	2009	2010	2011
	Note	RMB	RMB	RMB	RMB
Financial
arrangements:
Amounts due from
shareholders	(i)	–	4,717,073	10,155,204	11,254,002
Amounts due to
shareholders	(i)	12,064,294	3,965,000	17,633,820	14,282,948

(i) Amounts due from/to shareholders are unsecured, interest-free and have no fixed terms of repayment, which are cash advances in nature.

34. Parent and ultimate holding company

The directors consider the parent company, Lucky Start Holding Limited, a company incorporated in British Virgin Islands (the “BVI”), to be the ultimate holding company.

35. Event after the reporting period

The Target Group, through the Project Company, has entered into a contract with bank in the PRC to guarantee a loan to a non-group company in January 2011. Under which, the maximum contingent liabilities, that the Project Company would take up is about HK$15.5 millions (RMB13 millions). However, the Target Group has ceased to be the guarantor of the aforesaid non-group company in June 2011.

– 113 –

APPENDIX II

ACCOUNTANT’S REPORT OF THE TARGET GROUP

As a part of the reorganization, the Project Company underwent the process to buy back the 46.8% interests in one of its subsidiaries, Suzhou Baina Renewable Resources Yancheng Company Limited, from shareholder with non-controlling interests. After the reorganization, Suzhou Baina Renewable Resources Yancheng Company Limited becomes a wholly owned subsidiary of the Project Company. The buyback process has been completed in June 2011.

The Target Company has invested in a new wholly owned subsidiary named Huaian Bai Run Renewable Resources Company Limited in May 2011.

III. SUBSEQUENT FINANCIAL STATEMENTS

No audited financial statements of the Target Group have been prepared in respect of any period subsequent to 31 March 2011.

Yours faithfully,

Cheng & Cheng Limited

Certified Public Accountants (Practising) Cheng Hong Cheung Practising Certificate Number P01802 10/F., Allied Kajima Building, 138 Gloucester Road, Wanchai, Hong Kong

– 114 –

APPENDIX III MANAGEMENT DISCUSSION AND ANALYSIS ON THE GROUP AND THE TARGET GROUP

MANAGEMENT DISCUSSION AND ANALYSIS OF THE GROUP

Set out below are the management discussion and analysis on the Group as extracted from the 2009, 2010 and 2011 annual reports of the Company (the “ Management Discussion and Analysis ”).

Terms used below shall have the same meanings as those defined in the Management Discussion and Analysis. Furthermore, all pages/sections/appendices mentioned in the below text are referred to those of the Management Discussion and Analysis:

For the year ended 31 March 2011

Business review and prospects

Consolidated turnover of the Group for the year ended 31 March 2011 was HK$58,818,000, representing a 14.8% decline as compared with HK$69,042,000 of the previous year. Operating loss of the Group was HK$3,444,000, which included gain of HK$49,800,000 on disposal of land and buildings in the Suzhou subsidiary in Mainland China and loss of HK$7,001,000 on disposal of sustained loss-incurring subsidiaries in the Group. Excluding the results of the above disposals, the Group experienced a loss of HK$46,243,000 as compared to HK$39,963,000 of the previous year.

As reflected in the trends and results of the current year, operating loss has arisen from the unfavourable operating environment, in particular the environment for the laminate division. Decrease in market demand and increase in raw material costs overall during the year imposed great pressure on the Group’s operations. The Group has continued to implement a number of measures to minimize operating costs while maintaining an adequate production level, and at the same time, looking for further business opportunities to diversify the business of the Group, streamline the business and dispose of non-profitable and sustained loss-incurring operating units.

Trading and manufacturing of printed circuit boards (“ PCBs ”)

For the year ended 31 March 2011, the PCB division recorded a turnover of HK$49,860,000 (2010: HK$44,844,000), which accounted for approximately 85% of the Group’s total turnover and represented an increase of 11% as compared to the previous year. Increase in turnover was attributable to increase in market demand in the PCB market.

The Group had placed greater focus on the PCB business in the year under review. Although the PCB market had not been picking up generally, the Group still achieved an increase in turnover. With attendance at trade shows and launch of more aggressive marketing and promotion campaigns, new customers have been attracted to the Group. With the increase in turnover, the profitability of the Group’s PCB business is expected to be improved.

– 115 –

APPENDIX III MANAGEMENT DISCUSSION AND ANALYSIS ON THE GROUP AND THE TARGET GROUP

Trading and manufacturing of industrial laminates

During the year under review, the industrial laminate business achieved a turnover of HK$4,692,000 (2010: HK$21,914,000), representing approximately 8% of the Group’s total turnover and a decrease of 79% as compared to the previous year.

The industrial laminate division continued to sustain losses due to strong competition and weak market demand. Sales orders for the year persistently decreased.

The industrial laminate operation in Suzhou, Mainland China during the year under review remained idle and the management disposed of the Suzhou land and factory in March 2011. Sale proceeds were received subsequently in May 2011 and used for repayment of directors’ loans, bank loans and other borrowings.

Connected transaction

On 28 June 2010, the Group entered into the following agreements and transactions: (1) sale and purchase agreement (as supplemented by the supplemental agreement) in relation to the disposal of substantial loss-incurring subsidiaries manufacturing and trading in industrial laminates and copper foils, with a company named Nature Ample Limited which is wholly owned by one of the Company’s directors, namely Mr. Lau Chung Yim, at a consideration of HK$28 million; (2) Master Supply Agreement with the above-mentioned disposed group (the “ Disposed Group ”) in relation to the Group’s purchase of industrial laminates from the Disposed Group for a term commencing from the completion of the disposal of the Disposed Group (the “ Disposal ”) up to 31 March 2012 (with the maximum purchase amounts of HK$4,000,000 and HK$15,000,000 for the period ended 31 March 2011 and for the year ending 31 March 2012, respectively) so as to ensure that the Group has a steady supply of laminates for trading in the market; and (3) continued provision of financial assistance by the Company to the Disposed Group by way of loans advances up to a maximum amount of HK$25,000,000 and by way of corporate guarantee executed on 11 February 2004 in favour of Bangkok Bank Public Company Limited in respect of borrowing by Bangkok Industrial Laminate Limited (a member of the Disposed Group) up to a maximum principal amount of Baht 70,000,000 after the completion of the Disposal. The Disposal incurred a loss of HK$7 million for the Group.

– 116 –

APPENDIX III

MANAGEMENT DISCUSSION AND ANALYSIS ON THE GROUP AND THE TARGET GROUP

Investment in electric car battery business

On 16 July 2010, the Company entered into an agreement pursuant to which the Company conditionally agreed to acquire 9.9% of the issued share capital of Swift Profit International Limited (“ Swift Profit ”) at a consideration of HK$170,000,000. Swift Profit is exclusively licensed to apply the patent and the related technology for the manufacturing of electric car battery. Completion of the acquisition took place on 29 December 2010 and HK$99 million of the consideration was settled in convertible notes and the balance in cash.

Under the business model of Swift Profit, it will receive a royalty fee of 12% from Zhongsheng Dongli New Energy Investment Limited (“ Zhongsheng ”) on sale of multielement polymer battery to the market without bearing any production cost or capital expenditure. Zhongsheng has already secured orders from automotive manufacturers for 200 electric vehicles. Based on the secured orders from automotive manufacturers, it is estimated that 3,000 sets of the multi-element polymer battery will be sold to these automotive manufacturers in 2012. The electric car battery business has generated revenue of approximately HK$21 million to Swift Profit in the first quarter of 2011. The Board is of the view that the electric car battery business will be developed into a sustainable income source for the Group.

Proposed recycling business acquisition

On 19 November 2010, the Company entered into a framework agreement with four parties in relation to a possible acquisition of 80% of the issued share capital of Ideal Market Holdings Limited. Ideal Market Holdings Limited indirectly holds Suzhou Baina Renewable Resources Co., Ltd (“ Suzhou Baina ”) which is principally engaged in the recycling business of waste paper. As announced on 9 May 2011, the Company entered into a Sale and Purchase Agreement (as supplemented by the Supplemental Agreement), pursuant to which the Company, as the purchaser, conditionally agreed to acquire the Sale Shares and the Sale Loans at the consideration of HK$850 million. The Sale Shares represent 80% of the issued share capital of Ideal Market Holdings Limited. The Company has paid HK$270,000,000 in total as purchase deposit and the balance of the Consideration is expected to be settled by a combination of issue of the Promissory Notes and issue of the Convertible Notes. The management expects to complete the Acquisition on or before 31 October 2011 and the recycling business will bring another source of main income to the Group in the future.

– 117 –

APPENDIX III

MANAGEMENT DISCUSSION AND ANALYSIS ON THE GROUP AND THE TARGET GROUP

Outlook and future plans

The continuing unfavourable operating environment has exerted great pressure on the operation of industrial businesses. Recovery of the economy is not expected in a short period of time. The Group has experienced tight profit margins in the year under review in both the laminate and PCB divisions and is of the view that the unfavourable operating environment will continue for a period of time.

Unfavourable operating results in turn exerted significant pressure on the Group’s cashflow position. In the coming years, the Group will implement a series of measures to improve the situation. Such measures will include a more conservative approach in the procurement of resources to reduce operating costs.

Events after the reporting period

On 31 January 2011, the Board announced that the Company proposed to effect the capital reorganization, which involved (i) the consolidation of every sixteen (16) shares of HK$0.10 each in the issued share capital of the Company into one (1) issued consolidated shares of HK$1.60 in the issued share capital of the Company; (ii) the reduction of the issued share capital of the Company through a cancellation of the paid-up capital of the Company to the extent of HK$1.599 on each of the issued consolidated share so that the nominal value of each issued consolidated share will be reduced from HK$1.60 to HK$0.001; and (iii) the subdivision of each authorized but unissued share into 100 new share of HK$0.001 each. Subject to the capital reorganization becoming effective, the Company has raised approximately HK$206.08 million before expenses, by issuing 3,030,531,634 right shares to the qualifying shareholders by way of rights issue at the subscription price of HK$0.068 per rights share on the basis of twenty six (26) rights shares for every one (1) new share held on 30 March 2011. The rights issue became unconditional on 18 April 2011.

On 9 May 2011, the Company entered into the Sale and Purchase Agreement (as supplemented by the Supplemental Agreement) with the vendors (Lucky Start Holdings Limited, All Prosper Group Limited, Triumph Return Holdings Limited and Jia Sheng Holdings Limited), pursuant to which the Company, as the purchaser, has conditionally agreed to acquire, and the Vendors have conditionally agreed to sell, the Sale Shares and the Sale Loans at the Consideration of HK$850 million. The Sale Shares represent 80% of the issued share capital of the Ideal Market Holdings Limited. Ideal Market Holdings Limited indirectly holds Suzhou Baina which is principally engaged in the recycling business of waste paper. The Company has paid a sum of HK$270,000,000 as purchase deposit and the Consideration is expected to be settled in the combination of cash, the issue of the Promissory Notes and the issue of the Convertible Notes.

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APPENDIX III MANAGEMENT DISCUSSION AND ANALYSIS ON THE GROUP AND THE TARGET GROUP

In order to finance the proposed Acquisition of Ideal Market Holdings Limited and comply with Rule 13.64 of the Rules Governing the Listing of Securities on the Stock Exchange (the “ Listing Rules ”), the Board announced on 27 May 2011 that the Company propose to implement the share consolidation on the basis that every ten (10) issued and unissued shares of HK$0.001 each in the share capital of the Company will be consolidated into one (1) consolidated share of HK$0.01 each in the issued share capital of the Company. The share consolidation was effected on 30 June 2011.

Liquidity and financial resources

It is the Group’s policy to rely on internally generated funds, bank borrowings and equity financing to finance its operations and proposed acquisition.

As at 31 March 2011, the Group’s total cash and bank balances and pledged fixed deposits amounted to HK$3,266,000 (2010: HK$17,659,000). Total bank loans and other borrowings decreased from HK$98,376,000 as at 31 March 2010 to HK$55,829,000 as at 31 March 2011. The Group’s gearing ratio, which is net debt divided by total shareholders’ equity plus net debt, decreased from 0.75 as at 31 March 2010 to 0.25 as at 31 March 2011. Net debt included bank and other borrowings, trade, bills and other payables and accruals, less cash and bank balances. As at 31 March 2011, the Group had a current ratio of 1.77 (2010: 0.74) and net current assets of HK$74,972,000 (2010: net current liabilities of HK$33,571,000).

The overall financial position of the Group as at 31 March 2011 was favourable as compared with the previous year. The management had used the sales proceeds from the disposal of land and buildings in its Suzhou subsidiary for repayment of bank loans and other borrowings to improve the gearing ratio of the Group.

The Group’s borrowings and cash and bank balances are primarily denominated in Hong Kong dollars, Baht and RMB. Given the continuous revaluation of Baht and RMB, the Group is expected to experience pressure on its operating costs.

Pledge of assets

As at 31 March 2011, the Group’s assets pledged as security for banking facilities amounted to approximately HK$11,409,000 (2010: HK$81,324,000).

Contingent liabilities

As at 31 March 2011, the Group had no material contingent liabilities.

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APPENDIX III MANAGEMENT DISCUSSION AND ANALYSIS ON THE GROUP AND THE TARGET GROUP

Employment, training and remuneration policy

During the year under review, the Group continued to reduce the size of its workforce and strengthen staff quality through staff development and training programmes. The Group had approximately 231 employees as at 31 March 2011 (2010: 431). Remunerations are commensurate with the nature of the job, experience and market conditions.

For the year ended 31 March 2010

Business review and prospects

Consolidated turnover of the Group for the year ended 31 March 2010 was HK$69,042,000, representing a 46.6% decline as compared with HK$129,394,000 of the previous year. Operating loss of the Group decreased from HK$82,405,000 to HK$39,963,000 in which HK$2,090,000 incurred from the impairment loss on property, plant and equipment (2009: HK$52,438,000).

As reflected in the trends and results of the previous year, operating loss arose from the unfavourable operating environment for the whole Group, in particular for the laminate division. Decrease in market demand and increase in raw material costs during the year imposed great pressure on the Group’s operations. The Group has introduced a number of measures to minimize operating costs while maintaining an adequate production level, and at the same time, looking for further business opportunities to diversify the business of the Group.

Industrial laminate division

During the year under review, the industrial laminate business achieved a turnover of HK$21,914,000 (2009: HK$55,031,000), representing approximately 32% of the Group’s total turnover and a decrease of 60% as compared with the turnover of the previous year.

The industrial laminate division continued to sustain loss due to the substantial impairment of plant and machinery and the unfavourable economic conditions arising from the recent global financial tsunami. Sales orders for the year significantly decreased owing to the decrease in overall market demand and the careful selection of sales orders to minimize the possibility of doubtful debts.

The industrial laminate operation in Suzhou, Mainland China in the year under review has remained idle as the management considers it unprofitable to re-start the production plant at this point in time. Maintenance cost incurred in the Suzhou plant has been reduced to the minimum. The management team is actively looking for opportunities to dispose of the Suzhou section of the Group.

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APPENDIX III MANAGEMENT DISCUSSION AND ANALYSIS ON THE GROUP AND THE TARGET GROUP

The laminate sector is considered to be in a downturn because of huge competition and higher material cost. The Group will focus on supply to the printed circuit board division rather than looking for outsider customers.

Printed circuit board (PCB) division

For the year ended 31 March 2010, the PCB division recorded a turnover of HK$44,844,000 (2009: HK$72,899,000), which accounted for approximately 65% of the Group’s total turnover and represented a decrease of 38% as compared with the turnover of the previous year. Decrease in turnover was attributable to decrease in market demand in the PCB market.

This is a prevalent phenomenon in the global economy since the financial tsunami. Nevertheless, business remained steady and the Group considers the PCB business, together with the development of car battery business, to be its main focus in the coming years. The Group will put more emphasis on exploring more customers, in particular those overseas, in order to maintain the business level.

The plant in Zhuhai, Mainland China has not yet commenced operation as the management considers it unprofitable to put the plant into operation at this point in time given the limited financial resources available to the Group.

Copper foil division

For the year ended 31 March 2010, the copper foil plant in Thailand recorded an operating loss of approximately HK$11,681,000 due to the sustained high prices of copper and other production materials. As copper prices have been unsteadily fluctuating in the current year, the management has been very cautious in the procurement of copper to minimize the adverse effect.

Proposed disposal of loss-making subsidiaries

In view of continuing losses from certain manufacturing subsidiaries, particularly the laminate production factory in Zhongshan and copper foil production subsidiary in Thailand, the Board has made the decision, after careful consideration, to dispose of these subsidiaries in order to improve the Group’s overall performance.

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APPENDIX III MANAGEMENT DISCUSSION AND ANALYSIS ON THE GROUP AND THE TARGET GROUP

On 28 June 2010, a wholly owned subsidiary of the Company entered into a sale and purchase agreement with a company, which is wholly owned by one of the Directors of the Company (the “ Purchaser ”), pursuant to which the Purchaser agreed to acquire and the Company agreed to sell certain subsidiaries of the Group at a consideration of HK$28 million. After the disposal, however, the disposed subsidiaries will continue to be the Group’s manufacturing suppliers under a master supply agreement between the Company and the disposed subsidiaries for a term up to 31 March 2012.

The directors consider the disposal to be in the best interest of the Group as a whole as the disposed subsidiaries have been making huge losses for a number of years.

Proposed acquisition of an electric car battery related business

As noted in a series of announcements from December 2009, the Group is entering into a number of memoranda of understanding regarding a possible very substantial acquisition of an electric car battery related business (the “ Target Company ”).

On 15 April 2010, the Company entered into an agreement with the holding company (the “ Battery Business Vendor ”) of the Target Company, the Target Company being a company licensed to apply the patent and the technology in manufacturing electric car battery, in respect of a proposed acquisition, which was subsequently terminated as the Stock Exchange considered the transaction constituted a reverse takeover transaction under the Rules Governing the Listing of Securities on the Stock Exchange (the “ Listing Rules ”).

On 16 July 2010, the Company entered into an agreement with the Battery Business Vendor, pursuant to which the Company conditionally agreed to acquire from the Battery Business Vendor 9.9% of the issued share capital of the Target Company at a consideration of HK$170,000,000, to be paid to the Battery Business Vendor partly by cash and partly by the Company’s issue of convertible notes. The Target Company is exclusively licensed to apply the patent and the related technology for the manufacturing of electric cars battery.

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APPENDIX III

MANAGEMENT DISCUSSION AND ANALYSIS ON THE GROUP AND THE TARGET GROUP

Outlook and the future plans

The continuing unfavourable operating environment arising from the recent financial tsunami has exerted great pressure on the operation of industrial businesses. Recovery of the economy is not expected in a short period of time. The Group has experienced a tight profit margin in the past year in the laminate division and considers the unfavourable operating environment will continue for a period of time. Unfavourable operating results in turn exerted significant pressure on the Group’s cashflow position. In the coming years, the Group will implement a series of measures to improve the situation. Such measures include a more conservative approach in the procurement of resources to reduce operating costs and the disposal of certain non-productive facilities, properties and assets.

The Group is optimistic about the abovementioned proposed acquisition and disposal as they will bring business opportunities with attractive profit margins to the Group.

Capital structure, liquidity and financial resources

It is the Group’s policy to rely on internally generated funds and bank borrowings to finance its operations.

As at 31 March 2010, the Group’s total cash and bank balances and pledged fixed deposits amounted to HK$17,659,000 (2009: HK$20,276,000). Total bank loans and other borrowings increased from HK$81,622,000 as at 31 March 2009 to HK$98,376,000 as at 31 March 2010. The Group’s gearing ratio, which is net debt divided by total shareholders’ equity plus net debt, increased from 0.82 as at 31 March 2009 to 0.75 as at 31 March 2010. Net debt included bank and other borrowings, obligations under finance leases, trade, bills and other payables and accruals, less cash and bank balances. As at 31 March 2010, the Group had a current ratio of 0.79 (2009: 0.59) and net current liabilities of HK$24,576,000 (2009: HK$47,061,000).

The overall financial position of the Group as at 31 March 2010 was less favourable as compared with that of the last year. Although concerted efforts have been made to reduce the bank borrowing level, the management considers the current ratio and gearing ratio to be unsatisfactory and will put in further efforts to rectify, through certain financing activities, the net current liabilities situation arising from the mismatch of short-term and long-term borrowings in previous years. Furthermore, the management has already implemented plans to dispose of certain non-operating properties and assets to provide additional working capital for the Group’s operations.

The Group’s borrowings and cash and bank balances are primarily denominated in Hong Kong dollars, Thai Baht and Renminbi (“ RMB ”). Given the continuous revaluation of the Thai Baht and RMB, the Group is expected to experience pressure on its operating costs.

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APPENDIX III

MANAGEMENT DISCUSSION AND ANALYSIS ON THE GROUP AND THE TARGET GROUP

Financial instruments

The Group’s major financial instruments include held for trading investments, trade and bills receivables, other receivables and deposits paid, pledged fixed deposits, bank balances and cash, trade and bills payables, other payables and accruals, bank and other borrowings and obligations under finance leases. The risks associated with these financial instruments include market risk (currency risk and interest rate risk), credit risk and liquidity risk. The management manages and monitors these exposures to ensure appropriate measures are implemented on a timely and effective manner.

Currency risk

Several subsidiaries have foreign currency sales and purchases, which expose the Group to foreign currency risk. Approximately 52% (2009: 49%) of the Group’s sales are denominated in currencies other than the functional currencies of the group entity making the sales, whilst almost 87% (2009: 73%) of costs are denominated in the Group’s functional currencies. The Group also has bank balances, trade receivables, other receivables and deposits paid, trade payables, other payables and accruals and bank and other borrowings denominated in foreign currency, which is United States Dollars (“ US$ ”).

Fair value and cash flow interest rate risk

The Group has significant pledged fixed deposits, bank balances and bank and other borrowings which bear interest rate risk. Pledged fixed deposits, bank balances and bank and other borrowings at variable rates expose the Group to cash flow interest-rate risk. Bank and other borrowings at fixed rates expose the Group to fair value interest-rate risk. During the year, the Group has not hedged its cash flow and fair value interest rate risk. At the end of the reporting period, assuming the variable rate pledged fixed deposits, bank balances and bank and other borrowings had been outstanding for the whole year, if interest rates had increased by 100 basis points (2009: 25 to 200 basis points) and all other variables held constant, there was an increase in post-tax loss by approximately HK$765,000 (2009: HK$419,000). If interest rates had decreased by 100 basis points (2009: 25 to 200 basis points), there would be an equal but opposite impact on the loss for the year. A 100 basis point increase or decrease represents management’s assessment of the reasonably possible change in interest rates. As a result of the stabilization of financial market, the management adjusted the sensitivity rate from 25 to 200 basis points to 100 basis points in the current year for the purpose of analyzing interest rate risk.

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APPENDIX III

MANAGEMENT DISCUSSION AND ANALYSIS ON THE GROUP AND THE TARGET GROUP

Credit risk

The carrying amount of the trade and other receivables included in the consolidated statement of financial position represents the Group’s maximum exposure to credit risk. The Group manages the credit risk by setting up a team responsible for the determination of credit terms, credit approvals and other monitoring procedures to ensure that followup action is taken to recover overdue debt. In addition, it is the Group’s policy to review regularly the recoverable amount of trade debtors to ensure that adequate impairment provisions are made against the irrecoverable amounts. Trade receivables consist of a large number of customers, spread across diverse industries and geographical areas.

As at 31 March 2010, the Group’s concentration of credit risk by geographical locations is mainly in Hong Kong, which accounted for 75% (2009: 85%) of the total trade and bills receivables. As at 31 March 2010, the Group has certain concentration of credit risk as 7% (2009: 8%) and 44% (2009: 20%) of the total trade and bills receivables were due from the Group’s largest and the five largest customers respectively.

As at 31 March 2010, the Group has significant concentration of credit risk arising from deposit paid for the acquisition of investment from an independent third party. However, the directors of the Company consider the credit risk is under control since the management exercise due care in entering in new business opportunities by carrying out due diligence procedures on the target investment. The credit risk on liquid funds is limited because the majority of the counterparties are banks with high credit ratings assigned by international credit-rating agencies.

Liquidity risk

The Group is exposed to liquidity risk as at 31 March 2010 as the Group had net current liabilities of approximately HK$24,576,000 (2009: HK$47,061,000). The Group’s policy is to regularly monitor current and expected liquidity requirements to ensure that it meets the liquidity requirements in the short and long term. The Group’s objective is to maintain a balance between continuity of funding and flexibility through the use of an adequate amount of committed credit facilities. Management aims to maintain flexibility in funding by keeping credit lines available.

Pledged fixed deposits and bank balances and cash

Pledged fixed deposits/bank balances comprise cash held by the Group and short-term bank deposits with an original maturity of six months or less (2009: three months or less). The bank balances and deposits carry interest at market rate ranging from 0.03% to 0.14% (2009: 3.52% to 4.35%) per annum.

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APPENDIX III MANAGEMENT DISCUSSION AND ANALYSIS ON THE GROUP AND THE TARGET GROUP

Treasury policy

For the year ended 31 March 2010, the Group had no formal treasury policy.

Pledge of assets

As at 31 March 2010, the Group’s assets pledged as security for banking facilities amounted to approximately HK$81,324,000 (2009: HK$93,401,000).

Contingent liabilities

As at 31 March 2010, the Group had no material contingent liabilities.

Employment, training and remuneration policy

During the year under review, the Group continued to reduce the size of its workforce and strengthen staff quality through staff development and training programmes. The Group had approximately 431 employees as at 31 March 2010 (2009: 519). Remunerations are commensurate with the nature of job, experience and market conditions. Eligible employees are offered discretionary bonuses and share options depending on the Group’s performance and individual effort. The principle is reward for performance.

For the year ended 31 March 2009

Business review and prospects

Consolidated turnover of the Group for the year ended 31 March 2009 was HK$129,394,000, representing a 57% decline as compared with HK$302,813,000 of the previous year. Operating loss of the Group decreased from HK$91,565,000 to HK$82,405,000, in which HK$52 million loss incurred represented an exceptional loss from impairment of certain plant and machinery (2008: HK$47 million).

The operating loss arose mainly from the unfavourable operating environment for the whole Group, in particular for the laminate division. Decrease in market demand and increase in raw material costs arising from the global economic downturn during the year impose great pressure on the Group’s operations. The Group has introduced a number of measures to minimize operating costs while maintaining an adequate production level.

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APPENDIX III

MANAGEMENT DISCUSSION AND ANALYSIS ON THE GROUP AND THE TARGET GROUP

Industrial laminate division

During the year under review, the industrial laminate business achieved a turnover of HK$55,031,000 (2008: HK$198,273,000), representing approximately 43% of the Group’s total turnover and a decrease of 72% as compared with the turnover of the previous year.

The industrial laminate division continued to sustain loss due to the substantial impairment of plant and machinery and the unfavourable economic conditions arising from the financial tsunami. Sales orders for the year significantly decreased owing to the decrease in overall market demand and the careful selection of sales orders to minimize the possibility of doubtful debts.

The industrial laminate operation in Suzhou, Mainland China in the year under review has remained idle as the management considers it unprofitable to re-start the production plant at this point in time. Maintenance cost incurred in the Suzhou plant has been reduced to the minimum. The management is seriously considering the possibility of realisation of the Suzhou plant to reduce the Group’s burden.

The Group has introduced a number of cost saving measures to deal with the unfavourable economic conditions. These measures include the reduction of labour costs by streamlining the production headcount, more efficient use of available resources, and careful procurement of raw materials. In addition, the Group will focus its marketing efforts on customers with prompt repayment history and shorten credit terms to improve cash flow. The Group will also focus greater attention on the overseas markets, the market demand of which is likely to be more promising.

Printed circuit board (PCB) division

For the year ended 31 March 2009, the PCB division recorded a turnover of HK$72,899,000 (2008: HK$101,854,000), which accounted for approximately 56% of the Group’s total turnover and represented a decrease of 28% as compared with the turnover of the previous year. Decrease in turnover was attributable to decrease in market demand in the PCB market. This is a prevalent phenomenon in the global economy since the financial tsunami.

Nevertheless, the business remained steady and the Group considers the PCB business to be its main focus in the coming years. The Group will put more emphasis on exploring more customers, in particular those overseas, in order to maintain the business level.

The plant in Zhuhai, Mainland China has not yet commenced operation as the management considers it unprofitable to put the plant into operation at this point in time given the limited financial resources available to the Group.

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APPENDIX III

MANAGEMENT DISCUSSION AND ANALYSIS ON THE GROUP AND THE TARGET GROUP

Copper foil division

For the year ended 31 March 2009, the copper foil plant in Thailand recorded an operating loss of approximately HK$20,320,000 due to the sustained high prices of copper and other production materials.

As copper prices have been unsteadily fluctuating in the current year, the management has been very cautious in the procurement of copper to minimize the adverse effect. On the other hand, an impairment of approximately HK$10 million was made on certain idle equipment. These assets are expected not to be used in the coming years having considered the current market demand.

Outlook and the future plans

The continuing unfavourable operating environment arising from the recent financial tsunami has exerted great pressure on the operation of industrial businesses. Recovery of the economy is expected not in a short period of time. The Group has experienced tight profit margin in the past year in the laminate division and considered unfavourable operating environment will continue for a certain period of time.

The unfavourable operating results in turn exerted significant pressure on the Group’s cashflow position. In the coming years, the Group will implement a series of measures to improve the situation. Such measures include a more conservative approach in the procurement of resources to reduce operating costs and the disposal of certain nonproduction facilities, properties and assets.

Capital structure, liquidity and financial resources

It is the Group’s policy to rely on internally generated funds and bank borrowings to finance its operations. As at 31 March 2009, the Group’s total cash and bank balances and pledged fixed deposits amounted to HK$20,276,000 (2008: HK$15,116,000). The total interest-bearing bank loans and other borrowings decreased from HK$121,923,000 as at 31 March 2008 to HK$81,622,000 as at 31 March 2009. The Group’s gearing ratio, which is net debt divided by total shareholders’ equity plus net debt, increased from 0.64 as at 31 March 2008 to 0.82 as at 31 March 2009. Net debt included bank and other borrowings, trade, bills and other payables and accruals, less cash and bank balances. As at 31 March 2009, the Group had a current ratio of 0.59 (2008: 0.77) and net current liabilities of HK$47,061,000 (2008: HK$45,455,000).

The overall financial position of the Group as at 31 March 2009 is less favourable as compared with that of the last year. Although concerted efforts have been made to reduce the bank borrowing level, the management considers the current ratio and gearing ratio to be unsatisfactory and will put in further efforts to rectify, through certain financing activities, the net current liability situation arising from the mismatch of short-term and long-term borrowings in previous years. Furthermore, the management has already implemented plans to dispose of certain non-operating properties and assets to provide additional working capital for the Group’s operations.

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APPENDIX III MANAGEMENT DISCUSSION AND ANALYSIS ON THE GROUP AND THE TARGET GROUP

The Group’s borrowings and cash and bank balances are primarily denominated in Hong Kong dollars, Thai Baht and RMB. Given the continuous revaluation of the Thai Baht and RMB, the Group is expected to experience pressure on its operating costs.

Financial instruments

The Group’s major financial instruments comprise held for trading investments, trade receivables, other receivables and deposits paid, pledged fixed deposits, cash and bank balances, trade and bills payables, other payables and accruals, bank and other borrowings and obligations under finance leases. The risks associated with these financial instruments and the policies on how to mitigate these risks are set out below. The management manages and monitors these exposures to ensure appropriate measures are implemented on a timely and effective manner.

Foreign currency risk

Certain bank balances, receivables and payables of the Group are denominated in foreign currencies. The Group currently does not have a foreign currency hedging policy. However, the management monitors foreign exchange exposure and will consider hedging significant foreign currency exposure should the need arise.

Interest rate risk

As the Group has no significant interest-bearing assets, the Group’s income and operating cash flows are substantially independent of changes in market interest rates. The Group’s interest rate risk mainly arises from bank and other borrowings. The Group has not used interest rate swaps to hedge its exposure to interest rate risk.

Credit risk

The carrying amount of the trade and other receivables included in the consolidated balance sheet represents the Group’s maximum exposure to credit risk. The Group manages the credit risk by setting up a team responsible for the determination of credit terms, credit approvals and other monitoring procedures to ensure that follow-up action is taken to recover overdue debt. In addition, it is the Group’s policy to review regularly the recoverable amount of trade debtors to ensure that adequate impairment provisions are made against the irrecoverable amounts. The Group does not have any other significant concentration of credit risk. Trade receivables consist of a large number of customers, spread across diverse industries. The credit risk on liquid funds is limited because the majority of the counterparties are banks with high credit ratings assigned by international credit-rating agencies.

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APPENDIX III

MANAGEMENT DISCUSSION AND ANALYSIS ON THE GROUP AND THE TARGET GROUP

Liquidity risk

The Group is exposed to liquidity risk as at 31 March 2009 as the Group had net current liabilities of approximately HK$47,061,000 as at 31 March 2009. The Group’s policy is to regularly monitor current and expected liquidity requirements to ensure that it meets the liquidity requirements in the short and long term.

The Group’s objective is to maintain a balance between continuity of funding and flexibility through the use of an adequate amount of committed credit facilities. Management aims to maintain flexibility in funding by keeping credit lines available.

Pledged fixed deposits and bank balances and cash

Pledged fixed deposits/bank balances comprise short-term bank deposits with maturity of less than three months of approximately HK$18,641,000 (2008: HK$12,579,000) at prevailing interest rate or at fixed interest rates ranging from 3.52% to 4.35% (2008: 5.42% to 6.05%) per annum.

Treasury policy

For the year ended 31 March 2009, the Group had no formal treasury policy.

Pledge of assets

As at 31 March 2009, the Group’s assets pledged as security for banking facilities amounted to approximately HK$93,401,000 (2008: HK$87,661,000).

Contingent liabilities

As at 31 March 2009, the Group had no material contingent liabilities.

Employment, trading and remuneration policy

During the year under review, the Group continued to reduce the size of its workforce and strengthen staff quality through staff development and training programmes. The Group had approximately 519 employees as at 31 March 2009 (2008: 915). Remunerations are commensurate with the nature of job, experience and market conditions. Eligible employees are offered discretionary bonuses and share options depending on the Group’s performance and individual effort. The principle is reward for performance.

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APPENDIX III MANAGEMENT DISCUSSION AND ANALYSIS ON THE GROUP AND THE TARGET GROUP

MANAGEMENT DISCUSSION AND ANALYSIS OF THE TARGET GROUP

Set out below are the management discussion and analysis on the Target Group for the three years ended 31 December 2008, 2009 and 2010 and the three months ended 31 March 2010 and 2011 (the “ Reporting Period ”).

Business review

The Target Company was incorporated in the British Virgin Islands with limited liability on 18 August 2010 and is principally engaged in investment holding. As at the Latest Practicable Date, the Target Company is indirectly interested in 100% of the equity interest in the WFOE and the Project Company is wholly-owned by the WFOE. Baina Yancheng (after the completion of the Reorganization in June 2011), Bai Run and Guoyuan are wholly-owned subsidiaries of the Project Company.

As confirmed by the management of the Target Group, Bai Run was set up as the purchase agent of the Project Companies and has commenced its business since its establishment. Bai Run is in the initial stage of its operation, and all of its sales were made among the Project Companies as intergroup transactions.

Turnover

For the three years ended 31 December 2008, 2009 and 2010 and the three months ended 31 March 2010 and 2011, the Target Group recorded a turnover of approximately RMB18.97 million, RMB237.06 million, RMB296.02 million, RMB61.18 million and RMB92.11 million respectively. The substantial increase in the turnover in the Reporting Period was mainly attributable to the development of the business, such as opening new collection station and attracting sizable customers. Besides, another factor for the significant increase in the turnover for the three months ended 31 March 2011 compared to the corresponding period in 2010, is the rise in the waste paper price.

Cost of sales

The cost of sales of the Target Group for the three years ended 31 December 2008, 2009 and 2010 and the three months ended 31 March 2010 and 2011 were approximately RMB17.33 million, RMB202.17 million, RMB240.50 million, RMB54.80 million and RMB76.84 million respectively. The costs of sales increased in proportion to the revenue of the Target Group during the Reporting Period. The major component of cost of sales is the cost of purchase of the raw waste papers.

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APPENDIX III

MANAGEMENT DISCUSSION AND ANALYSIS ON THE GROUP AND THE TARGET GROUP

Gross profit

Accordingly, the Target Group recorded gross profit of approximately RMB1.64 million RMB34.89 million, RMB55.52 million, RMB6.38 million and RMB15.27 million for the three years ended 31 December 2008, 2009 and 2010 and the three months ended 31 March 2010 and 2011 respectively. The gross profit margins were approximately 8.65%, 14.72%, 18.76%, 10.43% and 16.58% for the three years ended 31 December 2008, 2009 and 2010 and the three months ended 31 March 2010 and 2011, respectively. The increase in gross profit margin was due to the availability of better purchase terms from its raw waste paper providers as the increasing economies of scale of the Target Group brings to the Target Group greater bargaining power on the purchase price of the raw waste paper.

Expenses

The major expenses of the Target Group during the three years ended 31 December 2008, 2009 and 2010 and the three months ended 31 March 2010 and 2011 were (i) the selling and distribution expenses, (ii) the administrative expenses and (iii) the finance costs. The major items included in selling and distribution expenses were wages and salaries, depreciation expense, rental expenses and transportation expenses; while in administrative expenses were salaries, staff welfare and training and insurance. During the Reporting Period, both selling and distribution expenses and administrative expenses of the Target Group increased in proportion to the revenue of the Target Group as a result of the increase in (i) the number of collection stations, (ii) the number of staff and (iii) the transportation volume of waste paper involved.

Other income

The other income of approximately RMB82,912, RMB24,139, RMB47,583, RMB1,891 and RMB26,120 for the three years ended 31 December 2008, 2009 and 2010 and the three months ended 31 March 2010 and 2011 respectively, included bank interest income of approximately RMB740, RMB1,095, RMB3,913, RMB1,033 and RMB1,872 for the three years ended 31 December 2008, 2009 and 2010 and the three months ended 31 March 2010 and 2011 respectively, with the remaining from the share of storage costs for warehouse and sales of scrap consumables. The other income did not have any material impact to the financials of the Target Group.

The finance costs of the Target Group increased substantially from nil for the year ended 31 December 2008 to approximately RMB746,646 for the year ended 31 December 2010. The finance costs were interest expenses on bank borrowings wholly repayable within five years. Such increase was due to the increase in bank borrowings of the Target Group in 2010. The total bank borrowings of the Target Group increased from nil as at 31 December 2008 to approximately RMB16.95 million as at 31 December 2010. As at 31 March 2011, the bank borrowings of the Target Group further increased to approximately RMB37.50 million. The increase in bank borrowings was due to the increase in the number of waste paper collection stations, the working capital required for increase in the business scale of the Target Group and the repayment of third parties’ loans.

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APPENDIX III

MANAGEMENT DISCUSSION AND ANALYSIS ON THE GROUP AND THE TARGET GROUP

Net profit/(loss)

Overall, the Target Group recorded net profit/(loss) after taxation of approximately RMB(2.40) million, RMB13.14 million, RMB27.60 million, RMB2.48 million and RMB7.69 million for the three years ended 31 December 2008, 2009 and 2010 and the three months ended 31 March 2010 and 2011 respectively. The net profit after taxation increased significantly from 2008 to 2010 mainly due to the stable increasing demand of waste paper in the PRC and better arrangement of delivery network to reduce the transportation costs.

Capital structure, liquidity, financial resources and gearing ratio

Non-current assets

As at 31 December 2008, 2009 and 2010 and 31 March 2011, the Target Group had noncurrent assets of approximately RMB7.20 million, RMB12.37 million, RMB20.29 million and RMB20.75 million respectively, of which property, plant and equipment were approximately RMB7.19 million, RMB12.38 million, RMB19.62 million and RMB20.75 million respectively and construction in progress were approximately nil, nil, RMB0.67 million and nil respectively.

The plant and equipment consisted of furniture and equipment, motor vehicles, plant and machinery and leasehold improvement, increased correspondingly to the business scale of the Target Group.

Current assets

As at 31 December 2008, 2009 and 2010 and 31 March 2011, the Target Group had current assets of approximately RMB3.84 million, RMB19.02 million, RMB88.36 million and RMB109.44 million respectively, of which inventories were approximately RMB5,950, RMB4.60 million, RMB35.62 million and RMB22.64 million respectively; trade and bills receivables were approximately RMB2.51 million, RMB3.56 million, RMB24.70 million and RMB39.94 million respectively; other receivables, prepayment and deposit paid were approximately RMB324,617, RMB2.89 million, RMB6.38 million and RMB8.64 million respectively; amounts due from shareholders of the Target Group were approximately nil, RMB4.72 million, RMB10.16 million and RMB11.25 million respectively; and bank balances and cash were approximately RMB1.00 million, RMB3.26 million, RMB11.50 million, RMB26.97 million respectively. The increase in trade and bill receivables as at 31 December 2010 and 31 March 2011 was due to the significant sales incurred in these three months, and the average trade debtors turnover days of the Target Group were 30 and 39 respectively, which were in line to the Company’s credit term policy. In other receivables, prepayments and the deposits paid, the deposit paid increased from nil as at 31 December 2008 to RMB563,598 as at 31 December 2009 and further increased to RMB3.02 million as at 31 December 2010 and RMB3.24 million as at 31 March 2011 mainly due to the normal purchase deposits paid. The increase in prepayment in 2011 was due to the construction materials cost prepaid. The amounts due from shareholders of the Target Group were of non-trading nature, unsecured, interest free and had no fixed repayment terms. The Vendors have undertaken to the Company that the amounts due from shareholders of the Target Group shall be settled before Completion.

– 133 –

APPENDIX III

MANAGEMENT DISCUSSION AND ANALYSIS ON THE GROUP AND THE TARGET GROUP

Increase in inventories in each of the years ended 31 December 2009 and 2010 was mainly caused by the management’s desire to keep a sufficient level of inventories in each collection station for better sales arrangement. The management of the Target Group expected that the demand for waste paper and the market price would both increase in the year 2011, the larger inventories as at 31 December 2010 would meet the demand for the year 2011 and strengthen the profitability of the Target Group. The Target Group has its policy of allowing credit period ranging from 1 to 3 months to its trade customers. As at 31 December 2008, 2009 and 2010 and 31 March 2011, approximately RMB2.46 million, RMB3.56 million, RMB24.70 million and RMB39.94 million of trade and bills receivables were ageing 0-30 days respectively.

Current liabilities

Current liabilities were approximately RMB13.74 million, RMB29.46 million, RMB78.27 million and RMB93.07 million respectively at 31 December 2008, 2009 and 2010 and 31 March 2011. As at 31 December 2008, 2009 and 2010 and 31 March 2011, trade and bills payables were approximately RMB1.09 million, RMB0.31 million, RMB0.54 million and RMB7.50 million respectively; other payables and accruals were approximately RMB0.59 million, RMB8.31 million, RMB15.53 million and RMB2.56 million respectively; bank borrowings were approximately nil, RMB1.40 million, RMB16.95 million and RMB37.50 million respectively; obligations under finance leases were approximately nil, nil, RMB0.28 million and RMB0.28 million respectively, amounts due to shareholders of the Target Group were RMB12.06 million, RMB3.97 million, RMB17.63 million and RMB14.28 million respectively, and tax payables were approximately RMB1,203, RMB15.47 million, RMB27.34 million and RMB30.95 million respectively. As advised by the management of the Project Companies, the trade and bills payable of RMB7.50 million as at 31 March 2011 were mainly attributable to the purchase transactions from two enterprises incurred in March 2011. The trade and bills payable from these enterprises were subsequently settled in April and May 2011 respectively. The other payables and accruals in 2010 increased substantially because of the advances from third parties. However, most of those advances have been repaid during January to March 2011. The bank borrowings increased as a result of the business expansion (opening and operating new collection stations and purchasing furniture and equipment, motor vehicles, plant and machinery and leasehold improvement) and third parties’ loans repayment. The significant balance of trade payables of RMB1.09 million as at 31 December 2008 was mainly attributable to normal trades. The amounts due to shareholders of the Target Group were of nontrading nature, unsecured, interest free and have no fixed repayment terms.

The amounts due from shareholders of the Target Group and the amounts due to shareholders of the Target Group will be fully settled before the Completion of the Acquisition.

– 134 –

APPENDIX III

MANAGEMENT DISCUSSION AND ANALYSIS ON THE GROUP AND THE TARGET GROUP

During the Reporting Period, the current ratios, expressed as the total current assets divided by the total current liabilities, were approximately 0.28, 0.65, 1.13 and 1.18 respectively as at 31 December 2008, 2009 and 2010 and 31 March 2011. Although the current ratios as at 31 December 2008 and 2009 were below 1.00, as the business grew, the current ratio had also been steadily improving and had exceeded 1.00 as at 31 December 2010.

As at 31 December 2008, 2009 and 2010 and 31 March 2011, the Target Group’s gearing ratios, expressed as the net debt divided by the total capital plus net debt, were approximately N/A, 78%, 54% and 46% respectively. The Target Group had also increased its bank borrowing as a result of increased investments in opening the new collection stations, purchase of equipment and working capital financing.

Liquidity and financial resources

The Target Group has historically funded its operations primarily by cash flows from operating activities and bank borrowings. It requires cash for:

• (i) the working capital requirements, such as operating expenses and development; and

• (ii) capital expenditures related to the open of new collection stations and the purchases of property, plant and equipment.

Generally, the Target Group maintains cash for its daily transactions and operations. The Target Group’s bank balances and cash were approximately RMB1.00 million, RMB3.26 million, RMB11.50 million and RMB26.97 million as at 31 December 2008, 2009 and 2010 and 31 March 2011 respectively.

The following table is a summary of the cash flow data for the periods indicated:

				Three months ended	Three months ended
	Year	ended 31 December		31 March
	2008	2009	2010	2010	2011
	RMB	RMB	RMB	RMB	RMB
Cash and cash equivalents
at beginning of year/period	87,245	1,004,700	3,262,430	3,262,430	11,500,935
Net cash from/(used in)
operating activities	3,372,937	20,649,538	7,884,912	4,343,663	(1,590,425)
Net cash used in investing
activities	(2,455,482)	(6,509,505)	(11,121,268)	(6,505,259)	(1,072,712)
Net cash from/(used in)
financing activities	–	(11,882,303)	11,474,861	411,929	8,631,620
Cash and cash equivalents
at end of year/period	1,004,700	3,262,430	11,500,935	1,512,263	17,469,418

– 135 –

APPENDIX III

MANAGEMENT DISCUSSION AND ANALYSIS ON THE GROUP AND THE TARGET GROUP

Cash flows from operating activities

The operating cash inflow is principally derived from the receipt of payments for the sales of the waste paper. The cash outflow to operating activities is principally for the purchase of raw waste paper and other operating costs such as staff costs and utilities.

Net cash inflow of approximately RMB3.37 million, RMB20.65 million, RMB7.88 million, RMB4.34 million and RMB(1.59) million were generated from the Target Group’s operations for each of the three years ended 31 December 2008, 2009 and 2010 and three months ended 31 March 2010 and 2011 respectively, mainly attributable to the strong operating cash inflow generated from the business before movements in working capital. A relatively lower net cash flow from operating activities was generated in 2010 as the trade and bills receivables at 31 December 2010 was higher than that as at 31 December 2009 and 2008. Most of the trade and bills receivable as at 31 December 2010 had been collected from the debtors in January and February 2011, which will be recorded as cash generated from operating activities for the period ended 31 March 2011.

Cash flows used in investing activities

During the Reporting Period, the cash outflow to investing activities was principally used in opening the new collection stations and purchasing property, plant and equipment.

Cash flows from financing activities

During the Reporting Period, the cash flow was principally generated from the utilization of banking facilities and drawdown of bank borrowings. In addition, new bank borrowings of approximately RMB1.40 million and RMB15.55 million were raised in 2009 and 2010 respectively.

Financial resources

Prior to Completion of the Acquisition, the operations of the Target Group were financed principally by the shareholders of the Target Group’ equity, internally generated funds and bank borrowings.

Capital commitments

As at 31 December 2008, 2009 and 2010 and 31 March 2011, Target Group did not have any significant capital commitments.

– 136 –

APPENDIX III

MANAGEMENT DISCUSSION AND ANALYSIS ON THE GROUP AND THE TARGET GROUP

Contingent liabilities

The Target Group, through the Project Company, has entered into a contract with a bank in the PRC to guarantee a loan extended to an Independent Third Party, under which, the maximum contingent liability that the Project Company would be liable is about HK$6 million (approximately RMB5 million). However, the Target Group has ceased to be the guarantor in respect of the said guarantee with effect from 28 June 2011.

As at 31 December 2008, 2009 and 2010 and 31 March 2011, except for those disclosed above, the Directors were not aware of any possible material contingent liabilities.

Banking facilities

The banking facilities of certain subsidiaries in the Target Group were secured by the guarantee from one of the directors of the Project Companies and an independent third party. Such banking facilities amounted to nil, RMB1.40 million, RMB16.95 million and RMB37.50 million as at 31 December 2008, 2009 and 2010 and 31 March 2011 respectively. The facilities were fully utilised as at the end of each of the Reporting Period.

Charge on assets

For the three years ended 31 December 2008, 2009 and 2010 and the three months ended 31 March 2011, the Target Group had no charge on its assets.

Treasury policy

For the three years ended 31 December 2008, 2009 and 2010 and the three months ended 31 March 2011, the Target Group had no formal treasury policy.

Foreign currency exposures

The Target Group has no exposure to foreign currency risk as all of its business transactions, assets and liabilities are denominated in RMB.

– 137 –

APPENDIX III

MANAGEMENT DISCUSSION AND ANALYSIS ON THE GROUP AND THE TARGET GROUP

Segment information

The Target Group is principally engaged in the recycling of waste paper. No segment accounts were prepared as the Target Group is only operating one single line of products and the market is located only in the Yangtze River Delta at present.

Acquisition and disposal of subsidiaries

On 1 April 2010, the Project Company and Mr. Hue Kwok Chiu agreed to increase the registered capital of Baina Yancheng by way of capital injection to Baina Yancheng by Mr. Hue Kwok Chiu for the amount of HK$1.00 million, representing 46.8% equity interest in Baina Yancheng (after completion of the capital injection). Subsequently, on 2 January 2011, the Target Company has agreed to acquire from Mr. Hue Kwok Chiu his 46.8% equity interest in Baina Yancheng at a consideration of HK$1.00 million. Upon the full payment of the HK$1.00 million by the Target Company, Mr. Hue Kwok Chiu transferred his 46.8% equity interest in Baina Yancheng to the Project Company pursuant to the direction of the Target Company. This transfer was completed in June 2011 upon which Baina Yancheng became the wholly owned subsidiary of the Project Company. Save and except for the aforementioned, the Target Group did not have any significant investments, material acquisition and disposals for the years ended 31 December 2008, 2009 and 2010 and the three months ended 31 March 2011. Upon the completion of the Reorganization in June 2011, Baina Yancheng becomes a wholly-owned subsidiary of the Project Company and the Target Company can account for 100% of the profits and losses of Baina Yancheng.

On 12 May 2011, the Project Company established Bai Run with limited liability in the PRC and owns 100% equity interest in Bai Run. Save as disclosed, the Target Group did not have any significant investments, material acquisition and disposals during the Reporting Period and up to the Latest Practicable Date.

Employment, training and development

As at 31 December 2008, 2009 and 2010 and 31 March 2011, there were approximately 122, 196, 231, and 231 full-time permanent employees in the Target Group respectively. Total staff costs for the three years ended 31 December 2008, 2009 and 2010 and the three months ended 31 March 2010 and 2011 were approximately RMB0.65 million, RMB3.29 million, RMB4.16 million, RMB0.87 million and RMB1.36 million respectively. Remuneration was determined by reference to market terms and the qualifications and experience of the staff concerned.

Prospect

The Target Group will focus on its principal activities which are domestic waste paper recycling in PRC and further expand its business scale in the future. For the development plan of the business, please refer to the section headed “Information on the Project Companies – Future business plan of the Project Companies” in the letter from the Board of this circular. The capital requirement for the Target Group will be contributed by the Company either by its internal resources or other fund raising exercises such as debt financing and equity financing.

– 138 –

APPENDIX IV

UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

1. INTRODUCTION

The following is the Unaudited Pro Forma Financial Information of the Enlarged Group prepared in accordance with Rule 4.29 of the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited for the purpose of illustrating the effect of the Acquisition as if the Acquisition took place on 31 March 2011 for the consolidated statement of financial position and 1 April 2010 for the consolidated statement of comprehensive income and consolidated statement of cash flows.

The unaudited pro forma consolidated statement of financial position of the Enlarged Group is prepared based on the audited consolidated statement of financial position of the Group as at 31 March 2011 extracted from the published annual report of the Group as of 31 March 2011 published on 28 July 2011 and the audited consolidated statement of financial position of the Target Group as at 31 March 2011 as extracted from the accountants’ reports as set out in Appendix II to this circular.

The unaudited pro forma consolidated statement of comprehensive income and consolidated statement of cash flow of the Enlarged Group are prepared based on the audited consolidated statement of comprehensive income and consolidated statement of cash flow of the Group for the year ended 31 March 2011 extracted from the published annual report of the Group as of 31 March 2011 published on 28 July 2011 and the audited consolidated statement of comprehensive income and consolidated statement of cash flow of the Target Group for the year ended 31 December 2010 as extracted from the accountants’ reports as set out in Appendix II to this circular.

The Unaudited Pro Forma Financial Information is based on the aforesaid historical data after giving effect to the pro forma adjustments described in the accompanying notes. A narrative description of the pro forma adjustments that are (i) directly attributable to the transactions and (ii) factually supportable is summarised in the accompanying notes. The Unaudited Pro Forma Financial Information is prepared assuming the Target Group has completed the Reorganization of buying back the 46.80% shareholdings of Bainan Yancheng from Mr. Hue Kwok Chiu.

In additions, due to the conversion price range of the Convertible Notes, two scenarios have been presented to illustrate the effects of the conversion in the Pro Forma Financial Information. The first scenario is to assume that the Convertible Notes with principal amount of HK$290,000,000 have been issued at the maximum conversion price of HK$0.68; and the second scenario is to assume that the Convertible Notes with principal amount of HK$290,000,000 have been issued at the minimum conversion price of HK$0.227. The financial effects of these two scenarios are set out in the consolidated statement of financial position of the Enlarged group and their respective adjustment notes .

The accompanying Unaudited Pro Forma Financial Information of the Enlarged Group has been prepared by the directors of the Company for illustrative purposes only and is based on certain assumptions, estimates, uncertainties and other currently available financial information. Because of its hypothetical nature, it may not give a true picture of the actual financial position, financial results and cash flows of the Enlarged Group following Completion. Further, the accompanying Unaudited Pro Forma Financial Information of the Enlarged Group does not purport to predict the Enlarged Group’s future financial position or results of operations.

– 139 –

APPENDIX IV

UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

2. UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF FINANCIAL POSITION OF THE ENLARGED GROUP

Scenario 1

NON-CURRENT ASSETS Property, plant and equipment Goodwill Investment property Prepaid lease payments Available for sale investment Derivative financial instruments CURRENT ASSETS Inventories Trade and bills receivables Other receivables, prepayments and deposits paid Amounts due from shareholders Financial assets at fair value through profit or loss Pledged fixed deposits Bank balances and cash (Note 6) CURRENT LIABILITIES Trade and bills payables Other payables and accruals Amounts due to shareholders Bank and other borrowings Obligations under finance leases Tax payables Convertible notes NET CURRENT ASSETS/(LIABILITIES) NON-CURRENT LIABILITIES Obligations under finance leases Promissory note Convertible note Deferred tax	The Group as at 31 March 2011 HK$’000 (Audited) 18,898 9,380 1,052 172,888 – 202,218 6,449 4,503 158,124 – 62 2,029 1,237 172,404 8,807 28,699 – 46,980 – 4,097 8,849 97,432 74,972 277,190 – – – – – 277,190	The Target Group as at 31 March 2011 Pro forma adjustment HK$’000 HK$’000 HK$’000 (Audited) (Note 1) (Note 1) 24,471 (b) 764,892 – – – – (e) 38,777 24,471 26,694 47,105 10,184 (b) (96,000) 13,271 – 11,203 20,601 (b) (204,000) 129,058 8,845 3,019 16,843 44,222 331 36,493 – 109,753 19,305 43,776 468 – (b) 257,436 – (e) 255,811 – (e) 5,641 468 43,308	Pro forma Enlarged Group HK$’000 43,369 764,892 9,380 1,052 172,888 38,777
			1,030,358
			33,143 51,608 72,308 13,271 62 13,232 (182,162)
			1,462
			17,652 31,718 16,843 91,202 331 40,590 8,849
			207,185
			(205,723)
			824,635
			468 257,436 255,811 5,641
			519,356
			305,279

– 140 –

APPENDIX IV

UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

CAPITAL AND RESERVES Share capital Reserves Total equity attributable to owners of the Company Non-controlling interest	117 277,073 277,190 – 277,190 The Group as at 31 March 2011 HK$’000 (Audited)	2 (b) (2) 43,306 (b) (43,306) (e) 25,068 (e) (5,641) 43,308 – (b) 8,662 43,308 The Target Group as at 31 March 2011 Pro forma adjustment HK$’000 HK$’000 HK$’000 (Audited) (Note 1) (Note 1)	117 296,500 Pro forma Enlarged Group HK$’000
			296,617 8,662
			305,279

– 141 –

APPENDIX IV

UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

2. UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF FINANCIAL POSITION OF THE ENLARGED GROUP

Scenario 2

NON-CURRENT ASSETS Property, plant and equipment Goodwill Investment property Prepaid lease payments Available for sale investment Derivative financial instruments CURRENT ASSETS Inventories Trade and bills receivables Other receivables, prepayments and deposits paid Amounts due from shareholders Financial assets at fair value through profit or loss Pledged fixed deposits Bank balances and cash CURRENT LIABILITIES Trade and bills payables Other payables and accruals Amounts due to shareholders Bank and other borrowings Obligations under finance leases Tax payables Convertible notes NET CURRENT ASSETS/(LIABILITIES)	The Group as at 31 March 2011 HK$’000 (Audited) 18,898 9,380 1,052 172,888 – 202,218 6,449 4,503 158,124 – 62 2,029 1,237 172,404 8,807 28,699 – 46,980 – 4,097 8,849 97,432 74,972 277,190	The Target Group as at 31 March 2011 Pro forma adjustment HK$’000 HK$’000 HK$’000 (Audited) (Note 1) (Note 1) 24,471 (b) 793,071 – – – – (e) 14,243 24,471 26,694 47,105 10,184 (b) (96,000) 13,271 – 11,203 20,601 (b) (204,000) 129,058 8,845 3,019 16,843 44,222 331 36,493 – 109,753 19,305 43,776	Pro forma Enlarged Group HK$’000 43,369 793,071 9,380 1,052 172,888 14,243
			1,034,003
			33,143 51,608 72,308 13,271 62 13,232 (182,162)
			1,462
			17,652 31,718 16,843 91,202 331 40,590 8,849
			207,185
			(205,723)
			828,280

– 142 –

APPENDIX IV

UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

NON-CURRENT LIABILITIES Obligations under finance leases Promissory note Convertible note Deferred tax CAPITAL AND RESERVES Share capital Reserves Total equity attributable to owners of the Company Non-controlling interest	The Group as at 31 March 2011 HK$’000 (Audited) – – – – – 277,190 117 277,073 277,190 – 277,190	The Target Group as at 31 March 2011 Pro forma adjustment HK$’000 HK$’000 HK$’000 (Audited) (Note 1) (Note 1) 468 – (b) 257,436 – (e) 255,811 – (e) 5,641 468 43,308 2 (b) (2) 43,306 (b) (43,306) (e) 28,713 (e) (5,641) 43,308 – (b) 8,662 43,308	Pro forma Enlarged Group HK$’000 468 257,436 255,811 5,641
			519,356
			308,924
			117 300,145
			300,262 8,662
			308,924

– 143 –

UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

APPENDIX IV

3. UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME OF THE ENLARGED GROUP

Scenario 1 and Scenario 2

Continuing operations Turnover Cost of sales Gross profit Other income Gain on disposal of property, plant and equipment Selling and distribution expenses Administrative expenses Finance costs Profit before taxation Taxation Profit for the year from continuing operations Discontinued operations Loss for the year from discontinued operations Profit/(loss) for the year	The Group year ended 31 March 2011 HK$’000 (Audited) 53,455 (42,206) 11,249 3,526 49,800 (1,932) (34,106) (2,700) 25,837 (4,012) 21,825 (25,269) (3,444)	The Target Group year ended 31 December 2010 Pro forma adjustment Pro forma adjustment HK$’000 HK$’000 HK$’000 (Audited) (Note 2) (Note 2) 349,080 (283,608) 65,472 56 – (17,326) (4,404) (880) (16,559) (2,564) 42,918 (10,369) 32,549 – 32,549	Pro forma Enlarged Group HK$’000 402,535 (325,814)
			76,721 3,582 49,800 (19,258) (38,510) (22,703)
			49,632 (14,381)
			35,251 (25,269)
			9,982

– 144 –

APPENDIX IV

UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

Profit for the year from continuing operations Loss for the year from discontinued operations Profit/(loss) for the year Exchange differences arising on translations of foreign operations and other comprehensive income for the year Total comprehensive income for the year Profit /(loss) for the year Attributable to owners of the Company Non-controlling interests Total comprehensive income for the year Attributable to owners of the Company Non-controlling interests	The Group year ended 31 March 2011 HK$’000 (Audited) 21,825 (25,269) (3,444) 9,197 5,753 (3,444) – (3,444) 5,753 – 5,753	The Target Group year ended 31 December 2010 Pro forma adjustment Pro forma adjustment HK$’000 HK$’000 HK$’000 (Audited) (Note 3) (Note 7) 32,549 – 32,549 – 32,549 21,309 (6,510) 11,240 11,240 6,510 (11,240) 32,549 21,309 (6,510) 11,240 11,240 6,510 (11,240) 32,549	Pro forma Enlarged Group HK$’000 35,251 (25,269)
			9,982 9,197
			19,179
			3,472 6,510
			9,982
			12,669 6,510
			19,179

– 145 –

APPENDIX IV

UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

Scenario 1 Earnings/(loss) per share From continuing and discontinued operations Basic Diluted From continuing operations Basic Diluted Scenario 2 Earnings/(loss) per share From continuing and discontinued operations Basic Diluted From continuing operations Basic Diluted	The Group year ended 31 March 2011 HK$’000 (Audited) HK(3.77) cents N/A HK23.88 cents HK22.83 cents HK(3.77) cents N/A HK23.88 cents HK22.83 cents	The Target Group year ended 31 December 2010 Pro forma adjustment HK$’000 HK$’000 (Audited) (Note 4) HK10,654.50 cents N/A HK10,654.50 cents N/A HK10,654.50 cents N/A HK10,654.50 cents N/A	Pro forma Enlarged Group HK$’000 HK3.80 cents
			N/A
			HK31.45 cents
			HK8.7 cents
			HK3.80 cents
			HK1.46 cents
			HK31.45 cents
			HK3.29 cents

– 146 –

APPENDIX IV

UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

4. UNAUDITED PRO FORMA CONSOLIDATED CASH FLOW STATEMENT OF THE ENLARGED GROUP

Scenario 1 and Scenario 2 Operating activities Profit before tax from continuing operations Profit after tax from continuing operations Loss after tax from discontinued operations Adjustments for: Tax charge recognised in profit or loss Amortisation of prepaid lease payments Bank interest income Depreciation of property, plant and equipment Fair value changes in investment property Fair value changes in finance assets at fair value through profit or loss Finance costs Gain on disposal of property, plant and equipment Imputed interest Loss on disposal of subsidiaries Impairment loss recognised in respect of trade receivable Net foreign exchange loss Movements in working capital	The Group year ended 31 March 2011 HK$’000 (Audited) – 21,825 (25,269) (3,444) 4,012 150 (6) 15,041 (2,420) (15) 3,007 (48,647) – 7,001 3,419 6,193 (15,709)	The Target Group year ended 31 December 2010 Pro forma adjustment HK$’000 HK$’000 (Audited) (Note 2) 42,918 – (19,123) – 42,918 (19,123) – – (5) 2,611 – – 880 – – 19,123 – – – 46,404	Pro forma Enlarged Group HK$’000 42,918 2,702 (25,269) 20,351 4,012 150 (11) 17,652 (2,420) (15) 3,887 (48,647) 19,123 7,001 3,419 6,193 30,695

– 147 –

UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

APPENDIX IV

Decrease in inventories Decrease in trade and bills receivables Decrease in other receivables, prepayments and deposits paid Increase in amounts due to shareholders Decrease in trade and bills payables Increase in other payables and accruals Cash generated from/(used in) operations Income tax paid Net cash generated from/(used in) operating activities Investing activities Payments for property, plant and equipment Construction in progress Acquisition of Target Group Decease in pledged fixed deposits Purchase of available for sales investment Proceeds from disposal of property, plant and equipment Bank interest received Net cash inflow from disposal of subsidiaries Net cash used in investing activities	The Group year ended 31 March 2011 HK$’000 (Audited) 6,013 2,061 (23,099) – (7,130) (1,404) (39,268) (819) (40,087) (41,536) – (96,000) 10,012 (25,000) 73,863 6 27,782 (50,873)	The Target Group year ended 31 December 2010 Pro forma adjustment HK$’000 HK$’000 (Audited) (Note 1(c)) (36,578) (24,937) (4,125) 16,119 272 12,240 9,395 (98) 9,297 (11,153) (788) (1,179) (204,000) – – – 5 – (13,115)	Pro forma Enlarged Group HK$’000 (30,565) (22,876) (27,224) 16,119 (6,858) 10,836 (29,873) (917) (30,790) (52,689) (788) (301,179) 10,012 (25,000) 73,863 11 27,782 (267,988)

– 148 –

UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

APPENDIX IV

Financing activities Proceeds from issue of convertible notes Issuance of equity shares Payment for transaction costs attributable to issue of new ordinary shares Proceeds from borrowings Repayments of borrowings Decrease in trust receipt loans Interest paid Increase in amounts due from shareholders Injection from non-controlling interest for allotment of registered capital Repayments of obligations under finance leases Decrease in advances from banks as consideration for the factored received Net cash generated from financing activities Net increase/(decrease) in cash and cash equivalents Cash and cash equivalents at beginning of the year Effect of foreign currency rate changes Cash and cash equivalents at end of the year	The Group year ended 31 March 2011 HK$’000 (Audited) 110,000 29,145 (5,319) 25,133 (63,426) (6,015) (2,280) – – (65) (76) 87,097 (3,863) 1,129 843 (1,891)	The Target Group year ended 31 December 2010 Pro forma adjustment HK$’000 HK$’000 (Audited) – 2 – 18,339 – – (880) (6,413) 1,605 880 – 13,533 9,715 3,847 – 13,562	Pro forma Enlarged Group HK$’000 110,000 29,147 (5,319) 43,472 (63,426) (6,015) (3,160) (6,413) 1,605 815 (76) 100,630 (198,148) 4,976 843 (192,329)

– 149 –

APPENDIX IV

UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

Notes to Unaudited Pro Forma Financial Information of the Enlarged Group

Under HKFRS3 Business Combinations (revised) (“HKFRS3(R)”), the Company will apply the purchase methods to account for the Acquisition. In applying the purchase method, the identifiable assets, liabilities and contingent liabilities of the Target Group will be recorded on the consolidated statement of financial position of the Group at their fair values at the date of completion. Any goodwill or discount arising on the Acquisition will be determined as the excess or deficit of the purchase price to be incurred by the Group over the Group’s interests at the date of completion. Bargain purchase gain resulting from the business combinations should be recognised immediately in the consolidated statement of comprehensive income.

According to the terms of the Convertible Notes, the holders of the Convertible Notes shall have the right to convert the whole or any part of the outstanding principal amount of the Convertible Notes at any time from its date of issue at a conversion price determined based on the average closing price of the Company’s share for the five consecutive trading days prior to the completion of the Acquisition plus a premium of 30% and the conversion price shall not in any event be more than HK$0.68 or less than HK$0.227 per conversion share. Due to the conversion price range of the Convertible Notes, two scenarios have been presented to illustrate the effects of the conversion in the Pro Forma Financial Information. The first scenario is to assume that the Convertible Notes with principal amount of HK$290,000,000 have been issued at maximum conversion price of HK$0.68 and the second scenario is to assume that the Convertible Notes with principal amount of HK$290,000,000 have been issued at minimum conversion price of HK$0.227.

• (1) (a) The Company entered into a Sale and Purchase Agreement and the Supplemental Agreements with the Vendor to acquire 80% issued share capital of the Target Company at a consideration of HK$850,000,000 (the “Consideration”) and is to be satisfied by:

Refundable deposits Principal amount of the Promissory Notes Principal amount of Convertible Notes Total	HK$’000 300,000 260,000 290,000
	850,000

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UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

• (b) Details of goodwill arising from the Acquisition are as below:

Scenario 1

Fair value of the consideration as at 31 March 2011

Refundable deposits Cash payable (1c) Promissory Notes (1d) Convertible Notes (1e) Total Assumed fair value of the net identifiable assets and liabilities of the Target Group as at 31 March 2011 Consideration for acquisition of 80% interest in Target Group Assumed fair value of 80% share of the net identifiable assets and liabilities of the Target Group Goodwill	HK$’000 96,000 204,000 257,436 242,102 799,538 HK$’000 43,308 HK$’000 799,538 (34,646) 764,892

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UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

APPENDIX IV

Scenario 2

Fair value of the consideration as at 31 March 2011

Refundable deposits Cash payable (1c) Promissory Notes (1d) Convertible Notes (1e) Total Assumed fair value of the net identifiable assets and liabilities of the Target Group as at 31 March 2011 Consideration for acquisition of 80% interest in Target Group Assumed fair value of 80% share of the net identifiable assets and liabilities of the Target Group Goodwill	HK$’000 96,000 204,000 257,436 270,281 827,717 HK$’000 43,308 HK$’000 827,717 (34,646) 793,071

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UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

APPENDIX IV

Scenario 1 and Scenario 2

The non-controlling interest of HK$8,662,000 represented 20% share of the net identifiable assets and liabilities of the Target Group as at 31 March 2011.

For the purpose of the presentation of the Unaudited Pro Forma Financial Information, the fair value of the net identified assets and liabilities of the Target Group are assumed to be equal to their carrying amounts as at 31 March 2011. On completion of the Acquisition, the fair values of the identifiable assets and liabilities at the completion date will be assessed. As a result of the assessment, the amount of goodwill may be different from the amount estimated based on the basis stated above for the purpose of preparation of the Unaudited Pro Forma Financial Information. Accordingly, the actual goodwill arising from the Acquisition may be different from the estimated amount as shown above.

The directors have reviewed the carrying value of goodwill of the Enlarged Group in accordance with Hong Kong Accounting Standard 36 Impairment of Assets (“HKAS 36”), taking into account the independent valuation report, which could be referred to Appendix V, carried out by Roma Appraisals Limited (“Roma”), an independent professional valuer. Based on the valuation report, the directors are of the opinion that there are no indications that the values of the goodwill of the Enlarged Group may be impaired in respect of the goodwill with an assumed fair value of the entire business of the Target Group of approximately HK$1,080,000,000.

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APPENDIX IV

UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

In accordance with HKAS 36, the directors will carry out impairment review of the goodwill of the Enlarged Group with reference to an independent valuation report, which will be prepared under the same principal assumptions and valuation method in the future financial statements. The principal assumptions applied by the directors represent the assumptions of the Projections disclosed in the Business Valuation Report as set out in Appendix V.

It is the responsibility solely of the directors to ensure that the Company is adopting and will continue to adopt consistent accounting policies and ensure that the principal assumption of the Valuation for assessment of the impairment of the Enlarged Group’s intangible assets and goodwill are consistent for future annual audit of the Group.

The reporting accountants concurred with the directors’ assessment of impairment on the goodwill in the Unaudited Pro Forma Financial Information and adoption of consistent accounting policies and principal assumptions in the preparation of consolidated financial statements of the Group after the completion of the Acquisition.

• (c) HK$204,000,000 will be payable by cash to the Vendor as at 31 March 2011 and after additional payment of HK$174,000,000 on 11 May 2011, the balance of HK$30,000,000 will be payable by cash to the Vendor at the date of completion of the Acquisition.

In the preparation of the Unaudited Pro Forma Financial Information, the directors of the Company assumed that the amount of HK$30,000,000 would be funded by the Company’s other fund raising activities and other borrowings as disclosed in the section headed “Working capital statement” as continued in Appendix I to this Circular, and the amount of HK$174,000,000 has been paid by the proceeds received from the offering of right issue on 11 May 2011.

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APPENDIX IV

UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

Included in the consideration an amount of HK$52,000,000 will be held in escrow agent and shall only be released to the Vendors according to the terms of the profit guarantee set forth in the Sale and Purchase Agreement. For the purpose of preparing the Unaudited Pro Forma Financial Information, the fair value of this contingent consideration payment of HK$52,000,000 is assumed to be equal to its carrying amount. Fair value of this contingent consideration shall be assessed on the date of completion and therefore subject to change upon completion of the Acquisition.

The cash payable will not have the continuing effect on the financial statements of the Enlarged Group in subsequent years.

The balance of cash and cash equivalents of the Enlarged Group in the unaudited pro forma consolidated statement of financial position is for illustration purpose only.

• (d) The carrying amount of the Promissory Notes of approximately HK$257,436,000 represents the carrying value of the Promissory Notes carried at its amortised cost and is calculated using the discounted cash flow method at an effective interest rate of 1.01%. In preparation of the Unaudited Pro Forma Financial Information, it is assumed that prime rate of 1.01% is the effective interest rate. The effective interest rate was determined by reference to a various factors, including the credit spread of the Company and specific risk premium being assessed by Roma. Fair values of the Promissory Notes shall be assessed on the date of completion and therefore subject to change upon completion of the Acquisition.

• (e) Scenario 1

The pro forma adjustment represented the liability, non-equity and equity components of the Convertible Notes issued for the Acquisition as if it was issued on 31 March 2011. The estimated fair value of the liability component of the Convertible Notes is HK$255,811,000 determined using the discounted cash flow method. The estimated fair values of the non-equity derivative assets and equity components are HK$38,777,000 and HK$25,068,000 respectively, which are determined by application of Black-Scholes Option Pricing Model being assessed by Roma.

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UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

Scenario 2

The pro forma adjustment represented the liability, non-equity and equity components of the Convertible Notes issued for the Acquisition as if it was issued on 31 March 2011. The estimated fair value of the liability component of the Convertible Notes is HK$255,811,000 determined using the discounted cash flow method. The estimated fair values of the non-equity derivative assets and equity components are HK$14,243,000 and HK$28,713,000 respectively, which are determined by application of Black-Scholes Option Pricing Model being assessed by Roma.

Scenario 1 and Scenario 2

Fair values of the Convertible Notes shall be assessed on the date of completion and therefore subject to change upon completion of the Acquisition.

Principal amount of the financial instruments Less: Carrying amount of the financial instruments as at 31 March 2011 Temporary difference Deferred tax liabilities at a tax rate of 16.5%	HK$’000 290,000 (255,811) 34,189 5,641

For the purpose of preparing the unaudited pro forma consolidated statement of financial position of the Enlarged Group, it is assumed that the Acquisition has been completed on 31 March 2011.

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APPENDIX IV UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

• (2) The pro forma adjustment of approximately HK$19,123,000 represents the annual finance cost of the imputed interest expenses recognized for the Promissory Notes and the Convertible Notes in the consolidated statement of comprehensive income of the Enlarged Group with the imputed interest rates of 1.01% and 6.27% respectively for the year ended 31 December 2010. These interest expenses will have the continuing effect on the financial statements of the Enlarged Group in subsequent years. The imputed interest rates were determined by reference to a various factors, including the credit spread of the Company and specific risk premium being assessed by Roma.

Details are set out as follows:

Imputed interest on Promissory Notes Imputed interest on Convertible Notes	HK$’000 2,564 16,559
	19,123

• (3) This adjustment represents the non-controlling interest of 20% on the Target Group’s profit, assuming the Acquisition has been completed on 1 April 2010.

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APPENDIX IV

UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

• (4) The calculation of unaudited pro forma earnings/(loss) per share are shown as follows:

• (a) From continuing and discontinued operation

The calculation of the unaudited pro forma earnings/(loss) per share attributable to owners of the Company is based on the following data:

Earnings/(loss) Earnings/(loss) for the year attributable to the owners of the Company for the purpose of basic earnings/(loss) per share Effect of dilutive potential ordinary shares: Interest on Convertible Notes Earnings/(loss) for the year attributable to the owners of the Company for the purpose of diluted earnings/(loss) per share Scenario 1 Number of shares Weighted average number of ordinary shares for the purpose of basic earnings/(loss) per share Effect of dilutive potential ordinary shares: Convertible Notes (note a) Effect of dilutive potential ordinary shares: Convertible Notes Weighted average number of ordinary shares for the purpose of diluted earnings/(loss) per share	The Group year ended 31 March 2011 HK$’000 (3,444) – (3,444) ’000 91,396 – 4,221 95,617	Pro forma Enlarged Group HK$’000 3,472 16,559
		20,031
		’000 91,396 426,471 4,221
		522,088

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APPENDIX IV

UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

		The Group	Pro forma
		Year ended	Enlarged
	Scenario 2	31 March 2011	Group
	Number of shares	’000	’000
	Weighted average number of ordinary
	shares for the purpose of basic earnings/
	(loss) per share	91,396	91,396
	Effect of dilutive potential ordinary shares:
	Convertible Notes (note a)	–	1,277,533
	Effect of dilutive potential
	ordinary shares:
	Convertible Notes	4,221	4,221
	Weighted average number of ordinary
	shares for the purpose of duilted
	earnings/(loss) per share	95,617	1,373,150
(b)	From continuing operations
	The calculation of the unaudited pro	forma earnings/(loss) per share
	attributable to owners of the Company is based on the following data:
		HK$’000	HK$’000
	Earnings/(loss)
	Earnings/(loss) for the year attributable
	to the owners of the Company for the
	purpose of basic earnings per share	(3,444)	3,472
	Add: Loss before tax from
	discontinued operations	25,269	25,269
	Earnings for the year attributable to the
	owners of the Company for the purpose
	of basic earnings per share from
	continuing operations	21,825	28,741
	Effect of dilutive potential ordinary shares:
	Interest on Convertible Notes	–	16,559
	Earnings for the year attributable to the
	owners of the Company for the purpose
	of diluted earnings per share	21,825	45,300

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UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

APPENDIX IV

Scenario 1 Number of shares Weighted average number of ordinary shares for the purpose of basis earnings per share Effect of dilutive potential ordinary shares: Convertible Notes (note a) Effect of dilutive potential ordinary shares: Convertible Notes Weighted average number of ordinary shares for the purpose of diluted earnings per share Scenario 2 Number of shares Weighted average number of ordinary shares for the purpose of basis earnings per share Effect of dilutive potential ordinary shares: Convertible Notes (note a) Effect of dilutive potential ordinary shares: Convertible Notes Weighted average number of ordinary shares for the purpose of diluted earnings per share	The Group Year ended 31 March 2011 ’000 91,396 – 4,221 95,617 ’000 91,396 – 4,221 95,617	Pro forma Enlarged Group ’000 91,396 426,471 4,221 522,088 ’000 91,396 1,277,533 4,221 1,373,150

Note a: According to the Company’s announcement dated 23 September 2011, the holders of the Convertible Notes shall have the right to convert the whole or any part of the outstanding principal amount of the Convertible Notes at any time from its date of issue at the conversion price with maximum at HK$0.68 and minimum at HK$0.227.

Note b: Certain diluted earning/(loss) per share has not been presented due to the antidilutive effect from the conversion of the Convertible Notes.

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APPENDIX IV

UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

• (5) The financial statements of Target Group was translated into Hong Kong dollars at translation rates of HK$1 = RMB0.848

• (6) The bank balance and cash of the Unaudited Pro Forma Financial Information is a negative cash balance of HK$192,329,000. The cash consideration has been financed by the gross proceeds from the offering of right issues in the amount of approximately HK$206.08 million and will be financed by other fund raising activities and other borrowings as disclosed in the section headed “Working capital statement” as continued in Appendix I to this Circular, subsequent to 31 March 2011.

• (7) This adjustment represents the effect of reversing the non-controlling share of the profits from Bainan Yancheng assuming the Target Group has completed the Reorganization of buying back the 46.80% shareholdings of Bainan Yancheng from Mr. Hue Kwok Chiu.

• (8) Subsequent Event

Bai Run, one of the subsidiaries of the Project company, was established on 12 May 2011. Bai Run was set up as the purchase agent of the Project Companies and has commenced its business since its establishment. Bai Run is in the initial stage of its operation, and all of its sales were made among the Project Companies as intergroup transactions. As its operating result was out of the period presented for the Target Group, which is for the year ended 31 December 2008, 2009 and 2010 and the period ended 31 March 2011, it was not considered valuable to include its results in the accountant’s report for the aforesaid period without presenting the sales figures of the Project Company for the corresponding period. In this connection, the results of Bai Run have not been included in the accountant’s report.

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APPENDIX IV

UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

5. ACCOUNTANTS’ REPORT ON UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

The following is the text of an accountants’ report dated 23 September 2011 prepared for the sole purpose of inclusion in this circular, received from the independent reporting accountants, CCTH CPA Limited, Certified Public Accountants, Hong Kong, in respect of the Unaudited Pro Forma Financial Information of the Enlarged Group.

CCTH CPA LIMITED

23 September 2011

The Board of Directors

China Environmental Energy Investment Limited

22/F., Tower Two, Lippo Centre, 89 Queensway, Hong Kong

Dear Sirs,

We report on the Unaudited Pro Forma Financial Information of China Environmental Energy Investment Limited (the “Company”) and its subsidiaries (hereinafter collectively referred to as the “Group”), Ideal Market Holdings Limited and its subsidiaries (the “Target Group”) (together with the Group hereinafter referred to as the “Enlarged Group”), which has been prepared by the directors of the Company, solely for illustrative purposes only, to provide information about how the proposed acquisition of the entire issued capital in the Target Group by the Company (the “Acquisition”), might have affected the financial information presented, as set out on pages 139 to 161 of the Company’s circular dated 23 September 2011 (the “Circular”). The basis of preparation of the Unaudited Pro Forma Financial Information is set out in the section under the heading of “Unaudited Pro Forma Financial Information of the Enlarged Group” (the “Pro Forma Financial Information”) in Appendix IV to the Circular.

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APPENDIX IV

UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

Respective Responsibilities of Directors of the Company and Reporting Accountants

It is the responsibility solely of the directors of the Company to prepare the Unaudited Pro Forma Financial Information in accordance with paragraph 4.29 of the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited (the “Listing Rules”) and with reference to Accounting Guideline 7 “Preparation of Pro Forma Financial Information for Inclusion in Investment Circulars” issued by the Hong Kong Institute of Certified Public Accountants (the “HKICPA”).

It is our responsibility to form an opinion, as required by paragraph 4.29(7) of the Listing Rules, on the Unaudited Pro Forma Financial Information and to report our opinion to you. We do not accept any responsibility for any reports previously given by us on any financial information used in the compilation of the Unaudited Pro Forma Financial Information beyond that owed to those to whom those reports were addressed by us at the respective dates of their issue.

Basis of opinion

We conducted our engagement in accordance with Hong Kong Standard on Investment Circular Reporting Engagements 300 “Accountants’ Reports on Pro Forma Financial Information in Investment Circulars” issued by the HKICPA. Our work consisted primarily of comparing the unadjusted financial information with the source documents, considering the evidence supporting the adjustments and discussing the Unaudited Pro Forma Financial Information with the directors of the Company. This engagement did not involve independent examination of any of the underlying financial information.

We planned and performed our work so as to obtain the information and explanations we considered necessary in order to provide us with sufficient evidence to give reasonable assurance that the Unaudited Pro Forma Financial Information has been properly compiled by the directors of the Company on the basis stated, that such basis is consistent with the accounting policies of the Group and that the adjustments are appropriate for the purposes of the Unaudited Pro Forma Financial Information as disclosed pursuant to paragraph 4.29(1) of the Listing Rules.

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APPENDIX IV

UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

The Unaudited Pro Forma Financial Information is for illustrative purposes only, based on the judgements and assumptions of the directors of the Company, and because of its hypothetical nature, does not provide any assurance or indication that any event will take place in the future and may not be indicative of:

• the financial position of the Enlarged Group as at 31 March 2011 or any future date; or

• the results and cash flows of the Enlarged Group for the year ended 31 December 2011 or any future periods.

Opinion

In our opinion:

• (a) the Unaudited Pro Forma Financial Information has been properly compiled by the directors of the Company on the basis stated;

• (b) such basis is consistent with the accounting policies of the Group; and

• (c) the adjustments are appropriate for the purposes of the Unaudited Pro Forma Financial Information as disclosed pursuant to paragraph 4.29(1) of the Listing Rules.

Yours faithfully,

CCTH CPA Limited

Certified Public Accountants

Kwong Tin Lap

Practising Certificate Number P01953 Units 9-10, 27/F., North Tower, Concordia Plaza, 1 Science Museum Road, Tsim Sha Tsui, Kowloon

– 164 –

APPENDIX V

VALUATION REPORT OF THE TARGET GROUP

==> picture [97 x 56] intentionally omitted <==

Unit 3806, 38/F, China Resources Building, 26 Harbour Road, Wan Chai, Hong Kong Tel (852) 2529 6878 Fax (852) 2529 6806 E-mail info@roma-international.com http://www.roma-international.com

23 September 2011

China Environmental Energy Investment Limited

Room 2211,22/F, Tower Two, Lippo Centre, 89 Queensway, Hong Kong

Case Ref: KY/BV552/MAY11

Dear Sir/Madam,

Re: Business Valuation of the 100% Equity Interest in Ideal Market Holdings Limited

In accordance with the instructions from China Environmental Energy Investment Limited (hereinafter referred to as the “ Company ”) to us to conduct a business valuation on the 100% equity interest in Ideal Market Holdings Limited (hereinafter referred to as the “ Business Enterprise ”), we are pleased to report that we have made relevant enquiries and obtained other information which we considered relevant for the purpose of providing our opinion of the market value of the Business Enterprise as at 30 April 2011 (hereinafter referred to as the “ Date of Valuation ”).

This report states the purpose and basis of valuation, scope of work, economic and industry overview, an overview of the Business Enterprise, major assumptions, valuation methodology, limiting conditions, and presents our opinion of value.

1. PURPOSE OF VALUATION

This report is prepared solely for the use of the directors and management of the Company. The Company is a public company listed on the main board of the Hong Kong Stock Exchange. In addition, Roma Appraisals Limited (hereinafter referred to as “ Roma Appraisals ”) acknowledges that this report may be made available for public documentation purpose and included in the Company’s circulars only.

Roma Appraisals assumes no responsibility whatsoever to any person other than the Company in respect of, or arising out of, the contents of this report. If others choose to rely in any way on the contents of this report they do so entirely on their own risk.

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VALUATION REPORT OF THE TARGET GROUP

APPENDIX V

2. SCOPE OF WORK

Our valuation conclusion is based on the assumptions stated herein and on information provided by the management of the Business Enterprise, and/or its representative (together referred to as the “ Management ”).

In preparing this report, we have had discussions with the Management in relation to the development and prospect of the recycling industry in the PRC, and the development, operations and other relevant information of the Business Enterprise. As part of our analysis, we have reviewed such financial information and other pertinent data concerning the Business Enterprise provided to us by the Management and have considered such information and data as attainable and reasonable.

We have no reason to believe that any material facts have been withheld from us, however, we do not warrant that our investigations have revealed all of the matters which an audit or more extensive examination might disclose.

3. ECONOMIC AND INDUSTRY OVERVIEW

3.1 Overview of the Economy in the China

According to the National Bureau of Statistics of China, the nominal Gross Domestic Product (“ GDP ”) in 2010 was RMB39,798.3 billion, an increase of 10.3% in real term over the previous year. China is the second largest economy in the world, ranked after United States, in terms of nominal GDP measured by the International Monetary Fund in 2010. Despite the global financial crisis in late 2008, the Chinese economy continued to be supported by the Chinese government through spending in infrastructure and real estates.

Throughout 2009, the global economic downturn reduced foreign demand for Chinese exports for the first time in many years. The government vowed to continue reforming the economy and emphasized the need to increase domestic consumption in order to make China less dependent on foreign exports. China economy rebounded quickly in 2010, outperforming all other major economies with robust GDP growth and the economy appears to remain in strong growth in 2011.

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APPENDIX V VALUATION REPORT OF THE TARGET GROUP

Over the past decade from 2001 to 2010, compound annual growth rate of China’s GDP was 9.3% and in the government’s latest plan, it is targeted to grow at 7% for the period from 2011 to 2015.

Figure 1 – China’s Gross Domestic Product in 2006-2010

==> picture [349 x 261] intentionally omitted <==

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

billion RMB
45,000
39,798.3
40,000
35,000 34,090.3
31,404.5
30,000
26,581.0
25,000
21,631.4
20,000
15,000
10,000
5,000
0
2006 2007 2008 2009 2010
----- End of picture text -----

Source: National Bureau of Statistics of China

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VALUATION REPORT OF THE TARGET GROUP

APPENDIX V

3.2 Overview of Paper Recycling Industry in China

According to the China Paper Association, paper and board production in China grew at an average annual growth rate of 12.27% for the period spanning 2000 to 2009 and reached 89.4 million tonnes in 2009. This is driven by the strong growth of the China economy in the past decade. Statistics from the Bureau of International Recycling shows that China has overtaken the U.S. as the largest producer of paper and board globally since 2008. Figure 2 illustrates the trend of paper and board production from 2000 to 2009.

Figure 2 – Paper and Board Production Trend in China from 2000 to 2009

==> picture [313 x 240] intentionally omitted <==

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

Million Tonnes
100
90
80
70
60
50
40
30
20
10
0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Paper and Board Production
----- End of picture text -----

Source: China Paper Association

Owing to the stable growth in paper production, overall demand for waste paper as feedstock also increased. Consumption of imported waste paper increased sixfold from 3.7 million tonnes in 2000 to 27.5 million tonnes in 2009, according to the China Paper Association, turning China into the largest importer of waste paper in the world. Figure 3 shows the amount of imported waste paper in China from 2000 to 2009.

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VALUATION REPORT OF THE TARGET GROUP

APPENDIX V

Figure 3 – Amount of Imported Waste Paper in China from 2000 to 2009

==> picture [303 x 238] intentionally omitted <==

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

Million Tonnes
30
25
20
15
10
5
0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Amount of Imported Waste Paper
----- End of picture text -----

Source: China Paper Association

Despite continuous increase in the amount of imported waste paper in absolute term, imported waste paper as a proportion of total waste paper consumption has been declining, primarily because of the hike in prices of imported waste paper, smaller supply from some of the exporting countries, improved efficiency of domestic suppliers and local paper mill’s intention to build domestic waste paper collection networks to secure a steady stream of feedstocks. Domestic waste paper outgrew the imported ones during the period. With reference to the China Paper Association, the share of domestic supply of waste paper increased from approximately 50% in 2005 to approximately 56% in 2009.

Demand for paper in China is on a rising trend. But per capita consumption of paper and board in China remains low at 64 kg according to the China Paper Association, comparing to developed countries like North America and Europe with apparent per capita consumption of paper and board of 227.2 kg and 127 kg respectively in 2009, according to the Bureau of International Recycling. With such low base, together with increasing environmental awareness among Chinese citizens and government support for recycling, potential for growth of recycled paper consumption in China is huge.

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VALUATION REPORT OF THE TARGET GROUP

APPENDIX V

Note:

The Bureau of International Recycling was founded in 1948 and is a global recycling industry association representing more than 750 member companies from the private sector and 40 national trade federations in more than 70 countries. The organisation serves as a platform to establish business relations and to promote recycling among other industrial sectors and policy makers.

The China Paper Association was founded in Beijing in 1992. It is incorporated as a social entity under the guidance of relevant departments of the State Council of the People’s Republic of China. It mainly serves as a bridge between the government and the industry and regularly publishes reports and statistics of the paper industry.

4. THE BUSINESS ENTERPRISE

The Business Enterprise was incorporated in the British Virgin Islands with limited liability on 18 August 2010, its principal asset is the 100% equity interests in Topbright International Group Holdings Limited, a company incorporated under the laws of Hong Kong on 13 September 2010 with limited liability.

The principal asset of Topbright International Group Holdings Limited is the 100% equity interest in Xiangshan Gaoming Environmental Protection Technology Limited, a wholly foreign owned enterprise incorporated under the laws of the PRC.

Xiangshan Gaoming Environmental Protection Technology Limited was incorporated in the PRC on 25 October 2010 with limited liability and its principal asset is the 100% equity interest in Suzhou Baina Renewable Resources Co., Ltd.

Suzhou Baina Renewable Resources Co., Ltd, a company incorporated in the PRC with limited liability, owns the entire equity interests in each of its subsidiaries, namely Suzhou Baina Renewable Resources Yancheng Company Limited, Huaian Guo Yuan Renewable Resources Company Limited and Huaian Bai Run Renewable Resources Co., Ltd, upon the completion of reorganisation. The principal business activities of Suzhou Baina Renewable Resources Co., Ltd and its subsidiaries are operating a trading centre in Jiangsu and 23 waste paper collection stations located in Jiangsu, Anhui and Shanghai.

5. BASIS OF VALUATION

Our valuation is based on going concern premise and conducted on a market value basis. Market value is defined as “the amount for which an asset could be exchanged, or a liability settled between knowledgeable, willing parties in an arm’s length transaction”.

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APPENDIX V

VALUATION REPORT OF THE TARGET GROUP

6. INVESTIGATION AND ANALYSIS

Our investigation included discussions with members of the Management in relation to the development, operations and other relevant information of the Business Enterprise. In addition, we have made relevant inquiries and obtained further information and statistical figures regarding the economy of the China as we considered necessary for the purpose of the valuation.

As part of our analysis, we have reviewed such financial information and other pertinent data concerning the Business Enterprise provided to us by the Management and had considered such information and data as attainable and reasonable. We have also consulted other sources of financial and business information.

The valuation of the Business Enterprise requires consideration of all pertinent factors, which may or may not affect the operation of the business and its ability to generate future investment returns. The factors considered in our valuation include, but are not necessarily limited to, the following:

• The nature and prospect of the Business Enterprise;

• The financial condition of the Business Enterprise;

• The economic outlook in general and the specific economic environment and market elements affecting the business, industry and market;

• Relevant licences and agreements;

• The business risk of the Business Enterprise such as the ability in maintaining competent technical and professional personnel; and

• Investment returns and market transactions of entities engaged in similar lines of business.

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APPENDIX V

VALUATION REPORT OF THE TARGET GROUP

7. VALUATION METHODOLOGY

There are generally three accepted approaches to obtain the market value of the Business Enterprise, namely the Market-Based Approach, Income-Based Approach and Asset-Based Approach. Each of these approaches is appropriate in one or more circumstances, and sometimes, two or more approaches may be used together. Whether to adopt a particular approach will be determined by the most commonly adopted practice in valuing business entities that are similar in nature.

7.1 Market-Based Approach

The Market-Based Approach values a business entity by comparing prices at which other business entities in a similar nature changed hands in arm’s length transactions. The underlying theory of this approach is that one would not pay more than one would have to for an equally desirable alternative. By adopting this approach, the valuator will first look for valuation indication of prices of other similar business entities that have been sold recently.

The right transactions employed in analyzing indications of values need to be sold at an arm’s length basis, assuming that the buyers and sellers are well informed and have no special motivations or compulsions to buy or to sell.

7.2 Income-Based Approach

The Income-Based Approach focuses on the economic benefits due to the income producing capability of the business entity. The underlying theory of this approach is that the value of the business entity can be measured by the present worth of the economic benefits to be received over the useful life of the business entity. Based on this valuation principle, the Income-Based Approach estimates the future economic benefits and discounts them to their present values using a discount rate appropriate for the risks associated with realizing those benefits.

Alternatively, this present value can be calculated by capitalizing the economic benefits to be received in the next period at an appropriate capitalization rate. This is subject to the assumption that the business entity will continue to maintain stable economic benefits and growth rate.

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APPENDIX V

7.3 Asset-Based Approach

The Asset-Based Approach is based on the general concept that the earning power of a business entity is derived primarily from its existing assets. The assumption of this approach is that when each of the elements of working capital, tangible and intangible assets is individually valued, their sum represents the value of a business entity and equals to the value of its invested capital (“ equity and long term debt ”). In other words, the value of the business entity is represented by the money that has been made available to purchase the business assets needed.

This money comes from investors who buy stocks of the business entity (“ equity ”) and investors who lend money to the business entity (“ debt ”). After collecting the total amounts of money from equity and debt, and converted into various types of assets of the business entity for its operation, their sum equals the value of the business entity.

7.4 Business Valuation

In the process of valuing the market value of the Business Enterprise, we have taken into account of the uniqueness of its nature and the relevant industry. The Income-Based Approach was not adopted, because definitive forecasts on revenue, capital expenditure, working capital, net profit, and other financial projections were not available in details that were good enough for the purpose of adopting Income-Based Approach. The Asset-Based Approach was also not adopted because it could not reflect the future potential growth of the Business Enterprise. We have therefore considered the adoption of Market-Based Approach in arriving at the market value of the Business Enterprise.

Under the Market-Based Approach, we have to determine the appropriate value multiples of similar companies, in which we have considered price-to-sales, price-toearnings, and price-to-book multiples. In this valuation, we have adopted the price-toearnings multiple and we considered it as the most appropriate method in valuing the Business Enterprise. Price-to-sales multiples are not adopted because of the extreme wide range of the multiples, from the low of 0.6 times to the high of 9.8 times, and thus cannot provide a good guidance for valuation. Price-to-book multiple is not considered appropriate as a paper recycling company, unlike a bank or a property developer, is not capital intensive. As such, price-to-earnings multiple is considered to be the appropriate method in the valuation of the Business Enterprise.

In view of the limited number of listed companies operating in the wasted paper recycling business in China, we broadened our selection of comparable companies to those that can reflect the market sentiment towards companies engaged in the general recycling business industry. Furthermore, we expanded the selection of comparable companies to China-listed companies, in addition to considering HK-listed companies. All comparable companies selected are representative of the generally recycling business in China and share the characteristics of the Business Enterprise.

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VALUATION REPORT OF THE TARGET GROUP

Companies that principally operate in the general recycling business in China and with majority of revenue and operating profit generated from this business segment were selected. Integrated paper manufacturers with waste paper recycling operation were excluded in our selection of comparable companies because finished paper products are likely to generate the majority of revenue and profit. Furthermore, companies that operate under strong upstream industries, such as motor vehicle and marine vessels, were excluded from the selection of comparable companies as the business of such companies are likely to be under significant influence of the upstream industries and therefore, the market may associate such companies less with the recycling business than the upstream industry.

We have selected five listed comparable companies of which their operating businesses were in general recycling industry. The price-to-earnings multiples of the comparable companies were extracted from Bloomberg as at the Date of Valuation and the details are listed as follows:

		Last Price		Last FY	Price/Book	Price/
Ticker	Name	(LC)	Mkt Cap	P/E (x)	Value (x)	Sales (x)
			(LC million)
923 HK	Fook Woo Group	2.41	5,926	12.7	2.2	2.5
000630 CH	Tongling Nonferrous Metals	25.34	36,023	34.0	3.6	0.6
002171 CH	Anhui Jingcheng Copper	18.58	6,057	64.3	9.1	2.0
002340 CH	Shenzhen Green Eco-Manu	46.49	5,639	64.6	5.3	9.8
600531 CH	Henan Yuguang Gold&Lead	31.36	9,259	46.1	5.0	0.8
	Average			44.3	5.0	3.1

Note: LC for local currency, HK$ for companies listed in Hong Kong and RMB for those listed in the PRC

The price-to-earnings multiple adopted was the average of price-to-earnings multiples of five of the comparable companies listed above. Also, we have obtained the RMB27.2 million reported net profit in FY2010, based on the unaudited financial information provided by the Management.

In accordance with the Market-Based Approach, we applied the average price-to-earnings multiple of 44.3 to the reported net profit figure of the Business Enterprise and the market value of the Business Enterprise, before any premium and discounts, is RMB1,204 million.

7.4.1 Marketability Discount

Compared to similar interest in public companies, ownership interest is not readily marketable for closely held companies. Therefore, the value of a share of stock in a privately held company is usually less than an otherwise comparable share of stock in a publicly held company. In the article with title “Why Is the Value of Minority Stock Discounted So Heavily” authored by Phil Williams and John Linder with LarsonAllen, the authors conducted analysis and determined appropriate lack of marketability discounts for nonmarketable stocks in privately held companies. In concluding their analysis, they stated the average discount for discount for marketability, and accordingly, a marketability discount of 25.00% has been considered in arriving at our opinion of value of the Business Enterprise.

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APPENDIX V

8. MAJOR ASSUMPTIONS

We have adopted certain specific assumptions in our valuation and the major ones are as follows:

• All relevant legal approvals and business certificates or licenses to operate the business in the localities in which the Business Enterprise operates or intends to operate would be officially obtained and renewable upon expiry;

• There will be sufficient supply of technical staff in the industry in which the Business Enterprise operates, and the Business Enterprise will retain competent management, key personnel and technical staff to support its ongoing operations and developments;

• There will be no major change in the current taxation laws in the localities in which the Business Enterprise operates or intends to operate and that the rates of tax payable shall remain unchanged and that all applicable laws and regulations will be complied with;

• There will be no major change in the political, legal, economic or financial conditions in the localities in which the Business Enterprise operates or intends to operate, which would adversely affect the revenues attributable to and profitability of the Business Enterprise; and

• Interest rates and exchange rates in the localities for the operation of the Business Enterprise will not differ materially from those presently prevailing.

9. INFORMATION REVIEWED

Our estimate requires consideration of relevant factors affecting the market value of the Business Enterprise. The factors considered included, but were not necessarily limited to, the following:

• Historical information of the Business Enterprise;

• Market trends of the recycling industry in the PRC and other dependent industries;

• General descriptions in relation to the Business Enterprise; and

• Economic outlook in China.

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VALUATION REPORT OF THE TARGET GROUP

We have discussed the details and reviewed the basis with the Management. We have also conducted research from various sources to verify the reasonableness and fairness of information provided and we believe that such information is reasonable and reliable. We had assumed the accuracy of information provided and relied to a considerable extent on such information in arriving at our estimate.

10. LIMITING CONDITIONS

The valuation reflects facts and conditions existing at the Date of Valuation. Subsequent events or circumstances have not been considered and we are not required to update our report for such events and conditions.

We would particularly point out that our valuation was based on the information such as company background, business nature and market share of the Business Enterprise provided to us.

To the best of our knowledge, all data set forth in this report are reasonable and accurately determined. The data, opinions, or estimates identified as being furnished by others that have been used in formulating this analysis are gathered from reliable sources; yet, no guarantee is made nor liability assumed for their accuracy.

We have relied to a considerable extent on the historical and/or prospective information provided by the Management and other third parties in arriving at our opinion of value. The information has not been audited or compiled by us. We are not in the position to verify the accuracy of all information provided to us. However, we have had no reason to doubt the truth and accuracy of the information provided to us and to doubt that any material facts have been omitted from the information provided. No responsibilities for the operation and financial information that have not been provided to us are accepted.

We assumed that the Management is competent and perform duties under the company regulation. Also, ownership of the Business Enterprise was in responsible hands, unless otherwise stated in this report. The quality of the Management may have direct impact on the viability of the business as well as the market value of the Business Enterprise.

We have not investigated the title to or any legal liabilities of the Business Enterprise and have assumed no responsibility for the title to the Business Enterprise appraised.

Our conclusion of the market value was derived from generally accepted valuation procedures and practices that rely substantially on the use of various assumptions and the consideration of many uncertainties, not all of which can be easily quantified or ascertained. The conclusion and various estimates may not be separated into parts, and/or used out of the context presented herein, and/or used together with any other valuation or study.

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VALUATION REPORT OF THE TARGET GROUP

We assume no responsibility whatsoever to any person other than the directors and the Management in respect of, or arising out of, the content of this report. If others choose to rely in any way on the contents of this report, they do so entirely on their own risk.

No change to any item in any part of this report shall be made by anyone except Roma Appraisals. We have no responsibility for any such unauthorized change. Neither all nor any part of this report shall be disseminated to the public through any means of communication or referenced in any publications, including but not limited to advertising, public relations, news or sales media.

This report may not be reproduced, in whole or in part, and utilized by any third parties for any purpose, without the written consent and approval of Roma Appraisals.

The working papers and models for this valuation are being kept in our files and would be available for further references. We would be available to support our valuation if required.

11. REMARKS

Unless otherwise stated, all monetary amounts stated in this valuation report are in Hong Kong Dollars (HK$).

We hereby confirm that we have neither present nor prospective interests in the Company and the associated companies, the Business Enterprise or the values reported herein.

12. OPINION OF VALUE

Based on the investigation and analysis stated above and on the valuation method employed, the market value of the Business Enterprise as at the Date of Valuation, in our opinion, is reasonably estimated as HK$1,080,000,000 (HONG KONG DOLLAR ONE BILLION AND EIGHTY MILLION ONLY).

Yours faithfully, For and on behalf of

Roma Appraisals Limited

Kelvin Luk	H. C. Kwan
MIBA	CFA
Director	Director

Note:

Mr. Luk is a member of the Institute of Business Appraisers. He has over 5 years of experience in valuation and consultation related to similar assets or companies engaged in similar business activities worldwide as that of the Business Enterprise.

Mr. Kwan is a member of the CFA Institute. He has over 10 years of experience in valuation of similar assets or companies engaged in similar business activities as that of the Business Enterprise.

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APPENDIX VI PROPERTY VALUATION REPORT OF THE ENLARGED GROUP

The following is the text of a letter, summary of values and a valuation certificate prepared for the purpose of incorporation in this circular received from LCH (Asia-Pacific) Surveyors Limited, an independent professional surveyor, in connection with its valuations as at 31 July 2011 of the property interests held by the Group.

==> picture [195 x 45] intentionally omitted <==

The readers are reminded that the report which follows has been prepared in accordance with the guidelines set by the International Valuation Standards, Eighth Edition, 2007 (the “ IVS ”) published by the International Valuation Standards Committee as well as the HKIS Valuation Standards on Properties, First Edition, 2005 (the “ HKIS Standards ”) published by The Hong Kong Institute of Surveyors (“ The HKIS ”). Both standards entitle the valuer to make assumptions which may on further investigation, for instance by the readers’ legal representative, prove to be inaccurate. Any exception is clearly stated below. Headings are inserted for convenient reference only and have no effect in limiting or extending the language of the paragraphs to which they refer. Translation of terms in English or in Chinese are for reader’s identification purpose only and have no legal status or implication in this report. This report was prepared and signed off in English format, translation of this report in language other than English shall only be used as a reference and should not be regarded as a substitution to this report. Piecemeal reference to this report is considered to be inappropriate and no responsibility is assumed from our part for such piecemeal reference. It is emphasised that the findings and conclusion presented below are based on the documents and facts known to the valuers at the date of this report. If additional documents and facts are made available, the valuers reserve the right to amend this report and its conclusions.

17th Floor Champion Building Nos. 287 – 291 Des Voeux Road Central Hong Kong 23 September 2011

The Board of Directors

China Environmental Energy Investment Limited

Room 2211, 22nd Floor, Tower 2 Lippo Centre No. 89 Queensway Admiralty Hong Kong

Dear Sirs,

In accordance with the instructions given by the management of China Environmental Energy Investment Limited (hereinafter referred to as the “ Company ”) to us to value certain properties in which the Company or its subsidiaries (collectively, hereinafter together with the Company referred to as the “ Group ”) have interests in Hong Kong and the People’s Republic of China (hereinafter referred to as the “ PRC ” or “ China ”), we confirm that we have conducted inspections, made relevant enquiries and obtained such further information as we consider necessary to support our findings and our conclusion of values of the property interests as at 31 July 2011 (hereinafter referred to as the “ Date of Valuation ”) for the Company’s internal management reference purpose.

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PROPERTY VALUATION REPORT OF THE ENLARGED GROUP

We understand that the use of our work product (regardless of form of presentation) will form part of the Company’s due diligence but we have not been engaged to make specific sales or purchase recommendations, or give opinion for financing arrangement. We further understand that the use of our work product will not supplant other due diligence which the management of the Company should conduct in reaching its business decision regarding the properties valued. Our work is designed solely to provide information that will give the management of the Company a reference in its due diligence process, and our work will not be the only factor to be referenced by the Company. Our findings and conclusion of values of these properties are documented in a valuation report and submitted to the Company at today’s date.

At the request of the management of the Company, we prepared this summary report (including this letter, summary of values and a valuation certificate) to summarise our findings and conclusion of values as documented in the valuation report for the purpose of inclusion in this circular at today’s date for the Company’s shareholders’ reference. Terms herein used without definition shall have the same meanings as in the valuation report, and the assumptions and caveats adopted in the valuation report also applied to this summary report.

BASIS OF VALUATION AND ASSUMPTIONS

According to the IVS, which the HKIS Standards also follows, there are two valuation bases, namely market value basis and valuation bases other than market value. In this engagement, we have provided our conclusion of values of the properties on market value basis.

The term “ Market Value ” is defined by the IVS and the HKIS Standards as “the estimated amount for which a property should exchange on the date of valuation between a willing buyer and a willing seller in an arm’s-length transaction after proper marketing wherein the parties had each acted knowledgeably, prudently and without compulsion”.

Unless otherwise stated, our valuations of the property interests have been made on the assumptions that, as at the Date of Valuation,

1. the legally interested party in each of the properties has free and uninterrupted rights to assign its relevant property interest for the whole of the unexpired terms as granted, and any premiums payable have already been fully paid; and

2. the legally interested party in each of the properties sells its relevant property interest in the market in its existing state as an unique interest without the benefit of a deferred terms contract, leaseback, joint venture, management agreement or any other similar arrangement which would serve to increase the value of the property interest;

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APPENDIX VI PROPERTY VALUATION REPORT OF THE ENLARGED GROUP

Unless otherwise stated, our valuation of the property interest in Group I has been made on further assumptions that, as at the Date of Valuation,

1. the legally interested party in the property has absolute title to its relevant property interest;

2. the property has obtained relevant government’s approvals for the sale of the property and is able to be disposed of and transferred free of all encumbrances (including but not limited to the cost of transaction) in the market; and

3. the property can be freely disposed of and transferred free of all encumbrances as at the Date of Valuation for its existing uses in the market to both local and overseas purchasers without payment of any premium to the government.

Should any of the above not be the case, it will have adverse impact to the values as reported.

APPROACH TO VALUE

There are three generally accepted approaches in arriving at the market value of a property on an absolute title basis, namely the Sales Comparison Approach (or known as the Market Approach), the Cost Approach and the Income Approach.

Having considered the general and inherent characteristics of the property in Group I, we have adopted the depreciated replacement cost (“ DRC ”) approach which is a procedural valuation approach and an application of the Cost Approach in valuing specialised properties like the property in Group I. The use of this approach requires an estimate of the market value of the land use rights for its existing use, and an estimate of the new replacement cost of the buildings and other site works from which deductions are then made to allow for age, condition, and functional obsolescence taken into account of the site formation cost and those public utilities connection charges to the property. The land use rights of the property has been determined from market-based evidences by analysing similar sales or offerings of comparable properties.

For owner-occupied specialised properties where it is impracticable to identify the market value by Sales Comparison Approach, the DRC approach is considered as the most appropriate approach. The underlying theory of this approach is the market value of the valued property should, at least, be equivalent to the replacement cost of the remaining service potential of the valued property i.e. the DRC of the valued property. In our opinion, the DRC generally furnishes the most reliable indication of value for property where it is not practicable to ascertain its value on market evidence basis.

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PROPERTY VALUATION REPORT OF THE ENLARGED GROUP

Specialised properties are certain types of properties which are rarely, if ever, sold in the open market, except by way of a sale of the business of which they are a part (called the business in occupation), due to their uniqueness arising from their specialised nature and design of the buildings, their configuration, size, location or otherwise. Examples are: standard properties located in particular geographical areas and remote from main business centres for operational or business reasons, that are of such an abnormal size for that district, that there would be no market for such buildings there; buildings and site engineering works related directly to the business of the owner, as it is highly unlikely that they would have a value to anyone other than a company acquiring the undertaking; and properties of such construction, arrangement, size or specification that there would be no market (for a sale to a single owner occupier for the continuation of existing use) for those buildings. Having considered the inherent and general characteristics of the property, we take the view that the property is a specialised property.

By using this approach, the land should be assumed to have the benefit of planning permission for the replacement of the existing buildings and it is always necessary when valuing the land, to have regard to the manner in which the land is developed by the existing buildings and site works, and the extent to which these realise the full potential value of the land. When considering a notional replacement site, it should normally be regarded as having the same physical and location characteristics as the actual site, other than characteristics of the actual site which are not relevant, or are of no value, to the existing use. In considering the buildings, the gross replacement cost of the buildings should take into consideration everything which is necessary to complete the construction from a new green field site to provide buildings as they are, at the date of valuation, fit for and capable of being occupied and used for the current use. These costs to be estimated are not to erect buildings in the future but have the buildings available for occupation at the date of valuation, the work having commenced at the appropriate time.

We need to state that our conclusion of value of property in Group I is not necessarily intended to represent the amount that might be realised from disposition of land use rights or the buildings of the property on piecemeal basis in the open market.

In valuing the property in Group II, we have adopted the investment method of the Income Approach (or sometimes referred to as a method of the Market Approach for the reversionary interests and the rate of return are market-derived) by taking into account the current rent receivable from the existing tenancy agreement and the reversionary potential of the property interest. The underlying assumption of this method is that an investor will pay no more for the property than he or she would have to be paid for another property with an income stream of comparable amount, duration, and certainty.

The property in Group II is located in the New Territories of Hong Kong in which the Government Leases had already expired before 30 June 1997, and we have taken into account the provisions of Annex III of the Joint Declaration of the Government of the United Kingdom of Great Britain and Northern Ireland and the Government of the PRC on the question of Hong Kong and the New Territories Leases (Extension) Ordinance (Chapter 150 of the Laws of Hong Kong). According to the above document and ordinance, such lease had already been extended without premium until 30 June 2047, and that an annual rent at three per cent. of the rateable value of the property has been charged from the date of extension.

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APPENDIX VI PROPERTY VALUATION REPORT OF THE ENLARGED GROUP

Unless otherwise stated, we have not carried out a valuation on a redevelopment basis and the study of possible alternative development options and the related economics do not come within the scope of our work.

MATTERS THAT MIGHT AFFECT THE VALUES REPORTED

For the sake of valuation, we have adopted the areas as appeared in the copies of the documents as provided and no further verification work has been conducted. Should it be established subsequently that the adopted areas were not the latest approved, we reserve the rights to revise our report and valuations accordingly.

No allowance has been made in our valuations for any charges, mortgages, outstanding premium or amounts owing on the properties valued nor any expenses or taxation which may be incurred in effecting a sale. Unless otherwise stated, it is assumed that the properties are free from encumbrances, restrictions, and outgoings of an onerous nature which could affect their values.

In our valuations, we have assumed that each of the properties is able to be sold and purchased in the market without any legal impediment (especially from the regulators). Should this not be the case, it will affect the reported values significantly. The readers are reminded to have their own legal due diligence work on such issues. No responsibility or liability is assumed.

As at the Latest Practicable Date of this circular, we were unable to identify any adverse news against the properties which may affect the reported values in our work product. Thus, we are not in the position to report and comment on its impact (if any) to the properties. However, should it be established subsequently that such news did exist at the Date of Valuation, we reserve the right to adjust the values reported herein.

ESTABLISHMENT OF TITLES

Based on the purpose of this engagement and the market value basis of valuation, the management of the Company was requested to provide us the necessary copies of documents to support the Group’s titles to the property in Group I, and that the Group has free and uninterrupted rights to transfer, to mortgage or to let its relevant property interests (in this instance, an absolute title) for the whole of the unexpired terms as granted free of all encumbrances and any premiums payable have already been paid in full or outstanding procedures have been completed. However, we have not examined the original documents to verify the ownership and encumbrances, or to ascertain the existence of any amendments which may not appear on the copies handed to us. All documents disclosed (if any) are for reference only and no responsibility is assumed for any legal matters concerning the titles and the rights (if any) to the property valued in Group I. Any responsibility for our misinterpretation of the documents cannot be accepted.

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PROPERTY VALUATION REPORT OF THE ENLARGED GROUP

Due to inherent defects in the land registration system of China, we are unable to search the original documents of the property in Group I from the relevant authorities to verify legal titles or to any material encumbrances which may not appear on the copies handed to us. We need to state that we are not legal professional and are not qualified to ascertain the titles and to report any encumbrances that may be registered against the property. However, we have complied with the requirements as stated in Practice Note No. 12 of the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited and relied solely on the copies of document and the copy of the PRC legal opinions provided by the management of the Company with regard to the legal title of the property in Group I. We are given to understand that the PRC legal opinions was prepared by a qualified PRC legal adviser 廣東恒益律師事務所 (“ GFE Law office ”) dated 17 June 2011. As advised by the management of the Company, the legal opinions is still effective as at the Latest Practicable Date of this circular. No responsibility or liability from our part is assumed in relation to those legal opinions.

In our report, we have assumed that the Group has obtained all the approval and/or endorsement from the relevant authorities to own or to use the property, and that there would have no legal impediment (especially from the regulators) for the Group to continue the legal titles to the property in Group I. Should this not be the case, it will affect our findings or conclusion of value in this report significantly. The readers are reminded to have their own legal due diligence work on such issues. No responsibility or liability is assumed.

We have caused searches to be made at the Land Registry of Hong Kong, and we have been provided with the copy of the tenancy agreement regarding the property in Group II. We have not examined the original documents to verify the ownership and encumbrances, or to ascertain the existence of any agreement amendments which may not appear on the copies handed to us. We are not legal professional and are not qualified to ascertain the titles and to report any encumbrances that may be registered against the property. All documents and agreement have been used as reference only. No responsibility and liability is assumed.

INSPECTIONS AND INVESTIGATIONS OF THE PROPERTIES IN ACCORDANCE WITH VALUATION STANDARD 4 OF THE HKIS STANDARDS

We have conducted inspections to the exterior, and where possible, the interior of the properties in respect of which we have been provided with such information as we have requested for the purpose of this engagement. We have not inspected those parts of the properties which were covered, unexposed or inaccessible and such parts have been assumed to be in a reasonable condition. We cannot express an opinion about or advise upon the condition of the properties and our work product should not be taken as making any implied representation or statement about the condition of the properties. No structural survey, investigation or examination has been made, but in the course of our inspections, we did not note any serious defects in the properties inspected. We are not, however, able to report that the properties are free from rot, infestation or any other structural defects. No tests were carried out to the utilities (if any) and we are unable to identify those utilities covered, unexposed or inaccessible.

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APPENDIX VI PROPERTY VALUATION REPORT OF THE ENLARGED GROUP

We have not carried out on-site measurements to verify the correctness of the areas of the properties, but have assumed that the areas and the official layout plans shown on the documents handed to us are correct. All dimensions, measurements and areas are approximations.

Our engagement and the agreed procedures to value the properties did not include an independent land survey to verify the legal boundaries of the properties. We need to state that we are not in the land survey profession, therefore, we are not in the position to verify or ascertain the correctness of the legal boundaries of the properties that appeared on the documents handed to us. No responsibility from our part is assumed. The management of the Company or interested party in the properties should conduct their own legal boundaries due diligence work.

We have not arranged for any investigation to be carried out to determine whether or not any deleterious or hazardous material has been used in the construction of the properties, or has since been incorporated, and we are therefore unable to report that the properties are free from risk in this respect, and we have not considered such factor in our valuations.

We are not aware of the content of any environmental audit or other environmental investigation or soil survey which may have been carried out on the properties and which may draw attention to any contamination or the possibility of any such contamination. In undertaking our work, we have been instructed to assume that no contaminative or potentially contaminative uses have ever been carried out in the properties. We have not carried out any investigation into past or present uses, either of the properties or of any neighbouring land, to establish whether there is any contamination or potential for contamination to the properties from these uses or sites, and have therefore assumed that none exists. However, should it be established subsequently that contamination, seepage or pollution exists at the properties or any neighbouring land, or that the premises have been or are being put to a contaminative use, this might reduce the values now reported or our findings.

SOURCES OF INFORMATION AND ITS VERIFICATION IN ACCORDANCE WITH VALUATION STANDARD 5 OF THE HKIS STANDARDS

In the course of our work, we have provided with copies of the documents regarding the properties, and these copies have been referenced without further verifying with the relevant bodies and/or authorities. Our procedures to value did not require us to conduct any searches or inspected the original documents to verify ownership or to verify any amendment which may not appear on the copies handed to us. We need to state we are not legal professional, therefore, we are not in the position to advise and comment on the legality and effectiveness of the documents provided by the management of the Company.

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APPENDIX VI PROPERTY VALUATION REPORT OF THE ENLARGED GROUP

We have relied solely on the information provided by the management of the Company or its appointed personnel without further verification and have fully accepted advice given to us on such matters as planning approvals or statutory notices, locations, titles, easements, tenure, occupation, lettings, rental, site and floor areas and all other relevant matters.

The scope of valuation has been determined by reference to the property list provided by the management of the Company. All properties on the list have been included in our report. The management of the Company has confirmed to us that the Group has no property interest other than those specified on the list supplied to us.

Our valuations have been made only based on the advice and information made available to us. While a limited scope of general inquiries had been made to the local property market practitioners, we are not in a position to verify and ascertain the correctness of the advice given by the relevant personnel. No responsibility or liability is assumed.

Information furnished by others, upon which all or portions of our report are based, is believed to be reliable but has not been verified in all cases. Our procedures to value or work do not constitute an audit, review, or compilation of the information provided. Thus, no warranty is made nor liability assumed for the accuracy of any data, advice, opinions, or estimates identified as being furnished by others which have been used in formulating our report.

When we adopted the work products from other professions, external data providers and the management of the Company or its appointed personnel in our works, the assumptions and caveats adopted by them in arriving at their figures also apply in this report. The procedures we have taken do not provide all the evidence that would be required in an audit and, as we have not performed an audit, accordingly, we do not express an audit opinion.

We are unable to accept any responsibility for the information that has not been supplied to us by the management of the Company or its appointed personnel. Also, we have sought and received confirmation from the management of the Company or its appointed personnel that no materials factors have been omitted from the information supplied. Our analysis and valuations are based upon full disclosure between us and the Company of material and latent facts that may affect our works.

We have had no reason to doubt the truth and accuracy of the information provided to us by the management of the Company or its appointed personnel. We consider that we have been provided with sufficient information to reach an informed view, and have had no reason to suspect that any material information has been withheld.

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APPENDIX VI PROPERTY VALUATION REPORT OF THE ENLARGED GROUP

Unless otherwise stated, all monetary amounts are in Hong Kong dollars (HK$). In valuing the property in the PRC, the adopted exchange rate was the prevailing rate as at the Date of Valuation, being Renminbi Yuan (RMB) 0.82 to HK$1 and no significant fluctuation in exchange rate has been found between the Date of Valuation and the date of this report.

LIMITING CONDITIONS IN THIS SUMMARY REPORT

Our findings and conclusion of values of the properties in this summary report is valid only for the stated purpose and only for the Date of Valuation, and for the sole use of the named Company. We or our personnel shall not be required to give testimony or attendance in court or to any government agency by reason of this report, and the valuers accept no responsibility whatsoever to any other person.

Our valuations have been made on the assumption that no unauthorised alteration, extension or addition has been made in the properties, and that the inspections and the use of this report do not purport to be a building survey of the properties. We have assumed that the properties are free of rot and inherent danger or unsuitable materials and techniques.

No responsibility is taken for changes in market conditions and local government policy and no obligation is assumed to revise this summary report to reflect events or conditions, which occur or make known to us subsequent to the date hereof.

Neither the whole nor any part of this report or any reference made hereto may be included in any published documents, circular or statement, or published in any way, without our written approval of the form and context in which it may appear. Nonetheless, we consent to the publication of this summary report in this circular for the Company’s shareholders’ reference.

Our maximum liability relating to services rendered under this engagement (regardless of form of action, whether in contract, negligence or otherwise) shall be limited to the charges paid to us for the portion of its services or work products giving rise to liability. In no event shall we be liable for consequential, special, incidental or punitive loss, damage or expense (including, without limitation, lost profits, opportunity costs, etc.), even if it has been advised of their possible existence.

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APPENDIX VI

PROPERTY VALUATION REPORT OF THE ENLARGED GROUP

The Company is required to indemnify and hold us and our personnel harmless from any claims, liabilities, costs and expenses (including, without limitation, attorney’s fees and the time of our personnel involved) brought against, paid or incurred by us at a time and in any way based on the information made available in connection with our report except to the extent that any such loses, expenses, damages or liabilities are ultimately determined to be the result of gross negligence of our engagement team in conducting its work. This provision shall survive even after the termination of this engagement for any reason.

STATEMENTS

The attached summary of values and valuation certificate are prepared in line with the requirements contained in the Chapter 5 and Practice Note No. 12 of the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited as well as the guidelines contained in both IVS and the HKIS Standards. The valuations have been undertaken by valuers (see End Notes), acting as external valuers, qualified for the purpose of the valuations.

We retain a copy of this summary report and the valuation report together with the data from which it was prepared, and these data and documents will, according to the Laws of Hong Kong, keep for a period of 6 years from the date of this report and to be destroyed thereafter. We considered these records confidential, and we do not permit access to them by anyone, with the exception for law enforcement authorities or court order, without the Company’s authorisation and prior arrangement made with us. Moreover, we will add the Company’s information into our client list for our future reference.

The valuations of the properties depend solely on the assumptions made in our report and not all of which can be easily quantified or ascertained exactly. Should some or all of the assumptions prove to be inaccurate at a later date, it will affect the reported values significantly.

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APPENDIX VI PROPERTY VALUATION REPORT OF THE ENLARGED GROUP

We hereby certify that the fee for this service is not contingent upon our conclusion of values and we have no significant interest in the properties, the Group or the values reported.

Our valuations are summarised below and the valuation certificate is attached.

Yours faithfully, For and on behalf of

LCH (Asia-Pacific) Surveyors Limited

Elsa Ng Hung Mui Yuki Chan Wan Yuk B.Sc. M.Sc. RPS(GP) BCom RPS(GP) Director Associate Director

Yuki Chan Wan Yuk

Contributing valuer:

Terry Fung Chi Hang B.Sc. M.Sc.

Notes:

1. Ms. Elsa Ng Hung Mui is a Registered Professional Surveyor who has been conducting valuation of real estate properties since 1994. She has rich experience in valuing properties in Hong Kong and mainland China. She is a Member of The HKIS and a valuer on the List of Property Valuers for Undertaking Valuation for Incorporation or Reference in Listing Particulars and Circulars and Valuation in Connection with Takeovers and Mergers published by The HKIS.

2. Ms. Yuki Chan Wan Yuk is a Member of The HKIS, an Associate Member and a Certified Practising Valuer of The Australian Property Institute, who has more than 6 years of experience in valuing properties in Hong Kong and more than 4 years of experience in valuing properties in the PRC.

3. Mr. Terry Fung Chi Hang is a graduated surveyor who has been involved in valuation of real estate properties both in Hong Kong and in the PRC for more than 6 years. He obtained a Master Degree in Real Estate and involved in various assets valuations, mine valuation and agriculture property assets valuation.

– 188 –

APPENDIX VI

PROPERTY VALUATION REPORT OF THE ENLARGED GROUP

SUMMARY OF VALUES

Group I – Property held and occupied by the Group under various long-term title certificates in the PRC and valued on market value basis

Property Interest attributable to the Group 1. A factory complex located at Ludong Management District Humen Town Dongguan City Guangdong Province The PRC 523935 100 per cent. Sub-Total:	Amount of valuation in its existing state attributable to the Group as at 31 July 2011 HK$ 10,360,000 HK$10,360,000

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APPENDIX VI PROPERTY VALUATION REPORT OF THE ENLARGED GROUP

Group II – Property owned by the Group in Hong Kong for investment and valued on market value basis

Property Interest attributable to the Group 2. Unit 4B on Ground Floor Fo Tan Industrial Centre Nos. 26-28 Au Pui Wan Street Fo Tan Shatin New Territories Hong Kong 100 per cent. Sub-Total: Grand Total:	Amount of valuation in its existing state attributable to the Group as at 31 July 2011 HK$ 9,540,000 HK$9,540,000 HK$19,900,000

– 190 –

PROPERTY VALUATION REPORT OF THE ENLARGED GROUP

APPENDIX VI

VALUATION CERTIFICATE

• Group I – Property held and occupied by the Group under various long-term title certificates in the PRC and valued on market value basis

				Amount of
				valuation in its
				existing state
				attributable to the
				Group as at
	Property	Description and tenure	Particulars of occupancy	31 July 2011
				HK$
1.	A factory complex	The property comprises two parcels	As inspected and confirmed	10,360,000
	located at	of adjoining land having a total site	by the management of the
	Ludong	area of approximately 3,665 sq. m.	Company, the property is	(100 per cent.
	Management	(see Note 1 below) with 8 various	occupied by the Group for	interest)
	District	buildings and structures erected	manufacturing, ancillary	(See Note 3)
	Humen Town	thereon.	office, staff quarters and
	Dongguan City		other supporting facilities
	Guangdong	The buildings and structures include	purposes.
	Province	a 4-storey workshop building, a
	The PRC	6-storey dormitory, two single
	523935	storey workshops, a single storey
		warehouse and various single storey
		supporting facilities which were
		completed in between 1993 and
		2003. They have a total gross floor
		area of approximately 9,501.9 sq. m.
		(see Notes 2 and 3 below).
		The property is subject to a right to
		use the lands for two various terms
		till November 2043 and December
		2045 for industrial usage.

Notes:

1. The right to possess the land is held by the State and the right to use the land has been granted by the State or granted by the State and transferred to the Group vide the following ways:

2. (i) A parcel of land having a site area of approximately 2,211 sq. m.

   • Pursuant to a Contract for the Grant of State-owned Land Use Rights dated 10 November 1993, the land use rights of a parcel of land having a site area of approximately 2,572 sq. m. was contracted to be granted to 香港南興電路版有限公司 (translated as Hong Kong Nam Hing Circuit Board Company Limited and hereinafter referred to as “ Nam Hing Circuit Board ”), a wholly-owned subsidiary of the Company, for a term of 50 years for the construction of its circuit board factory usage; and

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APPENDIX VI

PROPERTY VALUATION REPORT OF THE ENLARGED GROUP

  - Pursuant to a State-owned Land Use Rights Certificate known as Dong Fu Guo Yong (1993) Zi Di Te 575 Hao（東府國用(1993)字第特575號）dated 21 December 1993 and issued by the People’s Government of Dongguan City, the legally interested party in the land having a site area of approximately 2,211 sq. m. is Nam Hing Circuit Board for a term of 50 years commencing from November 1993 till November 2043 for industrial usage.

• (ii) A parcel of land having a site area of approximately 1,454 sq. m.

  • Pursuant to an industrial land transfer agreement dated 20 January 1995, the land use rights of a parcel of land having a site area of approximately 1,200 sq. m. was contracted to be transferred to 南興電子電路版（東莞）有限公司 (translated as Nam Hing Circuit Board (Dongguan) Company Limited and hereinafter referred to as “ Nam Hing Circuit Board (Dongguan) ”), a wholly-owned subsidiary of the Company, for a term commencing from 3 March 1995 to 2 March 2045 for industrial usage; and

  • Pursuant to a State-owned Land Use Rights Certificate known as Dong Fu Guo Yong (1996) Zi Di Te 102 Hao（東府國用(1996)字第特102號）dated 7 March 1996 and issued by the People’s Government of Dongguan City, the legally interested party in the land having a site area of approximately 1,454 sq. m. is Nam Hing Circuit Board for a term of 50 years commencing from December 1995 till December 2045 for industrial usage.

• Pursuant to 2 various Building Ownership Certificates known as Yue Fang Zi Di 0578046 Hao（粵房字第 0578046號）and Yue Fang Zi Di 0578047 Hao（粵房字第0578047號）both issued by the People’s Government of Dongguan City and dated 1 November 1994, the legally interested party in two various buildings having a total gross floor area of approximately 8,472.9 sq. m. is Nam Hing Circuit Board (Dongguan). The area breakdowns for each of the buildings covered in the certificates are as follows:

(i) A 6-storey dormitory (ii) A 4-storey workshop Total:	Gross Floor Area (sq. m.) 2,604.90 5,868.00
	8,472.90

– 192 –

APPENDIX VI

PROPERTY VALUATION REPORT OF THE ENLARGED GROUP

1. According to our on-site inspection on 11 May 2011, 6 various supporting facilities buildings (listed below) without title certificate but with a total gross floor area of approximately 1,029 sq. m. were erected on the land. In our valuation, we have taken into account of these buildings on the assumption that they are able to be transferred together with the land and other buildings as an unique interest without further encumbrances/ premium to be paid. They are listed as follows.

(i) A single storey workshop A (ii) A single storey workshop B (iii) A single storey warehouse (iv) A single storey guardhouse (v) A single storey waste water treatment shed (vi) A single storey storage shed Total:	Gross Floor Area (sq. m.) 185.00 360.00 300.00 24.00 140.00 20.00
	1,029.00

For reference purpose, the aggregate sum of depreciated replacement cost of the above buildings (excluding the land), as at the date of valuation, would be in the region of HK$1,290,000, which should be deducted from the amount of valuation if the buildings are unable to be sold as an unique interest in the open market.

1. Pursuant to a copy of a 企業法人營業執照 (translated as Enterprise Legal Person Business License) dated 5 January 2011, Nam Hing Circuit Board (Dongguan) is a limited liability company with an operational period commencing from 4 September 1993 to 3 September 2014.

2. According to the legal opinion as prepared by the Group’s PRC legal adviser, the following opinions are noted:

3. (i) Nam Hing Circuit Board has legally obtained the land use rights of the lands as mentioned in Note 1. Nam Hing Circuit Board is the legally interested party in the lands as mentioned in Note 1 and has the right to occupy, use, lease, transfer or mortgage such lands within the specified land use rights term except for the restriction stated in (v) below;

4. (ii) As advised by Nam Hing Circuit Board, the lands as mentioned in Note 1 are not subject to mortgage up to the date of the legal opinion;

5. (iii) Nam Hing Circuit Board (Dongguan) has legally obtained the building ownership rights of the buildings as mentioned in Note 2. Nam Hing Circuit Board (Dongguan) is the legally interested party in the buildings as mentioned in Note 2 and has the right to occupy, use, transfer, lease or mortgage such buildings within the specified land use rights term except for the restriction stated in (v) below;

6. (iv) As advised by Nam Hing Circuit Board (Dongguan), the buildings mentioned in Note 2 are not subject to mortgage up to the date of the legal opinion; and

7. (v) The legally interested party stated in the State-owned Land Use Right Certificates and the Building Ownership Certificates are different. As advised by the Dongguan Humen Land and Resources Sub-bureau, such situation is common and is a historical issue in the locality. The above-mentioned inconsistency will not affect the right to use and the ownership right of the relevant property. However, if Nam Hing Circuit Board and Nam Hing Circuit Board (Dongguan) are going to transfer the land as mentioned in Note (i) above and the buildings as mentioned in Note (ii) above, they should complete the registration of changing the name of the legally interested party in the property prior to disposal of the property.

– 193 –

APPENDIX VI PROPERTY VALUATION REPORT OF THE ENLARGED GROUP

Group II – Property owned by the Group in Hong Kong for investment and valued on market value basis

				Amount of
				valuation in its
				existing state
				attributable to the
				Group as at
	Property	Description and tenure	Particulars of occupancy	31 July 2011
				HK$
2.	Unit 4B on	The property comprises an industrial	As inspected and confirmed	9,540,000
	Ground Floor	unit on the Ground Floor of a	by the management of the
	Fo Tan Industrial	19-storey industrial building which	Company, the property	(100 per cent.
	Centre	was completed in about 1985.	is subject to a tenancy	interest)
	Nos. 26-28 Au Pui		agreement.
	Wan Street	The property has a saleable area of	(See Note 3 below)
	Fo Tan	approximately 3,767 sq.ft.
	Shatin	(349.96 sq.m.).
	New Territories
	Hong Kong	Under Section 6 of the New
		Territories Leases (Extension)
	16/52th shares of	Ordinance 1988, the lease term of
	52/3,882nd shares	the Government Lease has already
	of and in Sha Tin	been extended to 30 June 2047 at a
	Town Lot No. 170	Government Rent of 3 per. cent. of
		the rateable value for the time being
		of the property.

Notes:

1. The registered owner of the property is Nam Hing Industrial Laminate Limited, which is a wholly-owned subsidiary of the Company, vide an Assignment dated 30 June 1994 and registered in the Shatin Land Registry by Memorial No. 770952 on 26 July 1994.

2. The property is subject to a Mortgage in favour of DBS Bank (Hong Kong) Limited dated 17 October 2008 and registered in the Land Registry by Memorial No. 08110301580157 on 3 November 2008.

3. Pursuant to a tenancy agreement entered between Nam Hing Industrial Laminate Limited (the “landlord”) and K. Lee Marine & Machinery Limited (the “tenant”), which is an independent third party of the Company, dated 19 July 2010, the property was leased to the tenant for industrial purpose and for a term of 2 years commencing from 2 August 2010 to 1 August 2012, at a monthly rental of HK$18,000 inclusive of management fee, government rates and rent.

4. The tenancy agreement is subject to a break clause that either the landlord or the tenant has the right to terminate the agreement after 12 months from the commencement date of the term (i.e. 2 August 2010) by serving not less than one month written notice or by paying one month rent in lieu to the other party. As advised by the management of the Company, either the landlord or the tenant does not have any intention to terminate the tenancy agreement as at the Latest Practicable Date of this circular.

– 194 –

APPENDIX VIIA PRINCIPAL TERMS OF THE CONVERTIBLE NOTES

• A. The principal terms of the Convertible Notes are as follows:

Capitalized terms used in this Appendix VIIA shall have the meaning as defined in Clause 1 herein.

TERMS AND CONDITIONS OF THE CONVERTIBLE NOTES

The convertible notes proposed to be issued by China Environmental Energy Investment Limited (the “Company”) with a principal value of HK$290,000,000 maturing in 2013 (the “Convertible Notes”) and the Conversion Shares to be issued pursuant to the exercise of the Conversion Right granted thereunder were approved at a meeting of the board of Directors.

Subject to the Shareholders’ approval being obtained at the special general meeting to be held on 13 October 2011, the Convertible Notes are to be issued subject to the terms and conditions in the instrument of Convertible Notes (the “Instrument”) given by the Company and the terms and conditions appended to the back of the Convertible Notes certificates, a summary of which is set out in this Appendix VIIA.

1. Definitions and Interpretations

• 1.1 For the purpose of the Conditions, the following terms shall have the following meanings:

“Approved Merchant Bank” an independent merchant bank engaged in accordance with Clause 8 of the Instrument

“Associate” in respect of any person, means his or her or its “associate” and/or “connected person” as defined in Chapter One of the Listing Rules “Business Day” any day (other than a Saturday) on which licensed banks are generally open for normal banking businesses

“Completion Date” the day on which the acquisition of 80% of the issued share capital of Ideal Market Holdings Limited by the Company is completed and pursuant to which the Convertible Notes are issued to the vendors as part of the consideration for the said acquisition

– 195 –

APPENDIX VIIA

PRINCIPAL TERMS OF THE CONVERTIBLE NOTES

• “Conditions”

the terms and conditions as appended to the back of the Convertible Notes certificates, as modified from time to time in accordance with the stipulations in the Instrument

• “Conversion Date”

• the effective date on which Convertible Notes are converted into Shares

• “Conversion Notice” a conversion notice in a form substantially the same as that set out in the appendix to the Convertible Notes certificates or a notice in such other format clearly evidencing the Note Holder’s intention to convert the Convertible Notes into Conversion Shares

• “Conversion Period”

• 24 months calculated from the date of issuance of the Convertible Notes

• “Conversion Price”

• the conversion price for each Conversion Share subject to the adjustments as stipulated in the Conditions

• “Conversion Right”

• subject to and in compliance with the Conditions, the right of Note Holders to convert all or part of the Convertible Notes

• “Conversion Shares ”

• the Shares allotted and issued on exercise of the Conversion Right

• “Designated Office”

the principal place of business of the Company in Hong Kong stated on the back page of the Convertible Notes certificates or such other address as notified to the Note Holders in accordance with Clause 14 of Appendix VIIA herein

• “Directors”

the directors of the Company

– 196 –

APPENDIX VIIA

PRINCIPAL TERMS OF THE CONVERTIBLE NOTES

“Disposal and Allocation”	any sales, transfer, exchange, renting out, lending,
	lease, discharge, permission, direct or indirect
	retention, waiver, concession, assignment, treatment
	or granting of any option, preemptive right,
	authorisation or other rights or interests, including
	the signing of any agreement for any of the foregoing
	acts
“Due Date”	the date being two years after the Note Issuing Date,
	or the first Business Day thereafter if such date does
	not fall on a Business Day
“Encumbrance”	any mortgage, pledge, hypothecation, retention (save
	as arising in accordance with law), equitable pledge
	of, or adverse claim against, or other encumbrances,
	preemptive rights or security interest established
	on, or delayed purchase, title retention, lease, sales,
	after-sales lease point arrangement of any property,
	assets, right or interest (of whatever nature), or any
	agreement relevant to the foregoing contents
“Events of Default”	any event listed in Clause 10 of Appendix VIIA
	herein
“Group”	the Company and its subsidiaries
“Hong Kong”	Hong Kong Special Administrative Region of the
	People’s Republic of China
“HK$”	Hong Kong Dollars, being the legal tender of Hong
	Kong at the relevant time
“Listing Rules”	the Rules Governing the Listing of Securities on The
	Stock Exchange of Hong Kong Limited
“Note Holder”	the holder whose name or title is registered as a
	Note Holder in the Register of Note Holders; and
	in respect of any “Holder” of Convertible Notes, a
	corresponding interpretation shall be adopted

– 197 –

PRINCIPAL TERMS OF THE CONVERTIBLE NOTES

APPENDIX VIIA

“Note Issuing Date”	the date on which the Convertible Notes are first	the date on which the Convertible Notes are first
	issued
“Outstanding”	in the	case of the Convertible Notes, all Convertible
	Notes	that have been issued, except:
	(a)	the Convertible Notes that have been
		redeemed or the Convertible Notes to which
		the Conversion Right has been exercised (and
		cancelled in accordance with the Conditions);
	(b)	the Convertible Notes whose redemption date
		is due in accordance with the Conditions
		and whose redemption amount (including all
		interests (if any) accruing on the Convertible
		Notes as of the relevant redemption date) has
		been paid to the relevant Note Holders (or
		their agents);
	(c)	the Convertible Notes which have become
		invalid or the Convertible Notes to which
		the limitation of action for the claim of
		reimbursement right has been expired in
		accordance with Clause 11 of Appendix VIIA
		herein;
	(d)	the Convertible Notes represented by
		Convertible Notes certificates which are
		torn or destroyed and have been returned in
		exchange for a replacement Convertible Note
		in accordance with Clause 3.6 of Appendix
		VIIA herein;
	(e)	the Convertible Notes represented by
		Convertible Notes certificates which are
		alleged to have been lost or destroyed
		and in respect of which replacement
		Convertible Notes have been issued (purely
		for the purpose of identifying the number of
		Outstanding Convertible Notes and without
		prejudice to the legal status of the Convertible
		Notes); or

– 198 –

APPENDIX VIIA

PRINCIPAL TERMS OF THE CONVERTIBLE NOTES

(f) the Convertible Notes that are redeemed, purchased and cancelled in accordance with Clause 7 of Appendix VIIA herein.

“Register of Note Holders” the register of Note Holders established and prepared in accordance with Clause 3.5 of Appendix VIIA herein “Registration Date” has the meaning ascribed to it in Clause 5.5 of Appendix VIIA herein “Restricted Holder” a Note Holder who is a resident or citizen of the jurisdiction other than Hong Kong and is unable to take the following actions lawfully (or unable to take the following actions lawfully, unless the Company first takes several actions in the jurisdictions of relevant company laws) in accordance with the laws and regulations of relevant jurisdiction: any exercise by such holder of the Conversion Right or the Company performs its obligations under the Instrument or the Conditions or the allotment, issuance and holding of the Conversion Shares “Sale and Purchase the sale and purchase agreement entered into Agreement” between the Company and Lucky Start Holdings Limited, All Prosper Group Limited, Triumph Return Holdings Limited and Jia Sheng Holdings Limited for the purchase of 80% of the shareholding interest in Ideal Market Holdings Limited by the Company “SEHK” The Stock Exchange of Hong Kong Limited “Share Registrar” the branch share registrar of the Company in Hong Kong for the time being and any branch share registrar “Shareholders” the holders of the Shares

– 199 –

APPENDIX VIIA

PRINCIPAL TERMS OF THE CONVERTIBLE NOTES

• “Shares”

the ordinary shares of the Company with a par value of HK$ 0.01 per share or the shares (as may belong to any one or several classes) arising from the subdivision, consolidation or restructuring of the foregoing shares, whereas amongst such shares, no priority shall be accorded to the payment of dividends by the Company nor distribution on liquidation (whether voluntary or mandatory) as between them

• “Subsidiary”

as defined in the Companies Ordinance (Chapter 32 of the Laws of Hong Kong)

• “Takeovers Codes”

Hong Kong Codes on Takeovers and Mergers and Share Repurchases

“Taxes”

the taxes in all forms, including taxes levied in Hong Kong and any region outside of Hong Kong and profit taxes, interest taxes, value-added taxes and stamp duties in all forms and all levies, tariffs, charges, fees, withholding fees and withholding taxes collected or levied by any statutory, governmental, national, provincial, local or municipal authority in respect of any relevant profits, incomes, revenues, sales, trades, intellectual property rights, tangible or intangible assets or other special items, and also including: (i) any fine, interest or other payment related to taxation; and (ii) tax burden reduction and exemption, tax preference, tax credit, tax reimbursement or financial return that is deprived of or lost and the term “Tax” shall have the same meaning

– 200 –

APPENDIX VIIA PRINCIPAL TERMS OF THE CONVERTIBLE NOTES

• 1.2 Notes: For the purpose of the Conditions:

• (1) fees, charges, emoluments or expenses shall include value-added taxes, turnover taxes or other similar taxes payable on the same;

• (2) the actions, remedies or legal proceedings taken by a creditor in the jurisdictions other than Hong Kong to exercise its rights should encompass the actions, remedies or judicial procedures which accept the choice of Hong Kong laws, that may be taken in such jurisdictions or are most appropriate and may be taken by the creditor to exercise its rights;

• (3) the obligations performed or the representations made by more than one person shall be deemed as being performed or made by such persons jointly and severally;

• (4) words referring to the singular also include the plural and vice versa;

• (5) words referring to the masculine, feminine and neuter shall include each other such gender;

• (6) “Person” includes partnership and company and vice versa;

• (7) time on any day refers to Hong Kong time; and

• (8) any statutory provisions or non-statutory provisions (including the Listing Rules, Hong Kong Accounting Standard and Hong Kong Financial Reporting Standards) shall include any modification to or amendment of such provisions and legal instruments, orders or regulations promulgated under relevant provisions (or provisions modified or reformulated).

• 1.3 Heading: Headings shall not be taken account of in the interpretation of the Conditions.

– 201 –

APPENDIX VIIA PRINCIPAL TERMS OF THE CONVERTIBLE NOTES

2. Status, Form, Face Value and Ownership

• 2.1 Status: The Convertible Notes shall constitute the direct, unconditional, non-deferred and unsecured obligations of the Company and the same rights are accorded to all the Convertible Notes issued. Unless otherwise specified by any applicable laws, the payment obligations of the Company under the Convertible Notes shall at any time be the same as the current and future unsecured and non-deferred obligations of the Company.

• 2.2 Listing: The Company did not and will not apply for the listing of the Convertible Notes on the SEHK or any other stock exchange.

• 2.3 Form and face value: The Convertible Notes are issued in registered form and shall be expressed in HK$. The principal face value of each Convertible Note shall be HK$500,000 or any integral multiples thereof, unless the exercise amount of the Conversion Right attached to the Convertible Notes is less than HK$500,000 or the relevant amount is less than HK$500,000 due to the adjustment made in accordance with the Conditions. Each Note Holder will obtain a Convertible Notes certificate in respect of all of its Convertible Notes held through registration. Each Convertible Note and each Convertible Notes certificate will be arranged in the order of index numbers which will be recorded on the Convertible Notes certificates and the Register of Note Holders maintained and prepared by the Company (or any third party on behalf of the Company).

• 2.4 Ownership: The ownership of the Convertible Notes shall only be formally transferred after the registration in the Register of Note Holders is changed.

– 202 –

APPENDIX VIIA PRINCIPAL TERMS OF THE CONVERTIBLE NOTES

3. Transfer of Convertible Notes, Issuance of Convertible Notes certificates and List of Note Holders

3.1 Transfer and Mortgage

• (1) In accordance with Clause 3.1(2) of the Conditions and with the prior written consent of the Company (such consent shall not be unreasonably withheld), any Note Holder may transfer or mortgage the Convertible Notes to other persons, provided that the amount of each transfer shall be in integral multiples of HK$500,000 (or such lesser amount representing all the Convertible Notes then Outstanding). The transfer shall only take effect upon the delivery of the Convertible Notes certificates representing the Convertible Notes together with the transfer form(s) (duly completed and personally signed by the respective authorized executive personnel (or other authorized persons) of the transferor and the transferee) to the Designated Office. Unless and until the relevant details of the transfer are registered in the Register of Note Holders, the transfer of the Convertible Notes may not take effect.

• (2) Without the consent of the SEHK, the Convertible Notes may not be transferred to any connected person of the Company (as defined in the Listing Rules) (if necessary).

• (3) The following documents shall be delivered to the Designated Office together with the Convertible Notes certificates: (i) a duly executed transfer form; (ii) the power of attorney conferring the power on the executive personnel to sign on behalf of a Note Holder which is a corporate where the transfer form is signed by the foregoing personnel; and (iii) other evidence (including legal opinions), as reasonably required by the Company, where the transfer form is signed by a person other than the Note Holder on behalf of the Note Holder. Within 3 Business Days after the receipt of all foregoing documents provided by the Note Holder, the Company shall cancel the relevant Convertible Notes certificates and issue the new Convertible Notes certificates to the transferee (in case of a partial transfer).

3.2 Delivery of the new Convertible Notes certificates

The new Convertible Notes certificates issued to the transferee shall be delivered by registered mail or personal delivery (risks arising from such manner of delivery shall be borne by the Note Holder) within 3 Business Days after the Company receives the relevant transfer forms and all other documents specified in Clause 3.1(3) hereinabove.

– 203 –

APPENDIX VIIA

PRINCIPAL TERMS OF THE CONVERTIBLE NOTES

• 3.3 No additional charges for transfer procedures: No additional charges shall be levied for the transfer procedures handled by the Company (or through a third party); provided that the relevant parties to the transfer must first pay (or (as deemed necessary by the Company) give an undertaking as to indemnity to the Company) any tax or other governmental charges which may be imposed on the transfer.

• 3.4 Period during which transfer is not registered: The Note Holder may not require the Company to handle any transfer of the Convertible Notes within 7 Business Days prior to the Due Date of any principal or interest (if any) of the Convertible Notes.

• 3.5 Register of Note Holders: The Company shall on its own (or procure the Share Registrar to) prepare and maintain at such place as the Company may from time to time decide a Register of Note Holders to record the Convertible Notes, any transfer thereof, any conversion thereof into Shares, and redemption, cancellation and destruction thereof, all replacement Convertible Notes certificates issued to replace any Convertible Notes certificates torn, damaged, lost, stolen or destroyed, and sufficient identification data (including address and authorized signatories) of all Note Holders holding the Convertible Notes from time to time. The Company or the Share Registrar shall make available the Register of Note Holders or the duplicate thereof for inspection by the Note Holders at a reasonable time.

• 3.6 Replacement of Convertible Notes certificates: Where any Convertible Notes certificates are torn, damaged, lost, stolen or destroyed, such Convertible Notes certificates may be replaced at the Designated Office; provided that the Note Holder requiring a replacement must pay the expenses arising therefrom, provide the Company with all relevant evidence and any undertaking as to compensation reasonably required by the Company, and pay a fee to be decided by the Company with an amount of not more than HK$50. The Convertible Notes certificates torn or damaged must be returned to the Company prior to the issuance of the replacement certificate. If the Convertible Notes certificates are lost or stolen, the precondition for the issuance of the replacement Convertible Notes certificates is that its holder shall enter into a compensation deed with the Company with the provisions thereof to the reasonable satisfaction of the Company.

– 204 –

PRINCIPAL TERMS OF THE CONVERTIBLE NOTES

APPENDIX VIIA

4. Interest

The Convertible Notes do not bear any interest.

5. Conversion into Shares

5.1 Conversion Right

• (1) Conversion right: Unless otherwise specified in the Conditions, a Note Holder shall be entitled to convert the Convertible Notes into Conversion Shares at any time within the Conversion Period.

• (2) Minimum conversion amount: In compliance with the Conditions, a Note Holder may at any time within the Conversion Period and at its discretion exercise the Conversion Right attached to any Convertible Notes but the relevant amount shall not be less than HK$500,000 and in its integral multiples, unless the Outstanding principal of the Convertible Notes held by the Note Holder at that time is less than HK$500,000, or all the (and not part of) Outstanding principal of the Convertible Notes held by the Note Holder which is planned to be converted is less than HK$500,000.

• (3) Number of Conversion Shares: When any Convertible Note is converted into Conversion Shares, the number of Conversion Shares issued shall equal to the quotient of (i) the principal of the Convertible Notes (or the principal planned to be converted in case that the portion planned to be converted is a portion of the Convertible Notes represented by a certain Convertible Notes certificates) and (ii) the Conversion Price prevailing on the Conversion Date. If a Note Holder holds more than one Convertible Notes, the number of Conversion Shares that shall be issued upon conversion shall be calculated as per the accumulated principal sum of the Convertible Notes planned to be converted into Shares.

• (4) Loss of the right to claim for reimbursement: When a Note Holder exercises the Conversion Right, the right to claim for repayment of the principal and interest (and premium (if any)) under the Convertible Notes shall be completely lost and discharged on the Conversion Date.

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• (5) No fractional Shares: No fractional Conversion Shares will be issued upon conversion and no cash adjustment will be made in respect thereof. Notwithstanding the foregoing provisions, if the Shares are consolidated or restructured due to the application of any laws or other circumstances after the Note Issuing Date, which causes the Conversion Shares to be allotted on exercise of any Conversion Right to result in fractional numbers and the principal corresponding to such fractional Conversion Shares exceeds HK$100, the Company shall pay the balance to the Note Holders by cashier order issued by a bank in Hong Kong with the Note Holders as the payee.

5.2 Conversion Price

• (1) Conversion Price: With regard to the Convertible Notes, the Conversion Price of each Share shall be calculated according to the following formula and adjusted in accordance with Clause 5.3 of the Conditions.

• (a) the Conversion Price shall be the average closing price of the Shares for the five consecutive trading days prior to the Completion Date plus a premium of 30%;

• (b) the maximum Conversion Price is HK$0.68 and the minimum price is HK$0.227; and

• (c) if the Conversion Price calculated in accordance with Clause 5.2(1)(a) is higher than HK$0.68, the Conversion Price shall be HK$0.68; if the Conversion Price so calculated is lower than HK$0.227, the Conversion Price shall be HK$0.227.

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5.3 Adjustment of Conversion Price:

• (1) Change in capital: Where the share capital of the Company has changed and such change has been effective prior to the Conversion Date (regardless of whether such change results from the capitalization of profits or reserves, rights issue or making of offer for other securities (including any securities that may be converted into Shares, or warrants, or options subscribing for any Shares of the Company), consolidation, subdivision or reduction of the Company’s capital, or otherwise, and in whatever manner), the Company shall engage an Approved Merchant Bank or a qualified certified public accountant prior to the Conversion Date to determine whether it is necessary to make any adjustment to the Conversion Price so as to fairly and properly reflect the relative rights and interests between the Company and the Note Holders; where the Approved Merchant Bank or the qualified certified public accountant considers that the Conversion Price should be adjusted, the board of Directors of the Company shall adjust the Conversion Price in a manner that is confirmed in writing to be appropriate by the Approved Merchant Bank or the qualified certified public accountant. The above-mentioned adjustment shall be applicable to the Conversion Notices given on or after the Conversion Date.

• (2) Other provisions:

• (a) If more than one events that cause (or may cause) the Conversion Price to be adjusted occur within a short time and the Approved Merchant Bank or the qualified certified public accountant considers in good faith that the application of the foregoing provisions must be adopted to adjust the Conversion Price so as to achieve the intended commercial effect, then relevant changes shall be made according to the opinions of the Approved Merchant Bank or the qualified certified public accountant (as expert).

• (b) The Conversion Price needs no adjustment under the following circumstances: (i) the Shares are allotted or issued pursuant to the exercise of the Conversion Right; or (ii) the Shares, options or any securities convertible into Shares of the Company (or any Subsidiary thereof) are granted or issued to the participants under a share option scheme in accordance with the share option scheme adopted and approved by the Company.

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• (c) Save and except for the consolidation of Shares stated in clause 5.9 of Appendix VII A herein, the adjustment of any Conversion Price shall not involve any increase of the Conversion Price.

• (3) Decisions made by the Approved Merchant Bank or the qualified certified public accountant: If there is any doubt about whether any adjustment of the Conversion Price is appropriate, the written certificate issued by the Approved Merchant Bank or the qualified certified public accountant shall be final and conclusive, unless there is any obvious or proved error.

• (4) Deletion of mantissa: If the Conversion Price as adjusted is not an integral number of one tenth (1/10) HK Dollar, the relevant Conversion Price shall be rounded down to the nearest one tenth (1/10) HK Cent. If a certain adjustment of the Conversion Price does not require any rounding, or the relevant Conversion Price has been rounded, the mantissa deleted shall not be calculated in the adjustment thereafter.

• (5) No issuance at discount: The reduction in the Conversion Price may not in any way cause the issuance price of the Conversion Shares to be lower than the par value of the Shares when the Convertible Notes are converted into the Conversion Shares.

• (6) Selection of the Approved Merchant Bank or the qualified certified public accountant: If any provision of the Conditions allows or requires the Approved Merchant Bank or the qualified certified public accountant to make a decision, the Company shall be entitled to select a merchant bank with international reputation or a qualified certified public accountant to make the decision. Unless the decision made by the Approved Merchant Bank or the qualified certified public accountant is legally wrong or subject to significant errors, the decision shall be final, conclusive and binding upon the Company, all Note Holders, and all persons claiming for repayment through the Note Holders or claiming for repayment pursuant to the rights of the Note Holders.

• (7) Notice of adjustment: After any adjustment is made, notices shall be sent to the Note Holders as soon as possible in accordance with Clause 14 of the Conditions if possible.

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APPENDIX VIIA

PRINCIPAL TERMS OF THE CONVERTIBLE NOTES

5.4 Conversion Procedures and Relevant Provisions

• (1) Conversion Notice: If the Conversion Right attached to any Convertible Notes are exercised, the Note Holder must properly complete and sign the Conversion Notice (in duplicate) and at its own expense deliver the Conversion Notice (together with the original Convertible Notes certificates) to the Designated Office during the Company’s normal business hours. The Conversion Notice may not be withdrawn once delivered.

• (2) Conversion Date: With regard to the exercise of any Conversion Right, the Conversion Date of the Convertible Notes shall be deemed to be the following date:

• (a) The next Business Day of the date on which the Convertible Notes certificates of the Convertible Notes and the Conversion Notice (and (if applicable) payment and undertaking as to compensation are made in respect of the exercise of the Conversion Right in accordance with the Conditions) are delivered, save as under the circumstances specified in item (b) below; or

• (b) If the above-mentioned date of return and delivery falls on a date when the Company’s register of members is closed for registration, the Conversion Date shall be the Business Day after the day on which the Company’s register of members reopens.

• (3) Capital tax, etc.: The Company shall be liable for paying the Taxes arising from the exercise of the Conversion Right in accordance with the laws of Hong Kong and/or Bermuda (only limited to the laws of Hong Kong and/or Bermuda) (including any Tax, transaction levy or capital tax or stamp tax payable by the Company on its allotment and issuance of the Shares in accordance with the Instrument and Taxes on listing of the Shares due to the conversion).

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APPENDIX VIIA PRINCIPAL TERMS OF THE CONVERTIBLE NOTES

• (4) Delivery of certificates: If the Conversion Right attached to the Convertible Notes is exercised and the Note Holder has delivered the Conversion Notice and the Convertible Notes certificates and paid other amounts due to the Company, the Company will, within the shortest practicable period (which in any case shall not exceed 21 Business Days calculated from the Conversion Date) register the Note Holder (or any relevant participants of the Central Clearing and Settlement System listed in the Conversion Notice) in the Company’s register of members as the Shareholder of the corresponding number of Shares and procure the Share Registrar to issue one (or several) Share certificates for the Shares which shall be made available at the Designated Office for collection; or if specific instructions have been given in the Conversion Notice, the Company will procure the Share Registrar to mail the Share certificates (together with any other securities, properties or cash that shall be delivered upon conversion or subscription and other transfer deeds and other documents (if any) necessary for the relevant transfer in accordance with the applicable laws) to the person and address stated in the Conversion Notice; provided that the Note Holder shall bear the risks thereof and the persons receiving the Share certificates shall be liable for paying the postage (except ordinary mail).

• 5.5 Priority of Conversion Shares: The person receiving the Conversion Shares upon the exercise of the Conversion Right will become the registered holder of the Shares from the date when its name is entered as a Shareholder in the Company’s register of members (“Registration Date”). The Conversion Shares issued when the Convertible Notes are converted into Conversion Shares shall rank pari passu in all respects with the Shares that are in issue on the relevant Registration Date as if the Conversion Shares issued as a result of the conversion (or subscription) have been issued on that day (unless excluded by the mandatory provisions of any applicable laws). Unless otherwise specified below, the holders of the Conversion Shares may not enjoy any right arising prior to the Registration Date.

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APPENDIX VIIA

PRINCIPAL TERMS OF THE CONVERTIBLE NOTES

• 5.6 Restricted Holders: Restricted Holders may not exercise the Conversion Right attached to any Convertible Notes. The exercise of any Conversion Right by the Note Holders shall constitute the Note Holders’ making of the following confirmation, representation and warranty to the Company: that the Note Holders are not Restricted Holders; that all necessary consents and permissions from any governmental or supervisory institutions have been obtained and all regulatory procedures have been complied with for the purpose of rendering the exercise of the Conversion Right by the Note Holders legal, the holding of the Conversion Shares by the Note Holders is legal and the allotment of the Conversion Shares by the Company is legal and effectual.

• 5.7 Restrictions on Note Holders’ exercise of the Conversion Right: the Note Holders may not exercise the Conversion Right if following the conversion: (i) holder(s) of the Convertible Notes and any parties acting in concert with it/them will hold 20% or more of the issued share capital of the Company; or (ii) holder(s) of the Convertible Notes and any parties acting in concert with it/them will become obliged to make a mandatory offer under Rule 26 of the Takeovers Code; or (iii) the Company will be in breach of the minimum public shareholding requirement stipulated under Rule 8.08 of the Listing Rules or other relevant requirements under the Listing Rules.

• 5.8 Compliance with law by Note Holders exercising the Conversion Right: On each conversion, the Note Holders exercising the Conversion Right must comply with all applicable foreign exchange control, financial and other laws and regulations (including but not limited to the Note Holders’ payment of all Taxes payable (or possibly becoming payable) and performance of all obligations that shall be performed (or become necessary to be performed)) in respect of the exercise of the Conversion Right, the allotment and issue of the Conversion Shares thereto and holding of the Conversion Shares thereby.

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PRINCIPAL TERMS OF THE CONVERTIBLE NOTES

• 5.9 Merger, Amalgamation, joint venture: If the Company merges or amalgates with or forms joint venture with any other company (but excluding the circumstance under which the Company is still an independent company after the relevant merger, amalgamation or joint venture), or if the Company sells or transfers its entire (or part thereof) assets, the Company shall notify the Note Holders in accordance with the terms herein. Unless otherwise restricted by laws, the Company shall procure the company on completion of the merger, amalgamation or the joint venture, or the company after the acquisition of the relevant assets (as applicable in the circumstances) to execute a supplemental deed, to ensure that the Holders of any Outstanding Convertible Notes at the said time shall, for the duration of the Conversion Period, continue to enjoy the right to convert the Convertible Notes into Shares, other securities or assets. In ascertaining the basis for determining the quantity and nature of said Shares, other securities and/or assets, it shall be treated as if the Conversion Right pertaining to the Convertible Notes were exercised at the moment immediately prior to the relevant merger, amalgamation, joint venture, sale or transfer, and the holder of the number of Shares so allotted can receive the corresponding quantity of shares, other securities or assets.

The stipulation stated in this Clause 5.9 herein shall be equally applicable to any subsequent merger, amalgamation, joint venture, sales or transfer.

6. Payment

• 6.1 Terms of payment: The principal or interest (if any) payable shall be remitted into the registered bank account of the Note Holder by transfer, or if the Note Holder has no registered bank account, the Company shall mail a HK$ cheque to the registered address of the Note Holder by registered mail. The principal may be paid only after the Convertible Notes certificates are returned to the Designated Office.

• 6.2 Registered bank account and address: For the purpose of this Clause, the registered bank account of the Note Holder refers to the HK$ account opened by the Note Holder (or on behalf of the Note Holder) in banks in Hong Kong, which details are recorded in the Register of Note Holders as of the end of business hours on the previous Business Day of the Due Date; the registered address of the Note Holder refers to the address listed in the Register of Note Holders as of the same time.

• 6.3 Financial laws: All payments must comply with all applicable financial and other laws and regulations, without prejudice to the provisions in Clause 8 (Taxes) of Appendix VIIA herein. With regard to the relevant payment, no commission or expense may be collected from the Note Holders.

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PRINCIPAL TERMS OF THE CONVERTIBLE NOTES

APPENDIX VIIA

• 6.4 Payment Instructions: If any amount is transferred to any registered bank account, the payment instructions will be sent on the Due Date (or the next Business Day, if that day is not a Business Day); or if any amount is paid by cheque, it will be mailed on the Due Date; with regard to the principal, it will be sent or mailed on the next Business Day after the day when the Convertible Notes certificates are returned to the Designated Office.

7. Redemption, Purchase and Cancellation

7.1 Redemption

• (A) Mandatory Redemption

The Convertible Notes may be mandatorily redeemed by the Company under the following circumstances:

Unless a Note Holder has waived any investigation into any event of default listed in Clause 10 of Appendix VIIA herein in writing, the Note Holder shall, at any time after the occurrence of the relevant event of default, be entitled to send a written notice to require the Company to redeem all (but not part) of the Outstanding principal of the Convertible Notes according to the redemption amount calculated in accordance with Clause 7.1(B) of Appendix VIIA herein. Once the above-mentioned written notice is sent, the relevant amount shall become due and owing and shall be paid in the manner specified in Clause 6 of Appendix VIIA herein, and the due date shall be the 30th Business Day after the day when the foregoing written notice is sent.

(B) Redemption Amount

Upon the occurrence of the circumstances specified in Clauses 7.1(A) and (C) herein, the redemption amount due to the Note Holder shall be equal to the principal of the Convertible Notes Outstanding and redeemable plus the interest accrued on the relevant principal (until all sums payable have been settled), and the redemption amount shall be paid on the due date in accordance with Clause 6 of hereinabove.

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PRINCIPAL TERMS OF THE CONVERTIBLE NOTES

(C) Partial Mandatory Redemption

If the Company fails to perform its obligations relevant to allotment, issue and delivery of the Conversion Shares (regardless of whether it is due to the relevant quantity exceeding the quantity authorized by the Company in general meeting, the quantity of Shares approved to be issued by the Company’s board of Directors or the maximum quantity of the Conversion Shares that is permitted to be listed by the SEHK) under Clause 5.4(4) herein (unless it is due to the Note Holder’s failure to perform its obligations under Clause 5.4(4) herein) and such failure is not remedied within 60 Business Days after the occurrence of the relevant circumstances, the Company shall redeem the portion of the Outstanding principal of the Convertible Notes stated in the Conversion Notice that, upon conversion thereof, exceeds the number of Shares that may be allotted and issued by the Company with the redemption amount calculated in accordance with Clause 7.1(B) herein. The said amount shall be paid to the Convertible Note Holder on the 5th Business Day after the expiry of the foregoing grace period of 60 Business Days as stated in Clause 6 herein.

• (D) Voluntary Early Redemption

From the Note Issuing Date, the Company may redeem all or any part of the Convertible Notes in advance through negotiations with the Note Holders. If there are two or more Note Holders at that time, the Company may choose to redeem from whichever party and each Note Holder may not raise any objection.

• 7.2 Purchase: The Company or any Subsidiary thereof may purchase the Convertible Notes from any Note Holders at any time and from time to time at a price to be agreed by and between the Company (or the relevant Subsidiary) and the Note Holders. If the purchase is subject to bidding, the Company shall invite all Note Holders to participate.

• 7.3 Cancellation: All Convertible Notes redeemed or converted (voluntarily or mandatorily) into Shares or purchased by the Company or any Subsidiary thereof will be cancelled immediately. The Convertible Notes certificates of all Convertible Notes cancelled shall be delivered to the Company (or any third party designated by the Company), and the Convertible Notes so cancelled (including any Convertible Note purchased by any Subsidiary) may not be reissued or resold.

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APPENDIX VIIA

PRINCIPAL TERMS OF THE CONVERTIBLE NOTES

• 7.4 Convertible Notes certificates deemed as being returned: Upon the occurrence of the circumstances specified in Clause 7.1(A) or 7.1(D) above, as long as the Company has allotted the Conversion Shares to the Note Holders (or (as the case may be) paid all relevant redemption amounts due to the Note Holders), the Note Holders must return the relevant Convertible Notes certificates to the Company (or any third party designated by the Company) for cancellation within 10 Business Days after the receipt of the written notice from the Company. Notwithstanding that the Note Holders may fail to return the Convertible Notes certificates, such certificates shall be deemed as having been returned to the Company on the foregoing allotment date (or the due date) and cancelled. The aforementioned written notice, proof of service of notice and allotment of Conversion Shares (or payment of redemption amount) shall constitute the final and conclusive proofs binding upon the Note Holders (or any transferee, or intended transferee, or any person who actually makes or attempts to make or intends to make or plans to make any demand in the name of or by right of the Note Holders).

8. Automatic Conversion

If a Note Holder still holds all or part of the Convertible Notes on the expiry date of the Convertible Notes, all Convertible Notes will automatically convert into the Shares of the Company at the Conversion Price subject to Clause 5.7 of Appendix VIIA herein. Where the foregoing automatic conversion will cause Clause 5.7 of the Conditions to be violated, the Note Holder shall be entitled to transfer the balance of Convertible Notes held thereby to an independent third party.

9. Taxes

• 9.1 The Company shall be entitled to withhold from the principal, premium (if any) or interest payable by the Company for any current or future Tax, levy or governmental charge (of whatever nature, including but not limited to deduction or withholding of Taxes, income tax and capital value-added tax on the overall performance or revenue of the Note Holder) imposed or levied by the tax authorities of Bermuda, Hong Kong or other jurisdictions in accordance with any laws and regulations. If the Company must perform any relevant deduction or withholding, the Company’s payment of the net amount after the foregoing deduction or withholding to the Note Holders shall be deemed as the Company’s full performance of its payment obligations.

• 9.2 The principal, premium (if any) or interest stated in the Conditions shall encompass the extra amount stated in this Clause, and any amount added or replaced in accordance with any undertaking or promise given under the Instrument.

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PRINCIPAL TERMS OF THE CONVERTIBLE NOTES

APPENDIX VIIA

10. Events of Default

• 10.1 Any Note Holder may send a written notice to the Company, stating that the Convertible Notes are due and payable upon the occurrence of any one (or several) of the following events:

• (1) Insufficient capital: Without violating Clause 7.1(C) of Appendix VIIA herein, the unissued share capital of the Company is insufficient to allow it to perform its obligations on conversion of the Convertible Notes;

• (2) Other events of default: The Company is in breach of any covenants, conditions or provisions (but excluding the covenants relating to the payment of principal, premium (if any) or interest (if any) under any Convertible Note) borne by the Company as set forth in the Instrument or the Conditions, and the relevant events of default are not remedied within 14 Business Days after any Note Holder sends a written notice (setting forth the summary information of the events of default and the requirements for the remedy of the events of default) to the Company;

• (3) Violation of Sale and Purchase Agreement: The Company commits any flagrant violation of any provision of the Sale and Purchase Agreement and the supplemental agreement thereto, including the violation of any representation made therein, and such violation was not known prior to the issuance and delivery of the Convertible Notes;

• (4) Winding-up of the Company and Disposal and Allocation by the Company: Any resolution relating to the winding-up or liquidation of the Company or the Company’s disposal of all (or nearly all) of its assets is passed or any order relating to the same is issued by a competent court, unless the aforesmentioned winding-up, liquidation or Disposal and Allocation is due to or related to any merger, takeover, consolidation or reorganization carried out soon thereafter;

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APPENDIX VIIA PRINCIPAL TERMS OF THE CONVERTIBLE NOTES

• (5) Encumbrance: The chargee of any encumbrance obtains the right of possession of, or the liquidation administrator takes over, all or any significant part of the Company’s assets or business;

• (6) Detention, etc.: Any significant part of the Company’s property is detained, forfeited or imposed with a closure order, executed or charged and the same is not renounced within 30 Business Days; or

• (7) Suspension of listing or delisting: The listing of the Shares on the SEHK has been suspended for more than 90 consecutive trading days of the SEHK or the listing status of the Shares on the SEHK is withdrawn or revoked.

• 10.2 Once the aforegoing notice is given to the Company, the principal and accrued interest (as calculated under Clause 4 of Appendix VIIA herein) shall become due and payable on the 14th Business Day after the delivery of the aforesaid notice.

11. Loss of Right

The right to claim for reimbursement of any principal, premium (if any) and interest will be lost, unless such claim is lodged on or prior to the following date: with regard to the principal, the date one year after the Due Date of the principal; in respect of the interest (if any), the date one year after the Due Date of the interest.

12. Enforcement

If any Convertible Note is not fully paid after it is due and payable, the Note Holder may directly take legal proceedings against the Company without any further notice to the Company for the purpose of enforcing its rights against the Company for the repayment of the principal and the interest accrued thereon.

13. Modification and Surrender of Rights

• 13.1 Modification and surrender of rights: Modification to the Instrument or the Conditions must (1) be made by deed poll and signed by the Company stating that it is a supplement to the Instrument or the Conditions; and (2) will only take effect after being approved by the SEHK (unless such modification automatically comes into force in accordance with the Instrument or the Conditions).

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APPENDIX VIIA PRINCIPAL TERMS OF THE CONVERTIBLE NOTES

• 13.2 Rights and interests of the Note Holders: When performing its functions (including but not limited to any function related to the proposed changes or surrender of rights), the Company shall take all Note Holders into consideration as a whole and should not consider the effect thereof on any individual Notes Holders. The Company shall not be liable for (and the Note Holders may not raise) any claims for indemnity, compensation or payment demand for the tax impact on any individual Note Holders as a result of the performance of the Company’s aforesaid functions.

14. Notice

• 14.1 Each Note Holder shall register an address in Hong Kong or other regions with the Company so that the Company may send communications to it. If the Note Holder fails to provide any address to the Company, the Company may send its communications to the last known business address or residential address of the Note Holder in a manner mentioned below, and such communications shall be deemed as being delivered; or if the Company is not aware of any address of the Note Holder, the Company may post the communications for three days at its own registered address and main business address, and such communications shall also be deemed as being delivered.

• 14.2 Any communication shall be sent by personal delivery or prepaid mail via ordinary mail or registered mail (in the case of airmail, the precondition is that registered airmail service is offered at that place) with postage prepaid.

• 14.3 If any Convertible Note is held jointly, all communications shall be sent to the Note Holder ranking first in the Register of Note Holders; the communications sent in the foregoing manner shall be deemed as having been delivered to every joint Note Holder.

• 14.4 The communications shall be deemed as being served or received at the following time:

• (1) 2 Business Days after the mailing day where the communications are sent by ordinary mail in the same region;

• (2) 4 Business Days after the mailing day where the communications are sent by airmail;

• (3) the time of delivery where the communications are sent by personal delivery;

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PRINCIPAL TERMS OF THE CONVERTIBLE NOTES

APPENDIX VIIA

• (4) the time on the first day of posting where the communications are posted at the Company’s own registered address or principal place of business.

• 14.5 The delivery (or mailing) of communications to the address listed in the Register of Note Holders will be deemed as valid delivery.

15. Governing Law and Jurisdiction

• 15.1 Governing law: The Convertible Notes and the Instrument shall be governed by and interpreted in accordance with the Laws of Hong Kong.

• 15.2 Jurisdiction: The Courts of Hong Kong shall have jurisdiction over any dispute arising from or related to the Instrument or the Convertible Notes; therefore, any legal actions or lawsuits (“Lawsuits”) arising from or relating to the Instrument and/or the Convertible Notes may be filed to the courts of Hong Kong. The Note Holders shall be entitled to file Lawsuits in any other courts in other jurisdictions with jurisdiction and the filing of the Lawsuits in one (or several) jurisdiction(s) shall not preclude the filing of the Lawsuits in other jurisdictions (regardless of whether they are filed at the same time).

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PRINCIPAL TERMS OF THE PROMISSORY NOTES

APPENDIX VIIB

• B. The principal terms of the Promissory Notes are as follows:

Capitalized terms used in this Appendix VIIB shall have the meaning as defined in Clause 1 herein.

TERMS AND CONDITIONS OF THE PROMISSORY NOTES

The promissory notes proposed to be issued by China Environmental Energy Investment Limited (the “ Company ”) with a principal value of HK$260,000,000 due in 2012 with interest at 5.25% per annum (the “ Promissory Notes ”) was approved at a meeting of the board of directors.

Subject to the shareholders’ approval being obtained at the special general meeting to be held on 13 October 2011, the Promissory Notes are to be issued subject to the terms and conditions in the instrument of Promissory Notes (the “ Instrument ”) given by the Company and the terms and conditions appended to the back of the Promissory Notes certificates, a summary of which is set out in this Appendix VIIB.

1. Definitions and Interpretations

• 1.1 For the purpose of the Conditions, the following terms shall have the following meanings:

• “Associate”

in respect of any person, means his or her or its “associate” and/or “connected person” as defined in Chapter One of the Listing Rules

• “Business Day”

any day (other day a Saturday) on which licensed banks are generally open for normal banking businesses in Hong Kong

• “Completion Date”

the day on which the acquisition of 80% of the issued share capital of Ideal Market Holdings Limited by the Company is completed and pursuant to which the Promissory Notes are to be issued to the vendors as part of the consideration for the said acquisition

• “Conditions”

the terms and conditions as appended to the back of the Promissory Notes certificates, as modified from time to time in accordance with the stipulations in the Conditions

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APPENDIX VIIB

PRINCIPAL TERMS OF THE PROMISSORY NOTES

• “Designated Office” the principal place of business of the Company in Hong Kong stated on the back page of the Promissory Notes certificate or the other address notified to the Note Holders in accordance with Clause 12 of Appendix VIIB herein

• “Disposal and any sales, transfer, exchange, renting out, lending, lease, Allocation” discharge, permission, direct or indirect retention, waiver, concession, assignment, treatment or granting of any option, preemptive right, authorisation or other rights or interests, including the signing of any agreement for any of the foregoing acts

“Due Date” the date one year after the Issuing Date, or the first Business Day thereafter if such date does not fall on a Business Day “Events of Default” any event of default listed in Clause 8 of Appendix VIIB herein “Group” the Company and its Subsidiaries “Hong Kong” the Hong Kong Special Administrative Region of the People’s Republic of China “HK$” Hong Kong Dollars, being the legal tender of Hong Kong at the relevant time “Issuing Date” the date on which the Promissory Notes are first issued “Listing Rules” Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited “Note Holder” the holder whose name or title is registered as a note holder in the Register of Note Holders; and in respect of any “Holder” of the Promissory Notes, a corresponding interpretation shall be adopted

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APPENDIX VIIB

PRINCIPAL TERMS OF THE PROMISSORY NOTES

• “Outstanding”

in the case of the Promissory Notes, all Promissory Notes that have been issued, except:

• (a) the Promissory Notes that have been repaid;

• (b) the Promissory Notes whose repayment date is due in accordance with the Conditions and whose repayment amount (including all interests (if any) accrued on the Promissory Notes as of the relevant repayment date) has been paid to the relevant Note Holders (or their agents);

• (c) the Promissory Notes which have become invalid or the Promissory Notes to which the limitation of action for the claim of reimbursement right has been expired in accordance with Clause 9 of Appendix VIIB herein;

• (d) the Promissory Notes represented by Promissory Notes certificates which are torn or destroyed and in respect of which replacement Promissory Notes certificates have been issued in accordance with Clause 3.6 of Appendix VIIB herein;

• (e) the Promissory Notes represented by Promissory Notes certificates which are alleged to have been lost or destroyed and in respect of which replacement Promissory Notes certificates have been issued (purely for the purpose of identifying the number of the Promissory Notes Outstanding and without prejudice to the legal status of the Promissory Notes); or

• (f) the Promissory Notes that are repaid, purchased and canceled in accordance with Clause 6 of Appendix VIIB herein.

• “Register of Note the register of note holders established and prepared in Holders” accordance with Clause 3.5 of Appendix VIIB herein

• “Sale and Purchase Agreement”

the sale and purchase agreement entered into between the Company and Lucky Start Holdings Limited, All Prosper Group Limited, Triumph Return Holdings Limited and Jia Sheng Holdings limited for the purchase of 80% of the shareholding interest in Ideal Market Holdings Limited by the Company

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APPENDIX VIIB

PRINCIPAL TERMS OF THE PROMISSORY NOTES

• “SEHK”

The Stock Exchange of Hong Kong Limited

• “Shares”

the ordinary shares of the Company with a par value of HK$0.01 per share or the shares (as may belong to any one or several classes) arising from the subdivision, consolidation or restructuring of the foregoing shares. Amongst such shares, no priority shall be accorded to the payment of dividends by the Company nor distribution on liquidation (whether voluntary or mandatory) as between them

• “Subsidiary”

• as defined in the Companies Ordinance (Chapter 32 of the Laws of Hong Kong)

• “Taxes”

  • the taxes in all forms, including taxes levied in Hong Kong and any region outside of Hong Kong and profit taxes, interest taxes, value-added taxes and stamp taxes in all forms and all levies, tariffs, charges, fees, withholding fees and withholding taxes collected or levied by any statutory, governmental, national, provincial, local or municipal authority in respect of relevant profits, incomes, revenues, sales, trades, intellectual property rights, tangible or intangible assets or other special items, and also including: (i) any fine, interest or other payment related to taxation; and (ii) tax burden reduction and exemption, tax preference, tax credit, tax reimbursement or financial return that is deprived of or lost. “Tax” shall have the same meaning

• 1.2 Notes: For the purpose of the Conditions:

• (1) Fees, charges, emoluments or expenses shall include value-added taxes, turnover taxes or other similar taxes payable on the same;

• (2) The actions, remedies or legal proceedings taken by a Note Holder in the jurisdictions other than Hong Kong to exercise its rights should encompass the actions, remedies or judicial procedures which accept the choice of Hong Kong laws, that may be taken in such jurisdictions or are most appropriate and may be taken by the Note Holder to exercise its rights;

• (3) The obligations performed or the representations made by more than one person shall be deemed as being performed or made by such persons jointly and severally;

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PRINCIPAL TERMS OF THE PROMISSORY NOTES

APPENDIX VIIB

• (4) Words importing the singular also include the plural and vice versa;

• (5) Words importing one sexual nature include the meaning of masculine, feminine and neutral natures and vice versa;

• (6) “Person” includes partnership and company and vice versa;

• (7) Time on any day refers to Hong Kong time; and

• (8) Any statutory provisions or non-statutory provisions (including the Listing Rules, Hong Kong Accounting Standard and Hong Kong Financial Reporting Standards) shall include any modification to or amendment of such provisions and legal instruments, orders or regulations promulgated under relevant provisions (or provisions modified or reformulated).

• 1.3 Heading: Headings shall not be taken account of in the interpretation of the Conditions.

2. Status, Form, Face Value and Ownership

• 2.1 Status: The Promissory Notes shall constitute the direct, unconditional, non-deferred and unsecured obligations of the Company and the same rights are accorded to all the Promissory Notes issued. Unless otherwise specified by applicable laws, the payment obligation of the Company under the Promissory Notes shall at any time be the same as the current and future unsecured and non-deferred obligations of the Company.

• 2.2 Form and face value: The Promissory Notes are issued in a registered form and shall be expressed in HK$. The principal face value of each Promissory Note shall be HK$500,000 or an integral multiple thereof. Each Note Holder will obtain a Promissory Notes certificate in respect of all Promissory Notes held through registration. Each Promissory Note and each Promissory Notes certificate will be arranged in the order of index numbers which will be recorded on the Promissory Notes certificate and the Register of Note Holders maintained and prepared by the Company (or any third party on behalf of the Company).

• 2.3 Ownership: The ownership of the Promissory Notes shall only be formally transferred after the registration in the Register of Note Holders is changed.

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PRINCIPAL TERMS OF THE PROMISSORY NOTES

APPENDIX VIIB

3. Transfer of Promissory Notes, Issuance of Promissory Notes Certificate and List of Note Holders

3.1 Transfer and Mortgage

• (1) In accordance with Clause 3.1(2) of the Conditions and with the prior written consent of the Company (such consent shall not be unreasonably withheld), any Note Holder may transfer or mortgage the Promissory Notes to other persons; provided that the amount of each transfer shall be in integral multipls of HK$500,000 (or such lesser amount representing all Promissory Notes). The transfer shall take effect upon the delivery of the Promissory Notes certificate representing the Promissory Notes together with the transfer form (duly completed and personally signed by the respective authorized executive personnel (or other authorized persons) of the transferor and the transferee) to the Designated Office. Unless and until the details of the relevant transfer are registered in the Register of Note Holders, the transfer of the Promissory Notes may not take effect.

• (2) Without the consent of the Company, the Promissory Notes may not be transferred to any connected person (as defined in the Lisiting Rules) of the Company (if necessary).

• (3) The following documents shall be delivered to the Designated Office together with the Promissory Notes certificate: (i) a duly executed transfer form; (ii) the power of attorney conferring the power on the executive personnel to sign on behalf of the Note Holder which is a corporate where the transfer form is signed by the foregoing personnel; and (iii) other evidence (including legal opinions), as reasonably required by the Company, where the transfer form is signed by the person other than the Note Holder on behalf of the Note Holder. Within 3 Business Days after the receipt of all the foregoing documents provided by the Note Holder, the Company shall cancel the Promissory Notes certificate and issue a new Promissory Notes certificate to the transferee in case of a partial transfer).

3.2 Delivery of new Promissory Notes certificate

The new Promissory Notes certificate issued to the transferee shall be delivered by registered mail or personal delivery (risks arising from such manner of delivery shall be borne by the Note Holder) within 3 Business Days after the Company receives the transfer forms and all other documents specified in Clause 3.1(3) hereinabove.

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PRINCIPAL TERMS OF THE PROMISSORY NOTES

APPENDIX VIIB

• 3.3 No additional charges for transfer procedures: No additional charges shall be levied for the transfer procedures handled by the Company (or through a third party); provided that the relevant parties to the transfer must first pay (or (as deemed neccessary by the Company) give an undertaking as to indemnity to the Company) any tax or other governmental charges which may be imposed on the transfer.

• 3.4 Period during which transfer is not registered: The Note Holder may not require the Company to handle any transfer of the Promissory Notes within 7 Business Days prior to the Due Date of any principal or interest of the Promissory Notes.

• 3.5 Register of Note Holders: The Company shall prepare and maintain a Register of Note Holders at such place as it may from time to time decide to record the Promissory Notes, any transfer, cancellation and destruction thereof, all replacement Promissory Notes certificates issued to replace any Promissory Notes certificate torn, damaged, lost, stolen or destroyed, and sufficient identification data (including address and authorized signatories) of all Note Holders holding the Promissory Notes from time to time. The Company shall make available the Register of Note Holders or the duplicate thereof for inspection by the Note Holders at a reasonable time.

• 3.6 Replacement of Promissory Notes certificate: Where any Promissory Notes certificate is torn, damaged, lost, stolen or destroyed, such Promissory Notes certificate may be replaced at the Designated Office; provided that the Note Holder requiring a replacement must pay the expenses arising therefrom, provide the Company with all relevant evidence and undertaking as to compensation reasonably required by the Company, and pay a fee to be decided by the Company with an amount of not more than HK$50. The Promissory Notes certificate torn or damaged must be returned to the Company prior to the issuance of the replacement certificate. If the Promissory Notes certificate is lost or stolen, the precondition for the issuance of the replacement Promissory Notes certificate is that its holder shall enter into a compensation deed with the Company with the provisions thereof to the reasonable satisfaction of the Company.

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PRINCIPAL TERMS OF THE PROMISSORY NOTES

APPENDIX VIIB

4. Interest

The interest will be calculated at an annual interest rate of 5.25% from the issuance of the Promissory Notes.

5. Payment

• 5.1 Terms of payment: The principal or interest (if any) payable shall be remitted into the registered bank account of the Note Holder by bank transfer, or if the Note Holder has no registered bank account, the Company shall mail the HK$ cheque, with which money may be drawn from a licensed bank in Hong Kong, to the registered address of the Note Holder by registered mail. The principal shall be paid only after the Promissory Notes certificate is returned to the Designated Office.

• 5.2 Registered bank account and address: For the purpose of this Clause, the registered bank account of the Note Holder refers to the HK$ account opened by the Note Holder (or on behalf of the Note Holder) in banks in Hong Kong, which details are entered in the Register of Note Holders at the close of business on the Business Day prior to the Due Date; and the registered address of the Note Holder refers to the address so entered in the Register of Note Holders at the same time.

• 5.3 Financial laws: All payments must comply with all applicable financial and other laws and regulations, without prejudice to the provisions in Clause 7 (Taxes) of Appendix VIIB herein. With regard to any relevant payment, no commission or expense may be collected from the Note Holders.

• 5.4 Payment instructions: If any amount is transferred to any registered bank account, the payment instructions shall be sent on the Due Date (or the next Business Day, if that day is not a Business Day); or if any amount is paid by cheque, the cheque will be mailed on the Due Date; with regard to the principal, it will be sent or mailed on the next Business Day after the date when the relevant Promissory Notes certificate is returned to the Designated Office.

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APPENDIX VIIB PRINCIPAL TERMS OF THE PROMISSORY NOTES

6. Repayment and Cancellation

6.1 Repayment

(A) Early Repayment

The Promissory Notes may be repaid by the Company in advance under the following circumstances:

Unless the Note Holder has waived any investigation into any event of default listed in Clause 8 of Appendix VIIB herein in writing, the Note Holder shall, at any time after the occurrence of any relevant event of default, be entitled to send a written notice to require the Company to repay all (and not part of) of the principal of the Promissory Notes Outstanding in advance according to the repayment amount calculated in accordance with Clause 6.1(B) herein. Once the above-mentioned written notice is sent, the relevant amount shall become due and owing and shall be paid in a manner specified in Clause 5 herein, and the due date shall be the 30th Business Day after the date when the foregoing written notice is sent.

(B) Repayment Amount

In case of the occurrence of the circumstances specified in Clauses 6.1(A) and (C) herein, the repayment amount due to the Note Holder shall be equal to the principal of the Promissory Notes Outstanding and payable plus the interest accrued on the relevant principal (until all sums payable have been settled), and the repayment amount shall be paid on the due date in accordance with Clause 5 herein.

(C) Voluntary Earlier Repayment

From the Note Issuing Date, the Company may repay all or any part of the Promissory Notes in advance through negotiations with the Note Holders. If there are two or more Note Holders at that time, the Company may choose to repay whichever party it chooses and each Note Holder may not raise any objection.

• 6.2 Cancellation: All Promissory Notes repaid will be cancelled immediately. The Promissory Notes certificates of all Promissory Notes cancelled shall be returned to the Company (or any third party designated by the Company) and the Promissory Notes so cancelled may not be reissued or resold.

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PRINCIPAL TERMS OF THE PROMISSORY NOTES

APPENDIX VIIB

7. Taxes

• 7.1 The Company shall be entitled to withhold from the principal, premium (if any) or interest payable by the Company for any current or future Tax, levy or governmental charge (of whatever nature, including but not limited to deduction or withholding of Taxes, income tax and capital value-added tax on the overall performance or revenue of the Note Holder) imposed or levied by the tax authorities of Bermuda, Hong Kong or other jurisdictions in accordance with any laws and regulations. If the Company must perform any relevant deduction or withholding, the Company’s payment of the net amount after the foregoing deduction or withholding to the Note Holders shall be deemed as the Company’s full performance of its payment obligations.

• 7.2 The principal, premium (if any) or interest stated in the Conditions shall encompass the extra amount stated in this Clause, and any amount added or replaced in accordance with any undertaking or promise given under the Instrument.

8. Events of Default

• 8.1 Any Note Holder may send a written notice to the Company, stating that the Promissory Notes are due and payable upon the occurrence of any one (or several) of the following events:

• (1) Other events of default: The Company violates any covenants, conditions or provisions (but excluding the covenants relating to the payment of principal, premium (if any) or interest (if any) of any Promissory Note) borne by the Company as set forth in the Instrument or the Promissory Notes, and the relevant events of default are not remedied within 14 Business Days after any Note Holder sends a written notice (setting forth the summary information of the events of default and the requirements for the remedy of the events of default) to the Company;

• (2) Violation of Sale and Purchase Agreement and Supplemental Agreement thereto: If the Company commits any flagrant violation of any provision of the Sale and Purchase Agreement and the supplemental agreement, including the violation of any representation made therein, and such violation was not known prior to the issuance and delivery of the Promissory Notes;

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APPENDIX VIIB

PRINCIPAL TERMS OF THE PROMISSORY NOTES

• (3) Winding-up of the Company and Disposal and Allocation by the Company: Any resolution relating to the winding-up or liquidation of the Company or the Company’s disposal of all (or nearly all) of its assets is passed or any order relating to the same is issued by a competent court, unless the foregoing winding-up, liquidation or Disposal and Allocation is due to or related to any merger, takeover, consolidation or reorganization carried out soon thereafter;

• (4) Encumbrance: The chargee of any encumbrance obtains the right of possession of, or the liquidation administrator takes over, all or any significant part of the Company’s assets or business;

• (5) Detention, etc.: Any significant part of the Company’s property is detained, forfeited or imposed with a closure order, executed and the same is not renounced within 30 Business Days;

• (6) Suspension of listing or delisting: The listing of the Shares on the SEHK have been suspended for more than 30 consecutive trading days, unless such suspension occurs for the clearance of announcement or circular by the Company with the SEHK, or the listing status of the Shares on the SEHK is withdrawn or revoked; or

• (7) Issuance of new Shares without permission: Except for any Shares that may be issued pursuant to any convertible securities of the Company that are presently outstanding or to be issued under the Sale and Purchase Agreement, any issue of new Shares by the Company without obtaining the prior written consent of the Note Holders (if any) holding an Outstanding amount of not less than HK$130,000,000.

• 8.2 Once the foregoing notice is sent to the Company, the principal and any interest accrued in accordance with Clause 4 herein under the Promissory Notes will become payable on the 14th Business Days upon the service of relevant notice.

9. Loss of Right

The right to claim for repayment of any relevant principal, premium (if any) and interest will be lost, unless such claim is lodged on or prior to the following date: with regard to the principal, the date one year after the Due Date of the principal; in respect of the interest (if any), the date one year after the Due Date of the interest.

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PRINCIPAL TERMS OF THE PROMISSORY NOTES

APPENDIX VIIB

10. Enforcement

If any Promissory Note is not fully paid after it is payable, the Note Holder may directly take legal proceedings against the Company without any further notice to the Company for the purpose of enforcing its rights against the Company for the repayment of the principal and the interest accrued thereon.

11. Modification and Surrender of Rights

• 11.1 Modification and surrender of rights: Modification to the Instrument or the Conditions must be made by deed poll and signed by the Company stating that it is a supplement to the Promissory Notes or the Conditions before it will take effect.

• 11.2 Rights and interests of the Note Holders: When performing its functions (including but not limited to any function related to the proposed changes or surrender of rights), the Company shall take all Note Holders into consideration as a whole and should not consider the individual effect on certain Note Holders. The Company shall not be liable for (and the Note Holders may not raise) any claims for indemnity, compensation or payment demand for the tax impact on individual Note Holders as a result of the performance of the Company’s aforesaid functions.

12. Notice

• 12.1 Each Note Holder shall register its address in Hong Kong or other regions with the Company so that the Company may send communications to it. If the Note Holder fails to provide any address to the Company, the Company may send communications to the last known business address or residential address of the Note Holder in a manner mentioned below, and such communications shall be deemed as being delivered; or if the Company is not aware of any address of the Note Holder, the Company may post all relevant communications for three days at its own registered address and main business address, whereupon the communications shall be deemed as being delivered.

• 12.2 Any communication shall be sent by personal delivery or prepaid mail via ordinary mail or registered mail (in the case of airmail, the precondition is that registered airmail service is offered at that place) with postage prepaid.

• 12.3 If any Promissory Note is held jointly, all communications shall be sent to the Note Holder ranking first in the Register of Note Holders; the communications sent in the foregoing manner shall be deemed as having been delivered to every joint Note Holder.

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PRINCIPAL TERMS OF THE PROMISSORY NOTES

APPENDIX VIIB

• 12.4 The communications shall be deemed as being delivered or received at the following time:

• (1) 2 Business Days after the mailing day where the communications are sent by ordinary mail in the same region;

• (2) 4 Business Days after the mailing day where the communications are sent by airmail;

• (3) the time of delivery where the communications are sent by personal delivery;

• (4) the time on the first day of posting where the communications are posted at the Company’s own registered address or principal place of business.

• 12.5 The delivery (or mailing) of communications to the address listed in the Register of Note Holders will be deemed as valid service.

13. Governing Law and Jurisdiction

• 13.1 Governing law: The Promissory Notes and the Instrument shall be governed by and interpreted in accordance with the Laws of Hong Kong.

• 13.2 Jurisdiction: The Courts of Hong Kong shall have jurisdiction over any dispute arising from or related to the Instrument or the Promissory Notes; therefore, any legal actions or lawsuits (“Lawsuits”) arising from or relating to the Insturment and/or the Promissory Notes may be filed to the courts of Hong Kong. The Note Holders shall be entitled to file Lawsuits in any other courts in other jurisdictions with jurisdiction and the filing of the Lawsuits in one (or several) jurisdiction(s) shall not preclude the filing of the Lawsuits in other jurisdictions (regardless of whether they are filed at the same time).

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GENERAL INFORMATION

APPENDIX VIII

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 not misleading or deceptive, and there are no other matters the omission of which would make any statement herein or this circular misleading.

SHARE CAPITAL

The authorised and issued and fully paid up share capital of the Company (i) as at the Latest Practicable Date; (ii) taking into account the Conversion Shares to be issued upon the exercise in full of the conversion rights of the Convertible Notes at the minimum Conversion Price of HK$0.227; and (iii) taking into account the Conversion Shares to be issued upon the exercise in full of the conversion rights of the Convertible Notes at the maximum Conversion Price of HK$0.68, were and will be as follows:

(i) As at the Latest Practicable Date

HK$

Authorised:

100,000,000,000 Shares of HK$0.01 each 1,000,000,000.00 Issued and to be issued, fully paid and/or credited as fully paid: 314,709,054 Shares of HK$0.01 each 3,147,090.54

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GENERAL INFORMATION

APPENDIX VIII

• (ii) The Conversion Shares to be allotted and issued upon the exercise in full of the conversion rights of the Convertible Notes at the minimum Conversion Price of HK$0.227

Authorised: 100,000,000,000 Shares of HK$0.01 each Issued and to be issued, fully paid and/or credited as fully paid: 314,709,054 Shares of HK$0.01 each 1,277,533,039 Conversion Shares to be allotted and issued upon the exercise in full of the conversion rights of the Convertible Notes at the minimum Conversion Price of HK$0.227 1,592,242,093 Shares of HK$0.01 each	HK$ 1,000,000,000.00
	3,147,090.54 12,775,330.39
	15,922,420.93

• (iii) The Conversion Shares to be allotted and issued upon the exercise in full of the conversion rights of the Convertible Notes at the maximum Conversion Price of HK$0.68

Authorised: 100,000,000,000 Shares of HK$0.01 each Issued and to be issued, fully paid and/or credited as fully paid: 314,709,054 Shares of HK$0.01 each 426,470,588 Conversion Shares to be issued upon the exercise in full of the conversion rights of the Convertible Notes at the maximum Conversion Price of HK$0.68 741,179,642 Shares of HK$0.01 each	HK$ 1,000,000,000.00
	3,147,090.54 4,264,705.88
	7,411,796.42

All the Shares in issue, the Conversion Shares to be allotted and issued upon the exercise of the conversion rights attached to the Convertible Notes will rank pari passu in all respects with each other as regards dividends, voting and return of capital.

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GENERAL INFORMATION

APPENDIX VIII

DISCLOSURE OF INTERESTS

As at the Latest Practicable Date, the interests and short positions of the Directors and chief executives of the Company in the Shares, underlying shares and debentures of the Company and its associated corporations (within the meaning of Part XV of the SFO) which were required to be notified to the Company and the Stock Exchange pursuant to Divisions 7 and 8 of Part XV of the SFO (including interests which he/she was deemed or taken to have under such provisions of the SFO) or which were required, pursuant to Section 352 of the SFO, to be entered in the register referred to therein, or which were required, pursuant to the Model Code for Securities Transactions by Directors of Listed Issuers set out in the Listing Rules (the “ Model Code ”), to be notified to the Company and the Stock Exchange were as follows:

Long position in ordinary shares of the Company

		Number of
		ordinary shares	Percentage of
		of the	the Company’s
		Company	issued
Name of Director	Capacity	interested	share capital
Mr. Lau Chung Yim	Beneficial owner	3,412	0.00%

Save as disclosed above, as at the Latest Practicable Date, none of the Directors or chief executive of the Company had any interest or short position in the Shares, underlying shares or debentures of the Company or any of its associated corporation (within the meaning of Part XV of the SFO) which were required to be notified to the Company and the Stock Exchange pursuant to Divisions 7 and 8 of Part XV of the SFO (including interests and short positions which he/she was deemed or taken to have under such provisions of the SFO) or which were required, pursuant to Section 352 of the SFO, to be entered in the register referred to therein, or which were required, pursuant to the Model Code, to be notified to the Company and the Stock Exchange.

MATERIAL CONTRACTS

The following contracts (not being contracts in the ordinary course of business) have been entered into by the members of the Enlarged Group within the two years immediately preceding the Latest Practicable Date and are or may be material:

Material contracts entered into by the Group

1. the sale and purchase agreement dated 15 April 2010 entered into between Nurture Power Limited (“ Nurture ”) as vendor and the Company as purchaser for the acquisition by the Company of such number of shares of US$1.00 each representing the entire issued share capital of Swift Profit for a consideration of HK$3,000,000,000;

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GENERAL INFORMATION

APPENDIX VIII

1. the termination agreement dated 18 May 2010 entered into between the Company and Nurture to terminate the agreement as referred to in item (1) above;

2. the placing agreement dated 31 May 2010 entered into between the Company and Cheong Lee Securities Limited, as the placing agent, in relation to the placing of, on a best effort basis, 100,500,000 new Shares of the Company at HK$0.29 per share;

3. the memorandum of understanding dated 18 May 2010 entered into by the Company and Nurture in relation to the possible acquisition of the entire issued share capital in Swift Profit by the Company from Nurture;

4. the supplemental memorandum of understanding dated 10 June 2010 entered into by the Company and Nurture in relation to the possible acquisition of the entire issued share capital in Swift Profit by the Company from Nurture;

5. the sale and purchase agreement dated 28 June 2010 entered into between Nam Hing (B.V.I.) Limited as vendor, Nature Ample Limited as purchaser and Mr. Lau Chung Yim as the guarantor in relation to the sale and purchase of (a) 10 issued shares of US$1.00 each of Cosmo Terrace Corporation (“ Cosmo ”) (together with its subsidiaries as the “ Cosmo Group ”), being the entire issued share capital of Cosmo; (b) 10,000 issued shares of US$1.00 each of Fittingco Inc. (“ Fittingco ”) (together with its subsidiaries as the “ Fittingco Group ”), being the entire issued share capital of Fittingco; (c) two issued shares of HK$10.00 each of Majestic Mountain Limited (“ Majestic ”) (together with its subsidiaries as the “ Majestic Group ”), being the entire issued share capital of Majestic; (d) 10 issued shares of US$1.00 each of Ottawa Enterprises Limited (“ Ottawa ”) (together with its subsidiaries as the “ Ottawa Group ”) (the Cosmo Group, the Fittingco Group, the Majestic Group and the Ottawa Group, collectively, the “ Disposed Group ”); and (e) the all obligations, liabilities and debts owing or incurred by the Disposed Group to the Group (excluding the Disposed Group) as at the completion of the disposal for a consideration of HK$28,000,000 in cash (the “ Connected Disposal ”);

6. the master supply agreement dated 28 June 2010 entered into between Zhongshan Chung Yuen Electric Applied Materials Company Limited (“ Zhongshan CY ”) as supplier and Nam Hing Circuit Board Company Limited (“ Nam Hing HK ”) and Nam Hing Circuit Board (Dongguan) Co., Ltd. (“ Nam Hing DG ”) as purchaser in relation to the supply and purchase of industrial laminates for a term up to 31 March 2012 commencing from the completion of the Connected Disposal with the maximum aggregate annual value for period ending 31 March 2011 and the year ending 31 March 2012 at HK$10,000,000 and HK$15,000,000 respectively;

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GENERAL INFORMATION

APPENDIX VIII

1. the placing agreement dated 2 July 2010 entered into between the Company and Cheong Lee Securities Limited, as the placing agent, in relation to the placing of, on a best effort basis, convertible bonds for an aggregate principal amount of HK$200,000,000;

2. the sale and purchase agreement dated 16 July 2010 entered into between Nurture as vendor and the Company as purchaser for the acquisition of the 9.9% interest in the entire issued share capital of Swift Profit for a consideration of HK$170,000,000;

3. the supplemental agreement dated 30 September 2010 entered into among Nature Ample Limited as purchaser, Nam Hing (B.V.I.) Limited as vendor and Mr. Lau Chung Yim as guarantor in relation to extending the long stop date of the sale and purchase agreement as referred to in item (6) above;

4. the supplemental agreement dated 30 September 2010 entered into between Nam Hing HK, Nam Hing DG and Zhongshan CY in relation to the master supply agreement as referred to in item (7) above;

5. the agreement for sale and purchase of the land and buildings erected thereon dated 28 October 2010 and entered into amongst Suzhou Nam Hing, the Land Reserve Center and the Management Committee;

6. the Framework Agreement;

7. the supplemental agreement dated 21 December 2010 entered into between Nam Hing HK and Nam Hing DG and Zhongshan CY in relation to the master supply agreement as referred to in item (7) above;

8. the supplemental agreement dated 21 December 2010 entered into among Nature Ample Limited, Nam Hing (B.V.I.) Limited and Mr. Lau Chung Yim in relation to the sale and purchase agreement as referred to in item (6) above;

9. the letter of confirmation dated 31 December 2010 in relation to item (8) above;

10. the underwriting agreement dated 31 January 2011 entered into between the Company and Radland International Limited in relation to the underwriting arrangement in respect of a proposed issue by way of rights issue as announced in the announcement dated 31 January 2011 of the Company;

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GENERAL INFORMATION

APPENDIX VIII

1. the Sale and Purchase Agreement; and

2. the Supplemental Agreement.

Material contracts entered into by the Target Group

1. the agreement between the Project Company and Hue Kwok Chiu for the capital injection to Baina Yancheng by Hue Kwok Chiu for the amount of HK$1,000,000, representing 46.8% equity interest in Baina Yancheng (after completion of the said capital injection) as contained and evidenced in the shareholders’ resolution of Baina Yancheng dated 1 April 2010 and the capital verification report of Baina Yancheng dated 17 May 2010;

2. the share swap agreement amongst Zhao Zhen Zhen, Wong Sze Chung Armstrong, Hue Kwok Chiu dated 20 December 2010 for the transfer by Hue Kwok Chiu of his 46.8% in Baina Yancheng to Zhao Zhen Zhen and Wong Sze Chung Armstrong, in consideration of the transfer by Zhao Zhen Zhen and Wong Sze Chung Armstrong of their 13.33% shareholding in the Target Company to Hue Kwok Chiu;

3. the agreement amongst Zhao Zhen Zhen, Wong Sze Chung Armstrong, Hue Kwok Chiu and the Target Company dated 2 January 2011 for (a) the termination of the share swap agreement referred to in item (21) above and all rights and obligations thereunder and (b) the acquisition by the Target Company of Hue Kwok Chiu’s 46.8% equity interest in Baina Yancheng;

4. the agreement for the investment in Bai Run Renewable Resources Company Limited in May 2011;

5. the share transfer agreement entered into between Mr. Tang and the WFOE dated 9 November 2010 for the transfer of Mr. Tang’s 93.5% equity interest in the Project Company to the WFOE for a consideration of RMB9.35 million;

6. the share transfer agreement entered into between Tang Linmei and the WFOE dated 9 November 2010 for the transfer of Tang Linmei’s 6.5% equity interest in the Project Company to the WFOE for a consideration of RMB650,000;

7. the loan agreement entered into between the Project Company and the Changshu branch of the Agricultural Bank of China dated 14 July 2010 for a short term working capital loan in the amount of RMB10 million at an interest of 10% below the benchmark interest rate;

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GENERAL INFORMATION

APPENDIX VIII

1. the loan agreement entered into between the Project Company and the Changshu branch of the Shanghai Pudong Development Bank dated 22 February 2011 for a short term working capital loan in the amount of RMB1.5 million at an interest rate of 15% over the benchmark interest rate;

2. the loan agreement entered into between the Project Company and the Liantang branch of the Changshu Rural Commercial Bank dated 7 July 2010 for a loan of RMB3 million at an interest rate of 5.98% per month;

3. the guarantee agreement entered into between the Project Company and the Changshu branch of the Agricultural Bank of China dated 9 September 2010 under which the Project Company undertook to guarantee a short term working capital loan in the principal amount of RMB3 million;

4. the guarantee agreement for maximum liability entered into between the Project Company and the Changshu branch of the Shanghai Pudong Development Bank dated 10 January 2011 under which the Project Company undertook to guarantee a series of credit/loans extended to the debtor for a maximum amount of RMB13 million;

5. the series of loan agreements entered into between the Project Company and the Changshu branch of the Shanghai Pudong Development Bank over the period of 19 February 2011 to 19 February 2014 up to a maximum amount of RMB17 million;

6. the loan agreement entered into between Baina Yancheng and the Jiangsu Sheyang Rural Commercial Bank Limited dated 11 September 2010 for an amount of RMB2.5 million at an interest rate of 7.29% per annum; and

7. the loan agreement entered into between Baina Yancheng and the Jiangsu Sheyang Rural Commercial Bank Limited dated 11 January 2011 for an amount of RMB4 million at an interest rate of 8.025% per annum.

DIRECTORS’ SERVICE CONTRACTS

As at the Latest Practicable Date, none of the Directors had any existing or proposed service contract with any member of the Enlarged Group (excluding contracts expiring or determinable by the employer within one year without payment of compensation (other than statutory compensation)).

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GENERAL INFORMATION

APPENDIX VIII

INTERESTS IN ASSETS

As at the Latest Practicable Date, none of the Directors and the experts whose names are referred to in the section headed “Experts and consents” in this appendix had any interest, either direct or indirect, in any assets, acquired or disposed of by or leased to any member of the Enlarged Group, or are proposed to be acquired or disposed of by or leased to any member of the Enlarged Group.

DIRECTORS’ INTERESTS IN CONTRACTS

As at the latest Practicable date, none of the Directors was materially interested in any contract or arrangement which is significant in relation to the business of the Enlarged Group.

EXPERTS AND CONSENTS

The following is the qualification of the expert who has given opinions or advice which are contained in this circular:

Cheng & Cheng Limited	Certified public accountants
LCH (Asia- Pacific) Surveyors Limited	Professional surveyor
Roma Appraisals Limited	Valuer
CCTH CPA Limited	Certified public accountants
Shanghai Junjin Law Firm*	PRC legal adviser
（上海君錦律師事務所）

Each of the experts above has given and has not withdrawn its written consent to the issue of this circular with the inclusion herein of its letter and report and references to its name in the form and context in which it appears.

As at the Latest Practicable Date, all the experts above did not have any shareholding in any member of the Group or any right (whether legally enforceable or not) to subscribe for or to nominate persons to subscribe for securities in any member of the Group.

LITIGATION

No member of the Enlarged Group was engaged in any litigation, arbitration or claim of material importance and no litigation, arbitration or claim of material importance was known to the Directors to be pending or threatened against any member of the Enlarged Group as at the Latest Practicable Date.

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GENERAL INFORMATION

APPENDIX VIII

MATERIAL ADVERSE CHANGE

As at Latest Practicable Date, the Directors were not aware of any material adverse change in the financial position or trading position of the Group since 31 March 2011, being the date to which the latest published audited financial statements of the Group was made up.

COMPETING INTERESTS

Nature Ample Limited is a company incorporated in the British Virgin Islands and wholly and beneficially owned by Mr. Lau Chung Yim, the executive Director.

On 28 June 2010, Nam Hing (B.V.I.) Limited as the vendor, Nature Ample Limited as the purchaser and Mr. Lau Chung Yim as guarantor entered into the sale and purchase agreement with regard to the disposal of the entire issued share capital of the Disposed Group and the Connected Disposal. Details of the Connected Disposal are set out in the Company’s circular dated 24 December 2010. The Connected Disposal was completed on 21 January 2011.

The Disposed Group is principally engaged in manufacturing of copper foil and laminate and trading of laminate with production facilities in the PRC and Thailand. Nam Hing Industrial Laminate Limited, a subsidiary of the Group, is engaged mainly in the trading of laminate business.

The Disposed Group will supply their finished products to Nam Hing Industrial Laminate Limited for trading, which may compete, directly or indirectly, with the Group’s business.

Save for the above, as at the Latest Practicable Date, none of the Directors nor their respective associates was interested in any business apart from the Enlarged Group’s business which completes or is likely to compete, either directly or indirectly, with the Enlarged Group’s businesses pursuant to Rule 8.10 of the Listing Rules.

MISCELLANEOUS

1. The company secretary of the Company is Mr. Leung Chi Wing, Billy (“ Mr. Leung ”), who is a member of the Hong Kong Institute of Certified Public Accountants and The Association of Chartered Certified Accountants and a graduate of The Institute of Chartered Secretaries and Administrators in the United Kingdom. Mr. Leung holds a Bachelor’s degree in Accountancy and has extensive experience in finance, accounting and company secretarial functions.

2. Tricor Tengis Limited, the share registrar and transfer office of the Company is located at 26th Floor, Tesbury Centre, 28 Queen’s Road East, Wanchai, Hong Kong.

3. The English text of this circular prevails over the Chinese text.

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GENERAL INFORMATION

APPENDIX VIII

DOCUMENTS AVAILABLE FOR INSPECTION

Copies of the following documents are available for inspection at the principal place of business of the Company at Room 2211, 22/F., Tower Two, Lippo Centre, 89 Queensway, Hong Kong during normal business hours on any weekday other than public holidays, from the date of this circular up to and including the date of the SGM:

• (a) the bye-laws and memorandum of association of the Company;

• (b) the accountants’ report of the Target Group, the text of which is set out in Appendix II to this circular;

• (c) the report in relation to the unaudited pro forma financial information of the Enlarged Group, the text of which is set out in Appendix IV to this circular;

• (d) the valuation report on the Target Group, the text of which is set out in Appendix V to this circular;

• (e) the property valuation report of the Enlarged Group, the text of which is set out in Appendix VI to this circular;

• (f) the annual reports of the Company for each of the three financial years ended 31 March 2011;

• (g) the material contracts referred to in the paragraph headed “Material contracts” in this Appendix;

• (h) the written consent referred to under the paragraph headed “Experts and consents” in this Appendix;

• (i) the Sale and Purchase Agreement;

• (j) the Supplemental Agreement; and

• (k) this circular.

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NOTICE OF THE SGM

China Environmental Energy Investment Limited

(Incorporated in Bermuda with limited liability) (Stock Code: 986)

NOTICE IS HEREBY GIVEN that a special general meeting (the “ SGM ”) of the shareholders of China Environmental Energy Investment Limited (the “ Company ”) will be held at Falcon Room II, Gloucester Luk Kwok Hong Kong, 72 Gloucester Road, Wanchai, Hong Kong on Thursday, 13 October 2011 at 10:00 a.m. for the purpose of considering and, if thought fit, passing with or without amendments, the following resolution of the Company:

ORDINARY RESOLUTION

“ THAT

• (a) the sale and purchase agreement (the “ Sale and Purchase Agreement ”) dated 9 May 2011 and the Supplemental Agreement dated 14 September 2011 (the “ Supplemental Agreement ”), both entered into between Lucky Start Holdings Limited, All Prosper Group Limited, Triumph Return Holdings Limited and Jia Sheng Holdings Limited together as the vendors (collectively the “ Vendors ”), the Company as the purchaser and Mr. Lu Weikang（陸衛康）, Mr. Tang Guoming（唐國明）, Ms. Ng Hiu Ying（吳 曉瑛）and Mr. Hue Kwok Chiu（許國釗）as the Vendors’ guarantors in relation to the acquisition of 80% of the issued share capital in Ideal Market Holdings Limited (the “ Acquisition ”) (copies of the Sale and Purchase Agreement and the Supplemental Agreement have been produced at the SGM and marked “A” and “B” respectively and initialled by the chairman of the SGM for identification purpose) at a consideration of HK$850,000,000, of which HK$300,000,000 is to be satisfied by cash payment, HK$260,000,000 by means of issue of promissory notes (the “ Promissory Notes ”) and HK$290,000,000 by means of issue of convertible note(s) (the “ Convertible Note(s) ”) and all transactions contemplated under the Sale and Purchase Agreement (as supplemented by the Supplemental Agreement) be and are hereby approved, confirmed and ratified;

• For identification purposes only

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NOTICE OF THE SGM

• (b) the execution, delivery and performance of the Sale and Purchase Agreement, the Supplemental Agreement and all documents, deeds and agreements contemplated thereunder or incidental thereto by the Company be and are hereby approved, confirmed and ratified;

• (c) the Acquisition and all the transactions contemplated under or incidental to the Sale and Purchase Agreement (as supplemented by the Supplemental Agreement) and all actions taken or to be taken by the Company and/or its subsidiaries pursuant thereto be and are hereby approved, confirmed and ratified;

• (d) subject to the fulfillment or waiver of the conditions set out in the Sale and Purchase Agreement (as supplemented by the Supplemental Agreement), any director of the Company (the “ Director ”) be and is hereby authorised to issue the Convertible Notes in the aggregate principal amount of HK$290,000,000 and to issue the Promissory Note(s) in the aggregate principal amount of HK$260,000,000 in accordance with the terms and conditions of the Sale and Purchase Agreement (as supplemented by the Supplemental Agreement);

• (e) any Director be and is hereby authorised to allot and issue such number of new ordinary shares of HK$0.01 each in the share capital of the Company as may be required to be allotted and issued upon the exercise of the conversion rights attached to the Convertible Note(s) or part thereof to the relevant holder(s) of the Convertible Note(s); and

• (f) any Director be and is hereby authorized to sign, execute, perfect, deliver and do all such documents, deeds, acts, matters and things, as the case may be, as he may in his discretion consider necessary or expedient to carry out and implement the Sale and Purchase Agreement (as supplemented by the Supplemental Agreement) and all the transactions contemplated thereunder into full effect.”

By order of the Board

China Environment Energy Investment Limited Deng Hong Mei Director

Hong Kong, 23 September 2011

Registered office: Clarendon House 2 Church Street Hamilton HM 11 Bermuda

Head office and principal place of business in Hong Kong: Room 2211, 22/F., Tower Two, Lippo Centre, 89 Queensway, Hong Kong

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NOTICE OF THE SGM

Notes:

• (1) Any shareholder of the Company (the “ Shareholder(s) ”) entitled to attend and vote at the SGM shall be entitled to appoint another person as his proxy to attend and vote instead of him. A proxy need not be a Shareholder.

• (2) The form of proxy shall be in writing under the hand of the appointer or of his attorney duly authorised in writing or, if the appointer is a corporation, either under its seal or under the hand of an officer, attorney or other person authorised to sign the same.

• (3) Delivery of the form of proxy shall not preclude a Shareholder from attending and voting in person at the SGM and in such event, the form of proxy shall be deemed to be revoked.

• (4) Where there are joint Shareholders, any one of such joint Shareholder may vote, either in person or by proxy, in respect of such shares as if he were solely entitled thereto, but if more than one of such joint Shareholders are present at the SGM 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 Shareholders, and for this purpose seniority shall be determined by the order in which the names stand in the register of Shareholders of the Company in respect of the joint holding.

• (5) The form of proxy and (if required by the board of directors of the Company) the power of attorney or other authority (if any) under which it is signed, or a certified copy of such power or authority, shall be delivered to the Company’s branch share registrar in Hong Kong, Tricor Tengis Limited, at 26/F., Tesbury Centre, 28 Queen’s Road East, Wanchai, Hong Kong not less than 48 hours before the time appointed for the holding of the SGM or any adjournment thereof at which the person named in the form of proxy proposes to vote or, in the case of a poll taken subsequently to the date of the SGM or any adjournment thereof, not less than 24 hours before the time appointed for the taking of the poll and in default the form of proxy shall not be treated as valid.

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