ELL Environmental Holdings Limited

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 obtain independent professional advice or consult your stockbroker or other registered dealer in securities, bank manager, solicitor, professional accountant or other professional adviser.

If you have sold or transferred all your shares in ELL Environmental Holdings Limited, you should at once hand this circular and the accompanying form of proxy to the purchaser or transferee or to the bank, stockbroker or other agent through whom the sale or transfer was effected for transmission to the purchaser or transferee.

Hong Kong Exchanges and Clearing Limited and The Stock Exchange of Hong Kong Limited take no responsibility for the contents of this circular, make no representation as to its accuracy or completeness and expressly disclaim any liability whatsoever for any loss howsoever arising from or in reliance upon the whole or any part of the contents of this circular.

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

ELL ENVIRONMENTAL HOLDINGS LIMITED 強泰環保控股有限公司 *

(Incorporated in the Cayman Islands with limited liability)

(Stock Code: 1395)

(A) MAJOR TRANSACTION AND CONNECTED TRANSACTION IN RELATION TO THE ACQUISITION OF ALL THE ISSUED SHARES OF WEAL UNION LIMITED INVOLVING THE ISSUE OF CONSIDERATION SHARES TO A CONNECTED PERSON AND AN INDEPENDENT THIRD PARTY UNDER A SPECIFIC MANDATE AND

(B) NOTICE OF EXTRAORDINARY GENERAL MEETING

Financial Adviser

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

A notice convening an extraordinary general meeting of our Company to be held at Units 1-3, 11th Floor, Westlands Centre, 20 Westlands Road, Hong Kong on Thursday, 8 September 2016 at 10:00 a.m. is set out on pages EGM-1 to EGM-3 of this circular. If you are not able to attend the meeting but wish to exercise your right as a shareholder of the Company, please complete and return the form of proxy accompanying this circular in accordance with the instructions printed thereon to our Company’s share registrar and transfer office in Hong Kong, Boardroom Share Registrars (HK) Limited, at 31/F., 148 Electric Road, North Point, Hong Kong not later than 48 hours before the time appointed for the holding of the meeting (or the adjourned meeting or of the poll, as the case may be). Completion and return of the form of proxy will not preclude you from attending and voting at the meeting should you so wish.

* For identification purpose only

24 August 2016

			Page
Definition.....................................................................................................................			1
Letter from the	Board	.................................................................................................	8
Letter from the	Independent Board Committee........................................................		45
Letter from the	Independent Financial Adviser........................................................		47
Appendix I	—	Financial Information of the Group......................................	I-1
Appendix II	—	Accountants’ Report on the Target Group............................	II-1
Appendix III	—	Unaudited Pro Forma Financial Information of
		the Enlarged Group............................................................	III-1
Appendix IV	—	Management Discussion and
		Analysis on the Target Group............................................	IV-1
Appendix V(A)	—	Business Valuation Report.....................................................	V(A)-1
Appendix V(B)	—	Letters on the valuation.........................................................	V(B)-1
Appendix VI	—	General Information..............................................................	VI-1
Notice of Extraordinary General Meeting.................................................................			EGM-1

– i –

DEFINITIONS

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

“Acquisition”
the proposed acquisition by Eternity Time of the Sale Shares pursuant to the terms of the SPA
“Addendum”
the addendum on 10 May 2016 to the PLN Contract to supply an additional 10 Megawatt of excess power to be generated by the second power unit through PLN’s power supply network commencing latest by 7 September 2016
“Ancillary Power Plant” the power plant that comprises two power units, each having a power output of 15 Megawatt, owned and constructed by RPSL
“Announcement”
our Company’s announcement dated 16 June 2016
“Articles” the articles of association of the Company as amended, supplemented or otherwise modified from time to time
“associate(s)” has the meaning ascribed to it under the Listing Rules
“Avista” or “Valuer” AVISTA Valuation Advisory Limited, a professional valuer
“Board” the board of Directors
“business day”
a day (excluding Saturday, Sunday and public holiday) on which banks in Hong Kong and Indonesia are generally open for business in Hong Kong and Indonesia
“BVI” the British Virgin Islands
“Carlton Asia”

Carlton Asia Limited, a company incorporated in the BVI

“Chan Family” collectively, Ms. Wong, Ms. Chan, Mr. Chan, Mr. Brian Chan and Mr. Chan Chun Keung, the husband of Ms. Wong
“Chan Family Group”

collectively, Carlton Asia, Everbest Environmental, Hightop, Ms. Wong, Ms. Chan, Mr. Chan, Mr. Brian Chan and Mr. Chan Chun Keung, the husband of Ms. Wong and the father of Ms. Chan, Mr. Chan and Mr. Brian Chan

“close associate(s)”

has the meaning ascribed to it under the Listing Rules

– 1 –

DEFINITIONS

“Company” ELL Environmental Holdings Limited, a company incorporated in the Cayman Islands with limited liability, the issued Shares of which are listed on the Main Board of the Stock Exchange (Stock Code: 1395)
“Completion” completion of the Acquisition pursuant to the SPA “Completion Date” the fifth business day after the satisfaction of all the conditions set out in paragraph headed “2. The Share Purchase Agreement — Conditions precedent to Completion” in the “Letter from the Board”, or such other date as the parties to the SPA may mutually agree in writing
“connected person(s)” has the meaning ascribed to it in the Listing Rules “Consideration” the consideration for the sale and purchase of the Sale Shares pursuant to the SPA
“Consideration Shares” the new Shares, credited as fully paid, to be issued and allotted to the Vendors or their respective nominees in accordance with the SPA as payment of the Consideration for the Sale Shares in part
“Director(s)” director(s) of our Company
“EGM” an extraordinary general meeting of our Company to be convened and held for approving the SPA and the transactions contemplated thereunder, as well as the Specific Mandate
“Enlarged Group” collectively, the Group and the Target Group “Eternity Time” Eternity Time Group Limited, a limited liability company incorporated in the BVI and a direct wholly-owned subsidiary of our Company

“Euto Capital” or Euto Capital Partners Limited, a corporation licensed to “Financial Adviser” carry out type 6 (advising on corporate finance) regulated activity under the SFO, being the financial adviser to the Company in respect of the terms of the SPA and the transactions contemplated thereunder (including the issue and allotment of the Consideration Shares under the Specific Mandate)

“Everbest Environmental” Everbest Environmental Investment Limited, a limited liability company incorporated in the BVI, being a substantial shareholder of our Company held as to 50% by Ms. Wong, 30 % by Ms. Chan and 20% by Mr. Chan

– 2 –

DEFINITIONS

“Everbest Water” Everbest Water Treatment Development Company Limited, a limited liability company incorporated in Hong Kong and a wholly-owned subsidiary of our Company “Fusion Joy” Fusion Joy Holdings Inc., a company incorporated in the BVI “FY2013” the financial year ended 31 December 2013 “FY2014” the financial year ended 31 December 2014 “FY2015” the financial year ended 31 December 2015 “GIP” PT Global Inovasi Prima, a company incorporated under the laws of Indonesia “Group” our Company and its subsidiaries from time to time “Haian Hengfa” Haian Hengfa Wastewater Treatment Company Limited, a non-wholly owned subsidiary of our Company and a limited liability company established in the PRC on 18 December 2002, held by our Company as to 70% “Haian Hengfa Facility” the wastewater treatment facility operated by Haian Hengfa “Hightop” Hightop Investment Limited, a company incorporated in the BVI, which is held as to 50% by each of Ms. Wong and Mr. Chan Chun Keung, the husband of Ms. Wong “HK$” Hong Kong dollar, the lawful currency of Hong Kong “Hong Kong” Hong Kong Special Administrative Region of the PRC “IDR” Indonesian rupiahs, the lawful currency of Indonesia “Independent Board an independent committee of the Board comprising all Committee” the independent non-executive Directors established for the purpose of advising the Independent Shareholders on the Acquisition (including the issue and allotment of the Consideration Shares under the Specific Mandate)

– 3 –

DEFINITIONS

“Independent Financial Southwest Securities (HK) Capital Limited, a corporation Adviser” or licensed to carry out type 1 (dealing in securities) regulated “Southwest Securities” activity and type 6 (advising on corporate finance) regulated activity under the SFO, being the independent financial adviser to the Independent Board Committee and the Independent Shareholders in respect of the terms of the SPA and the transactions contemplated thereunder (including the issue and allotment of the Consideration Shares under the Specific Mandate)
“Independent Shareholders”
Shareholders, other than those required under the Listing Rules to abstain from voting, who have no interest in the transactions contemplated under the SPA
“independent third party(ies)”
a party or parties who/which is/are third party(ies) independent of our Company and its connected persons
“Indonesia”
the Republic of Indonesia
“IPO”
the initial public offering of 200,000,000 Shares
“Issue Price”
HK$0.50 per Consideration Share
“Latest Practicable Date”
19 August 2016, being the latest practicable date prior to the printing of this circular for the purpose of ascertaining certain information contained in this circular
“Listing”
the listing of the Shares on the Main Board of the Stock Exchange on 26 September 2014
“Listing Rules”
the Rules Governing the Listing of Securities on the Stock Exchange
“Mill”
the palm kernel oil mill that produces palm kernel expeller at a capacity of 33,750 tons per year and palm kernel oil at a capacity of 41,250 tons in Jambi City, Indonesia, owned and operated by RPSL
“Model Code”
the Model Code for Securities Transactions by Directors of Listed Issuers as contained in Appendix 10 to the Listing Rules
“Mr. Brian Chan”
Mr. Chan Pak Lam, Brian, a non-executive Director, a brother of Mr. Chan and Ms. Chan and a son of Ms. Wong

– 4 –

DEFINITIONS

“Mr. Chan” Mr. Chan Kwan, an executive Director and our Chief Executive Officer, a brother of Mr. Brian Chan and Ms. Chan and a son of Ms. Wong
“Mr. Chau”
Mr. Chau On Ta Yuen, an executive Director and the chairman of the Board
“Mr. Fadjar Suhendra”
Mr. Fadjar Suhendra, a director of each of Weal Union and RPSL, holding 3% of the issued shares in RPSL and 60% of the shares in First Pacific (Asia) Pte Ltd through a trust, which in turn holds all issued shares in Fusion Joy
“Mr. Sugih Suhendra” Mr. Sugih Suhendra, a director of each of Weal Union and RPSL, holding 2% of the issued shares in RPSL and 40% of the shares in First Pacific (Asia) Pte Ltd through a trust, which in turn holds all issued shares in Fusion Joy
“Ms. Chan”
Ms. Judy Chan, sister of Mr. Chan and Mr. Brian Chan and daughter of Ms. Wong
“Ms. Wong” Ms. Wong Shu Ying, mother of Mr. Chan, Mr. Brian Chan and Ms. Chan
“Percentage Ratios” the percentage ratios set out in Rule 14.07 of the Listing Rules to be applied for determining the classification of a transaction under the Listing Rules
“PLN” Indonesia’s state-owned power company, Perusahaan Listrik Negara
“PLN Contract”
the excess power supply contract dated 28 November 2014 and entered into between RPSL and PLN, and as amended on 2 March 2015 and 2 July 2015, for a term currently expiring on 16 January 2017, subject to renewal by the parties
“PRC” the People’s Republic of China and, for the purpose of this circular, excluding Hong Kong, the Macau Special Administrative Region of the People’s Republic of China and Taiwan
“Prospectus” the prospectus issued by our Company on 12 September 2014
“RPSL” PT Rimba Palma Sejahtera Lestari, a company incorporated under the laws of Indonesia and a 95%-owned subsidiary of Weal Union

– 5 –

DEFINITIONS

“Rugao Hengfa” Rugao Hengfa Water Treatment Company Limited, an indirect wholly-owned subsidiary of our Company established in the PRC on 27 November 2003
“Rugao Hengfa Facility” the wastewater treatment facility operated by Rugao Hengfa “Rugao Honghao” Rugao Honghao Metal Water Treatment Company Limited, an indirect wholly-owned subsidiary of our Company established in the PRC on 30 April 2010
“Rugao Honghao Facility” the wastewater treatment facility operated by Rugao Honghao
“Sale Shares” all the issued shares in Weal Union
“SFO” the Securities and Futures Ordinance, Chapter 571 of the laws of Hong Kong
“Share(s)” ordinary share(s) of par value HK$0.0001 each in the share capital of our Company
“Shareholder(s)” holder(s) of the Share(s)
“SPA” the share purchase agreement dated 16 June 2016 and entered into between our Company as issuer, Eternity Time as purchaser, and Fusion Joy and Carlton Asia as vendors, in respect of the acquisition of all the issued shares of Weal Union
“Specific Mandate” the specific mandate to be sought from the Independent Shareholders at the EGM for the issue of the Consideration Shares
“Stock Exchange” The Stock Exchange of Hong Kong Limited
“subsidiary(ies)” has the meaning ascribed to it under the Listing Rules
“substantial shareholder” has the meaning ascribed to it under the Listing Rules
“Takeovers Code” The Codes on Takeovers and Mergers and Share Buybacks of Hong Kong issued by the Securities and Futures Commission in Hong Kong as amended, supplemented and otherwise modified from time to time

– 6 –

DEFINITIONS

“Target Company” Weal Union “Target Group” collectively, Weal Union and RPSL “Top-up Placing” the top-up placing of 160,000,000 Shares “US$” United States dollar, the lawful currency of the United States of America

“Vendors” Fusion Joy and Carlton Asia

“Weal Union” Weal Union Limited, a limited liability company incorporated in Hong Kong

“Wealthy Sea” Wealthy Sea Holdings Limited, a company incorporated in Hong Kong, which is held as to 90% and 10% by Mr. Chau and Ms. Wong Mei Ling, the wife of Mr. Chau, respectively

“%” per cent or percentage

For the purpose of this circular, unless the context otherwise requires, conversion of USD into HK$ is based on the approximate exchange rate of US$1 = HK$7.75 and conversion of IDR into HK$ is based on the 2015 closing exchange rate of 1 IDR to 0.000562 HK$ for the purpose of illustration only and does not constitute a representation that any amount has been, could have been or may be converted.

– 7 –

LETTER FROM THE BOARD

ELL ENVIRONMENTAL HOLDINGS LIMITED 強泰環保控股有限公司 *

(Incorporated in the Cayman Islands with limited liability)

(Stock Code: 1395)

Executive Directors: Mr. Chau On Ta Yuen (Chairman) Mr. Chan Kwan (Chief Executive Officer)

Registered Office: P.O. Box 309, Ugland House Grand Cayman, KY1-1109 Cayman Islands

Non-Executive Directors: Mr. Chan Pak Lam Brian Headquarters: Mr. Chau Chi Yan Benny Rugao Hengfa Municipal and Industral Wastewater Treatment Facility Independent Non-executive Directors: North of Huimin Road Ms. Ng Chung Yan Linda Rugao Economic and Mr. Ng Man Kung Technical Development Zone Mr. Sze Yeuk Lung Benedict Jiangsu Province, PRC

Principal Place of Business in Hong Kong: Units 1-3, 11th Floor Westlands Centre 20 Westlands Road Hong Kong

24 August 2016

To the Shareholders

Dear Sir or Madam,

(A) MAJOR TRANSACTION AND CONNECTED TRANSACTION IN RELATION TO THE ACQUISITION OF ALL THE ISSUED SHARES OF WEAL UNION LIMITED INVOLVING THE ISSUE OF CONSIDERATION SHARES TO A CONNECTED PERSON AND AN INDEPENDENT THIRD PARTY UNDER A SPECIFIC MANDATE AND

(B) NOTICE OF EXTRAORDINARY GENERAL MEETING

* For identification purpose only

– 8 –

LETTER FROM THE BOARD

A. THE ACQUISITION

1. INTRODUCTION

Reference is made to the Announcement. On 16 June 2016, our Company, as issuer, and Eternity Time, as purchaser, entered into the SPA with Fusion Joy and Carlton Asia, as vendors. Pursuant to the SPA, Eternity Time has conditionally agreed to acquire 200 Sale Shares and 50 Sale Shares from Fusion Joy and Carlton Asia, respectively, at an aggregate consideration of approximately US$22.258 million (equivalent to approximately HK$172.500 million). Upon completion of the SPA, our Company is expected to hold all the issued shares of Weal Union. To satisfy the Consideration, our Company will (i) pay US$8,561,000 (equivalent to approximately HK$66,347,750) in cash, and issue and allot 143,300,000 Consideration Shares, to Fusion Joy, and (ii) pay US$3,439,000 (equivalent to approximately HK$26,652,250) in cash, and issue and allot 15,700,000 Consideration Shares, to Carlton Asia. The Consideration Shares shall be issued at the Issue Price of HK$0.50 per Consideration Share pursuant to the Specific Mandate at Completion. Application will be made to the Stock Exchange for the listing of, and the permission to deal in, the Consideration Shares, on the Stock Exchange.

2. THE SHARE PURCHASE AGREEMENT

Date:

16 June 2016

Parties:

(1) Eternity Time, a wholly-owned subsidiary of our Company, as purchaser
(2) Our Company, as issuer
(3) Fusion Joy and Carlton Asia, as vendors

Assets being acquired:

Eternity Time shall acquire 200 Sale Shares held by Fusion Joy and 50 Sale Shares held by Carlton Asia, which together, represent all the issued shares of Weal Union. The aggregate amount of costs incurred and contribution made to Weal Union and RPSL by each of Fusion Joy and Carlton Asia was HK$61.7 million and HK$45.7 million, respectively. Upon Completion, Weal Union shall become a wholly-owned subsidiary of our Company. RPSL, the only subsidiary of Weal Union, shall become 95% owned by our Company indirectly.

– 9 –

LETTER FROM THE BOARD

Consideration for the Sale Shares:

The aggregate consideration for the Sale Shares shall be approximately US$22.258 million (equivalent to approximately HK$172.5 million), which shall be satisfied as follows:

US$8,561,000 (equivalent to approximately HK$66.3 million) to be payable in cash, and 143,300,000 Consideration Shares to be issued and allotted, to Fusion Joy; and
US$3,439,000 (equivalent to approximately HK$26.7 million) to be payable in cash, and 15,700,000 Consideration Shares to be issued and allotted, to Carlton Asia.

Our Directors considered that the settlement of the Consideration by a combination of cash and issue of the Consideration Shares would enable the Company to enlarge its equity base and maintain its liquidity position by reducing cash outflow, but without unduly diluting Independent Shareholder’s interests in the issued capital of the Company.

The aforesaid terms of payment of the Consideration were determined after arm’s length negotiations with the Vendors after taking into account, among other things:

(i) the audited net asset value of the Target Group as at 31 December 2015;
(ii) the financial performance and operating results of the Target Group for the financial years ended 31 December 2014 and 2015;
(iii) the economic outlook and the competitive landscape affecting the Target Group’s businesses, and
(iv) the nature and prospects of the industry in which the Target Group is operating.

The Consideration represents a premium of 0.16% over the fair value of the 100% equity interest of Weal Union (having already taken into account that Weal Union only holds 95% of the issued shares of RPSL) as at 31 December 2015, being US$22,223,000 (equivalent to approximately HK$172,228,250), as valued by Avista, the professional valuer engaged by the Company to carry out a fair value analysis in connection with the Acquisition.

– 10 –

LETTER FROM THE BOARD

Pursuant to note 1(d) to Rule 13.80 of the Listing Rules, we have interviewed Avista as to its expertise and we have obtained knowledge about its qualification and experience. Based on our discussion with Avista and also with the management team of our Group, we understand that, to the best of our knowledge, (i) Avista has relevant experience and expertise in the valuation of power generation businesses or companies similar to the Target Group, (ii) apart from the independent valuation engagement for this Acquisition, Avista has no other current or prior relationships with our Company, other parties to the Acquisition or any of their core connected persons; and (iii) we are not aware that our Company or other parties to the Acquisition has made any formal or informal representation to Avista which is not in accordance with our knowledge. We have also reviewed the terms of engagement and the scope of work of Avista and considered the scope of work appropriate and without limitation. For details relating to the fair value analysis carried out by Avista, please refer to Appendix V(A) to this circular.

Our Directors are of the view that the fair value of the Target Group as at 31 December 2015 as valued by Avista is a reasonable benchmark for determining the Consideration as:

negotiations for the Acquisition began in April 2016 and definitive agreements were signed in June 2016, which were within six months from 31 December 2015 (the “ six-month period ”) was negotiated;
the fair value of the Target Group as at 31 December 2015 as valued by Avista already took into account the extension of the PLN Contract to cover the supply of electricity by the second power unit of the Ancillary Power Plant and the completion of the Capital Restructuring (defined below), which is a condition precedent to the completion of the SPA. The completion of the Capital Restructuring in accordance with the terms of the SPA is expected to reduce the liabilities and increase the equity of the Target Group, and thus result in a positive impact on the financial condition of the Target Group as at 31 December 2015;
there had been no material fluctuations in the financial results and the statement of financial position of the Target Group (except in respect of the Capital Restructuring) during the six-month period as such operations and results were driven by its supply of electricity pursuant to the agreed terms of the subsisting PLN Contract that has a term which is expected to expire in January 2017, subject to renewal;

– 11 –

LETTER FROM THE BOARD

the Directors have observed that the Target Group experienced short term fluctuations on the sales and the costs of raw materials during the six months ended 30 June 2016. Such fluctuations resulted in a deviation of the actual amounts of revenue, cost of sales and gross profits recorded by the Target Group from the corresponding forecast amounts detailed in the Business Valuation Report set out in Appendix V(A) to this circular. Given the valuation of the Target Group is primarily derived by a discounted cash flow method for a forecast period of eight years, the Directors, upon careful consideration and enquiries, are of the view that the aforesaid deviation for the first six month-period resulted from short term fluctuations will not materially affect the assumptions and model parameters adopted for the valuation of the Target Group, and thus, the value of the Target Group derived from such valuation;
to the best of the Directors’ knowledge, there were no other changes in material facts and circumstances relevant to the Target Group during the sixmonth period that would materially affect the valuation of the Target Group and which had not been taken into account in the valuation conducted by Avista; and
accordingly, the fair value of the Target Group is not expected to be subject to any material change of the Target Group during the six-month period.

Consideration Shares:

The aggregate of 159,000,000 Consideration Shares to be issued to the Vendors or their respective nominees represent (i) approximately 16.70% of the total number of Shares in issue as at the date of this circular, and (ii) approximately 14.31% of the total number of Shares in issue as enlarged by the issue of the Consideration Shares.

The Consideration Shares shall be issued at the Issue Price of HK$0.50, which represents:

(i) a premium of approximately 9.89% over the closing price of HK$0.455 per Share as quoted on the Stock Exchange on 16 June 2016, being the date of the SPA;
(ii) a premium of approximately 6.84% over HK$0.468 per Share, being the average of the closing prices of the Shares as quoted on the Stock Exchange for the last five consecutive trading days immediately prior to date of SPA; and
(iii) a premium of approximately 7.76% over HK$0.464 per Share, being the average of the closing prices of the Shares as quoted on the Stock Exchange for the last ten consecutive trading days immediately prior to date of SPA.

– 12 –

LETTER FROM THE BOARD

The Issue Price was determined after arm’s length negotiations by reference to the higher of the closing price per Share on the Stock Exchange on the date of the SPA and the average of the closing prices per Share as quoted on the Stock Exchange for the last five consecutive trading days immediately prior to date of SPA. The Directors (including the independent non-executive Directors) considered that the Issue Price is fair and reasonable and in the interests of the Shareholders as a whole.

The Consideration Shares, when issued and allotted, will rank pari passu in all aspects with the Shares then in issue, including the right to all dividends, distributions and other payments made or to be made, on the record date which falls on or after the date of such issue and allotment. The Consideration Shares are to be issued under the Specific Mandate. Application will be made by our Company to the Stock Exchange for the listing of and the permission to deal in the Consideration Shares.

The Consideration Shares are not subject to any lock-up requirements.

Conditions precedent to Completion:

Completion of the transactions contemplated under the SPA in respect of each Vendor is conditional upon fulfillment of certain conditions precedent, or the waiver (if applicable) by the relevant party:

(i) the representations, warranties and undertakings made by the Vendors in the SPA remaining true and correct in all material respects;
(ii) no event having material adverse effect having occurred;
(iii) the PLN Contract, as amended by the Addendum having remained in full force and effective;
(iv) the Vendors having performed and complied in all material respects with all covenants, obligations and agreements required by the SPA and their respective constitutional documents, that are required to be performed or complied with by the Vendors on or prior to the Completion Date;
(v) all consents and approvals of, notices to and filings or registrations with any governmental authority required pursuant to any applicable laws or regulations of any governmental authority for the Vendors to consummate the transactions under the SPA (to the extent that such transactions are to be completed on or prior to the Completion Date), including, without limitation, in relation to the change in control in the Target Group, having been obtained or made;

– 13 –

LETTER FROM THE BOARD

(vi) no governmental authority or any other person having (x) instituted or threatened any legal, arbitral or judicial proceedings, suits or investigations to restrain, prohibit or otherwise challenge the transactions contemplated under the SPA, (y) threatened to take any action as a result of or in anticipation of the implementation of the transactions contemplated under the SPA, or (z) proposed or enacted any statute or regulation that would prohibit, materially restrict or materially delay the implementation of the transactions contemplated under the SPA after Completion;
(vii) the shares held by Weal Union in RPSL shall have remained unchanged;
(viii) any legal and regulatory non-compliance matters in relation to the Target Group and its business and operations shall have resolved to the satisfaction of Eternity Time;
(ix) Eternity Time and/or its representatives shall have carried out due diligence investigation on the Target Group and Eternity Time shall have been satisfied with the results;
(x) the completion of the capital restructuring of Weal Union and RPSL as agreed by the parties to the SPA as follows (the “ Capital Restructuring ”);
(a) Fusion Joy injecting the Capital Injection Amount (defined below) into Weal Union to be credited as “other reserves” without any increase in the share capital of Weal Union or any issue of new shares to Fusion Joy by Weal Union;
(b) Weal Union injecting a cash amount in IDR equivalent to US$2,000,000 (equivalent to approximately HK$15,500,000) (the “ Capital Injection Amount ”) into RPSL to be credited as “equity advance for capital” (the “ RPSL Capital Injection ”);
(c) Fusion Joy injecting a cash amount equivalent to the Loan Repayment Amount (defined below) into Weal Union to be credited as “other reserves” without any increase in the share capital of Weal Union or any issue of new shares to Fusion Joy by Weal Union;
(d) any or all of the Vendors undertaking, or procuring any relevant party to undertake, such other restructuring steps as deemed appropriate by the Purchaser, including but not limited to the procurement of RPSL to repay, in part or in full, the loans that amounted to IDR40,632,000,000 (equivalent to approximately HK$22,835,184) in aggregate outstanding to Mr. Fadjar Suhendra and Mr. Sugih Suhendra, being the persons holding the remaining 5% of the issued shares of RPSL, as at 31 December 2015 (the “ Loan Repayment Amount ”);

– 14 –

LETTER FROM THE BOARD

(e) upon completion of the above steps (a) to (d), RPSL undertaking all necessary corporate actions to capitalise any amount of outstanding loans from shareholders and/or equity advance for capital such that 95%, 3% and 2% of the total share capital of RPSL immediately after the completion of such steps shall remain attributable to Weal Union, Mr. Fadjar Suhendra and Mr. Sugih Suhendra, respectively; and
(f) the granting of all necessary approvals from the relevant government authorities in respect of any of the above steps, where applicable;
(xi) our Company shall have obtained all necessary internal approvals (including, without limitation, any approval from its Independent Shareholders) in relation to the Acquisition and the Specific Mandate;
(xii) the listing of and permission to deal in all the Consideration Shares shall be granted by the Stock Exchange and such listing and permission not subsequently being revoked prior to the Completion Date; and

(xiii) the completion of the sale and purchase of the Sale Shares of the Vendors.

All of the above conditions can only be waived by Eternity Time, with the exception of Conditions (xi), (xii) and (xiii). In respect of Condition (v) and (viii), the parties to the SPA had commercially agreed that such Conditions are only waivable at the option of Eternity Time for more flexibility in Eternity Time’s favour.

To ensure the legal compliance of the operations of the Target Group upon Completion and that such Acquisition will not materially affect the Group’s legal and regulatory compliance, as at the Latest Practicable Date, there is no intention on the part of Eternity Time to waive any of Conditions (v) and (viii).

In respect of Condition (viii), it is the intention of the Company that it will only procure Eternity Time to proceed to Completion upon RPSL resolving all of its legal and regulatory non-compliance matters and obtaining the Industrial Business Licence for its operation of the Mill. As at the Latest Practicable Date, Condition (viii) has not been fully fulfilled. The Company will make further announcement upon the full satisfaction of this Condition (viii) and the expected timing of Completion.

In respect of Condition (v), our Indonesian legal adviser advised us that no consent, approval of, notices to and filings or registrations with any governmental authority shall be required under Indonesian law for the parties to consummate the Acquisition. As such, as at the Latest Practicable Date, Condition (v) has been fulfilled.

In respect of Condition (x), as at the Latest Practicable Date, the Capital Restructuring is expected to complete by 30 August 2016, upon which all remaining advance will be capitalised such that there remained no outstanding loans and/or equity advance from shareholders of RPSL and that the total issued capital of RPSL had become IDR230.9 billion (equivalent to approximately HK$129,765,800), being attributable to Weal Union, Mr. Fadjar Suhendra and Mr. Sugih Suhendra, as to 95%, 3% and 2%, respectively.

– 15 –

LETTER FROM THE BOARD

Completion:

Subject to the conditions precedent being fulfilled and/or waived (as the case may be), Completion shall take place on the Completion Date.

Termination:

Unless specifically waived by Eternity Time, if any of the conditions precedent are not fulfilled and/or waived on or before 30 September 2016, or such other date as may be agreed by the parties to the SPA, being the long stop date for the SPA, the SPA shall cease and determine (save for specific obligations relating to, among other things, confidentiality, costs and communications, which shall survive termination and continue to be valid, binding and enforceable on and/or against the parties to the SPA). None of the parties to the SPA shall have any claim against the other party for costs, damages, compensation or otherwise upon termination, save and except for any rights and remedies of any party against another party in respect of any antecedent claim or breach.

Indemnity:

Each of the Vendors hereby irrevocably, jointly and severally covenants, agrees and undertakes to fully and effectively indemnify and keeps the Purchaser and the Target Group fully and effectively indemnified at all times from and against (i) any tax or duty which is or becomes payable by Weal Union or RPSL by the operation of any laws on tax and duties or any other similar legislation in Hong Kong and Indonesia or any other relevant jurisdiction as a result or in consequence of any event or transaction occurring on or before the Completion Date, and (ii) all losses of whatever nature suffered by the Purchaser and the Target Group directly or indirectly, arising from, as a result of or in connection with any loss and/or penalty resulting from or in respect of any noncompliance, violation or breach, or any possible or alleged non-compliance, violation or breach, with any applicable laws, rules and regulations by Weal Union or RPSL on or before the Completion Date.

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LETTER FROM THE BOARD

Changes in corporate structure of the Target Group

The changes in the corporate structure of the Target Group resulting from the Acquisition are illustrated as follows:

Corporate structure of the Target Group as at 31 December 2015:

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Fusion Joy Carlton Asia
80% 20%
Mr. Fadjar Mr. Sugih
Weal Union [(1)]
Suhendra Suhendra
3% 2%
95% 5%
RPSL [(2)]
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Notes:
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(1) As at 31 December 2015:
each of Fusion Joy and Carlton Asia held 200 Sale Shares and 50 Sale Shares, respectively, which, together, represented 100% of the issued shares in Weal Union; and
Weal Union had other reserves of HK$107.3 million.
(2) As at 31 December 2015:
each of Weal Union, Mr. Fadjar Suhendra and Mr. Sugih Suhendra held IDR71,250.0 million (equivalent to approximately HK$40.0 million), IDR 2,250.0 million (equivalent to approximately HK$1.3 million) and IDR1,500.0 million (equivalent to approximately HK$0.8 million), respectively, of the total issued share capital in RPSL, which, together, represented 100% of the issued shares in RPSL;
RPSL owed to each of Mr. Fadjar Suhendra and Mr. Sugih Suhendra IDR25,300.0 million (equivalent to approximately HK$14.2 million) and IDR15,332.0 million (equivalent to approximately HK$8.6 million), respectively in the form of shareholders loan; and
RPSL owed to Weal Union IDR78,214.9 million (equivalent to approximately HK$44.0 million) in the form of equity advance for share capital from shareholder.

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LETTER FROM THE BOARD

Corporate structure of the Target Group immediately after the completion of the Capital Restructuring but prior to the Completion:

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

Fusion Joy Carlton Asia
80% 20%
Mr. Fadjar Mr. Sugih
Weal Union [(3)(4)]
Suhendra Suhendra
3% 2%
95% 5%
RPSL [(3)(5)]
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Notes:
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(3) Upon arm’s length negotiations among the parties to the SPA, it was agreed that the Completion is conditional upon the completion of the Capital Restructuring, under which (i) Fusion Joy will inject additional capital of US$2,000,000 (equivalent to approximately HK$15,500,000) into the Target Group in the form of capital contribution to enable RPSL to repay loans and/ or equity advance for capital from its shareholders, and (ii) any amount of outstanding loans from shareholders and/or equity advance for capital will be capitalised such that 95%, 3% and 2% of the total share capital of RPSL shall remain attributable to Weal Union, Mr. Fadjar Suhendra and Mr. Sugih Suhendra, respectively. As a result of the completion of the Capital Restructuring, all shareholder loans and equity advance for capital (as applicable) of Weal Union and RPSL outstanding as at 31 December 2016 will be fully repaid or capitalised.
(4) As at the Latest Practicable Date, it is expected that upon completion of the Capital Restructuring but prior to the Completion:
each of Fusion Joy and Carlton Asia will continue to hold 200 Sale Shares and 50 Sale Shares, respectively, which, together, represent 100% of the issued shares in Weal Union; and
Weal Union will have other reserves of HK$142.0 million.
(5) As at the Latest Practicable Date, it is expected that upon completion of the Capital Restructuring but prior to the Completion:
each of Weal Union, Mr. Fadjar Suhendra and Mr. Sugih Suhendra held IDR219,355.0 million (equivalent to approximately HK$123.3 million), IDR6,927.0 million (equivalent to approximately HK$3.9 million) and IDR4,618.0 million (equivalent to approximately HK$2.6 million), respectively, of the total issued share capital in RPSL, which, together, represented 100% of the issued shares in RPSL; and
RPSL shall no longer owe any amount to any of Weal Union, Mr. Fadjar Suhendra and Mr. Sugih Suhendra.

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LETTER FROM THE BOARD

Corporate structure of the Target Group immediately after the completion of the Acquisition:

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

Company
100%
Eternity Time Mr. Fadjar Mr. Sugih
Suhendra Suhendra
100%
Weal Union [(6)] 3% 2%
95% 5%
RPSL [(7)]
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----- Start of picture text -----

Notes:
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(6) As at the Latest Practicable Date, it is expected that upon Completion:
Eternity Time will hold 250 Sale Shares, which represents 100% of the issued shares in Weal Union; and
Weal Union will continue to have other reserves of HK$142.0 million.
(7) As at the Latest Practicable Date, it is expected that upon Completion:
each of Weal Union, Mr. Fadjar Suhendra and Mr. Sugih Suhendra held IDR219,355.0 million (equivalent to approximately HK$123.3 million), IDR6,927.0 million (equivalent to approximately HK$3.9 million) and IDR4,618.0 million (equivalent to approximately HK$2.6 million), respectively, of the total issued share capital in RPSL, which, together, represented 100% of the issued shares in RPSL; and
RPSL shall not owe any amount to any of Weal Union, Mr. Fadjar Suhendra and Mr. Sugih Suhendra.

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LETTER FROM THE BOARD

3. INFORMATION ON THE PARTIES TO THE SPA

Our Group is principally engaged in providing wastewater treatment facilities in Jiangsu Province, the PRC, using the “Build — Operate — Transfer” (or BOT) model. Eternity Time is an investment holding company incorporated in the BVI and a whollyowned subsidiary of our Company.

Fusion Joy is an investment holding company incorporated in the BVI. To the best of our Company’s knowledge, information and belief and having made all reasonable enquiries, Fusion Joy is wholly owned by independent third parties.

Carlton Asia is an investment holding company incorporated in the BVI. To the best of our Company’s knowledge, information and belief and having made all reasonable enquiries, Carlton Asia is indirectly legally and beneficially owned as to 100% by Mr. Chan, Mr. Brian Chan and their respective associates. Accordingly, Carlton Asia is a connected person of our Company.

4. INFORMATION ON THE TARGET GROUP

Weal Union and RPSL

Weal Union is a limited liability company incorporated under the laws of Hong Kong, the issued shares of which are held as to 80% by Fusion Joy and 20% by Carlton Asia as at the Latest Practicable Date. Weal Union is an investment holding company holding 95% of the issued shares in RPSL. Based on RPSL’s Capital Investment Principal Licences, RPSL operates the Mill, being a palm kernel oil mill that produces palm kernel expeller at a capacity of 33,750 tons per year and palm kernel oil at a capacity of 41,250 tons, in Jambi City, Indonesia. The Mill crushes palm kernel to render palm kernel oil for sale and the palm kernel expeller for use as additional fuel for the Ancillary Power Plant.

The Mill and the Ancillary Power Plant

The operation of the Mill is supported by the Ancillary Power Plant, being a power plant that comprises two power units constructed and owned by RPSL. As at the Latest Practicable Date, one power unit having a power output capacity of 15 Megawatt is in operation and supplies power to the Mill for up to around 2 Megawatt. The excess power generated is sold to PLN pursuant to the PLN Contract.

As at the Latest Practicable Date, except for the Industrial Business Licence for the operation of the Mill, RPSL holds all material licences necessary for its operation of the Mill and the Ancillary Power Plant and its supply of excess power pursuant to the PLN Contract, including appropriate Capital Investment Principal Licences, Environmental Licence, Business Licence for Power Supply for Private Use, and Trading Licence For Palm Kernel Oil Trading.

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LETTER FROM THE BOARD

The Outstanding Industrial Business Licence

Pursuant to the Regulation of Chairman of Indonesia Investment Coordinating Board Number 15 Year 2015 Regarding Guidelines And Procedures For Licensing and Non Licensing Investment published by the Indonesia Capital Investment Coordinating Board on 8 October 2015, if RPSL wishes to carry out commercial production/operation activities, it shall obtain the Industrial Business Licence by filing application therefor to Capital Investment Coordinating Board.

To the best of the knowledge of our Directors, the management of RPSL intended to restructure the primary business of RPSL as public power generation in 2014, having considered the fact that power generation had been and was likely to remain a major contributor to RPSL’s total revenue. To the knowledge of the management of RPSL, the Industrial Business Licence would not be required if RPSL managed to complete such restructuring and the production of palm kernel oil became an ancillary business of RPSL. RPSL commenced operation of the Mill in 2014 although the restructuring had yet to be completed. Despite favourable feasibility studies and RPSL’s communications with the government authorities, it was later concluded that the intended restructuring was unable to proceed due to certain limitation by the applicable laws and regulations. As a result, the operation of the Mill remained to be the primary business of RPSL and the Industrial Business Licence became mandatory. The absence of the required licence was brought to the attention of the management of the Company during our due diligence conducted in connection with the Acquisition. Going forward, the Board will seek regular and transactional advice from our Indonesia legal adviser to ensure compliance with all applicable laws and regulations in Indonesia in respect of the Target Group’s corporate maintenance and business licence and permits requirements.

Our Indonesian legal adviser has advised us that there is no legal impediment for RPSL to obtain the Industrial Business Licence. As at the Latest Practicable Date, the management of RPSL is preparing the necessary documentation for the application of the Industrial Business Licence and expect such licence to be granted to RPSL on or before 30 September 2016. The Company will make a further announcement when such licence is granted.

For details relating to the consequences of RPSL failing to obtain the Industrial Business Licence, please refer to item No. 3 in the table on material non-compliance incidents and rectification measures undertaken set out in the sub-paragraph headed “Compliance with Indonesian Laws” in this letter below.

As at the Latest Practicable Date, RPSL has not received the Industrial Business Licence. As disclosed in sub-paragraph (viii) on page 14 of this circular, the Completion is conditional upon, among other things, any laws and regulatory non-compliance matters in relation to the Target Group and its business and operations resolved to the satisfaction of Eternity Time, which included RPSL obtaining the Industrial Business Licence for its operation of the Mill. As at the Latest Practicable Date, there is no intention on the part of Eternity Time to waive such condition.

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LETTER FROM THE BOARD

Compliance with Indonesian Laws

The Company has conducted comprehensive legal due diligence in respect of the incorporation and constitution of RPSL, its ongoing corporate maintenance, and the licences required for carrying out the business activities relating to the Mill and the Ancillary Power Plant. Based on such legal due diligence, the Company had identified non-compliance incidents relating to its ongoing corporate maintenance and its holding of business licences. RPSL has undertaken reasonable measures to rectify the aforesaid non-compliance incidents as suggested by our Indonesian legal adviser to the satisfaction of the Board. The table below summaries the material non-compliance incidents and the rectification measures undertaken.

No. Non-compliance incidents

Rectification measures undertaken by RPSL as at the Latest Practicable Date

Legal consequences

Delayed submission of financial statements of RPSL to the Ministry of Trade of Indonesia.

All outstanding financial statements of RPSL were submitted to the Ministry of Trade of Indonesia on 29 July 2016.

A maximum fine of IDR1,000,000 (equivalent to approximately HK$562) imposable on RPSL and imprisonment term of 2 months imposable on the responsible officers of RPSL

Failure to submit Investment Activity Report in respect of the progress of construction of the Ancillary Power Plant and the commencement of operations of the Mill to Capital Investment Coordinating Board on a quarterly basis.
Failure to obtain the Industrial Business Licence for the operation of the Mill prior to the commencement of such operation.

The Investment Activity Reports were being prepared and were expected to be submitted to the Capital Investment Coordinating Board on or before 30 August 2016.

The application of the Industrial Business Licence for the operation of the Mill was being prepared and was expected to be submitted to the applicable authorities on or before 30 August 2016. The management of RPSL expects to receive the Industrial Business Licence on or before 15 September 2016.

The applicable authority may (i) issue warning letters to RPSL to demand rectification, (ii) mandatorily restrict RPSL’s scope of business activities if it fails to rectify the non-compliance within one (1) month of the issuance of the third warning letter, (iii) mandatorily suspend RPSL’s business activities if it fails to rectify the noncompliance within one (1) month of imposition of restriction of business activities, and (iv) revocation of RPSL’s Capital Investment Coordinating Board Principal Licences if RPSL fails to rectify the non-compliance after the issuance of the third warning letter or within one (1) month of the suspension of business

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LETTER FROM THE BOARD

No. Non-compliance incidents

Rectification measures undertaken by RPSL as at the Latest Practicable Date

Legal consequences

Failure to submit periodic reports on the implementation of power supply business activities to the applicable authorities as required under Business Licence for Power Supply for Private Use.

The report on the implementation of power supply business activities of RPSL from the issuance of the Business Licence for Power Supply for Private Use to June 2016 was submitted to the applicable authorities Jambi on or before 8 August 2016.

The applicable authority may impose administrative sanctions on RPSL, including issue of warning letters to, or suspension or revocation of, RPSL’s Environmental Licence

Failure to submit periodic reports on the implementation of environment management and monitoring activities to Environmental Board of Jambi after the issuance of Environmental Feasibility Degree by the government of Jambi in relation to the construction of the Mill and the Ancillary Power Plant.

Reports on the implementation of environment management and monitoring activities of RPSL from the issue of its Environmental Licence to June 2016 were submitted to the Environmental Board of Jambi on or around 27 June 2016.

The applicable authority may impose administrative sanctions on RPSL, including issue of warning letters to, or suspension or revocation of, RPSL’s Environmental Licence

As at the Latest Practicable Date, to the best of the Directors’ knowledge, information and belief and having made all reasonable enquiries, RPSL (i) has not been subject to any sanctions by the applicable authorities in respect of the non-compliance incidents set forth above, and (ii) has undertaken the aforesaid rectification measures as recommended by our Indonesian legal adviser. Our Indonesian legal advisers have advised us that there is no legal impediment for the completion of the Target Group’s rectification actions and the likelihood of the relevant authorities imposing sanctions involving substantial amount of fines, imprisonment term, or suspension or revocation of business on RPSL and its responsible officers, is remote. As such, our Directors are of the view that any imposition of sanction by the relevant authorities that would materially and adversely affect the operation of the RPSL’s business is unlikely. Upon Completion, we shall undertake to ensure compliance with the applicable laws by RPSL in respect of its ongoing corporate maintenance and business activities.

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LETTER FROM THE BOARD

Based on the status of implementation of rectification measures for the noncompliance incidents disclosed herein, to the best of the knowledge of our Directors upon due enquiries, our Directors expect RPSL to be compliant with all applicable laws and regulations in respect of its ongoing corporate maintenance and business activities from 15 September 2016 onwards. As mentioned above, the Company undertakes to proceed to the Completion only upon rectification of the aforesaid non-compliance incidents in full. The Company will make a further announcement when all non-compliance incidents are fully rectified and update the Shareholders the expected timing of Completion. Upon completion of the Acquisition, the Company undertakes to update the Shareholders on RPSL’s regulatory compliance status in its annual and interim financial reports, and where there is any material adverse change to RPSL’s regulatory compliance status, update the Shareholders by way of an announcement.

Financial Performance

Set out below is a summary of the audited financial information of the Target Group for FY2014, FY2015 and the six months ended 30 June 2016:

			Six months
			ended 30 June
	FY2014	FY2015	2016
	(HK$ million)	(HK$ million)	(HK$ million)
	Approximately	Approximately	Approximately
Consolidated net loss
before taxation	(15.7)	(6.5)	(3.7)
after taxation	(11.7)	(4.9)	(2.8)

Based on the audited financial information of the Target Group, there was no extraordinary items for FY2014, FY2015 and the six months ended 30 June 2016. For FY2015, approximately HK$1.8 million, which represents 6.7% of the revenue, was generated from the sale of palm kernel oil processed from the Mill, and approximately HK$25.4 million, which represents 93.3% of the revenue, was generated from the supply of excess power to PLN. For the six months ended 30 June 2016, 100% of the HK$12.0 million revenue was generated from the supply of excess power to PLN.

The audited financial statements of the Target Group as at 31 December 2015 and 30 June 2016 recorded consolidated net assets of approximately HK$69.4 million and HK$104.2 million, respectively.

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LETTER FROM THE BOARD

PLN Contract

The supply of electricity by RPSL to PLN pursuant to the PLN Contract constitutes the key business driver for the Target Group.

The PLN Contract was initially signed on 28 November 2014, and supplemented by three addenda signed by RPSL and PLN on 2 March 2015, 15 June 2015, 2 July 2015 and 10 May 2016, respectively. Under the current terms of the PLN Contract, RPSL agrees to sell and PLN agrees to purchase, electricity from the excess capacity that amounts to a maximum of 10 Megawatts produced by the first power unit of RPSL based on the demand of PLN for a term expiring on 16 January 2017, subject to renewal.

Pursuant to the terms in the addendum signed on 10 May 2016, which shall become effective latest in September 2016 when the interconnection facilities connecting the second power unit of RPSL and PLN’s electricity systems are completed, the sale and purchase of electricity arrangement under the PLN Contract shall extend to cover a maximum addition 10 Megawatts of excess power produced by the second power unit of RPSL based on the demand of PLN.

The sale and purchase of electricity under the PLN Contract (as amended by the aforesaid addendum) is carried out by RPSL connecting its power units to the electricity system of PLN via interconnection facilities. The unit price for the sale and purchase of electricity under the PLN Contract is IRD900 per kilowatt-hour (equivalent to approximately HK$0.51 per kilowatt-hour).

To the best of the knowledge of the Directors upon due enquiries, there is no other biomass or biogas independent power producer or excess power supplier in Jambi City. In addition, the terms of any power purchase agreement entered into by PLN and other power producers are kept confidential to third parties. As such, there is no publicly available information on the comparable market price for sale of electricity to PLN in Jambi City. However, according to the regulation “Permen ESDM 27/2014” issued by the Minister of Energy and Mineral Resources on the purchase of electricity from biomass and biogas power plants by PLN (http://prokum.esdm.go.id/permen/2014/Permen%20ESDM%20 27%202014.pdf), PLN may purchase excess power from biomass and biogas power plants with medium voltage of 20 kilovolts at a purchase price of IDR1,150 per kilowatt-hour (equivalent to approximately HKD0.65 per kilowatt-hour). As set out in PLN’s Direction Regulation No. 99/2015, PLN aims to purchase excess power (i) to overcome the power deficit on the local electricity distribution system and/or (ii) to lower PLN’s production cost on the local electricity distribution system. Although the generating capacity in Sumatera and East Indonesia, where Jambi City is located, is barely sufficient to meet the electricity needs of the community, there was no material deficit for electricity supply in Jambi City in 2014 and 2015. As such, in 2014 and 2015, PLN had entered into the PLN Contract with RPSL primarily to lower its production cost for electricity distribution in Jambi City, and accordingly the purchase price of electricity under the PLN Contract was determined to be IDR900 per kilowatt-hour (equivalent to approximately HKD0.51 per kilowatthour) upon arm’s length negotiations.

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LETTER FROM THE BOARD

Profitability

The Target Group has not reported any net profits in FY2014, FY2015 and the six months ended 30 June 2016. Based on the information provided by the Vendors and the due diligence conducted by our Group and subject to market changes in palm kernel oil prices, RPSL’s business of palm kernel oil will remain insignificant in the near future. RPSL has completed the construction of a second power unit with an estimated power output of 15 Megawatt. However, RPSL signed the Addendum on 10 May 2016 to supply an additional 10 Megawatt of excess power to be generated by the second power unit through PLN’s power supply network commencing latest by 7 September 2016. Based on the terms of the PLN Contract as amended by the Addendum, a total of 20 Megawatt of excess power supply will be consumed by PLN. Overhead and other administrative expenses are expected to be more efficiently utilised, which would in turn increase the overall profitability of the Ancillary Power Plant.

Upon Completion, we expect to enhance the supervision and management of the operations of the Target Group to develop and implement more effective cost control measures. All these are expected to improve its profit margins.

Furthermore, as reported in Bisnis Indonesia on 9 August 2016 (http://koran.bisnis. com/read/20160809/451/573350/tarif-listrik-biomassa-akan-dinaikkan-60), the Director General of Renewable Energy and Energy Conservation of the Ministry of Energy, Rida Mulyanamengatakan, has confirmed that the Indonesian government is planning to raise electricity tariffs from biomass power plants by up to 60% by revising the Regulation of the Minister of Energy and Mineral Resources in the near future. In addition, the price of renewable energy power will no longer be negotiable, such that PLN would be required to purchase electricity according to the tariff set by the Indonesian government, with subsidies to cover the difference in price. We expect such increase in tariff and regulatory change will result in a higher purchase price of electricity by PLN upon renewal of the PLN Contract, and an improved profitability for the excess power generation business of RPSL.

Prospective Renewal of the PLN Contract

As detailed in the Accountants’ Report set out in Appendix II to this circular, revenue generated from the sales of electricity decreased significantly in FY2014. Such decrease in sales of electricity was resulted from RPSL’s inability to renew its power supply contract with PLN for a material part of FY2014 due to an over-supply of electricity by diesel fuel oil power plants in the vicinity.

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LETTER FROM THE BOARD

Our Directors are of the view that RPSL’s source of income from sales of electricity to PLN is sustainable, and there is no obstacle in renewing the PLN Contract upon its expiry on a year-on-year basis, thereby continuing its sales of excess electricity to PLN on an ongoing basis for the following reasons:

the over-supply of electricity by diesel fuel oil power plants in the vicinity occurred in FY2014 is no longer relevant as diesel fuel oil power plants in the vicinity in Jambi City were closed down as a result of both PLN’s and the Indonesian Government’s policies to speed up renewable energy exploitation and to replace utilisation of diesel fuel oil with non-diesel fuel oil power plants in late 2014 and 2015;
as detailed in the paragraph headed “Letter from the Board — A. The Acquisition — 5. Reasons for and Benefits of the Acquisition”, the Indonesian government has, since late 2015, been publishing policies to speed up exploitation of renewable energy, to increase electricity supply and to change fossil fuel consumption by the utilisation of renewable energy;
in its Executive Summary to the Electricity Supply Business Plan issued for 2014-2015, PLN highlighted its business focus to replace the utilisation of diesel fuel oil with non-diesel fuel oil;
to the best of the Directors’ knowledge, information and belief and having made all reasonable enquiries, there are no power plants in the vicinity of the Ancillary Power Plant that operate power plants fuelled by biomass that will be in a position to compete with the Ancillary Power Plant for the supply of bioenergy generated electricity to PLN;
as detailed in the paragraph headed “Letter from the Board — A. The Acquisition — 4. Information on the Target Group — Profitability”, the Indonesian government is planning to raise electricity tariffs from biomass power plants and to provide PLN with subsidies to cover the price differences;
to the best of the Directors’ knowledge, information and belief and having made all reasonable enquiries, the Minister of Energy and Mineral Resources of Indonesia is expected to promulgate new policies to require PLN to, where available, purchase renewable energy in priority over non-renewable energy from power producers;
RPSL has already established an existing business relationship with PLN, and to the best of the Directors’ knowledge, information and belief and having made all reasonable enquiries, there had not been any disputes between PLN and RPSL; and

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LETTER FROM THE BOARD

the aforesaid policies of both the Indonesian government and PLN to increase electricity supply and to change fossil fuel consumption by the utilisation of renewable energy, the expected availability of government subsidies to cover price differences, the lack of competition for bioenergy supply in Jambi City, and the relationship established by RPSL with PLN, together, have well positioned RPSL to continue to renew the PLN Contract upon expiry of the its term on an on-going basis.

Capital Expenditure

To the best of our knowledge upon due enquiries, RPSL is in the process of constructing interconnection facilities for the second power unit of the Ancillary Power Plant, which is expected to complete by September 2016. The completion of construction of such interconnection facilities would enable RPSL to commence its supply of electricity produced by the second power unit to PLN pursuant to the PLN Contract. The total costs of such construction is expected to be approximately IDR3,952 million (equivalent to approximately HK$2.2 million).

Possible Continuing Connected Transaction

Historically and pursuant to a service agreement dated 4 January 2016 and entered into between RPSL and GIP (the “ Service Agreement ”), RPSL has been procuring direct labour, repair and maintenance services, plant and machinery acquisition services, administrative services, consultancy services and certain spare parts and equipment from GIP, an associate of Fusion Joy. According to the Service Agreement, RPSL agrees to procure (i) services to operate, monitor and maintain the two power plant units of RPSL from 1 January 2016 to 31 December 2018; and (ii) consultancy services from 1 January 2016 to 31 December 2016.

GIP is a company incorporated in Indonesia principally engaged in the provision of engineering, procurement and construction services in the power supply sector. GIP is routinely involved in the provision of power plant construction services, power plant operational services, and power plant repair and maintenance services.

Upon completion of the SPA, RPSL will become a 95%-owned subsidiary of our Company, Fusion Joy will become a substantial shareholder and a connected person of our Company, and GIP will also become a connected person of our Company. If the aforesaid transactions are to continue upon Completion, such transactions will constitute continuing connected transactions of our Company in accordance with the Listing Rules.

Based on the management’s due diligence on the operations of the Mill and the Ancillary Power Plant, the direct labour and services procured by RPSL from GIP are of administrative, maintenance and support nature and do not involve the supervision and general management of its operations. Such direct labour can be replaced by other independent third parties with minimal disruption to the business operation of RPSL.

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LETTER FROM THE BOARD

In addition, RPSL has a team of six management level employees who are responsible for the operations of the Mill and the Ancillary Power Plant, as well as the strategic planning, technical supervision and decision making of RPSL. Such management team independently operates and manages the business and operations of RPSL, including but not limited to the supervision of the services provided by GIP.

As such, our Company is of the view that upon Completion, the Target Group remains capable of operating independently from our substantial shareholders and its close associates in the event that the Group procures RPSL to continue engaging GIP for the provision of the aforementioned services.

Subject to the fulfilment and/or waiver of the conditions precedent and the completion of the SPA, we shall procure RPSL to enter into an amendment service agreement with GIP to revise the term of the Service Agreement in respect of the services to operate, monitor and maintain the power plants of RPSL from three years ending 31 December 2018 to one year ending 31 December 2016 with effect from the Completion Date (the “ Revised Service Agreement ”). We shall publish a further announcement on our possible continuing connected transactions with GIP in accordance with Chapter 14A of the Listing Rules as soon as practicable. Upon expiry of the term of the Revised Service Agreement, our Directors will, subject to the requirements of the Listing Rules, further review RPSL’s cooperation with GIP and renew the same as appropriate, and shall make further announcements and, where applicable, seek approval from independent Shareholders at a general meeting, in respect of such renewal.

Management of RPSL

RPSL is managed by a team of six management level employees who are collectively in charge of the strategic planning, technical supervision, and operational management of RPSL. The management team is led by the technical director, Mr. Tjan Saut (“ Mr. Saut ”), who is also a director of RPSL. Mr. Saut obtained a bachelor’s degree in electrical engineering from the University of Sisingamangaraja XII Medan in Indonesia in 1991 and a master’s degree in electrical engineering from the University of Sumatera Vtara in Indonesia in 2010. Mr. Tjan Saut obtained the Certificate of Expertise granted by Lembaga Pengembangan Jasa Konstruksi (Construction Services Development Board) in 2012 in respect of his qualification as Ahli Teknik Tenaga Listrik — Utama (Specialists Electrical Power Engineering — Prime) for carrying out professional engineering works in connection with the installation of electrical power level utilization for all power level, low voltage and medium voltage power distribution, electric power transmission, and construction of power plants of all power level, in Republic of Indonesia. He has approximately 24 years of experience in electrical engineering, having worked in Growth Sumatra Industri in Indonesia between 1992 and 2008, last serving as technical director, and in PT. Global Inovasi Prima, a specialized biomass power plant engineering, procurement, construction and operational service company between 2008 and 2016, where he had been responsible as managing director for the construction and operation of seven power units of 15 Megawatts (including the two power units comprising the Ancillary Power Plant).

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LETTER FROM THE BOARD

In addition to Mr. Saut, Mr. Radius Suhendra (“ Mr. Suhendra ”), a member of the board of commissioner of RPSL, is also heavily involved in the management of RPSL. Mr. Suhendra obtained a bachelor’ degree in business administration from Ohio State University, the United States in 1996. He has 15 years of experience in managing businesses in heavy industries in Asia, including 7 years in managing ferrous trading business of an ferrous alloy trading firm between 1998 and 2005 in Singapore. From 2006 to 2010, Mr. Suhendra was the president director of PT. Indoferro, which operates blast furnace producing nickel pig iron operated Indonesia. Since 2011, Mr. Suhendra has been overseeing the construction and operation of the Mill and the Ancillary Power Plant of RPSL.

Within the Group, Mr. Chan, our executive Director and chief executive officer, has been involved in the business of the Target Group since June 2011, when Carlton Asia first acquired shares in Weal Union and when Mr. Chan was appointed a director of Weal Union. Through his directorship, Mr. Chan is familiar with the business and operations of RPSL and the palm kernel oil production and power supply business in Indonesia, despite not being involved in the day-to-day management of the Mill and the Ancillary Power Plant.

Upon Completion, Mr. Suat shall continue to be employed by RPSL as technical director to manage the operations of the Mill and the Ancillary Power Plant, and shall form part of the senior management team of the Company. The Board also intends to appoint Mr. Suhendra as Director to strengthen the knowledge and experience of the Board in the management of palm kernel oil and power supply related business in Indonesia. Further details relating to the appointment and the biographical background of Mr. Suhendra will be made available to the Shareholders by way of an announcement upon Completion.

Directors’ Remuneration

The aggregate of the remuneration payable and benefits-in-kind receivable by the directors of Weal Union and RPSL will not be varied as a result of the completion of the SPA. The Board will, upon Completion, review the remuneration policy of the Target Group on a regular basis and consider adjustment of remuneration of the directors of Weal Union and RPSL as and when necessary.

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LETTER FROM THE BOARD

5. REASONS FOR AND BENEFITS OF THE ACQUISITION

Indonesia

Growing economy and energy consumption

Indonesia’s economy is the largest in Southeast Asia. According to “World Development Indicators” published by the World Bank in 2014, Indonesia had a gross domestic product (the “ GDP ”) estimated at US$888.5 billion in 2014. The country has experienced a steady growth emerging from the Asian financial crisis between 1997 and 1999, averaging a stable 5% to 6% annual growth rate. Indonesia’s gross national income per capita has steadily risen, from US$560 in 2000 to US$3,630 in 2014. “An Overview of Indonesia’s Economy” published by the World Bank on 5 April 2016 states that, by the end of 2014, Indonesia was the world’s fourth most populous nation and the world’s tenth largest economy in terms of purchasing power, and has been a member of the G-20. Indonesia has made enormous gains in poverty reduction, cutting the poverty rate to more than half since 1999, to 11.2% in 2015. According to “Energy Policies Beyond IEA Countries — Indonesia 2015” published by International Energy Agency in January 2015, even though Indonesia remains a net energy exporter due to the expansion of its coal and liquid biofuel production, the country is consuming more energy as a result of rising living standards, population growth and rapid urbanisation. According to the “World Development Indicator” published by the World Bank dated 2013, the electric power consumption per capita in Indonesia rose continuously from 636.6 Kilowatt-hour in 2010 to 787.7 Kilowatt-hour in 2013. In 2014, the total electricity consumption growth remained flat due to a weakened economy. According to “Power in Indonesia: Investment and Taxation Guide” published by PricewaterhouseCoopers in August 2015. President Joko Widodo, who took over presidency in Indonesia in October 2014, had stated that his government targeted a stronger growth for 2015 and beyond through business-friendly policies and anti-corruption measures. Despite that the GDP growth in 2015 faltered to 4.8%, as a result of a lack of government spending and investment, the World Bank has recently projected that the Indonesian economy will return to a gradual growth path after the 5 years of declining growth. The “Global Economics Prospect” published by the World Bank in June 2016 forecasts that the GDP growth will be 5.3% in 2016 and will reach 5.5% in 2017 owing to Indonesia’s commitment to increase foreign investment and government spending on infrastructure as a result of President Joko Widodo’s reforms. PLN has, in its 2014 annual report, forecast a 8.7% per annum increase in demand for electricity in Indonesia for the foreseeable future despite the slower economic growth in 2014. As reported by Raras Cahyafitri in “Electricity sales buck trend”, a news article published by The Jakarta Post on 20 February 2016, in line with such projections, PLN has recorded a 7.54% increase in electricity sales in January 2016 as compared to electricity sales in December 2015. All these signal potential in power supply related investments in Indonesia. The domestic consumption of raw materials including palm kernel oil has also been increasing along the growth of domestic industrial activities.

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LETTER FROM THE BOARD

Palm Kernel Oil Production

Palm kernel oil is the oil rendered from the edible seed of oil palm trees, which, to the best of the Directors’ knowledge, information and belief and having made all reasonable enquiries, is easily accessible by the Target Group, given the abundance of resources in the vicinity of the Mill. The pulp left after oil is rendered from the kernel is formed into “palm kernel meal”, which can be burnt in boilers to generate electricity or for feeding livestock.

The palm kernel has an oil content of around 45% and may be used as edible oils for pastry and confectionary, or industrially. Palm kernel oil is an important component of soap, detergent, pharmaceutical products, cosmetics, fuels and oleochemical products. Oleochemical product manufacturers are the main users of palm kernel oil, some of which can be used to produce fatty acid, fatty alcohol and glycerol. Fatty acids derived from the splitting process can also be used in products such as candles and rubbers.

Indonesia consumes a large share of its domestic production of palm kernel oil. In addition, the Indonesian oleochemical industry has shown a stable demand for palm kernel oil.

According to World Bank Commodity Price Data (http://pubdocs.worldbank. org/en/148131457048917308/CMO-Historical-Data-Monthly.xlsx), the market price of palm kernel oil dropped from US$2,296 per metric ton (equivalent to approximately HK$17,794) in February 2011, when RPSL was established, to US$847 (equivalent to approximately HK$6,564) per metric ton in December 2015, and subsequently rose back to US$1,312 (equivalent to approximately HK$10,168) per metric ton in June 2016. The significant decrease in palm kernel oil prices has adversely affected the profitability of the production and sale of palm kernel oil, despite the stable demand of such commodity from local oleochemical industries. Accordingly, the Target Group strategically did not engage in substantial production and sale of palm kernel oil, and as a result, had not generated a significant amount of revenue from palm kernel oil production during FY2014, FY2015 and the six months ended 30 June 2016. However, the operation of the Mill had enabled the Company to operate the Ancillary Power Plant to supply excess power to PLN as detailed in the paragraph headed “Excess Biomass Power Supply” below. Through its supply of excess power to PLN, the Target Group had derived a substantial revenue in FY2015 and the six months ended 30 June 2016 and is expected to continue to do so in the future.

Despite that the revenue of the Target Group was generated mostly from the supply of excess power to PLN, and that the amount of revenue generated from sales of palm kernel oil had been very limited, a stable industry demand for palm kernel oil presents potential business prospects for the Mill in the future when commodity prices for palm kernel oil increase and sales of palm kernel oil become profitable. With independent power supplied by the Ancillary Power Plant, any expanded commercial production of the Mill and sales of palm kernel oil in the future will be supported by adequate and stable power supply.

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LETTER FROM THE BOARD

Furthermore, while the power generated by the Ancillary Power Plant supports the operation of the Mill, the palm kernel oil meal produced as a by-product of palm kernel oil production of the Mill provides biomass fuel for the power generation of the Ancillary Power Plant or can be sold for feeding livestock, and any excess power generated can be supplied under the power supply contracts with PLN. As such, after the Acquisition, the Directors plan to maintain the existing business model of RPSL, such that the operations of the Mill and the Ancillary Power Plant can continue to allow RPSL to generate income from multiple channels.

The operation of the Mill and the Ancillary Power Plant enables RPSL to generate electricity by utilising palm kernel oil meal, a by-product of palm kernel oil production, instead of using traditional fuel such as crude oil and coal. Compared to traditional fossil fuels, biomass is a renewable and sustainable resource as it comes primarily from plants and vegetation that naturally re-grows in everyday agricultural or industrial processes. It also has a lower level of carbon emission and thus produces less pollutants than traditional fossil fuels. During their growth cycle, oil palm trees absorb carbon dioxide as part of the photosynthesis process. Although carbon dioxide is then released when palm kernel oil is burnt in a power plant, it is again absorbed during the next crop’s growth cycle. This repetitive cycle of absorption-release-absorption results in a lower level of carbon emission into the atmosphere, and is therefore less harmful to the environment. Accordingly, the Company sees the palm kernel oil and power generation business as a highly relevant part of its environmental protection business.

Excess Biomass Power Supply

Energy policy

Indonesia is highly dependent on oil imports. Meeting demand growth and ensuring the environmental sustainability of energy supplies are reported to be the key pillars of its economic and investment policies and strategies. To strengthen national energy security and to meet national demand, the priority of the current Indonesian energy policy is to increase electricity power and to change fossil fuel consumption by utilization of renewable energy including biomass wastes. It is also a national policy of Indonesia to reduce national carbon dioxide emission. Accordingly, the Indonesian government has announced the prohibition of the use of expensive diesel fuel for new power plants.

Policies and regulations on bioenergy are expected to be developed continuously to increase the investment in this sector and accelerate the utilization of bioenergy. The Indonesian government together with all stakeholders are expected to provide ongoing support for the bioenergy development.

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LETTER FROM THE BOARD

Potential for biomass energy generation

“Indonesia’s Renewable Energy and Energy Conservation Development” issued by the Ministry of Energy and Mineral Resources of Indonesia on 9 December 2015 reported that Indonesia is currently exploiting only around 5% of its renewable energy capacity, and that the government aims to speed up the exploitation of renewable energy and to increase its share of primary energy to 23% by 2025. In particular, Indonesia has significant potential for biomass energy generation from agricultural residues including rice husk, bagasse, rubber and especially palm oil. According to “Biomass Energy Potentials and Utilization in Indonesia” published by Kamaruddin Abdullah in 2000, about 150 million tons of biomass are produced in Indonesia per year, equivalent to 470 gigajoules of energy. In “Indonesia: Renewable Energy Market” published by the United States Department of Commerce in 2006, Anasia Silviati writes that the total potential for biomass-based electricity generation could reach around 50,000 Megawatt. All these policies and the continually growing power demands of the country signal opportunities for increased exploitation of biomass wastes for power generation.

Power supply to PLN

PLN has a de facto monopoly over the supply of power in Indonesia, with rights of first refusal to any activity in the sector. With policies in Indonesia focusing on bioenergy development and improving access to electricity around the country, pressure on the country’s already stretched distribution network operated by PLN is further tightened. In its Executive Summary to the Electricity Supply Business Plan issued for 2014-2015, PLN highlighted that one of their business focuses is to replace the utilisation of diesel fuel oil with non-diesel fuel oil. PLN also highlighted that, among others, the purchasing of the excess power is one of the solutions to address such issue.

The aforesaid energy policy adopted by the Indonesian government, Indonesia’s focus in bioenergy, and RPSL’s existing power supply agreements with PLN with respect to excess power generated by the Ancillary Power Plant together provide a solid foundation for RPSL’s continuous generation of income through the supply of excess power to PLN. Furthermore, to the best of the Directors’ knowledge, information and belief and having made all reasonable enquiries, there are no power plants in the vicinity of the Ancillary Power Plant that operates power plants fueled by biomass that will be in a position to compete with it for the supply of bioenergy generated electricity to PLN. All these provide RPSL with a significant competitive advantage for maintaining and further developing its excess biomass power supply businesses, and strengthen its position to continuously renew its PLN Contract in a long run.

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LETTER FROM THE BOARD

6. MATERIAL RISK FACTORS

Heavy Reliance on PLN and the PLN Contract

For FY2013, FY2014, FY2015 and the six months ended 30 June 2016, 100%, 74.8%, 93.3% and 100%, respectively, of the Target Group’s revenue was generated from the sale of excess power to PLN under the PLN Contract.

Given the current market conditions, the Target Group’s business segment in sales of electricity is comparatively much more profitable than its business segment in sale of palm kernel oil. Also, in Indonesia, PLN has an effective monopoly over the supply of electricity to end users. Similar to all electricity suppliers in Indonesia, it will not be possible for RPSL to expand its customer base for sale of electricity. As such, our business model may not be easily changed to reduce the level of single customer reliance due to the nature of the market environment surrounding palm kernel oil and electricity supply in Indonesia. We believe such high level of reliance is unlikely to decrease in the foreseeable future. In addition, we cannot assure that the PLN Contract will be renewed by the parties upon expiry of the current term in January 2017. In the event that PLN Contract is not renewed at commercially favourable terms or at all, the business, financial condition and results of operations of the Target Group may be materially and adversely affected.

To diversify the Target Group’s source of income, the Company undertakes to procure the Target Group to engage in continuous studies in complimentary businesses and investments in Indonesia to diversify its business, including more profitable businesses that can utilize the electricity produced by the Ancillary Power Plant. Where feasible and favourable to the business as a whole, the Company may also seek to improve existing facilities of the Mill to produce higher value and more profitable oil products to upgrade the business offerings of RPSL. In addition, upon Completion, the Company may review existing resources and logistics arrangements for the production of palm kernel oil to improve operational efficiencies and to reduce operating costs. At the same time, the Company will continue to monitor closely the commodity prices of palm kernel oil and, if determined to be favorable to the Group, will resume the operation of the Mill for the production and sale of palm kernel oil.

Currency Risks

RPSL has limited foreign currency risks as it mainly carried out transactions in IDR, which is the functional currency of their operations. However, as the Group’s consolidated financial position is reported in HK$, any appreciation or depreciation of HK$ against IDR after Completion will affect the Target Group’s consolidated financial position and be reflected in the exchange fluctuation reserve.

The management of the Company undertakes to manage its foreign currency risk, including but not limited to the risk against fluctuations of IDR, by closely reviewing the movement of the foreign currency rate and by considering hedging significant foreign currency exposure as necessary.

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LETTER FROM THE BOARD

Subcontracting and purchases

The Target Group has been procuring services, machinery and spare parts from GIP. The services procured from GIP included management services, operation and maintenance services and consultancy services. For FY2013, FY2014, FY2015 and the six months ended 30 June 2016, the total amount of services provided by GIP amounted to HK$2,010,000, HK$6,123,000, HK$10,286,000 and HK$4,881,000, respectively. However, changes in cost of services and cost of purchases may be resulted from changes in costs of labour requirements and changes in cost of materials, respectively. If GIP fails to supply the Target Group’s required machinery and spare parts, the Target Group would have to source these items elsewhere, which could delay our operations. Similarly, if GIP fails to provide services as required under a contract for any reason, the Target Group could be required to source another subcontractor, which could also disrupt our operations. Furthermore, the Target Group cannot assure that GIP, being a third-party of our Group, will continue to satisfy the business needs of the Target Group at a commercially reasonable cost or at all. Any material non-performance or substandard performance of GIP could disrupt the operations of the Target Group, and will materially and adversely affect the Target Group’s financial condition and results of operations. In the event our Directors continue to procure services and purchases from GIP upon Completion, our Directors and senior management will review RPSL’s cooperation with GIP on a halfyearly basis to assess the quality of purchases and performance standards of the services provided by GIP, and establish performance feedback mechanisms with GIP to ensure that any operational and performance issues will be sufficiently addressed. The Board will also review and consider on an annual basis the costs and risks of procuring services provided by GIP against these of direct employment of services to ensure quality of services and cost efficiency.

Operating in Indonesia

The operation of the Mill and the Ancillary Power Plant is subject to risks relating to the economic, political, legal and social environment of Indonesia. The business prospects of the Target Group may be materially and adversely affected by various factors, including but not limited to:

exposure to inflation rate fluctuations and other local economic conditions;
political changes resulting from change of presidency or otherwise;
unexpected changes in laws and regulations (or the interpretations thereof), government policies, trade or monetary or fiscal policies, including interest rates, foreign currency exchange rates, foreign investment, company organization and management, business, tax and trade;
limitations on repatriation of earnings and remittance of capital;
investment restrictions or requirements;

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LETTER FROM THE BOARD

political events, domestic or international acts of terrorism and hostilities or complications due to natural disasters; and
withholding tax on dividends or other taxes on remittances and other payments by subsidiaries, or industry-specific taxes and fees.

While our Company has no control over such conditions and developments and can provide no assurance in precluding their occurrences, our Directors are not aware of any significant indication that such conditions and developments exist and would result in material adverse impacts on the operations and profitability of the Target Group as at the Latest Practicable Date.

Upon Completion, the Board and the senior management of the Company undertakes to closely monitor the economic, political, legal and social developments in Indonesia closely to ensure that RPSL is sufficiently supported in terms of legal compliance and human resources, and has working capital sufficiency to enable prompt management and resolutions in the event of contingent situations. The management of the Group will also develop suitable business contingency plans for managing the Target Group’s operations in adverse circumstances.

7. DIRECTORS’ VIEWS

The Acquisition provides an opportunity to invest and develop new business segments in palm kernel oil production and excess biomass power supply in Indonesia. As disclosed in our annual report for 2015, we see huge prospects in other markets, including Indonesia, and have been proactive in seeking to diversify into green businesses that are in line with our corporate value and direction. Accordingly, the Directors (including the independent non-executive Directors) are of the view that the Acquisition is in line with our corporate value, direction, and hence our strategy to expand and diversify into other green businesses, and that the terms of the SPA and the transactions contemplated thereunder and the terms of issue of the Consideration Shares are on normal commercial terms and are fair and reasonable and in the best interests of our Company and the Shareholders as a whole.

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LETTER FROM THE BOARD

8. FUNDING

The Company has conducted the following equity fund raising activities for the 24 months prior to the Latest Practicable Date.

Date of
announcement
in respect of the					Actual use of
completion of			Intended use		proceeds as at the
the fund raising	Fund raising		of proceeds		Latest Practicable
activities	activities	Net proceeds	(approximately)		Date
26 September 2014	The IPO	HK$7.5 million	Capital expenditure		Fully utilised for
			for the upgrade works		capital expenditure
			of the Haian Hengfa		for the upgrade works
			Facility		of the Haian Hengfa
					Facility
		HK$55.2 million	Capital expenditure		Fully utilised for
			for the upgrade works		capital expenditure
			of the Rugao Hengfa		for the upgrade works
			Facility		of the Rugao Hengfa
					Facility
		HK$12.3 million	Potential investment		Fully utilised for
			into new wastewater		the payment of the
			treatment or other		refundable deposit to
			environmental		Fusion Joy in relation
			protection projects in		to the SPA in May
			and outside the PRC	(1)	2016 (the “Deposit”)	(1)
		HK$2.6 million	Capital and		Fully utilised for
			general corporate		working capital
			purposes, including		related purposes.
			administration
			expenses
5 May 2015	The Top-up	HK$122.7	Potential acquisition		Approximately
	Placing	million	of the Wuping		HK$3.2 million was
			Second Waste Water		used for the payment
			Treatment Facility (2)		of the Deposit (1).
			and other potential
			investments (1)

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LETTER FROM THE BOARD

Date of

announcement in respect of the completion of the fund raising Fund raising activities activities Net proceeds

Intended use of proceeds (approximately)

Actual use of proceeds as at the Latest Practicable Date

The unutilised proceeds of the Top-up Placing(2) amounting to HK$119.5 million was invested in available-for-sale investments primarily for higher interest income. The majority of the payment for the cash portion of the Consideration(1) is expected to be funded by the liquidation of the available-forsale investments. Immediately after the Completion, HK$42 million of the proceeds is expected to remain unutilised and continue to be invested in available-for-sale investments(2).

HK$28.4 million Further capital

Further capital Approximately expenditure required HK$7.2 million for the upgrade works was used for further of the Rugao Hengfa capital expenditure Facility for the upgrade works of Rugao Hengfa Facility

A total of HK$21.2 million remain unutilized (3)

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LETTER FROM THE BOARD

(1) As set out in the Company’s annual report for 2015, the management of the Group sees huge prospects in other markets, including Indonesia, and seeks to diversity in the environmental protection businesses that are in line with the corporate value and direction of our Company. The Acquisition enables the Group to diversify its business portfolio to cover palm kernel oil production and bioenergy supply businesses in Indonesia, that are in line with the Indonesian government’s national policy to reduce carbon emission and speed up the use of renewable energy. The management is, therefore, of the view that the Acquisition is in line with our corporate value and our planned use of proceeds from the IPO to pursue expansion in environmental protection related business.
(2) The Company’s plan in connection with the proposed acquisition of Wuping Second Waste Water Treatment Facility as set out in the Company’s announcement dated 22 April 2015 has been stalled as the Company has not been able to reach a consensus with the relevant vendors on the commercial terms of such acquisition, especially in light of the continuing devaluation of Renminbi against US$. The Company will update and make further announcement in relation to any change in the proposed use of the remaining funds raised from the Top-up Placing when suitable acquisition targets have been identified.
(3) A total of HK$21.2 million from the proceeds from the Top-up Placing allocated for the upgrade works of Rugao Hengfa Facility had remained untilised as at the Latest Practicable Date as part of the capital required for the upgrade works of Rugao Hengfa Facility was financed by a bank loan obtained by Rugao Hengfa. The Company will update and make further announcements in relation to any change in the proposed use of such remaining funds when suitable acquisition targets have been identified.

As detailed above, of the net proceeds of HK$77.6 raised from the IPO, approximately HK$3.5 million (equivalent to approximately 4.5% of the net proceeds) had been utilised as at 31 December 2014, approximately HK$65.3 million (cumulatively, and equivalent to approximately 54.1% of the net proceeds) had been utilised as at 31 December 2015, and, provided that the Acquisition completes before the Long Stop Date and the Deposit becomes non-refundable upon Completion, approximately HK$77.6 million (cumulatively, equivalent to 100% of the net proceeds) had been utilised as at 30 June 2016.

Of the net proceeds of HK$151.1 raised from the Placing, none of which had been utilised as at 31 December 2015, and, provided that the Acquisition completes before the Long Stop Date and the Deposit becomes non-refundable upon Completion, approximately HK$10.4 million (equivalent to approximately 6.9% of the net proceeds) had been utilised as at 30 June 2016.

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LETTER FROM THE BOARD

9. CHANGES IN THE SHAREHOLDING STRUCTURE OF OUR COMPANY AS A RESULT OF THE ACQUISITION

For illustrative purpose only, set below is a summary of the shareholdings in our Company (i) as at the date of the Latest Practicable Date, and (ii) immediately after the Completion and the issue and allotment of the Consideration Shares, assuming there being no other change in the shareholding structure and share capital of our Company from the date of the Latest Practicable Date up to the date of issue and allotment of the Consideration Shares:

Everbest Environmental (1) Hightop (2) Carlton Asia (3) Wealthy Sea (4) Fusion Joy (5) Public shareholders Total	As at the Latest Practicable Date Number of Approximate Shares % 375,000,000 39.39 5,790,000 0.60 — — 225,000,000 23.63 — — 346,210,000 36.37 952,000,000 100.00	Immediately after Completion and the issue and allotment of the Consideration Shares Number of Approximate Shares % 375,000,000 33.75 5,790,000 0.52 15,700,000 1.41 225,000,000 20.25 143,300,000 12.90 346,210,000 31.16 1,111,000,000 100.00	Immediately after Completion and the issue and allotment of the Consideration Shares Number of Approximate Shares % 375,000,000 33.75 5,790,000 0.52 15,700,000 1.41 225,000,000 20.25 143,300,000 12.90 346,210,000 31.16 1,111,000,000 100.00
			100.00

Notes:

(1) Everbest Environmental is owned as to 50% by Ms. Wong, 30% by Ms. Chan and 20% by Mr. Chan.
(2) Hightop is owned as to 50% by each of Ms. Wong and Mr. Chan Chun Keung, the husband of Ms. Wong and the father of Mr. Chan and Mr. Brian Chan.
(3) Carlton Asia is indirectly owned as to 25% by each of Mr. Chan, Mr. Brian Chan, Ms. Chan and Ms. Wong.
(4) Wealthy Sea is owned as to 90% by Mr. Chau and 10% by Ms. Wong Mei Ling, the wife of Mr. Chau.
(5) Fusion Joy is legally and wholly owned by First Pacific (Asia) Pte. Ltd. as trustee, on behalf of Mr. Fadjar Suhendra and Mr. Sugih Suhendra (as beneficial owners) as to 60% and 40%, respectively.

The Acquisition will not result in a change in control of our Company.

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LETTER FROM THE BOARD

10. IMPLICATIONS UNDER THE LISTING RULES

Carlton Asia is indirectly legally and beneficially owned as to 100% in aggregate by Mr. Chan, Mr. Brian Chan and their associates. Accordingly, Carlton Asia is a connected person of our Company. It follows that the Acquisition and the issue of the Consideration Shares to Carlton Asia constitute connected transactions of our Company.

As the applicable Percentage Ratios in respect of the Acquisition exceed 25% but are less than 100%, the Acquisition constitutes a major transaction and a non-exempt connected transaction of our Company under Chapters 14 and 14A of the Listing Rules, and is therefore subject to reporting, announcement and Independent Shareholders’ approval requirements. The issue of the Consideration Shares to Carlton Asia under the Specific Mandate also constitutes a non-exempt connected transaction of our Company under Chapter 14A of the Listing Rules and is subject to reporting, announcement and the Independent Shareholders’ approval requirements.

B. SPECIFIC MANDATE TO ISSUE AND ALLOT THE CONSIDERATION SHARES

Approval is being sought from the Independent Shareholders at the EGM to grant the Specific Mandate to the Directors to exercise the powers of our Company to allot and issue 143,300,000 Consideration Shares to Fusion Joy and 15,700,000 Consideration Shares to Carlton Asia, by way of an ordinary resolution to be proposed at the EGM. The Consideration Shares shall be issued at the Issue Price of HK$0.50 per Consideration Share pursuant to the Specific Mandate at Completion.

As at the Latest Practicable Date, the authorised share capital of the Company is HK$380,000, which is divided to 3,800,000,000 shares of a par value of HK$0.0001 each, and there are 952,000,000 issued Shares. Subject to the passing of the resolution granting the Specific Mandate and on the basis that no further Shares will be issued or repurchased and cancelled before the EGM, our Company will be allowed under the Specific Mandate to allot, issue and deal a total of 159,000,000 Consideration Shares, representing (i) approximately 16.70% of the total number of Shares in issue as at the Latest Practicable Date, and (ii) approximately 14.31% of the total number of Shares in issue as enlarged by the issue of the Consideration Shares.

C. EXTRAORDINARY GENERAL MEETING

The EGM will be held on Thursday, 8 September 2016 at 10:00 a.m. at Units 1-3, 11th Floor, Westlands Centre, 20 Westlands Road, Hong Kong during which ordinary resolutions shall be proposed to the Independent Shareholders to approve the SPA and the transactions contemplated thereunder, including the issue and allotment of the Consideration Shares under the Specific Mandate.

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LETTER FROM THE BOARD

A notice convening the EGM is set out on pages EGM-1 to EGM-3 of this circular. A form of proxy for use in connection with the EGM is enclosed. If you are not able to attend the EGM but wish to exercise your right as a Shareholder, you are requested to complete and return the form of proxy in accordance with the instructions printed thereon to our Company’s branch share registrar and transfer office in Hong Kong, Boardroom Share Registrars (HK) Limited, at 31/F., 148 Electric Road, North Point, Hong Kong no later than 48 hours before the time appointed for the holding of the EGM (or the adjourned meeting or of the poll, as the case may be). Completion and return of a form of proxy will not preclude you from attending and voting at the EGM (or the adjourned meeting or of the poll, as the case may be) if you so wish.

Any Shareholder with a material interest in the SPA and the transactions contemplated thereunder and his/her/its associates will abstain from voting on the resolutions approving the same. To the best knowledge, belief and information of the Directors, having made all reasonable enquiries, Everbest Environmental and Hightop, which collectively hold 380,790,000 Shares, equivalent to approximately 40.00% of the issued share capital of the Company, and their respective associates, will abstain from voting in relation to the ordinary resolutions to be put forward at the EGM for the purpose of approving the SPA and the transactions contemplated thereunder. Apart from that, none of the Shareholders has a material interest in the SPA and the transactions contemplated thereunder, and therefore no other Shareholder is required to abstain from voting on the proposed resolutions approving the same.

Mr. Chan and Mr. Brian Chan, who together with their associates, control Carlton Asia, have not voted or been counted torwards the quorum at the Board meeting in relation to the SPA and the transactions contemplated thereunder (including the issue and allotment of the Consideration Shares to Carlton Asia). Apart from that, none of the Directors has a material interest in the SPA and the transaction contemplated thereunder or was required to abstain from voting on the Board resolutions for considering and approving the same.

As required under rule 13.39(4) of the Listing Rules, any vote of shareholders at a general meeting must be taken by poll except where the chairman, in good faith, decides to allow a resolution which relates purely to a procedural or administrative matter to be voted on by a show of hands. Accordingly, the chairman of the EGM will exercise his right under article 13.6 of the Articles to demand a poll on each of the resolutions to be proposed at the EGM.

D. RECOMMENDATION

An Independent Board Committee has been established to make recommendations to the Independent Shareholders regarding the SPA and the transactions contemplated thereunder, including the issue and allotment of the Consideration Shares under the Specific Mandate. Southwest Securities has been appointed as the independent financial adviser to advise the Independent Board Committee and the Independent Shareholders in relation to the SPA and the transactions contemplated thereunder, including the issue and allotment of the Consideration Shares under the Specific Mandate.

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LETTER FROM THE BOARD

Your attention is drawn to the letter from the Independent Board Committee set out on pages 45 and 46 of this circular, which contains its recommendation to the Independent Shareholders regarding the SPA and the transactions contemplated (including the issue and allotment of the Consideration Shares under the Specific Mandate).

Your attention is also drawn to the letter from Southwest Securities set out on pages 47 to 87 of this circular, which contains, among other things, its advice to the Independent Board Committee and the Independent Shareholders regarding the SPA and the transactions contemplated (including the issue and allotment of the Consideration Shares under the Specific Mandate).

The Directors (including the Independent Board Committee which has taken into account the advice of the Independent Financial Adviser) is of the view that the Acquisition is in line with our corporate value, direction, and hence our strategy to expand and diversify into other green businesses, and that the terms of the SPA and the transactions contemplated thereunder (including the issue and allotment the Consideration Shares) are on normal commercial terms and are fair and reasonable and in the best interests of our Company and the Shareholders as a whole. Accordingly, the Directors (including the Independent Board Committee) recommend the Independent Shareholders to vote in favour of the relevant ordinary resolutions in relation to the Acquisition.

E. ADDITIONAL INFORMATION

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

Completion is conditional upon, among other things, the fulfilment and or/waiver of the conditions precedent of the SPA, and therefore may or may not materialise. Shareholders and investors are reminded to exercise caution when dealing with the Shares.

Yours faithfully, By order of the Board ELL Environmental Holdings Limited Chau On Ta Yuen Chairman and Executive Director

– 44 –

LETTER FROM THE INDEPENDENT BOARD COMMITTEE

The following is the text of a letter from the Independent Board Committee, which has been prepared for the purpose of incorporation into this circular, setting out its recommendation to the Independent Shareholders in relation to the SPA and the transactions contemplated therein.

ELL ENVIRONMENTAL HOLDINGS LIMITED 強泰環保控股有限公司 *

(Incorporated in the Cayman Islands with limited liability)

(Stock Code: 1395)

24 August 2016

To the Independent Shareholders

Dear Sir or Madam,

MAJOR TRANSACTION AND CONNECTED TRANSACTION IN RELATION TO THE ACQUISITION OF ALL THE ISSUED SHARES OF WEAL UNION LIMITED INVOLVING THE ISSUE OF CONSIDERATION SHARES TO A CONNECTED PERSON AND AN INDEPENDENT THIRD PARTY UNDER A SPECIFIC MANDATE

We refer to the circular issued by our Company to the Shareholders dated 24 August 2016 (the “ Circular ”) of which this letter forms part. Terms defined in the Circular shall have the same respective meanings in this letter unless the context otherwise requires.

We have been appointed as the Independent Board Committee to consider and to advise you on the terms of the SPA and the transactions contemplated therein including but not limited to the issue of the Consideration Shares under the Specific Mandate as set out in the Circular as to the fairness and reasonableness and to recommend whether or not the Independent Shareholders should approve the same. Southwest Securities has been appointed as the Independent Financial Adviser to advise you and us in this regard. Details of the independent advice of the Independent Financial Adviser, together with the principal factors and reasons the Independent Financial Adviser has taken into consideration, are set out on pages 47 to 87 of the Circular.

* For identification purpose only

– 45 –

LETTER FROM THE INDEPENDENT BOARD COMMITTEE

RECOMMENDATION

We wish to draw your attention to the letter from the Board and the letter from the Independent Financial Adviser to the Independent Board Committee and the Independent Shareholders, which contains its advice to us in relation to the SPA and the transactions contemplated therein and the additional information set out in the appendices to the Circular.

Having taken into account the principal factors and reasons considered by and the opinion of the Independent Financial Adviser as stated in its letter of advice, we consider the terms of the SPA and the transactions contemplated therein (including but not limited to the issue of Consideration Shares under the Specific Mandate) as set out in the Circular to be fair and reasonable so far as the interests of the Independent Shareholders are concerned and to be in the interests of our Company and the Shareholders as a whole. We, therefore, recommend the Independent Shareholders to support and to vote in favour of the ordinary resolutions to approve the SPA and the transactions contemplated therein (including but not limited to the issue of Consideration Shares under the Specific Mandate).

Yours faithfully, For and on behalf of The Independent Board Committee of ELL ENVIRONMENTAL HOLDINGS LIMITED Ms. Ng Chung Yan Linda Mr. Ng Man Kung Mr. Sze Yeuk Lung Benedict Independent Non-Executive Directors

– 46 –

LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

The following is the text of the letter of advice from Southwest Securities (HK) Capital Limited, the Independent Financial Adviser to the Independent Board Committee and Independent Shareholders, prepared for the purpose of inclusion in this circular.

==> picture [150 x 46] intentionally omitted <==

SOUTHWEST SECURITIES (HK) CAPITAL LIMITED

Rooms 1601, 1606-1608, 16/F Central Plaza, 18 Harbour Road Wanchai Hong Kong

24 August 2016

To the Independent Board Committee and the Independent Shareholders

Dear Sir or Madam,

MAJOR TRANSACTION AND CONNECTED TRANSACTION IN RELATION TO THE ACQUISITION OF ALL THE ISSUED SHARES OF WEAL UNION LIMITED INVOLVING THE ISSUE OF CONSIDERATION SHARES TO A CONNECTED PERSON AND AN INDEPENDENT THIRD PARTY UNDER A SPECIFIC MANDATE

INTRODUCTION

We refer to our engagement as the independent financial adviser to the Independent Board Committee and the Independent Shareholders in respect of the Share Purchase Agreement (the “ SPA ”) and the transactions contemplated thereunder, details of which are set out in the circular of the Company to the Shareholders dated 24 August 2016 (the “ Circular ”), of which this letter forms part. Unless the context otherwise requires, terms used in this letter shall have the same meanings as those defined in the Circular.

On 16 June 2016, the Company, as issuer, and Eternity Time, as purchaser, entered into the SPA with Fusion Joy and Carlton Asia, as vendors. Pursuant to the SPA, Eternity Time has conditionally agreed to acquire 200 Sale Shares and 50 Sale Shares from Fusion Joy and Carlton Asia, respectively, at an aggregate consideration of approximately US$22,258,000 (equivalent to approximately HK$172.5 million). Upon the completion of the SPA, the Company is expected to hold all the issued shares of Weal Union. To satisfy the Consideration, the Company will pay US$8,561,000 (equivalent to approximately HK$66.3 million) in cash, and issue and allot 143,300,000 Consideration Shares, to Fusion Joy, and pay US$3,439,000 (equivalent to approximately HK$26.7 million) in cash, and issue and allot 15,700,000 Consideration Shares, to Carlton Asia. The Consideration Shares shall be issued at the Issue Price of HK$0.50 per Consideration Share pursuant to the Specific Mandate at Completion.

– 47 –

LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

Carlton Asia is indirectly, legally and beneficially owned as to 100% in aggregate by Mr. Chan, Mr. Brian Chan and their associates. Accordingly, Carlton Asia is a connected person of the Company. It follows that the Acquisition and the issue of Consideration Shares to Carlton Asia constitute connected transactions of the Company.

As the applicable Percentage Ratios in respect of the Acquisition exceed 25% but are less than 100%, the Acquisition constitutes a major transaction and a non-exempt connected transaction of the Company under Chapters 14 and 14A of the Listing Rules, and is therefore subject to reporting, announcement and Independent Shareholders’ approval requirements. The issue of the Consideration Shares to Carlton Asia under the Specific Mandate also constitutes a non-exempt connected transaction of the Company under Chapter 14A of the Listing Rules and is subject to reporting, announcement and the Independent Shareholders’ approval requirements.

The EGM will be held for the Independent Shareholders to consider and, if thought fit, approve ordinary resolutions in respect of the SPA and the transactions contemplated thereunder, including the grant of the Specific Mandate to the Directors for the issue and allotment of the Consideration Shares.

The Independent Board Committee, comprising all of the independent non-executive Directors, namely Ms. Ng Chung Yan Linda, Mr. Ng Man Kung, and Mr. Sze Yeuk Lung Benedict, has been formed to advise the Independent Shareholders in respect of the SPA and the transactions contemplated thereunder. We, Southwest Securities (HK) Capital Limited, have been appointed as the independent financial adviser to the Independent Board Committee and the Independent Shareholders in this regard.

BASIS OF OUR OPINION

Other than this appointment as the Independent Financial Adviser, we were not aware of any relationships or interests between Southwest Securities (HK) Capital Limited and the Company or any other parties that could be reasonably regarded as hindrance to our independence as defined under Rule 13.84 of the Listing Rules to act as the Independent Financial Adviser to the Independent Board Committee and the Independent Shareholders in respect of the SPA and the transactions contemplated thereunder.

In formulating our opinion to the Independent Board Committee and the Independent Shareholders, we have relied on (i) the information and facts contained or referred to in the Circular; (ii) the information supplied by the Group and its advisers; (iii) the opinions expressed by and the representations of the Directors and the management of the Group; and (iv) our review of the relevant public information. We have assumed that all the information provided, and representations and opinions expressed to us by the Group’s Directors and management, for which they are fully responsible, or contained or referred to in the Circular, in all material aspects, are true and accurate at the time when they were made and continue to be so as at the Latest Practicable Date. We have also assumed that all statements of belief, opinion, expectation and intention made by the Group’s Directors and management in the Circular were reasonably made after due enquiry and careful consideration. We have no reason to suspect

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

that any material facts or information have been withheld or to doubt the truth, accuracy and completeness of the information and facts provided to us by the Group and its advisers or contained or in the Circular, or the reasonableness of the opinions and representations expressed to us by the Company and its advisers. Our opinion is based on the representation and confirmation of the Directors and management of the Group that no material facts have been withheld or omitted from the information provided and referred to in the Circular and that all information or representations provided to us by the Directors and the management of the Group are true, accurate, complete and not misleading in all respects at the time they were made and continued to be so until the date of the Circular.

The Directors have collectively and individually accepted full responsibility for the accuracy of the information contained in the Circular and have confirmed, having made all reasonable enquiries, which to the best of their knowledge and belief, that the information contained in the 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 in the Circular or the Circular misleading. We, as the Independent Financial Adviser, take no responsibility for the contents of any part of the Circular, save and except for this letter of advice.

Having completed the abovementioned work done, we consider that we have taken sufficient and necessary steps on which to form a reasonable basis and an informed view for our opinion in compliance with Rule 13.80 of the Listing Rules. We have not, however, conducted any independent verification and in-depth investigation into the documents provided by the Company as well as the business and affairs of the Group or its subsidiaries or associates, we have also not considered the taxation implication on the Group or the Shareholders as a result of the Transaction. Our opinion is necessarily based on the financial, economic, market and other conditions in effect and the information made available to us as at the Latest Practicable Date. Shareholders should note that subsequent developments (including any material change in market and economic conditions) may affect and/or change our opinion and we have no obligation to update this opinion to take into account events occurring after the Latest Practicable Date or to update, revise or reaffirm our opinion. In addition, nothing contained in this letter should be construed as a recommendation to hold, sell or buy any Shares or any other securities of the Company.

Lastly, where information in this letter has been extracted from published or otherwise publicly available sources, it is our responsibility to ensure that such information has been correctly extracted from the relevant sources while we are not obligated to conduct any independent verification and in-depth investigation or into the accuracy and completeness of those information.

– 49 –

LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

PRINCIPAL FACTORS AND REASONS CONSIDERED

In formulating our opinion and recommendation on the SPA and the transactions contemplated thereunder, we have taken into account the following principal factors and reasons:

1. Information on the Group, the Vendors and the Target Group

1.1 Information on the Group

The Group is a wastewater treatment services provider in Jiangsu Province, China, offering a one-stop approach to the provision of wastewater treatment services using the “Build — Operate — Transfer” (or BOT) model. The Group covers the whole spectrum of activities from the design of wastewater treatment facilities, through the procurement of suitable equipment and materials, to the supervision of construction as well as the on-going operation and maintenance of the facilities throughout long-term concession periods.

At the moment, the Group has three wastewater treatment facilities in operation which are all located within Jiangsu Province, China. These facilities are used to treat municipal, industrial and heavy metal wastewater.

The following table summarises the consolidated statements of profit or loss and other comprehensive income of the Group for the two years ended 31 December 2015 as extracted from the annual report of the Company for the year ended 31 December 2015 (the “ Annual Report ”):

	For the year	For the year
	ended 31 December
	2014	2015
	HK$’000	HK$’000
	(audited)	(audited)
Revenue	85,183	145,462
Gross Profit	47,958	50,427
Profit before tax	22,136	36,229
Profit attributable to owners of the parent	9,267	39,506

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

Revenue of the Group increased by 70.8% from approximately HK$85.2 million for the year ended 31 December 2014 to approximately HK$145.5 million for the year ended 31 December 2015. The increase in revenue was primarily attributable to the increase in construction revenue arising from the upgrade works of Rugao Hengfa Facility, which amounted to HK$79.8 million (2014: HK$16.7 million). Gross profit increased by 5.1%, approximately from HK$48.0 million for the year ended 31 December 2014 to HK$ 50.4 million for the year ended 31 December 2015 primarily due to the net effect of the upgrade works of the Rugao Hengfa Facility amounted to approximately HK$19.2 million and the decrease of operating margin of approximately HK$16.9 million as the result of the increase in the volume of wastewater treated. The profit before tax and profit attributable to owners of the parent increased by approximately 63.7% and 326.3% respectively, primarily due to (i) the increase in revenue and gross profit as mentioned above and (ii) the decrease of administrative expenses by approximately 40.7%, which was primarily attributable to the absence of the professional fees incurred in relation to the listing during the year ended 31 December 2014, partially offset by the increase in directors’ fees, other office and administrative expenses, legal and professional fees incurred in relation to, among other things, regulatory compliance with the Listing Rules, and foreign exchange loss due to the depreciation in Renminbi against Hong Kong dollar incurred for the year ended 31 December 2015.

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

The following table sets out a summary of the consolidated statements of financial position of the Group as at 31 December 2015 from the Annual Report:

Non-current assets Current assets Total assets Current liabilities Non-current liabilities Total liabilities Equity attributable to owners of the parent Non-controlling interests Total equity/Net assets	As at 31 December 2015 HK$’000 (audited) 480,038 130,401
	610,439

	50,014 45,290
	95,304

	487,542 27,593
	515,135

As at 31 December 2015, the Group had (i) non-current assets of approximately HK$480.0 million, which mainly comprised receivables under service concession arrangement of approximately HK$349.9 million and available-for-sale investments of approximately HK$127.9 million; (ii) current assets of approximately HK$130.4 million, which mainly comprised cash and cash equivalents of approximately HK$87.8 million and receivables under service concession arrangements of approximately HK$40.4 million; (iii) current liabilities of approximately HK$50.0 million, which mainly comprised interest-bearing bank borrowings of approximately HK$32.9 million; and (iv) non-current liabilities of approximately HK$45.3 million, which mainly comprised deferred tax liabilities of approximately HK$36.5 million.

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

1.2 Information on the Vendors

Fusion Joy is an investment holding company incorporated in the BVI. To the best of the Company’s knowledge, information and belief and having made all reasonable enquiries, Fusion Joy is wholly owned by independent third parties.

Carlton Asia is an investment holding company incorporated in the BVI. To the best of the Company’s knowledge, information and belief and having made all reasonable enquiries, Carlton Asia is indirectly, legally and beneficially owned as to 100% by Mr. Chan, Mr. Brian Chan and their respective associates. Accordingly, Carlton Asia is a connected person of the Company.

1.3 Information on the Target Group

Weal Union and RPSL

Weal Union is a limited liability company incorporated under the laws of Hong Kong, the issued shares of which are held as to 80% by Fusion Joy and 20% by Carlton Asia as at the date. Weal Union is an investment holding company holding 95% of the issued shares in PT Rimba Palma Sejahtera Lestari (“ RPSL ”). Based on RPSL’s Capital Investment Principal Licences, RPSL operates a palm kernel oil mill that produces palm kernel expeller at a capacity of 33,750 tons per year and palm kernel oil at a capacity of 41,250 tons, in Jambi City, Indonesia (the “ Mill ”). The Mill crushes palm kernel to render palm kernel oil for sale and the palm kernel expeller for use as additional fuel for the Ancillary Power Plant.

The Mill and the Ancillary Power Plant

The operation of the Mill is supported by a power plant that comprises two power units owned and constructed by RPSL. As at the date, one power unit having a power output capacity of 15 Megawatts is in operation and supplies power to the Mill for up to around 2 Megawatts. The excess power generated is sold to PLN pursuant to the PLN Contract.

As disclosed in the Letter from the Board, as at the date, except for the Industrial Business Licence for the operation of the Mill, RPSL holds all material licences necessary for its operation of the Mill and the Ancillary Power Plant and its supply of excess power pursuant to the PLN Contract, including appropriate Capital Investment Principal Licences, Environmental Licence, Business Licence for Power Supply for Private Use, and Trading Licence For Palm Kernel Oil Trading.

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

The Outstanding Industrial Business Licence

Pursuant to the Regulation of Chairman of Indonesia Investment Coordinating Board Number 15 Year 2015 Regarding Guidelines And Procedures For Licensing and Non-Licensing Investment published by the Indonesia Capital Investment Coordinating Board on 8 October 2015, if RPSL wishes to carry out commercial production/operation activities, it shall obtain the Industrial Business Licence by filing application therefor to Capital Investment Coordinating Board.

According to the Letter from the Board, we note that, to the best of the knowledge of the Directors, the management of RPSL intended to restructure the primary business of RPSL as public power generation in 2014, having considered the fact that power generation had been and was likely to remain as a major contributor to RPSL’s total revenue. According to the management of RPSL, the Industrial Business Licence would not be required if RPSL managed to complete such restructuring and the production of palm kernel oil became an ancillary business of RPSL. RPSL commenced operation of the Mill in 2014 although the restructuring had yet to be completed. Despite favourable feasibility studies and RPSL’s communications with the government authorities, it was later concluded that the intended restructuring was unable to proceed due to a certain limitation set by the applicable laws and regulations. As a result, the operation of the Mill remained to be the primary business of RPSL and the Industrial Business Licence became mandatory. The absence of the required licence was brought to the attention of the management of the Company during the due diligence conducted in connection with the Acquisition. Going forward, the Board will seek regular and transactional advice from the Indonesia legal adviser of the Company to ensure compliance with all applicable laws and regulations in Indonesia in respect of the Target Group’s corporate maintenance, business licence and permits requirements.

As mentioned in the Letter from the Board and as advised by the Indonesian legal adviser of the Company, in respect of RPSL’s failure to obtain the Industrial Business Licence for the operation of the Mill prior to the commencement of such operation, the applicable authority may (i) issue warning letters to RPSL to demand rectification, (ii) mandatorily restrict RPSL’s scope of business activities if it fails to rectify the non-compliance within 1 month of the issuance of the third warning letter, (iii) mandatorily suspend RPSL’s business activities if it fails to rectify the non-compliance within 1 month of imposition of restriction of business activities, and (iv) revoke RPSL’s Capital Investment Coordinating Board Principal Licences if RPSL fails to rectify the non-compliance after the issuance of the third warning letter or within 1 month of the suspension of business.

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

As advised by the Indonesian legal adviser of the Company, there is no legal impediment for RPSL to obtain the Industrial Business Licence. As at the Latest Practicable Date, the management of RPSL is preparing the necessary documentation for the application of the Industrial Business Licence and expect such licence to be granted to RPSL on or before 30 September 2016. The Company will make a further announcement when such licence is granted.

According to the Letter from the Board, as at the Latest Practicable Date, RPSL has not received the Industrial Business Licence. As disclosed in the Letter from the Board, the Completion is conditional upon, among other things, any laws and regulatory non-compliance matters in relation to the Target Group and its business and operations resolved to the satisfaction of Eternity Time, which included RPSL obtaining the Industrial Business Licence for its operation of the Mill. As at the Latest Practicable Date, there is no intention on the part of Eternity Time to waive such condition.

As mentioned in the Letter from the Board and as confirmed by the Directors, we note that the Directors intend to only complete the Acquisition pursuant to Condition (xiii) of the SPA after the Industrial Business Licence is granted to RPSL.

Based on the above, we are of the view that the outstanding Industrial Business Licence of RPSL would not have material adverse effect to the Group upon Completion.

Compliance with Indonesian Laws

According to the Letter from the Board, we note that the Company has conducted comprehensive legal due diligence in respect of the incorporation and constitution of RPSL, its ongoing corporate maintenance, and the licences required for carrying out the business activities relating to the Mill and the Ancillary Power Plant. Based on such legal due diligence, the Company had identified noncompliance incidents relating to its ongoing corporate maintenance and its holding of business licences. RPSL has undertaken reasonable measures to rectify the aforesaid non-compliance incidents as suggested by the Indonesian legal adviser to the satisfaction of the Board. For details of the rectification measures undertaken by RPSL as at the Latest Practicable Date, please refer to the table on material non-compliance incidents and rectification measures undertaken set out in the section headed “Letter from the Board — 4. Information on the Target Group — Compliance with Indonesian Laws” in this circular.

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

As at the Latest Practicable Date, to the best of the Directors’ knowledge, information and belief and having made all reasonable enquiries, RPSL (i) has not been subject to any sanctions by the applicable authorities in respect of the non-compliance incidents set forth above, and (ii) has undertaken the aforesaid rectification measures as recommended by the Company’s Indonesian legal adviser. The Group’s Indonesian legal advisers have advised that there is no legal impediment for the completion of the Target Group’s rectification actions and the likelihood of the relevant authorities imposing sanctions involving substantial amount of fines, imprisonment term, or suspension or revocation of business on RPSL and it responsible officers, is remote. As such, the Directors are of the view that any imposition of sanction by the relevant authorities that would materially and adversely affect the operation of the RPSL’s business is unlikely. Upon Completion, the Group shall undertake to ensure compliance with the applicable laws by RPSL in respect of its ongoing corporate maintenance and business activities.

Based on the status of implementation of rectification measures for the noncompliance incidents disclosed herein, to the best of the knowledge of the Directors upon due enquiries, the Directors expect RPSL to be compliant with all applicable laws and regulations in respect of its ongoing corporate maintenance and business activities from 15 September 2016 onwards. As mentioned above, the Company undertakes to proceed to the Completion only upon rectification of the aforesaid non-compliance incidents in full. The Company will make a further announcement when all non-compliance incidents are fully rectified and update the Shareholders the expected timing of completion. Upon completion of the Acquisition, the Company undertakes to update the Shareholders on RPSL’s regulatory compliance status in its annual and interim financial reports, and where there is any material adverse change to RPSL’s regulatory compliance status, update the Shareholders by way of an announcement.

We have reviewed the legal due diligence report prepared by the Indonesian legal advisers of the Company dated 21 June 2016 and communicated with the Company and the Company’s Indonesian legal advisers regarding the finding of such legal due diligence report. We note that the material non-compliance issues are mainly related to the failure of filing, submission of and maintaining consistent information in the statutory documents as disclosed in the summary of material non-compliance incidents and rectification measures undertaken and the relevant rectification actions had been taken. Based on our discussions with the Indonesian legal advisers of the Company, we are advised that, among others, (i) there should be no legal impediment for the completion of the Target Group’s rectification actions; and (ii) it is unlikely that the Target Group and the respective management will be subject to any imprisonment or punishment which could stop the business operations of the Target Group. In this regard, we concur with the Director’s view that any imposition of sanction by the relevant authorities that would materially and adversely affect the operation of the RPSL’s business is unlikely.

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

Financial Performance

The following table sets out a summary of the audited financial information of the Target Group for the financial year ended 31 December 2014 (“ FY2014 ”), 2015 (“ FY2015 ”) and the six months ended 30 June 2016 extracted from the accountant’s report set out in Appendix II to the Circular:

			Six months
			ended
			30 June
	FY2014	FY2015	2016
	HK$ million	HK$ million	HK$ million
	(audited)	(audited)	(audited)
Consolidated net loss
— before taxation	(15.7)	(6.5)	(3.7)
— after taxation	(11.7)	(4.9)	(2.8)

Based on audited financial information of the Target Group, there was no extraordinary item for FY2014, FY2015 and the six months ended 30 June 2016. For FY2015, approximately HK$1.8 million, which represents 6.7% of the revenue, was generated from the sale of palm kernel oil processed from the Mill, and approximately HK$25.4 million, which represents 93.3% of the revenue, was generated from the supply of excess power to PLN. For the six months ended 30 June 2016, 100% of the HK$12.0 million revenue was generated from the supply of excess power to PLN.

The audited financial statements of the Target Group as at 31 December 2015 and 30 June 2016 recorded consolidated net assets of approximately HK$69.4 million and HK$104.3 million, respectively.

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

The following table sets out a summary of the audited statements of financial position of the Target Group as at 30 June 2016 extracted from the accountant’s report set out in Appendix II to the Circular:

Non-current assets Current assets Total assets Current liabilities Non-current liabilities Total liabilities Net assets	As at 30 June 2016 HK$’000 (audited) 162,989 17,222
	180,211

	75,900 136
	76,036

	104,175

For further details of the financial performance and position of the Target Group, please refer to the accountant’s report set out in Appendix II to the Circular and the management discussion and analysis on the Target Group set out in Appendix IV to the Circular.

PLN Contract

The supply of electricity by RPSL to PLN pursuant to the PLN Contract constitutes the key business driver for the Target Group.

The PLN Contract was initially signed on 28 November 2014, and supplemented by three addenda signed by RPSL and PLN on 2 March 2015, 2 July 2015 and 10 May 2016, respectively. Under the current terms of the PLN Contract, RPSL agrees to sell and PLN agrees to purchase, electricity from the excess capacity that amounts to a maximum of 10 Megawatts produced by the first power unit of RPSL based on the demand of PLN for a term expiring on 16 January 2017, subject to renewal.

Pursuant to the terms in the addendum signed on 10 May 2016, which shall become effective latest in September 2016 when the interconnection facilities connecting the second power unit of RPSL and PLN’s electricity systems are completed, the sale and purchase of electricity arrangement under the PLN Contract shall extend to cover a maximum addition of 10 Megawatts of excess power produced by the second power unit of RPSL based on the demand of PLN.

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

The sale and purchase of electricity under the PLN Contract (as amended by the aforesaid addendum) is carried out by RPSL connecting its power units to the electricity system of PLN via interconnection facilities. The unit price for the sale and purchase of electricity under the PLN Contract is IDR900 per kilowatt-hour (equivalent to approximately HK$0.51 per kilowatt-hour).

As mentioned in the Letter from the Board, to the best of the knowledge of the Directors upon due enquiries, there is no other biomass or biogas independent power producer or excess power supplier in Jambi City. In addition, the terms of any power purchase agreement entered into by PLN and other power producers are kept confidential to third parties. As such, there is no publicly available information on the comparable market price for sale of electricity to PLN in Jambi City. However, according to the regulation “Permen ESDM 27/2014” issued by the Minister of Energy and Mineral Resources on the purchase of electricity from biomass and biogas power plants by PLN (http://prokum.esdm.go.id/permen/2014/Permen%20 ESDM%2027%202014.pdf), PLN may purchase excess power from biomass and biogas power plants with medium voltage of 20 kilovolts at a purchase price of IDR1,150 per kilowatt-hour (equivalent to approximately HKD0.65 per kilowatthour). As set out in PLN’s Direction Regulation No. 99/2015, PLN aims to purchase excess power (i) to overcome the power deficit on the local electricity distribution system and/or (ii) to lower PLN’s production cost on the local electricity distribution system. Although the generating capacity in Sumatera and East Indonesia, where Jambi City is located, is barely sufficient to meet the electricity needs of the community, there was no material deficit for electricity supply in Jambi City in 2014 and 2015. As such, in 2014 and 2015, PLN had entered into the PLN Contract with RPSL primarily to lower its production cost for electricity distribution in Jambi City, and accordingly the purchase price of electricity under the PLN Contract was determined to be IDR900 per kilowatt-hour (equivalent to approximately HKD0.51 per kilowatt-hour) upon arm’s length negotiations.

Profitability

The Target Group has not reported any net profits in FY2014, FY2015 and the six months ended 30 June 2016. Based on the information provided by the Vendors and the due diligence conducted by the Group and subject to market changes in palm kernel oil prices, RPSL’s business of palm kernel oil will remain insignificant in the near future. RPSL has completed the construction of a second power unit with an estimated power output of 15 Megawatts. However, RPSL signed the Addendum on 10 May 2016 to supply an additional 10 Megawatts of excess power to be generated by the second power unit through PLN’s power supply network commencing latest by 7 September 2016. Based on the terms of the PLN Contract as amended by the Addendum, a total of 20 Megawatts of excess power supply to be consumed by PLN. Overhead and other administrative expenses are expected to be more efficiently utilised, which would in turn increase the overall profitability of the Ancillary Power Plant.

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

Upon Completion, the Group expects to enhance the supervision and management of the operations of the Target Group to develop and implement more effective cost control measures. All these are expected to improve its profit margins.

Furthermore, as reported in Bisnis Indonesia on 9 August 2016 (http://koran. bisnis.com/read/20160809/451/573350/tarif-listrik-biomassa-akan-dinaikkan-60), the Director General of Renewable Energy and Energy Conservation of the Ministry of Energy, Rida Mulyanamengatakan, has confirmed that the Indonesian government is planning to raise electricity tariffs from biomass power plants by up to 60% by revising the Regulation of the Minister of Energy and Mineral Resources in the near future. In addition, the price of renewable energy power will no longer be negotiable, such that PLN would be required to purchase electricity according to the tariff set by the Indonesian government, with subsidies to cover the difference in price. The Directors expect such increase in tariff and regulatory change will result in a higher purchase price of electricity by PLN upon renewal of the PLN Contract, and an improved profitability for the excess power generation business of RPSL.

We have reviewed the Profit Forecast and discussed with the Directors regarding the pricing basis of excess power and understand that the selling price of excess power is forecasted to be IDR900 per kilowatt-hour (“ kWh ”) in 2016 (being the contracted price of the existing PLN Contract and the Addenda) with a growth of approximately 28% to to IDR1,150 per kWh in 2017, which is forecasted based on various public sources of information, that the Ministry of Energy and Mineral Resources of Indonesia (“ MEMR ”) intends to set up a special entity to provide feed-in-tariff (“ FiT ”) to encourage the development of green power operation, including biomass power generation plants, with an annual growth rate of 5% from 2018 onwards. We have further reviewed the PLN Contract and the Addenda and the aforesaid relevant government policies, and note that the forecasted selling price for 2016 is consistent with the PLN Contract and the Addenda and the forecasted selling price for 2017 is consistent with the unadjusted FiT amount for biomass energy source to medium voltage grid indicated in the relevant government policies. We also understand that the annual growth rate of 5% from 2018 onwards with reference to the Consumer Price Index (“ CPI ”) year-on-year average growth rates for 5 years in Indonesia, where the Target Group is operated, as per the data from Bloomberg, and have further cross-checked to the historical growth rates of electricity prices for industry and commercial use in Indonesia and considered the annual growth rate of the selling price of 5% from 2018 onwards is not unreasonable.

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In relation to the pricing basis of palm kernel oil, we understand that the selling price of crude palm kernel oil is expected to be stable with an annual growth rate of 5%, which is consistent with the CPI year-on-year average growth rates for 5 years in Indonesia as per the data from Bloomberg.

Based on the representation of the Directors, we understand that RPSL has two customers for the palm kernel oil business since the commencement of business and up to the Latest Practicable Date. As confirmed by the Directors and as mentioned in the Letter from the Board, the Target Group had not generated a significant amount of revenue from palm kernel oil production due to the unfavourable commodity prices and the small customer base of the palm kernel oil business, and accordingly, the Target Group strategically did not engage in substantial production and sale of palm kernel. However, the operation of the Mill enabled RPSL to operate the Ancillary Power Plant to supply excess power to PLN which is comparatively much more profitable and generates significant amount of revenue to RPSL. Through its supply of excess power to PLN, the Target Group derived a substantial revenue in FY2015 and the six months ended 30 June 2016 and is expected to continue to do so in the future.

According to the representation by the Directors of the Group, we understand that it is the common practice of PLN to enter into power supply contracts with power suppliers for one-year term which is renewable at maturity. We also understand that the Target Group can further utilise the remaining power output capacity of 5 Megawatts from the second power unit, subject to further demand from PLN.

We understand that, given the current market conditions, the Target Group’s business segment in sales of electricity is comparatively much more profitable than its business segment operating in the sale of palm kernel oil. We also understand that, in Indonesia, PLN has an effective monopoly over the supply of electricity to end customers. Similar to all other electricity suppliers in Indonesia, it will not be possible for RPSL to expand its customer base for the sale of electricity. As such, despite the fact that the business model of RPSL is highly dependent on a single customer due to the nature of the market environment of palm kernel oil and electricity supply in Indonesia, the Directors believe that the risk resulted from relying on a single customer is not material, taking into consideration that, (i) PLN has an effective monopoly over the supply of electricity to the end users in Indonesia; (ii) there are no power plants in the vicinity of the Ancillary Power Plant that are fueled by renewable resources that will be in a position to compete with it for supplying bioenergy generated electricity to PLN; (iii) the government

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policy in solving the power shortage issue and (iv) the existing PLN contract which is expected to have no obstacle for renewal due to continuous electricity demand in Indonesia.

Prospective Renewal of the PLN Contract

As detailed in the Accountants’ Report set out in Appendix II to this circular, revenue generated from the sales of electricity decreased significantly in FY2014. Such decrease in sales of electricity was resulted from RPSL’s inability to renew its power supply contract with PLN for a material part of FY2014 due to an oversupply of electricity by diesel fuel oil power plants in the vicinity.

The Directors are of the view that RPSL’s source of income from sales of electricity to PLN is sustainable, and there is no obstacle in renewing the PLN Contract upon its expiry on a year-on-year basis, thereby continuing its sales of excess electricity to PLN on an ongoing basis for the following reasons:

the over-supply of electricity by diesel fuel oil power plants in the vicinity occurred in FY2014 is no longer relevant as diesel fuel oil power plants in vicinity in Jambi City were closed down as a result of both PLN’s and the Indonesian Government’s policies to speed up renewable energy exploitation and to replace utilisation of diesel fuel oil with non-diesel fuel oil power plants in late 2014 and 2015;
as detailed in the paragraph headed “Letter from the Board - A. The Acquisition - 5. Reasons for and Benefits of the Acquisition”, the Indonesian government has, since late 2015, been publishing policies to speed up exploitation of renewable energy, to increase electricity supply and to change fossil fuel consumption by the utilisation of renewable energy;
in its Executive Summary to the Electricity Supply Business Plan issued for 2014-2015, PLN highlighted its business focus to replace the utilisation of diesel fuel oil with non-diesel fuel oil;
to the best of the Directors’ knowledge, information and belief and having made all reasonable enquiries, there are no other renewable energy power plants operating in the vicinity of the Ancillary Power Plant that will be in a position to compete with the Ancillary Power Plant for the supply of bioenergy generated electricity to PLN;
as detailed in the paragraph headed “Letter from the Board - A. The Acquisition - 4. Information on the Target Group - Profitability”, the Indonesian government is planning to raise electricity tariffs from biomass power plants and to provide PLN with subsidies to cover the price differences;

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RPSL has already established an existing business relationship with PLN, and to the best of the Directors’ knowledge, information and belief and having made all reasonable enquiries, there had not been any disputes between PLN and RPSL; and
the aforesaid policies of both the Indonesian government and PLN to increase electricity supply and to change fossil fuel consumption by the utilisation of renewable energy, the expected availability of government subsidies to cover price differences, the lack of competition for bioenergy supply in Jambi City, and the relationship established by RPSL with PLN together have well positioned RPSL to continue to renew the PLN Contract upon expiry of the its term on an ongoing basis.

Taking into consideration of above, we concur with the Director’s view that there is no obstacle in renewing the PLN Contract upon its expiry on a year-on-year basis, thereby continuing its sales of excess electricity to PLN on an ongoing basis.

Capital Expenditure

To the best of the Directors’ knowledge upon due enquiries, RPSL is in the process of constructing interconnection facilities for the second power unit of the Ancillary Power Plant, which is expected to complete by September 2016. The completion of construction of such interconnection facilities would enable RPSL to commence its supply of electricity produced by the second power unit to PLN pursuant to the PLN Contract. The total costs of such construction is expected to be approximately IDR3,952 million (equivalent to approximately HK$2.2 million).

Service Agreement with GIP

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Upon completion of the SPA, RPSL will become a 95%-owned subsidiary of our Company, Fusion Joy will become a substantial shareholder and a connected person of the Company, and GIP will also become a connected person of the Company. If the aforesaid transactions are to continue upon Completion, such transactions will constitute continuing connected transactions of the Company in accordance with the Listing Rules.

As such, the Company is of the view that upon Completion, the Target Group remains capable of operating independently from our substantial shareholders and its close associates in the event that the Group procures RPSL to continue engaging GIP for the provision of the aforementioned services.

Subject to the fulfilment and/or waiver of the conditions precedent and the completion of the SPA, the Group shall procure RPSL to enter into an amendment service agreement with GIP to revise the term of the Service Agreement in respect of the services to operate, monitor and maintain the power plants of RPSL from three years ending 31 December 2018 to one year ending 31 December 2016 with effect from the Completion Date (the “ Revised Service Agreement ”).

Risks associated with the subcontracting to and purchases from GIP

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which could delay the operations. Similarly, if GIP fails to provide services as required under a contract for any reason, the Target Group could be required to source another subcontractor, which could also disrupt the operations. Furthermore, the Target Group cannot assure that GIP, being a third-party of the Group, will continue to satisfy the business needs of the Target Group at a commercially reasonable cost or at all. Any material non-performance or substandard performance of GIP could disrupt the operations of the Target Group, and will materially and adversely affect the Target Group’s financial condition and results of operations. In order to mitigate such risks, in the event the Directors continue to procure services and purchases from GIP upon Completion, the Directors and senior management will review RPSL’s cooperation with GIP on a half-yearly basis to assess the quality of purchases and performance standards of the services provided by GIP, and establish performance feedback mechanisms with GIP to ensure that any operational and performance issues will be sufficiently addressed. The Board will also review and consider on an annual basis the costs and risks of procuring services provided by GIP against these of direct employment of services to ensure quality of services and cost efficiency.

Management of RPSL

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In addition to Mr. Saut, Mr. Radius Suhendra (“ Mr. Suhendra ”), a member of the board of commissioner of RPSL, is also heavily involved in the management of RPSL. Mr. Suhendra obtained a bachelor’s degree in business administration from Ohio State University, the United States in 1996. He has 15 years of experience in managing businesses in heavy industries in Asia, including 7 years in managing ferrous trading business of an ferriesalloy trading firm between 1998 and 2005 in Singapore. From 2006 to 2010, Mr. Suhendra was the president director of PT. Indoferro, which operates blast furnace producing nickel pig iron operated Indonesia. Since 2011, Mr. Suhendra has been overseeing the construction and operation of the Mill and the Ancillary Power Plant of RPSL.

Within the Group, Mr. Chan, the executive Director and chief executive officer, has been involved in the business of the Target Group since June 2011, when Carlton Asia first acquired shares in Weal Union and when Mr. Chan was appointed as a director of Weal Union. Through his directorship, Mr. Chan is familiar with the business and operations of RPSL and the palm kernel oil production and power supply business in Indonesia, despite not being involved in the day-to-day management of the Mill and the Ancillary Power Plant.

We understand that, taking into consideration that (i) Mr. Chan is the director of Weal Union and has been involved in the business of the Target Group since June 2011 and (ii) the Company will appoint Mr. Suhendra as Director after Completion, the Directors are of the view that the Company will have sufficient management expertise to manage the Target Group.

Directors’ Remuneration

The aggregate of the remuneration payable and benefits-in-kind receivable by the directors of Weal Union and RPSL will not be varied as a result of the SPA. The Board will, upon Completion, review the remuneration policy of the Target Group on a regular basis and consider adjustment of remuneration of the directors of Weal Union and RPSL as and when necessary.

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2. Reasons for and benefits of the Acquisition

Growing economy and energy consumption of Indonesia

Indonesia’s economy is the largest in Southeast Asia. According to “World Development Indicators” published by the World Bank in 2014, Indonesia had a gross domestic product (the “ GDP ”) estimated at US$888.5 billion in 2014. The country has experienced a steady growth emerging from the Asian financial crisis between 1997 and 1999, averaging a stable 5% to 6% annual growth rate. Indonesia’s gross national income per capita has steadily risen, from US$560 in 2000 to US$3,630 in 2014. “An Overview of Indonesia’s Economy” published by the World Bank on 5 April 2016 states that, by the end of 2014, Indonesia was the world’s fourth most populous nation and the world’s tenth largest economy in terms of purchasing power, and has been a member of the G-20. Indonesia has made enormous gains in poverty reduction, cutting the poverty rate to more than half since 1999, to 11.2% in 2015. According to “Energy Policies Beyond IEA Countries — Indonesia 2015” published by International Energy Agency in January 2015, even though Indonesia remains a net energy exporter due to the expansion of its coal and liquid biofuel production, the country is consuming more energy as a result of rising living standards, population growth and rapid urbanisation. According to the “World Development Indicator” published by the World Bank dated 2013, the electric power consumption per capita in Indonesia rose continuously from 636.6 Kilowatt-hour in 2010 to 787.7 Kilowatt-hour in 2013. In 2014, the total electricity consumption growth remained flat due to a weakened economy. According to “Power in Indonesia: Investment and Taxation Guide” published by PricewaterhouseCoopers in August 2015. President Joko Widodo, who took over presidency in Indonesia in October 2014, had stated that his government targeted a stronger growth for 2015 and beyond through business-friendly policies and anti-corruption measures. Despite that the GDP growth in 2015 faltered to 4.8%, as a result of a lack of government spending and investment, the World Bank has recently projected that the Indonesian economy will return to a gradual growth path after the 5 years of declining growth. The “Global Economics Prospect” published by the World Bank in June 2016 forecasts that the GDP growth will be 5.3% in 2016 and will reach 5.5% in 2017 owing to Indonesia’s commitment to increase foreign investment and government spending on infrastructure as a result of President Joko Widodo’s reforms. PLN has, in its 2014 annual report, forecasted a 8.7% per annum increase in demand for electricity in Indonesia for the foreseeable future despite the slower economic growth in 2014. As reported by Raras Cahyafitri in “Electricity sales buck trend”, a news articles published by The Jakarta Post on 20 February 2016, in line with such projections, PLN has recorded a 7.54% increase in electricity sales in January 2016 as compared to electricity sales in December 2015. All these signal potential in power supply related investments in Indonesia. The domestic consumption of raw materials including palm kernel oil has also been increasing along the growth of domestic industrial activities.

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Palm Kernel Oil Production

Palm kernel oil is the oil rendered from the edible seed of oil palm tree, which, to the best of the Directors’ knowledge, information and belief and having made all reasonable enquiries, is easily accessible by the Target Group, given the abundance of resources in the vicinity of the Mill. The pulp left after oil is rendered from the kernel is formed into “palm kernel meal”, which can be burnt in boilers to generate electricity or for feeding livestock.

Indonesia consumes a large share of its domestic production of palm kernel oil. The Indonesian oleochemical industry has shown stable a demand for palm kernel oil.

According to World Bank Commodity Price Data (http://pubdocs.worldbank. org/en/148131457048917308/CMO-Historical-Data-Monthly.xlsx), the market price of palm kernel oil dropped from US$2,296 per metric ton (equivalent to approximately HK$17,794) in February 2011, when RPSL was established, to US$847 (equivalent to approximately HK$6,564) per metric ton in December 2015, and subsequently rose back to US$1,312 (equivalent to approximately HK$10,168) per metric ton in June 2016. The significant decrease in palm kernel oil prices has adversely affected the profitability of the production and sale of palm kernel oil, despite the stable demand of such commodity from local oleochemical industries. Accordingly, the Target Group strategically did not engage in substantial production and sale of palm kernel oil, and as a result, had not generated a significant amount of revenue from palm kernel oil production during FY 2014, FY 2015 and the six months ended 30 June 2016. However, the operation of the Mill had enabled the Company to operate the Ancillary Power Plant to supply excess power to PLN as detailed in the paragraph headed “Excess Biomass Power Supply” below. Through its supply of excess power to PLN, the Target Group had derived a substantial revenue in FY2015 and the six months ended 30 June 2016 and is expected to continue to do so in the future.

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Furthermore, while the power generated by the Ancillary Power Plant supports the operation of the Mill, the palm kernel oil meal produced as a by-product of palm kernel oil production of the Mill provides biomass fuel for the power generation of the Ancillary Power Plant or can be sold for feeding livestock, and any excess power generated can be supplied under the power supply contracts with PLN. As such, after the Acquisition, the Directors plan to maintain the existing business model of RPSL, such that the operations of the Mill can continue to allow RPSL to generate income from multiple channels.

Excess Biomass Power Supply

Energy policy

Indonesia is highly dependent on oil imports. Meeting demand growth and ensuring the environmental sustainability of energy supplies are reported to be the key pillars of its economic and investment policies and strategies. To strengthen national energy security and to meet national demand, the priority of the current Indonesian energy policy is to increase electricity power and to change fossil fuel consumption by utilization of renewable energy including biomass wastes. It is also a national policy of Indonesia to reduce national carbon dioxide emission. To do so, the Indonesian government has said that it will ban the use of expensive diesel fuel for new power plant.

Policies and regulations on bioenergy are expected to continuously be developed to increase an investment on bioenergy in order to accelerate the utilization of bioenergy. The Indonesian government together with all stakeholders are expected to continuously support the bioenergy development.

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Potential for biomass energy generation

Power supply to PLN

The aforesaid energy policy adopted by the Indonesian government, Indonesia’s focus in bioenergy, the business needs of PLN to resolve power shortage related issues, and RPSL’s existing power supply agreements with PLN with respect to excess power generated by the Ancillary Power Plant together provide a solid foundation for RPSL’s continuous generation of income through the supply of excess power to PLN. Furthermore, to the best of the Directors’ knowledge, information and belief and having made all reasonable enquiries, there are no power plants in the vicinity of the Ancillary Power Plant that operates power plants fueled by renewable energy that will be in a position to compete with it for the supply of bioenergy generated electricity to PLN. All these provide RPSL with a significant competitive advantage for maintaining and further developing its excess biomass power supply businesses, and strengthen its position to continuously renew its PLN Contract in a long run.

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Directors’ view on the Acquisition

The Acquisition provides an opportunity to invest and develop new business segments in palm kernel oil production and excess biomass power supply in Indonesia. As disclosed in the annual report for 2015, the Directors see huge prospects in other markets, including Indonesia, and have been proactive in seeking to diversify into green businesses that are in line with the corporate value and direction. Accordingly, the Directors (including the independent non-executive Directors) are of the view that the Acquisition is in line with the corporate value, direction, and hence the strategy to expand and diversify into other green businesses, and that the terms of the SPA and the transactions contemplated thereunder and the terms of issue of the Consideration Shares are on normal commercial terms and are fair and reasonable and in the best interests of the Company and the Shareholders as a whole.

Based on the aforesaid and among others, our review of relevant public information, we did not identify any material inconsistency with the relevant industry information as disclosed in the Letter from the Board. Despite the palm kernel oil production business is new to the Group and the transaction is significant to the Group, the risks associated with the new business and the outstanding Industrial Business License, taking into consideration (i) the palm kernel oil production business constitute small contribution to the profit of RPSL; (ii) the operation of the Mill and the palm kernel oil production had enabled RPSL to operate the Ancillary Power Plant to supply excess power to PLN which is comparatively much more profitable and generates significant amount of revenue of RPSL; (iii) the Company will have sufficient management expertise to manage the Target Group after Completion given Mr. Chan Kwan is the director of Weal Union and has been involved in the business of the Target Group since June 2011 and the Company will appoint Mr. Radius Suhendra as Director after Completion; (iv) the Directors intend to only complete the Acquisition pursuant to Condition xiii of the SPA after the Industrial Business Licence is granted to RPSL; (v) the risk resulting from single customer reliance is not material given PLN has an effective monopoly over the supply of electricity to end users in Indonesia and there are no power plants in the vicinity of the Ancillary Power Plant that operates power plants fueled by renewable energy that will be in a position to compete with it for the supply of bioenergy generated electricity to PLN; (vi) the energy policy adopted by Indonesian government; (vii) the country’s focus in bioenergy; (viii) the business needs of PLN to resolve power shortage related issues; and (ix) the existing PLN contract with respect to excess power generated by the Ancillary Power Plant which is expected to have no obstacle for renewal, we concur with the Directors’ view that the Acquisition is in line with the Group’s corporate strategy to expand into other green businesses and in the interests of the Group and the Shareholders as a whole.

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3. The Share Purchase Agreement

3.1 Principal terms of the SPA

The following sets forth a summary of the principal terms of the Agreement:—

Date:

16 June 2016

Parties:

(1) Eternity Time, a wholly-owned subsidiary of the Company, as purchaser
(2) the Company, as issuer
(3) Fusion Joy and Carlton Asia, as vendors

Assets being acquired:

Consideration for the Sale Shares:

The aggregate consideration for the Sale Shares shall be US$22,258,000 (equivalent to approximately HK$172.5 million), which shall be satisfied as follows:

US$8,561,000 (equivalent to approximately HK$66.3 million) to be payable in cash and 143,300,000. Consideration Shares to be issued and allotted to Fusion Joy at the Issue Price of HK$0.50 per Share ; and
US$3,439,000 (equivalent to approximately HK$26.7 million) to be payable in cash and 15,700,000 Consideration Shares to be issued and allotted to Carlton Asia at the Issue Price of HK$0.50 per Share.

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The Consideration shall be fully settled on the Completion Date, provided that in the case of Fusion Joy, a total of US$2,000,000 (equivalent to approximately HK$15.5 million) shall be deducted from the aforesaid the its cash portion of the Consideration, as an equivalent amount has already been paid to it on 11 May 2016 as a deposit for the Acquisition. Such deposit is fully refundable if the parties fail to enter into the SPA, or if the Acquisition fails to complete. The source of funding the cash portion of the Consideration will be entirely from internal funds comprising (i) the unused proceeds from the IPO and the Top-up Placing and (ii) cash proceeds from the liquidation of available-for-sale assets acquired by the Company using proceeds from the IPO and Top-up Placing, which, as assessed and determined by the Directors, are highly liquid in the secondary market and can, at the Directors’ discretion, be disposed of in a timely manner for the payment of the Cash Consideration or any other capital requirement for future expansion and acquisition opportunities.

The Directors considered that the settlement of the Consideration by a combination of cash and issue of the Consideration Shares would enable the Company enlarging its equity capital base and maintain its liquidity position by reducing its cash outflow, but without unduly diluting Independent Shareholder’s interests in the issued capital of the Company.

The aforesaid terms of payment of the Consideration were determined after arm’s length negotiations with the Vendors after taking into account, among other things, (i) the audited net asset value of the Target Group as at 31 December 2015, (ii) the financial performance and operating results of the Target Group for the financial years ended 31 December 2014 and 2015, (iii) economic outlook and the competitive landscape affecting the Target Group’s businesses, and (iv) the nature and prospects of the industry in which the Target Group is operating. The Consideration represents a premium of 0.16% over the fair value of the 100% equity interest of Weal Union (having already taken into account that Weal Union only holds 95% of the issued share of RPSL) as at 31 December 2015, being US$22,223,000 (equivalent to approximately HK$172.2 million), as valued by Avista, the professional valuer engaged by the Company to carry out a fair value analysis in connection with the Acquisition. For details relating to such fair value analysis carried out by Avista, please refer to Appendix V(A) to the Circular.

Consideration Shares:

The aggregate of 159,000,000 Consideration Shares to be issued to the Vendors or their respective nominees represent (i) approximately 16.70% of the total number of Shares in issue as at the date of this announcement, and (ii) approximately 14.31% of the total number of Shares in issue as enlarged by the issue of the Consideration Shares.

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The Consideration Shares shall be issued at the Issue Price of HK$0.50, which represents:

(i) a premium of approximately 9.89% over the closing price of HK$0.455 per Share as quoted on the Stock Exchange on 16 June 2016, being the date of the SPA ;
(ii) a premium of approximately 6.84% over HK$0.468 per Share being the average of the closing prices of the Shares as quoted on the Stock Exchange for the last five consecutive trading days immediately prior to date of SPA ; and
(iii) a premium of approximately 7.76% over HK$0.464 per Share, being the average of the closing prices of the Shares as quoted on the Stock Exchange for the last ten consecutive trading days immediately prior to date of SPA.

The Issue Price was determined after arm’s length negotiations by reference the higher of the closing price per Share on the Stock Exchange on the date of the SPA and the average of the closing prices per Share as quoted on the Stock Exchange for the last five consecutive trading days immediately prior to date of SPA. The Directors (excluding the independent non-executive Directors) considered that the Issue Price is fair and reasonable and in the interests of the Shareholders as a whole.

The Consideration Shares, when issued and allotted, will rank pari passu in all aspects with the Shares then in issue, including the right to all dividends, distributions and other payments made or to be made, on the record date which falls on or after the date of such issue and allotment. The Consideration Shares are to be issued under the Specific Mandate. Application will be made by the Company to the Stock Exchange for the listing of and the permission to deal in the Consideration Shares.

The Consideration Shares are not subject to any lock-up requirements.

3.2 Assessment of the terms of the SPA

Consideration for the Sale Shares:

As mentioned in the Letter from the Board, the Company agreed to the aforesaid terms of payment of Consideration was determined after arm’s length negotiations with the Vendors and having regard to the following:

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(i) the valuation by AVISTA Valuation Advisory Limited, an independent valuer (the “ Valuer ”), of the fair value of the entire issued capital of the Target Group as at 31 December 2015 of US$22,223,000 (equivalent to approximately HK$172.2 million) which accounts for a discount of approximately 0.16% to the Consideration. Further information in relation to the valuation will be included in the Circular to be issued by the Company to its Shareholders in relation to the Acquisition; and
(ii) the financial performance and prospects of the Target Group, as detailed in paragraph headed “Information on the Target Group and Reasons for and Benefits of the Acquisition”.

In assessing the fairness and reasonableness of the Consideration, we have reviewed the valuation report in relation to the potential acquisition of Weal Union Limited (the “ Valuation Report ”) as set out in Appendix V(A) to the Circular and assessed the bases and assumptions used by the Valuer, details of which are explained below.

The Valuer and its engagement

We have conducted an interview with the Valuer to enquire its expertise in performing similar valuation in renewable energy industry in Indonesia, its independence, and have reviewed the terms of the engagement letter between the Company and the Valuer, in particular on its scope of work. During the interview with the Valuer, we consider that its scope of work is appropriate to form the opinion required and there is no limitation of the scope of work which might have an adverse impact on the degree of assurance given by the Valuer in the Valuation Report. During the interview with the valuer, we were also given to understand that it has years of experience in valuations, has specific experience on the valuations of similar industry in the past, and has no prior relationship with the Group. Also, during the course of our interview with the Valuer, we have not identified any major factors which cause us to doubt the fairness and reasonableness on the bases and assumptions adopted for the valuation and the valuation is a fair assessment of the market value of the Target Group. We have performed the work as required under note (1)(d) to the Rule 13.80 of the Listing Rules in relation to the Valuer and its work. Based on the above, we are of the view that the scope of work of the Valuer is appropriate and the Valuer is qualified for valuing the Target Company.

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Valuation Report and the valuation of the entire issued capital of the Target Group

To assess whether the Consideration is fair and reasonable and in the interests of the Group and the Shareholders as a whole, we have considered the following:

Regarding the equity interest valuation in relation to the fair market value of the entire issued shares of the Target Group, according to the Valuation Report issued by the independent Valuer, as disclosed in Appendix V(A) to the Circular, the fair market value of the entire issued shares of the Target Group as at 31 December 2015 (the “ Valuation Date ”) was US$22,223,000 (equivalent to approximately HK$172.2 million). The valuation was prepared by the Valuer using the discounted cash flow (“ DCF ”) method under the income approach which requires a number of parameters, including revenue and expense forecasts, working capital requirement and capital expenditure requirement.

In assessing the fairness and reasonableness of the Consideration, for our due diligence purpose, we have reviewed the Valuation Report and discussed with the Valuer the methodology, bases and assumptions used in arriving at the valuation of the entire issued shares of the Target Group as at the Valuation Date, as well as raised questions on areas which we require further explanation on the bases and assumptions on the parameters used in the DCF method such as expected earning streams, discount rate, beta and operating costs. We were advised by the Valuer, in which we are satisfied with their qualifications and experience, that there are three generally accepted asset valuation approaches, namely the market approach, cost approach and income approach. The Valuation Report has included all the information that Independent Shareholders should have known.

In determining the valuation of the entire issued shares of the Target Group, the Valuer considered the market approach is not appropriate to form a respective basis for opinion of value as there is neither comparable transaction nor any similar nature companies that can be used as reference. The Valuer also considered the cost approach not appropriate as it ignores the economic benefits of ownership of the business. The consolidated book value of the Target Group as of 31 December 2015 may not truly reflect the value of its equity interests as part of value will be attributed to future benefit of the Target Group derived from the income from the sales of palm kernel oil and excess power. Therefore, the Valuer considered that the DCF method under the income approach is the most appropriate valuation methodology in this particular case.

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The essential elements of the DCF method are (i) the expected earnings streams to be discounted, (ii) the discount rate and (iii) the terminal growth rate. As advised by the Valuer, the expected earnings streams are determined based on (i) the forecast annual supply and sales of a total of 20 Megawatt of excess power to PLN (comprises of 10 Megawatt by the current power unit and 10 Megawatt by the second power unit) stated on the PLN Contract and the Addendum provided by the management of the Company and the Target Group, (ii) the electricity price in 2016 arrived from the selling price according to the PLN Contract and the Addendum with a 28% increase in 2017 and an annual growth rate of 5% from 2018 onwards, and (iii) stable sales volume and selling price of crude palm kernel oil with annual growth rate of 5%. We have reviewed the forecast annual supply and sales volume of excess power provided by the management of the Company, and we note that the forecast supply and sales volume of excess power is determined based on the PLN Contract with the Addendum and the Director’s view that the Target Group will renew the power supply agreement with PLN, taking into account (i) the national policy of Indonesia to reduce national carbon dioxide emission and the Indonesian energy policy which targets to increase electricity power and to change fossil fuel consumption by utilisation of renewable energy including biomass wastes and (ii) the restriction of power generation capacity in Sumatera and East Indonesia, where the Target Group is located, and the urgency of PLN to satisfy the demand for electricity in the areas by purchasing electricity excess power. We further understand that the Target Group has the remaining power output capacity of approximately 7 Megawatt (approximately 3.5 Megawatt from each of the two power units) which can be further utilised and sold to PLN subject to further power demand from PLN. This can further increase the future sales volume of excess power despite it has not been taken into account in the forecast sales volume of excess power which is prudently assessed. Regarding the selling price of excess power, per our discussion with the Valuer, we note that (i) the selling price is forecasted to grow from IDR900 per kWh (being the contracted price of the existing PLN Contract and the Addendum) to IDR1,150 per kWh, representing a growth of approximately 28%. This is forecasted based on various public sources of information, such as the Ministry of Energy and Mineral Resources of Indonesia (“ MEMR ”) intends to set up a special entity to provide feed-in-tariff (“ FiT ”) to encourage the development of green power operation, including biomass power generation plants, and the forecasted selling price for 2017 is consistent with the unadjusted FiT amount for biomass energy source to medium-voltage grid indicated in the relevant government policies, and (ii) the Valuer has considered the annual growth rate of 5% from 2018 onwards with reference to the Consumer Price Index (“ CPI ”) year-on-year average growth rates for 5 years in Indonesia, where the Target Group is operating. The Valuer has also extracted data from Bloomberg and

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

further cross-checked to the historical growth rates of electricity prices for industry and commercial use in Indonesia and considered the annual growth rate of the selling price of 5% from 2018 onwards is not unreasonable. Regarding the annual growth rate of 5% on the selling price of crude palm kernel oil, per our discussion with the Valuer, we note that they have considered the growth rate with reference to the CPI year-on-year average growth rates for 5 years in Indonesia. Based on the aforesaid, we are of the view that forecast annual supply and sales of excess power, the forecast sales volume of crude palm kernel oil, and the growth rates applied on the selling price of excess power and crude palm kernel oil are fair and reasonable.

Regarding the cost of sales and operating expenses, we note from the Valuer that the forecast cost of sales are mainly projected based on the historical unit purchase price of Fibre used for the supply of excess power, and Palm Kernel for production of crude palm kernel oil with an annual inflation growth rate of 5%, and the expected annual direct costs with GIP. The operating expenses are mainly projected at a consistent percentage to the forecast revenue with reference to the historical operating costs and the construction progress of the second power unit. We also understand that the decrease in forecast operating expenses in terms of percentage over revenue from year 2016 to year 2017 is principally due to the completion of construction of the second power unit during year 2016, in which the corresponding consultancy fee for the second power unit’s construction can be saved in year 2017. Based on the aforesaid, we are of the view that the projection of cost of sales and operating costs is fair and reasonable.

Regarding the assumptions and parameters used for the discount rate applied in the DCF method such as risk free rate and premium rate, as advised by the Valuer, (i) since the Target Group operates the Mill, and sells its excess power and crude palm kernel oil in Indonesia in IDR, it is reasonable to adopt the yield of 10 year Indonesian Government bond as the risk free rate and adopt Indonesia’s equity risk premium, and (ii) it is reasonable to adopt the Indonesian market risk premium of 9.05% which was computed using the market risk premium of the United States (representing the return required by a rational investor investing in a mature equity market) and the country risk premium of Indonesia (which reflects the risk of Indonesian equity market over the United States). In addition, we note that specific risk premium and size premium are also included. As advised by the Valuer, we understand that, a company-specific risk premium of 3.0% is considered appropriate according to the Valuer’s professional judgment by taking into account the expected strong growth in the upcoming two years given the commencement of operation of PLTU 2 starting from September 2016 and the uncertainty of the future performance of the Target Group which may imply additional risk to the actualization of the earnings projection.

We also understand from the Valuer that, considering the relatively small size of the Target Group, the adoption of size premium of 4.22% for low-cap companies (which was referenced to the “2015 Valuation Handbook – Guide to Cost of Capital” published by Duff & Phelps Corp. Duff & Phelps Corp. is a listed company in the United States, providing global valuation and corporate finance

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

services) is considered reasonable. The application of the specific risk premium rate and small size premium could provide the applicable adjustments to the value of the Target Group in order to reflect the risk of uncertainty in the specific business operation in relation to the Target Group’s future performance and the size of the Target Group respectively. Therefore we consider that it is fair and reasonable to include such premium rates. Regarding the terminal growth rate, according the Valuation Report and per our discussion with the Valuer, we note that they have considered the terminal growth rate with reference to the CPI year-on-year average growth rates for 5 years in Indonesia, where the Target Group is operating, which is consistent with the data from Bloomberg. Therefore, we are of the view that the terminal growth rate of 5%, being applied in arriving the terminal value of the future earnings stream subsequent to the forecast period of 8 years, is fair and reasonable. Furthermore, we note that a lack of marketability discount of 20% is applied to the valuation of the Target Group, given the Target Group is a privately held company of which the value is usually less than the shares value in a publicly held company. We understand from the Valuer that, while there is no available empirical study on marketability discount for companies specifically located in Indonesia, reference has been made to “Determining Discounts for Lack of Marketability: A Companion Guide to The FMV Restricted Stock Study (2016 Edition)” published by FMV Opinions, Inc, in which the overall average discount for lack of marketability as observed based on data from July 1980 through September 2015 is 19.27%. By excluding transactions with premiums, the average discount observed is 20.89%. The Valuer have further adopted the option-pricing method to cross-check and estimate the LoMD. Under option-pricing method, the cost of put option, which can hedge the price change before the privately held shares can be sold, was considered as a basis to determine the lack of marketability discount. Based on the above and the Valuer’s analyses, the LoMD of 20% was applied. The application of lack of marketability discount is used to calculate the applicable adjustment to the value of the Target Group so as to reflect the reduced level of the marketability of the Target Group’s shares. Based on the above, we are of the view that the assumptions and parameters used for determining the discount rate and the lack of marketability discount are fair and reasonable.

In evaluating the Target Group, the Valuer concluded the fair value of the Target Group based on (i) the track record period from 2013 to 2015, (ii) the forecast of the earnings stream for the period of 8 years from 2016 to 2023, which is determined on the basis that (a) the Target Group is expected to have significant revenue growth until year 2018 and the parameters are projected for an additional five years beyond year 2018 in order to reach its stable level of operation according to the management and (b) that the adoption of forecast period of 8 years is not unreasonable based on the valuation experience of the Valuer with reference to “Valuation: The Market Approach” published by Bernstrom, Seth and (iii) the terminal growth rate being applied for the earnings stream beyond the forecast period; taking into consideration of the above mentioned, we are of the view that the income approach is suitable for evaluating the Target Group.

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

We have also reviewed the letter dated 24 August 2016 issued by Ernst & Young, Certified Public Accountants, the reporting accountants of the Company, and the letter dated 24 August 2016 issued by Euto Capital, financial adviser of the Company as set out in Appendix V(B) to the Circular in regard to their work performed on the Profit Forecast underlying the Valuation. Having considered (i) the independence, qualification and experience of the Independent Valuer and (ii) the application of the valuation methods, there is no reason for us to believe any of the information in the Valuation Report is not true or omits a material fact. Hence, after due and careful inquiry, we are of the view that the Valuation Report has been reasonably prepared, is normal in nature and that the methodology adopted for valuation is reasonable. We concurred with the Independent Valuer’s opinion and consider the valuation is a fair reference for Independent Shareholders to assess the fairness and reasonableness of the fair market value of the Target Group.

Given that (i) the Consideration is the similar to the appraised value of the Target Group by the Valuer and (ii) the valuation of the entire issued capital of the Target Group is fair and reasonable, we are of the view that the terms of the Agreement are in normal commercial terms, fair and reasonable and in the interests of the Company and the Shareholders as a whole.

Benchmark date of valuation for determining the Consideration

As mentioned in the Letter from the Board, the Directors are of the view that the fair value of the Target Group as at 31 December 2015 as valued by Avista is a reasonable benchmark for determining the Consideration as:

negotiations for the Acquisition began in April 2016 and definitive agreements were signed in June 2016, which were within six months from 31 December 2015 (the “ six-month period ”) was negotiated;
the fair value of the Target Group as at 31 December 2015 as valued by Avista already took into account the extension of the PLN Contract to cover the supply of electricity by the second power unit of the Ancillary Power Plant and the completion of the Capital Restructuring, which is a condition precedent to the completion of the SPA. The completion of the Capital Restructuring in accordance with the terms of the SPA is expected to reduce the liabilities and increase the equity of the Target Group, and thereby result in a positive impact on the financial condition of the Target Group as at 31 December 2015;
there had been no material fluctuation in the financial results and balance sheet of the Target Group (except in respect of the Capital Restructuring) during the six-month period as such operations and results were driven by its supply of electricity pursuant to the agreed terms of the subsisting PLN Contract that has a term is expected to expire in January 2017, subject to renewal;

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

the Directors have observed that the Target Group experienced short term fluctuations on the sales and the costs of raw materials during the six months ended 30 June 2016. Such fluctuations resulted in a deviation of the actual amounts of revenue, cost of sales and gross profits recorded by the Target Group from the corresponding forecasted amounts detailed in the Business Valuation Report set out in Appendix V(A) to this circular. Given the valuation of the Target Group is primarily derived by a discounted cash flow method for a forecast period of eight years, the Directors, upon careful consideration and enquiries, are of the view that the aforesaid deviation for the first six month-period resulted from short term fluctuations will not materially affect the assumptions and model parameters adopted for the valuation of the Target Group, and thus, the value of the Target Group derived from such valuation;
to the best of the Directors’ knowledge, there were no changes in material facts and circumstances relevant to the Target Group during the six-month period that would materially affect the valuation of the Target Group and which had not been taken into account in the valuation conducted by Avista; and
accordingly, the fair value of the Target Group is not expected to be subject to any material change of the Target Group during the six-month period.

Based on the above, we concur with the Directors’ view that the fair value of the Target Group as at 31 December 2015 as valued by Avista is a reasonable benchmark for determining the Consideration.

Consideration Shares:

Out of the aggregate Consideration of US$22,258,000 (equivalent to approximately HK$172.5 million), US$12,000,000 (equivalent to approximately HK$93.0 million) will be satisfied by cash and US$10,258,000 (equivalent to approximately HK$79.5 million) will be settled by issue and allotment of Consideration Shares to the Vendors at the Issue Price of HK$0.50 per Share.

We note that, according to the Annual Report, the Group had cash and cash equivalent of approximately HK$87.8 million as at 31 December 2015, which was less than the entire Consideration. As stated in the Letter from the Board, the Directors considered that the settlement of the Consideration by a combination of cash and issue of Consideration Shares would enable the Company to enlarge its equity base and maintain its liquidity position by reducing cash outflow, but without unduly diluting Independent Shareholder’s interests in the issued capital of the Company. Regarding bank financing and/or debt financing, we consider that it may (i) incur interest burden on the Group; and (ii) subject to, including but not limited to lengthy due diligence and negotiations with the banks with regards to the Group’s financial position, capital structure and cost of funding of the Group as well as the

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

prevailing market condition and the pledge of the Group’s assets. By other means of equity financing such as pro rata equity financing like rights issue or open offer, however, we consider that rights issue or open offer may be more time consuming as compared to direct placement of shares and would incur substantial costs in form of legal costs and underwriting commission. On the other hand, we note that the settlement method by way of issuance of Consideration Shares can (i) reduce cash outflow and retain more cash for general working capital and future expansion of the Group after the Acquisition; (ii) maintain proper liquidity position or financial leverage of the Group; and (iii) enlarge the equity capital base of the Company; we are of the view that the settlement of the Consideration partly by way of issuance of Consideration Shares is fair and reasonable and is in the interest of the Company and the Shareholders as a whole despite the dilution effect to the existing Shareholders, which is discussed in the paragraph headed “5. Dilution to the shareholding of the Independent Shareholders” below, upon issuance of Consideration Shares.

In order to further assess the fairness and reasonableness of the consideration of the Acquisition, we, on a best effort basis, have also selected and identified an exhaustive list of transactions relating to major acquisitions by listed issuers which constituted the issuance of consideration shares as announced by companies listed on the Main Board of the Hong Kong Stock Exchange (the “ Comparables ”) during the period from 1 January 2015 to the date of the SPA (i.e. 16 June 2016) (the “ Review Period ”), with the first comparable transaction being announced on 16 February 2015. We consider that the Review Period is appropriate to capture the recent market practice in relation to issue price of consideration shares in other major acquisitions involving issuance of consideration shares under the recent market conditions and sentiments. The Comparables are not connected transactions of the listed issuers and we consider that they are fair and representative as those respective transactions involving issue of consideration shares are entered according to arm’s length negotiation with respective independent third parties. Whilst it is reasonable to negotiate and determine the Issue Price with reference to, amongst other things, the principal activities of the Group, we do not consider it necessary to only focus on the Group’s principal activities as it would preclude us from seeing the overall comparison on the Issue Price in connected transactions generally. Given that the historical trading prices of the shares of a listed company provide relevant information on the market value of the company, when a listed company issues consideration shares to settle wholly or partly of acquisition consideration, we consider that it is reasonable to analyse the recent trading prices of the listed company to form a basis of the market value in order to assess the fairness and reasonableness of the Issue Price.

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

Our relevant findings are summarised in the table below:

			Approximate
			premium/
			(discount) of	Approximate		Approximate
			the consideration		premium/		premium/
			share issue price	(discount) of		(discount) of
			over/(to)	the consideration		the consideration
			the closing	share issue price		share issue price
			price/average		over/(to)		over/(to)
			closing price of		the closing		the closing
			shares on the date	price/average-		price/average
			of respective	closing price of		closing price of
Date of			sale and purchase	shares in the last		shares in the last
announcement	Company	Stock Code	agreement	five-trading days		ten-trading days
			(%)		(%)		(%)
2-Feb-16	China Finance Investment	875	(6.38)		(19.81)		(20.24)
	Holdings Limited
2-Feb-16	Central Wealth Financial	572	(5.3)		(8.76)		(11.91)
	Group Limited
11-Dec-15	Blue Sky Power Holdings	6828	(5.88)		(10.11)		(6.25)
	Limited
17-Nov-15	China Packaging Holdings	1439	(11.39)		(11.39)		(11.61)
	Development Limited
8-Nov-15	ASR Logistics Holdings	1803	(8.45)		(8.45)		(9.34)
	Limited
15-May-15	Sinoref Holdings Limited	1020	(31.91)		(23.99)		(27.19)
11-May-15	Skyway Securities Group	1141	(19.35)		(18.3)		(17.87)
	Limited
10-Mar-15	Ping An Securities Group	231	(9.91)		(9.5)		(9.3)
	(Holdings) Limited
16-Feb-15	Enterprise Development	1808	(15.03)		(13.56)		(11.38)
	Holdings Limited
	Maximum		(31.91)		(23.99)		(27.19)
	Minimum		(5.30)		(8.45)		(6.25)
	Mean		(12.62)		(13.76)		(13.90)
	The Company		9.89		6.84		7.76

Source: the website of the Stock Exchange

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

As demonstrated by the table above, the issue price for the Comparables represents: (i) the relevant closing prices on the date of respective sale and purchase agreements ranged from a discount 5.3% to 31.9%, with an average being a discount of 12.62%; (ii) the last five-trading days closing prices ranged from a discount of 8.5% to 23.99%, with an average being a discount of 13.76%; and (iii) the last ten-trading days closing prices ranged from a discount of 6.25% to 27.19%, with an average being a discount of 13.9%. Based on the above, we note that, (i) the premium of the Issue Price to the closing price of the Shares on the date of the SPA of approximately 9.89%, (ii) the premium of the Issue Price to the closing price of the Shares for the last five consecutive trading days immediately prior to date of SPA of approximately 6.84% and (iii) the premium of the Issue Price to the closing price of the Shares for the last ten consecutive trading days immediately prior to date of SPA of approximately 7.76% are more favourable to the Independent Shareholders as compared to the issue price of the Comparables which were at discount. As such, we are of the view that the Issue Price of the Consideration Shares is fair and reasonable.

After taking into account (i) the Consideration is similar to the Appraised Value of the Target Group based on the Valuation Report, which is prepared by an independent professional valuer; (ii) the Issue Price of the Consideration Shares is fair and reasonable; (iii) the issue of Consideration Shares can reduce cash outlay of the Group and allow the Group to retain more cash for general working capital and future expansion after the Acquisition ; and (iv) the reasons and benefits of the Acquisition, particularly the energy policy adopted by Indonesian government, the country’s focus in bioenergy, the business needs of PLN to resolve power shortage related issues, and the opportunity to invest and develop new business segments in palm kernel oil production and excess biomass power supply in Indonesia; we are of the view that the terms of the SPA and the transactions contemplated thereunder are on normal commercial terms and are fair and reasonable so far as the Independent Shareholders are concerned.

4. Possible financial effects of the Acquisition

I. Earnings

Upon Completion, the Target Group will become a subsidiary of the Company and the results of the Target Companies will be consolidated in the accounts of the Group. As disclosed in the Annual Report, the Group recorded profit attributable to owners of the parent of approximately HK$39.5 million for the year ended 31 December 2015. Despite the Target Group has recorded net loss of HK$4.9 million and HK$2.8 million for the year ended 31 December 2015 and the six months ended 30 June 2016, as disclosed in the Letter of the Board, the profit margin of the Target Group is expected to be improved following the PLN Contract and the Addendum entered into with PLN in relation to the supply of excess power.

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

II. Net assets

Upon Completion, the Target Group will become a subsidiary of the Company and the assets and liabilities of the Target Group will be consolidated in the accounts of the Group. As disclosed in the Annual Report, the Group had net assets of approximately of approximately HK$515.1 million as at 31 December 2015. According to the audited financial information of the Target Group, the consolidated net assets of the Target Group was approximately HK$104.2 million as at 30 June 2016. Based on the pro forma financial statements of the Enlarged Group set out in Appendix III to the Circular (the “ Pro Forma Statements ”), on the assumption that the Acquisition was completed on 31 December 2015, the Enlarged Group would have recorded net assets of approximately HK$586.6 million as at 31 December 2015, while the net assets per share as at 31 December 2015 would have been slightly decreased from HK$0.54 per share (based on the net assets as at 31 December 2015 divided by number of shares as at the Latest Practicable Date) to HK$0.53 per share (based on the unaudited pro forma net assets as at 31 December 2015 divided by number of shares immediately after Completion and the issue and allotment of the Consideration Shares).

III. Working capital

As disclosed in the Annual Report, the Group had cash and cash equivalents (including fixed deposits with bank and pledged bank deposits) of approximately HK$87.8 million as at 31 December 2015. According to the audited financial information of the Target Group, the consolidated cash and bank balances of the Target Group was approximately HK$13.8 million as at 30 June 2016. The Consideration amounts to approximately US$22,258,000 (equivalent to approximately HK$172.5 million), where (i) US$12,000,000 (equivalent to approximately HK$93.0 million) being settled by cash is anticipated to be funded by internal funds comprising unused proceeds from the IPO and the Top-up Placing cash proceeds from the liquidation of available-forsale assets acquired by the Company using proceeds from the IPO and Top-up Placing; and (ii) US$10,258,000 (equivalent to approximately HK$79.5 million) will be settled by the issue of the Consideration Shares. Based on the Pro Forma Statements, on the assumption that the Acquisition was completed on 31 December 2015, the Enlarged Group would have cash and cash equivalent of approximately HK$6.1 million as at 31 December 2015.

IV. Conclusion

After primarily taking into account (i) the Group can consolidate the results of the Target Group, the of which recorded positive net assets for the year ended 30 June 2016; (ii) the Director’s view on the expected improvement of profit margin, taking into account the commencement of the second power unit with an estimated power output of 15 Megawatt and the PLN Contract and the Addendum entered into between the Target Group and PLN to supply additional 10 Megawatts of excess power to be generated by the second power unit to PLN; (iii) the Consideration is partly settled by the issue of Consideration Shares which enables the Group to minimise the cash outflow for the

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

Acquisition and maintain sufficient working capital for the Group’s operation; (iv) the terms of the SPA and the transactions contemplated thereunder are fair and reasonable; and (v) the reasons and benefits of the Acquisition, particularly the energy policy adopted by Indonesian government, the country’s focus in bioenergy, the business needs of PLN to resolve power shortage related issues, and the opportunity to invest and develop new business segments in palm kernel oil production and excess biomass power supply in Indonesia, we consider the possible financial effects of the Acquisition to be acceptable.

5. Changes in the shareholding structure of the Company as a result of the acquisition

The following table illustrates the shareholdings in the Company (i) as at the Latest Practicable Date, and (ii) immediately after the Completion and the issue and allotment of the Consideration Shares, assuming there being no other change in the shareholding structure and share capital of the Company from the Latest Practicable Date up to the date of issue and allotment of the Consideration Shares:

Everbest Environmental (1) Hightop (2) Carlton Asia (3) Wealthy Sea (4) Fusion Joy (5) Public shareholders Total	As at the Latest Practicable Date Number of Approximate Shares % 375,000,000 39.39 5,790,000 0.61 — — 225,000,000 23.63 — — 346,210,000 36.37 952,000,000 100.00	Immediately after Completion and the issue and allotment of the Consideration Shares Number of Approximate Shares % 375,000,000 33.75 5,790,000 0.52 15,700,000 1.41 225,000,000 20.25 143,300,000 12.90 346,210,000 31.16 1,111,000,000 100.00	Immediately after Completion and the issue and allotment of the Consideration Shares Number of Approximate Shares % 375,000,000 33.75 5,790,000 0.52 15,700,000 1.41 225,000,000 20.25 143,300,000 12.90 346,210,000 31.16 1,111,000,000 100.00
			100.00

Notes:

(1) Everbest Environmental is owned as to 50% by Ms. Wong, 30% by Ms. Chan and 20% by Mr. Chan.
(2) Hightop is owned as to 50% by each of Ms. Wong and Mr. Chan Chun Keung, the husband of Ms. Wong and the father of Mr. Chan and Mr. Brian Chan.
(3) Carlton Asia is indirectly owned as to 25% by each of Mr. Chan, Mr. Brian Chan, Ms. Chan and Ms. Wong.
(4) Wealthy Sea is owned as to 90% by Mr. Chau and 10% by Ms. Wong Mei Ling, the wife of Mr. Chau.
(5) Fusion Joy is legally and wholly owned by First Pacific (Asia) Pte. Ltd. as trustee, on behalf of Mr. Fadjar Suhendra and Mr. Sugih Suhendra (as beneficial owners) as to 60% and 40%, respectively.

The Acquisition will not result in a change in control of the Company.

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

As shown above, the percentage shareholding interests of existing public Shareholders will be diluted from approximately 36.4% as at the Latest Practicable Date to approximately 31.2% upon issuance of the Consideration Shares. Taking into consideration that (i) optimistic outlook on the demand of electricity in Indonesia; (ii) the valuation of the Target Group is fair and reasonable and the Consideration is the same as the appraised value of the Target Group by the Valuer; (iii) the Director’s view on the expected improvement of profit margin, taking into account the commencement of the second power unit with an estimated power output of 15 Megawatts and the PLN Contract and the Addendum entered into between the Target Group and PLN to supply additional 10 Megawatts of excess power to be generated by the second power unit to PLN; and (iv) no material adverse impact on the net assets value, cash position and working capital of the Group, we are of the view that the extent of dilution to the Independent Shareholders is acceptable so far as the Independent Shareholders are concerned.

RECOMMENDATION

Having considered the above principal factors and reasons, we are of the view that the entering into of the SPA and the transactions contemplated thereunder is in line with the corporate strategy of the Group to expand and diversify into other green businesses, and is in the interests of the Company and the Shareholders as a whole, though it is not in the ordinary and usual course of business of the Group. We are also of the view that the terms of the SPA and the transactions contemplated thereunder are on normal commercial terms and are fair and reasonable so far as the Independent Shareholders are concerned. Accordingly, we advise the Independent Shareholders, as well as the Independent Board Committee to recommend the Independent Shareholders, to vote in favour of the ordinary resolution to be proposed at the EGM to approve the SPA and the transactions contemplated thereunder.

Yours faithfully, For and on behalf of Southwest Securities (HK) Capital Limited

Steven Lo

Managing Director

Note: Mr. Steven Lo has been a responsible officer of Type 6 (advising on corporate finance) regulated activity under the Securities and Futures Ordinance (Chapter 571 of the Laws of Hong Kong) since 2006. He has participated in the provision of independent financial advisory services for various connected transactions involving companies listed in Hong Kong

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FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

1. THREE-YEAR AUDITED FINANCIAL INFORMATION

The audited financial information of the Group for FY2013 was disclosed in the Prospectus and that for FY2014 and FY2015 was disclosed in the annual reports of the Company for the years ended 31 December 2014 and 2015, which were published on both the website of the Stock Exchange (http://www.hkex.com.hk) and the website of the Company (http://www. ellhk.com).

2. MATERIAL ACQUISITIONS

Subsequent to 31 December 2015, the date to which the latest published audited financial statements of the Company were made up, the Group has not acquired or agreed to acquire or is proposing to acquire an interest in the share capital of the companies (excluding the Target Group) and assets whose profits or assets make, will make or are expected to make a material contribution to the figures in the next published financial statements of the Group.

3. INDEBTEDNESS

As at 30 June 2016, being the latest practicable date for the purpose of this statement of indebtedness of the Enlarged Group prior to the publication of this circular, the Enlarged Group had outstanding bank borrowings, shareholder’s loan and non-controlling shareholders’ loans as follows:

	As at 30 June 2016	As at 30 June 2016
		*HK$’000*
Bank borrowing — unsecured and unguaranteed		29,168
Bank borrowing — secured and unguaranteed		3,792
Bank borrowing — secured and guaranteed		53,306
Shareholder’s loan — unsecured and unguaranteed		6,474
Non-controlling shareholders’ loans — unsecured and unguaranteed		4,576
		97,316

As at 30 June 2016, the bank borrowing of HK$53,306,000 was secured by certain property, plant and equipment of the Target Group, 100% equity interest of the Target Company’s subsidiary, unlimited personal guarantees provided by Mr. Fadjar Suhendra and Mr. Sugih Suhendra, and an unlimited corporate guarantee provided by PT. Growth Sumatra Industry which is a company controlled by Mr. Fadjar Suhendra.

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FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

As at 30 June 2016, the bank borrowing of HK$3,792,000 was secured by the Group’s land use right and properties used in the operation of the Group’s wastewater treatment business with a total construction cost of HK$6,047,000 which had been charged to the cost of sales in profit or loss in the prior years of constuction in accordance with HK(IFRIC)-Int 12.

Save as dislosed above in the paragraph headed “Indebtedness” in this appendix and apart from intra-group liabilities and normal trade payables in the ordinary course of the Enlarged Group’s business, as at the close of business on 30 June 2016, our Directors confirm that the Enlarged Group did not have any debt securities issued and outstanding, or authorised or otherwise created but unissued, or term loans, or other borrowings or indebtedness in the nature of borrowing including bank overdrafts and liabilities under acceptances (other than normal trade bills) or acceptance credits or hire purchase commitments, or mortgages and charges, and there were no contingent liabilities nor guarantees.

4. FINANCIAL AND TRADING PROSPECTS

Our Company, a wastewater treatment services provider in Jiangsu Province, the PRC, currently has three wastewater treatment facilities. With increasing challenges and opportunities in the market, our Company strives to maintain its excellent business performance and maximize its competitiveness. Aside from upgrading its facilities, it also proactively looks for business expansions with new sewage treatment projects, as well as other environmental protection projects, locally and abroad. The Acquisition is not only an opportunity for our Company to expand its business into Indonesia, but also a means for it to diversify its business portfolio and revenue streams, and thereby enhance shareholder value.

In respect of the proposed acquisition of the Target Group, the Board believes that such acquisition represents an excellent opportunity for the Group to diversify its business lines into the energy industry and is in line with the Group’s intention to develop the Group into a conglomerate. The Board further believes that such diversification into the energy industry would allow the Group to expand its operations and revenue streams, thereby enhancing shareholder value.

The operation of the second power unit of the Ancillary Power Plant is expected to be in commercial production latest by September 2016 and will generate additional revenue for the Target Group through supplying an additional 10 Megawatt of excess power per annum to PLN under the PLN Contract as amended by the Addendum.

Upon Completion, we shall perform a detailed review of the financial and operational management of the Target Group to develop and implement more effective cost control measures and to improve its profit margins. The management will also conduct a detailed review on the existing development plans to formulate detailed long term strategies for its future business development with the Target Group.

To the best of the Directors’ knowledge, information and belief and having made all reasonable enquiries, there are no power plants in the vicinity of the Ancillary Power Plant that operates power plants fueled by biomass that will be in a position to compete with it for the supply of bioenergy generated electricity to PLN. Based on RPSL’s existing business

– I-2 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

relationship with PLN, the ongoing demand for bioenergy and the lack of competition in the area, our Directors are of the view that RPSL’s source of income from sales of electricity to PLN is sustainable, and there is no obstacle for renewing the PLN Contract upon its expiry on a yearon-year basis, thereby continuing its sales of excess electricity to PLN on an ongoing basis.

Following the Completion, the management of the Company will continue to explore sound investment opportunities and potential acquisitions in environmental protection and green energy businesses in the PRC and Indonesia that may have synergies with the Enlarged Group’s business and operations. The Enlarged Group will make announcements in accordance with the Listing Rules as and when further acquisitions or investments are made.

5. MATERIAL ADVERSE CHANGES

As at the Latest Practicable Date, except as disclosed in the announcement of the Company dated 12 August 2016, the Directors were not aware of any material adverse changes in the financial or trading position of the Group since 31 December 2015, the date to which the latest published audited consolidated financial statements of the Group were made up.

6. WORKING CAPITAL

The cash portion of the Consideration for entire issued shares of Weal Union pursuant to the SPA is US$12.0 million (equivalent to approximately HK$93 million). Upon Completion, the Enlarged Group will also need to assume the financial obligations of the Target Group. The net current liabilities of the Target Group amounted to approximately HK$58.7 million as at 30 June 2016.

The Group has a healthy balance sheet and liquidity with cash and cash equivalents of approximately HK$87.8 million and liquid available-for-sale assets of HK$127.9 million as at 31 December 2015. The Group will continue to implement prudent investment and financial management principles in identifying sound business development opportunities to expand its business scope. Concurrently, the Group will also implement effective risk management and financial control measures in all its business activities.

Having considered the funding requirements for the existing wastewater treatment operations of the Group, the payment of the cash portion of the Consideration, and the current liabilities of the Target Group, the Directors are, after due and careful enquiry, of the opinion that, taking into account the financial resources available to the Group, including the internal resources that comprise cash and cash equivalents, available-for-sale investments, and banking facilities currently available for the operations of the existing wastewater treatment operations of the Group, the Enlarged Group will have sufficient working capital for its present requirements, that is for at least the next twelve months from the date of this circular.

In the event that any additional capital requirement arises for further acquisition or expansion of the businesses of the Enlarged Group, the Directors are confident that they will be able to obtain additional working capital through alternative fund raising exercises such as equity financing and/or obtaining loans from the Company’s intermediate holding companies and/or other parties with the financial support from the Company’s controlling shareholder.

– I-3 –

APPENDIX II ACCOUNTANTS’ REPORT ON THE TARGET GROUP

The following is the text of a report from the reporting accountants of our Company, Ernst & Young, Certified Public Accountants, Hong Kong prepared for the purpose of incorporation in this circular.

==> picture [86 x 70] intentionally omitted <==

22nd Floor CITIC Tower 1 Tim Mei Avenue Central Hong Kong 24 August 2016

The Board of Directors ELL Environmental Holdings Limited

Dear Sirs,

We set out below our report on the financial information of Weal Union Limited (the “ Target Company ”) and its subsidiary (hereinafter collectively referred to as the “ Target Group ”) comprising the consolidated statements of comprehensive income, the consolidated statements of changes in equity, the consolidated statements of cash flows for each of the years ended 31 December 2013, 2014 and 2015 and the six months ended 30 June 2016 (the “ Relevant Periods ”), and the consolidated statements of financial position of the Target Group as at 31 December 2013, 2014 and 2015 and 30 June 2016, together with the notes thereto (the “ Financial Information ”), and the consolidated statement of comprehensive income, consolidated statement of changes in equity, consolidated statement of cash flows of the Target Group for the six months ended 30 June 2015 (the “ Interim Comparative Information ”), prepared on the basis of presentation set out in note 2.1 of Section II below, for inclusion in the circular of ELL Environmental Holdings Limited (the “ Company ”) dated 24 August 2016 (the “ Circular ”) in connection with the proposed acquisition of 100% equity interests in the Target Company (the “ Proposed Acquisition ”).

The Target Company was incorporated as a limited liability company on 22 February 2011 in Hong Kong. The principal activity of the Target Company is investment holding. Particulars of its subsidiary are set out in note 1 of Section II below.

The Target Group has adopted 31 December as its financial year end date. The statutory financial statements of the Target Company for the years ended 31 December 2013, 2014 and 2015 were prepared in accordance with Hong Kong Financial Reporting Standards (“ HKFRSs ”), (which include all Hong Kong Financial Reporting Standards, Hong Kong Accounting Standards (“ HKASs ”) and Interpretations) issued by the Hong Kong Institute of Certified Public Accountants (“ HKICPA ”), accounting principles generally accepted in Hong Kong and the Hong Kong Companies Ordinance and were audited by LKY China, certified public accountants registered in Hong Kong, for the years ended 31 December 2013 and 2014 and by us for the year ended 31 December 2015. The Target Company’s subsidiary was registered in the Republic of Indonesia (“ Indonesia ”) and its statutory financial statements for the years ended 31 December 2013, 2014 and 2015 were prepared in accordance with Indonesian Financial Accounting Standards and were audited by Doli, Bambang, Sulistiyanto, Dadang & Ali, Registered Public Accountants in Indonesia.

– II-1 –

ACCOUNTANTS’ REPORT ON THE TARGET GROUP

APPENDIX II

For the purpose of this report, the directors of the Target Group have prepared the consolidated financial statements of the Target Group (the “ Underlying Financial Statements ”) for the Relevant Periods in accordance with HKFRSs. The Underlying Financial Statements for each of the years ended 31 December 2013, 2014 and 2015 and the six months ended 30 June 2016 were audited by us in accordance with Hong Kong Standards on Auditing issued by the HKICPA.

The Financial Information set out in this report has been prepared from the Underlying Financial Statements with no adjustments made thereon.

TARGET GROUP’S DIRECTORS’ RESPONSIBILITY

The directors of the Target Group are responsible for the preparation of the Underlying Financial Statements, the Financial Information and the Interim Comparative Information that give a true and fair view in accordance with HKFRSs, and for such internal control as the directors of the Target Group determine is necessary to enable the preparation of the Underlying Financial Statements, the Financial Information and the Interim Comparative Information that are free from material misstatement, whether due to fraud or error.

REPORTING ACCOUNTANTS’ RESPONSIBILITY

It is our responsibility to form an independent opinion and a review conclusion on the Financial Information and the Interim Comparative Information, respectively, and to report our opinion and review conclusion thereon to you.

For the purpose of this report, we have examined the Underlying Financial Statements and have carried out procedures on the Financial Information in accordance with Auditing Guideline 3.340 Prospectuses and the Reporting Accountant issued by the HKICPA.

We have also performed a review of the Interim Comparative Information in accordance with Hong Kong Standard on Review Engagements 2410 Review of Interim Financial Information Performed by the Independent Auditor of the Entity issued by the HKICPA. A review consists principally of making enquires of management and applying analytical procedures to the financial information and, bases thereon, assessing whether the accounting policies and presentation have been consistently applied unless otherwise disclosed. A review excludes audit procedures such as tests of controls and verification of assets and liabilities and transactions. It is substantially less in scope than an audit and therefore provides a lower level of assurance than an audit. Accordingly, we do not express an opinion on the Interim Comparative Information.

– II-2 –

ACCOUNTANTS’ REPORT ON THE TARGET GROUP

APPENDIX II

OPINION IN RESPECT OF THE FINANCIAL INFORMATION

In our opinion, for the purpose of this report, the Financial Information gives a true and fair view of the financial position of the Target Group as at 31 December 2013, 2014 and 2015 and 30 June 2016 and of the consolidated financial performance and cash flows of the Target Group for each of the Relevant Periods.

REVIEW CONCLUSION IN RESPECT OF THE INTERIM COMPARATIVE INFORMATION

Based on our review which does not constitute an audit, for the purpose of this report, nothing has come to our attention that causes us to believe that the Interim Comparative Information is not prepared, in all material respects, in accordance with the same basis adopted in respect of the Financial Information.

– II-3 –

ACCOUNTANTS’ REPORT ON THE TARGET GROUP

APPENDIX II

I. FINANCIAL INFORMATION

(A) CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

Notes
REVENUE
5
Cost of sales
Gross profit/(loss)
Other income and gains
5
Administrative expenses
Finance costs
7
LOSS BEFORE TAX
6
Income tax credit
8
LOSS FOR THE YEAR/PERIOD

Six months
Year ended 31 December
ended 30 June
2013
2014
2015
2015
2016
HK$’000
HK$’000
HK$’000
HK$’000
HK$’000
(Unaudited)
16,993
4,572
27,254
9,305
11,988
(16,110)
(14,245)
(24,475)
(11,497)
(11,547)
883
(9,673)
2,779
(2,192)
441
821
411
408
296
344
(1,189)
(529)
(5,567)
(2,780)
(2,862)
(2,131)
(5,879)
(4,163)
(2,270)
(1,650)
(1,616)
(15,670)
(6,543)
(6,946)
(3,727)
434
3,961
1,669
1,757
947
(1,182)
(11,709)
(4,874)
(5,189)
(2,780)

– II-4 –

APPENDIX II ACCOUNTANTS’ REPORT ON THE TARGET GROUP

I. FINANCIAL INFORMATION (continued)

(A) CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (continued)

				Six months
	Year	ended 31 December		ended 30 June
	2013	2014	2015	2015 2016
Note	HK$’000	HK$’000	HK$’000	HK$’000 HK$’000
				(Unaudited)

OTHER COMPREHENSIVE INCOME Other comprehensive income to be reclassified to profit or loss in subsequent periods: Exchange differences on translation of financial statements of an entity not using Hong Kong dollar (“HK$”) as functional currency Other comprehensive income not to be reclassified to profit or loss in subsequent periods: Actuarial gain/(loss) on a defined benefit plan, net of tax OTHER COMPREHENSIVE INCOME FOR THE YEAR/PERIOD, NET OF TAX TOTAL COMPREHENSIVE INCOME FOR THE YEAR/PERIOD Loss attributable to: Owners of the Target Company Non-controlling interests 22 Total comprehensive income attributable to: Owners of the Target Company Non-controlling interests	(9,163) 3 (9,160) (10,342) (1,123) (59) (1,182) (9,682) (660) (10,342)	(2,670) (1) (2,671) (14,380) (11,124) (585) (11,709) (13,781) (599) (14,380)	(9,197) 15 (9,182) (14,056) (4,631) (243) (4,874) (13,650) (406) (14,056)	(5,720) 7 (5,713) (10,902) (4,929) (260) (5,189) (10,529) (373) (10,902)	2,920 —
					2,920
					140

					(2,641) (139)
					(2,780)

					109 31
					140

– II-5 –

ACCOUNTANTS’ REPORT ON THE TARGET GROUP

APPENDIX II

I. FINANCIAL INFORMATION (continued)

(B) CONSOLIDATED STATEMENTS OF FINANCIAL POSITION

Notes NON-CURRENT ASSETS Property, plant and equipment 9 Prepayment for purchases of items of property, plant and equipment 12 Deferred tax assets 18 Total non-current assets CURRENT ASSETS Inventories 10 Trade receivables 11 Prepayments and other receivables 12 Cash and bank balances 13 Total current assets CURRENT LIABILITIES Trade payables 14 Other payables and accruals 15 Interest-bearing bank and other borrowings 16 Due to related parties 17 Total current liabilities NET CURRENT LIABILITIES TOTAL ASSETS LESS CURRENT LIABILITIES NON-CURRENT LIABILITIES Defined benefit liability 19 Net assets/(liabilities)	As at 31 December 2013 2014 2015 HK$’000 HK$’000 HK$’000 166,035 165,936 148,985 — 378 — 780 4,558 5,705 166,815 170,872 154,690 307 1,197 721 3,362 174 2,162 189 579 455 10,818 9,152 7,842 14,676 11,102 11,180 2,902 518 4,021 2,318 1,322 736 110,427 87,826 60,308 75,369 116,180 31,364 191,016 205,846 96,429 (176,340) (194,744) (85,249) (9,525) (23,872) 69,441 11 44 88 (9,536) (23,916) 69,353	As at 30 June 2016 HK$’000 156,074 — 6,915 162,989 737 2,118 573 13,794 17,222 883 468 53,306 21,243 75,900 (58,678) 104,311 136 104,175

– II-6 –

APPENDIX II ACCOUNTANTS’ REPORT ON THE TARGET GROUP

I. FINANCIAL INFORMATION (continued)

(B) CONSOLIDATED STATEMENTS OF FINANCIAL POSITION (continued)

Notes EQUITY/(DEFICIENCY IN ASSETS) Equity/(deficiency in assets) attributable to owners of the Target Company Share capital 20 Reserves 21 Non-controlling interests 22 Total equity/(deficiency in assets)	As at 31 December 2013 2014 2015 HK$’000 HK$’000 HK$’000 — — — (11,815) (25,596) 68,079 (11,815) (25,596) 68,079 2,279 1,680 1,274 (9,536) (23,916) 69,353	As at 30 June 2016 HK$’000 — 102,870
		102,870 1,305
		104,175

– II-7 –

ACCOUNTANTS’ REPORT ON THE TARGET GROUP

APPENDIX II

I. FINANCIAL INFORMATION (continued)

(C) CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

Attributable to the owner of the Target Company

At 1 January 2013 Loss for the year Other comprehensive income for the year: Exchange differences on translation of financial statements of an entity not using HK$ as functional currency Actuarial gain on a defined benefit plan Total comprehensive income for the year At 31 December 2013 and 1 January 2014 Loss for the year Other comprehensive income for the year: Exchange differences on translation of financial statements of an entity not using HK$ as functional currency Actuarial loss on a defined benefit plan Total comprehensive income for the year At 31 December 2014	Defined Exchange Share Other benefit fluctuation Accumulated capital reserve plan reserve losses HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 (note 20) (note 21(i)) (note 21(ii)) (note 21(iii)) — — — (637) (1,496) — — — — (1,123) — — — (8,562) — — — 3 — — — — 3 (8,562) (1,123) — — 3 (9,199) (2,619) — — — — (11,124) — — — (2,656) — — — (1) — — — — (1) (2,656) (11,124) — — 2 (11,855) (13,743)	Total Non- equity/ controlling (deficiency Total interests in assets) HK$’000 HK$’000 HK$’000 (2,133) 2,939 806 (1,123) (59) (1,182) (8,562) (601) (9,163) 3 — 3 (9,682) (660) (10,342) (11,815) 2,279 (9,536) (11,124) (585) (11,709) (2,656) (14) (2,670) (1) — (1) (13,781) (599) (14,380) (25,596) 1,680 (23,916)	Total Non- equity/ controlling (deficiency Total interests in assets) HK$’000 HK$’000 HK$’000 (2,133) 2,939 806 (1,123) (59) (1,182) (8,562) (601) (9,163) 3 — 3 (9,682) (660) (10,342) (11,815) 2,279 (9,536) (11,124) (585) (11,709) (2,656) (14) (2,670) (1) — (1) (13,781) (599) (14,380) (25,596) 1,680 (23,916)
			(10,342)
			(9,536) (11,709) (2,670) (1)
			(14,380)
			(23,916)

– II-8 –

ACCOUNTANTS’ REPORT ON THE TARGET GROUP

APPENDIX II

I. FINANCIAL INFORMATION (continued)

(C) CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (continued)

Attributable to the owner of the Target Company

At 1 January 2015 Loss for the year Other comprehensive income for the year: Exchange differences on translation of financial statements of an entity not using HK$ as functional currency Actuarial gain on a defined benefit plan Total comprehensive income for the year Capitalisation of shareholders’ loans (note 17(a)) At 31 December 2015 and 1 January 2016 Loss for the period Other comprehensive income for the period: Exchange differences on translation of financial statements of an entity not using HK$ as functional currency Total comprehensive income for the period Shareholder’s capital contributions At 30 June 2016	Defined Exchange Share Other benefit fluctuation Accumulated capital reserve plan reserve losses HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 (note 20) (note 21(i)) (note 21(ii)) (note 21(iii)) — — 2 (11,855) (13,743) — — — — (4,631) — — — (9,033) — — — 14 — — — — 14 (9,033) (4,631) — 107,325 — — — — 107,325 16 (20,888) (18,374) — — — — (2,641) — — — 2,750 — — — — 2,750 (2,641) — 34,682 — — — — 142,007 16 (18,138) (21,015)	Total Non- equity/ controlling (deficiency Total interests in assets) HK$’000 HK$’000 HK$’000 (25,596) 1,680 (23,916) (4,631) (243) (4,874) (9,033) (164) (9,197) 14 1 15 (13,650) (406) (14,056) 107,325 — 107,325 68,079 1,274 69,353 (2,641) (139) (2,780) 2,750 170 2,920 109 31 140 34,682 — 34,682 102,870 1,305 104,175	Total Non- equity/ controlling (deficiency Total interests in assets) HK$’000 HK$’000 HK$’000 (25,596) 1,680 (23,916) (4,631) (243) (4,874) (9,033) (164) (9,197) 14 1 15 (13,650) (406) (14,056) 107,325 — 107,325 68,079 1,274 69,353 (2,641) (139) (2,780) 2,750 170 2,920 109 31 140 34,682 — 34,682 102,870 1,305 104,175
			(14,056)
			107,325
			69,353 (2,780) 2,920
			140
			34,682
			104,175

– II-9 –

ACCOUNTANTS’ REPORT ON THE TARGET GROUP

APPENDIX II

I. FINANCIAL INFORMATION (continued)

(C) CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (continued)

At 1 January 2015 Loss for the period (unaudited) Other comprehensive income for the period: Exchange differences on translation of financial statements of an entity not using HK$ as functional currency (unaudited) Actuarial gain on a defined benefit plan (unaudited) Total comprehensive income for the period (unaudited) At 30 June 2015 (unaudited)	Attributable to the owner of the Target Company	Non- controlling Total interests HK$’000 HK$’000 (25,596) 1,680 (4,929) (260) (5,607) (113) 7 — (10,529) (373) (36,125) 1,307	Total deficiency in assets HK$’000 (23,916) (5,189) (5,720) 7
	Defined Exchange Share Other benefit fluctuation Accumulated capital reserve plan reserve losses HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 (note 20) (note 21(i)) (note 21(ii)) (note 21(iii)) — — 2 (11,855) (13,743) — — — — (4,929) — — — (5,607) — — — 7 — — — — 7 (5,607) (4,929) — — 9 (17,462) (18,672)
			(10,902)
			(34,818)

These reserve accounts comprise the consolidated reserves of HK$(11,815,000), HK$(25,596,000), HK$68,079,000 and HK$102,870,000 in the consolidated statements of financial position as at 31 December 2013, 2014 and 2015 and 30 June 2016, respectively.

– II-10 –

ACCOUNTANTS’ REPORT ON THE TARGET GROUP

APPENDIX II

I. FINANCIAL INFORMATION (continued)

(D) CONSOLIDATED STATEMENTS OF CASH FLOWS

Notes
CASH FLOWS FROM
OPERATING ACTIVITIES
Loss before tax
Adjustments for:
Bank interest income
5
Finance costs
7
Depreciation
6
Provision for defined
benefit plan
6
Decrease/(increase) in inventories
Decrease/(increase) in trade
receivables
Decrease/(increase) in prepayments
and other receivables
Increase/(decrease) in trade payables
Increase/(decrease) in other payables
and accruals
Increase/(decrease) in amounts due
to related parties
Net cash flows from/(used in)
operating activities
CASH FLOWS FROM
INVESTING ACTIVITIES
Interest received
Purchases of items of property,
plant and equipment
Net cash flows used in
investing activities

Six months
Year ended 31 December
ended 30 June
2013
2014
2015
2015
2016
HK$’000
HK$’000
HK$’000
HK$’000
HK$’000
(Unaudited)
(1,616)
(15,670)
(6,543)
(6,946)
(3,727)
(152)
(189)
(152)
(79)
(65)
2,131
5,879
4,163
2,270
1,650
2,671
5,608
5,052
2,586
2,523
7
34
69
36
43
3,041
(4,338)
2,589
(2,133)
424
(360)
(935)
365
(140)
16
(3,942)
3,270
(2,070)
(4,097)
138
(203)
(411)
67
67
(96)
3,403
(2,438)
3,670
1,787
(3,272)
1,040
(847)
(317)
169
(192)
19,108
(19,863)
5,815
2,051
1,269
22,087
(25,562)
10,119
(2,296)
(1,713)
152
189
152
79
65
(37,304)
(4,148)
(3,014)
(1,436)
(2,052)
(37,152)
(3,959)
(2,862)
(1,357)
(1,987)

– II-11 –

ACCOUNTANTS’ REPORT ON THE TARGET GROUP

APPENDIX II

I. FINANCIAL INFORMATION (continued)

(D) CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)

Notes
CASH FLOWS FROM
FINANCING ACTIVITIES
Advance from shareholders
Advance from/(repayment to)
non-controlling interests
Advance from related parties
Proceeds from shareholder’s
capital contributions
Repayment of bank and other
borrowings
Interest paid
Net cash flows from/(used in)
financing activities
NET INCREASE/(DECREASE)
IN CASH AND CASH
EQUIVALENTS
Cash and cash equivalents
at beginning of year/period
Effect of foreign exchange rate
changes, net
CASH AND CASH EQUIVALENTS
AT END OF YEAR/PERIOD

Six months
Year ended 31 December
ended 30 June
2013
2014
2015
2015
2016
HK$’000
HK$’000
HK$’000
HK$’000
HK$’000
(Unaudited)
41,128
33,630
20,886
17,064
6,474
(50)
27,750
(1,044)
—
(19,012)
—
21
38
2
2
—
—
—
—
34,682
(3,749)
(21,724)
(19,255)
(9,908)
(9,593)
(14,189)
(11,702)
(8,270)
(4,551)
(3,326)
23,140
27,975
(7,645)
2,607
9,227
8,075
(1,546)
(388)
(1,046)
5,527
4,961
10,818
9,152
9,152
7,842
(2,218)
(120)
(922)
(627)
425
10,818
9,152
7,842
7,479
13,794

– II-12 –

APPENDIX II ACCOUNTANTS’ REPORT ON THE TARGET GROUP

II. NOTES TO FINANCIAL INFORMATION

1. CORPORATE AND TARGET GROUP INFORMATION

The Target Company is a limited liability company incorporated in Hong Kong. The registered office of the Target Company is located at Units 1-3, 11th Floor, Westlands Centre, 20 Westlands Road, Hong Kong.

The Target Company is an investment holding company. During the Relevant Periods, the Target Group was principally involved in the production and sale of palm kernel oil and generation and supply of electricity in Indonesia.

In the opinion of the Directors, Fusion Joy Holdings Incorporation (“Fusion Joy”), a company incorporated in the British Virgin Islands, is the immediate holding company of the Target Company, and the ultimate holding company of the Target Company is First Pacific (Asia) Pte Ltd. (“First Pacific”) which is registered in the Independent State of Samoa.

Information about subsidiary

Particulars of the Target Company’s subsidiary are as follows:

			Percentage
			of equity
	Place of		directly
	incorporation	Registered	attributable to the	Principal
Company name	and business	share capital	Target Company	activities
PT. Rimba Palma	Indonesia	IDR75,000,000,000	95	Production and
Sejahtera Lestari				sale of palm
(“RPSL”)				kernel oil and
				generation and
				supply of
				electricity

2.1 BASIS OF PRESENTATION

As at 30 June 2016, the Target Group had net current liabilities of HK$58,678,000. Mr. Chan Kwan, Mr. Chan Pak Lam, Ms. Wong Shu Ying and Ms. Judy Chan, being beneficial shareholders with a 20% equity interest in aggregate in the Target Company, have agreed to provide financial support to the Target Group during the twelve months ending 30 June 2017 or up to the completion of the Proposed Acquisition, if earlier. The Company has agreed to provide financial support to the Target Group upon the completion of the Proposed Acquisition. The directors of the Target Company are of the opinion that based on the above, the Target Group can meet its liabilities as and when they fall due, and accordingly, they have prepared the Financial Information on a going concern basis.

– II-13 –

ACCOUNTANTS’ REPORT ON THE TARGET GROUP

APPENDIX II

II. NOTES TO FINANCIAL INFORMATION (continued)

2.2 BASIS OF PREPARATION

The Financial Information has been prepared in accordance with HKFRSs (which include all Hong Kong Financial Reporting Standards, HKASs and Interpretations) issued by the HKICPA and accounting principles generally accepted in Hong Kong.

All HKFRSs effective for the accounting period commencing from 1 January 2016, together with the relevant transitional provisions, have been early adopted by the Target Group in the preparation of the Financial Information throughout the Relevant Periods.

The Financial Information has been prepared under the historical cost convention and is presented in Hong Kong dollars (“HK$”) and all values are rounded to the nearest thousand except when otherwise indicated.

Basis of consolidation

The Financial Information includes the financial statements of the Target Company and its subsidiary for the years ended 31 December 2013, 2014 and 2015 and the six months ended 30 June 2016. A subsidiary is an entity (including a structured entity), directly or indirectly, controlled by the Target Company. Control is achieved when the Target Group is exposed, or has rights, to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee (i.e., existing rights that give the Target Group the current ability to direct the relevant activities of the investee).

When the Target Company has, directly or indirectly, less than a majority of the voting or similar rights of an investee, the Target Group considers all relevant facts and circumstances in assessing whether it has power over an investee, including:

(a) the contractual arrangement with the other vote holders of the investee;
(b) rights arising from other contractual arrangements; and
(c) the Target Group’s voting rights and potential voting rights.

The financial statements of the subsidiary are prepared for the same reporting period as the Target Company, using consistent accounting policies. The results of subsidiary are consolidated from the date on which the Target Group obtains control, and continue to be consolidated until the date that such control ceases.

– II-14 –

ACCOUNTANTS’ REPORT ON THE TARGET GROUP

APPENDIX II

II. NOTES TO FINANCIAL INFORMATION (continued)

2.2 BASIS OF PREPARATION (continued)

Basis of consolidation (continued)

Profit or loss and each component of other comprehensive income are attributed to the owners of the Target Company and to the non-controlling interests, even if this results in the non-controlling interests having a deficit balance. All intra-group assets and liabilities, equity, income, expenses and cash flows relating to transactions between members of the Target Group are eliminated in full on consolidation.

The Target Group reassesses whether or not it controls an investee if facts and circumstances indicate that there are changes to one or more of the three elements of control described above. A change in the ownership interest of a subsidiary, without a loss of control, is accounted for as an equity transaction.

If the Target Group loses control over a subsidiary, it derecognises (i) the assets (including goodwill) and liabilities of the subsidiary, (ii) the carrying amount of any non-controlling interests and (iii) the cumulative translation differences recorded in equity; and recognises (i) the fair value of the consideration received, (ii) the fair value of any investment retained and (iii) any resulting surplus or deficit in profit or loss. The Target Group’s share of components previously recognised in other comprehensive income is reclassified to profit or loss or retained profits, as appropriate, on the same basis as would be required if the Target Group had directly disposed of the related assets or liabilities.

– II-15 –

APPENDIX II ACCOUNTANTS’ REPORT ON THE TARGET GROUP

II. NOTES TO FINANCIAL INFORMATION (continued)

2.3 ISSUED BUT NOT YET EFFECTIVE HONG KONG FINANCIAL REPORTING STANDARDS

The Target Group has not applied the following new and revised HKFRSs, that have been issued but are not yet effective, in the Financial Information.

HKFRS 9 Financial Instruments[2] Amendments to HKFRS 10 Sale or Contribution of Assets between and HKAS 28 (2011) an Investor and its Associate or Joint Venture[4] HKFRS 15 Revenue from Contracts with Customers[2] HKFRS 16 Leases[2] Amendments to HKFRS 7 Disclosure Initiative[1] Amendments to HKFRS 12 Recognition of Deferred Tax Assets for Unrealised Losses[1] Amendments to HKFRS 15 Clarification to HKFRS 15[2]

1 Effective for annual periods beginning on or after 1 January 2017

2 Effective for annual periods beginning on or after 1 January 2018

3 Effective for annual periods beginning on or after 1 January 2019

4 No mandatory effective date is determined but is available for early adoption

The Target Group is in the process of making an assessment of the impact of these new and revised HKFRSs upon initial application.

– II-16 –

ACCOUNTANTS’ REPORT ON THE TARGET GROUP

APPENDIX II

II. NOTES TO FINANCIAL INFORMATION (continued)

2.4 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Fair value measurement

A fair value measurement of a non-financial asset takes into account a market participant’s ability to generate economic benefits by using the asset in its highest and best use or by selling it to another market participant that would use the asset in its highest and best use.

The Target Group uses valuation techniques that are appropriate in the circumstances and for which sufficient data are available to measure fair value, maximising the use of relevant observable inputs and minimising the use of unobservable inputs.

All assets and liabilities for which fair value is measured or disclosed in the Financial Information are categorised within the fair value hierarchy, described as follows, based on the lowest level input that is significant to the fair value measurement as a whole:

Level 1 — based on quoted prices (unadjusted) in active markets for identical assets or liabilities

Level 2 — based on valuation techniques for which the lowest level input that is significant to the fair value measurement is observable, either directly or indirectly

Level 3 — based on valuation techniques for which the lowest level input that is significant to the fair value measurement is unobservable

For assets and liabilities that are recognised in the Financial Information on a recurring basis, the Target Group determines whether transfers have occurred between levels in the hierarchy by reassessing categorisation (based on the lowest level input that is significant to the fair value measurement as a whole) at the end of each reporting period.

– II-17 –

ACCOUNTANTS’ REPORT ON THE TARGET GROUP

APPENDIX II

II. NOTES TO FINANCIAL INFORMATION (continued)

2.4 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Impairment of non-financial assets

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

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

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

Related parties

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

(a) the party is a person or a close member of that person’s family and that person
(i) has control or joint control over the Target Group;
(ii) has significant influence over the Target Group; or

– II-18 –

APPENDIX II ACCOUNTANTS’ REPORT ON THE TARGET GROUP

II. NOTES TO FINANCIAL INFORMATION (continued)

2.4 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Related parties (continued)

(a) (continued)
(iii) is a member of the key management personnel of the Target Group or of a parent of the Target Group;

(b) the party is an entity where any of the following conditions applies:
(i) the entity and the Target Group are members of the same group;
(ii) one entity is an associate or joint venture of the other entity (or of a parent, subsidiary or fellow subsidiary of the other entity);
(iii) the entity and the Target Group are joint ventures of the same third party;
(iv) one entity is a joint venture of a third entity and the other entity is an associate of the third entity;
(v) the entity is a post-employment benefit plan for the benefit of employees of either the Target Group or an entity related to the Target Group;
(vi) the entity is controlled or jointly controlled by a person identified in (a);
(vii) a person identified in (a)(i) has significant influence over the entity or is a member of the key management personnel of the entity (or of a parent of the entity); and
(viii) the entity, or any member of a group of which it is a part, provides key management personnel services to the Target Group or to the parent of the Target Group.

Property, plant and equipment and depreciation

Property, plant and equipment, other than construction in progress, are stated at cost less accumulated depreciation and any impairment losses. The cost of an item of property, plant and equipment comprises its purchase price and any directly attributable costs of bringing the asset to its working condition and location for its intended use.

– II-19 –

APPENDIX II ACCOUNTANTS’ REPORT ON THE TARGET GROUP

II. NOTES TO FINANCIAL INFORMATION (continued)

2.4 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Property, plant and equipment and depreciation (continued)

Expenditure incurred after items of property, plant and equipment have been put into operation, such as repairs and maintenance, is normally charged to profit or loss in the period in which it is incurred. In situations where the recognition criteria are satisfied, the expenditure for a major inspection is capitalised in the carrying amount of the asset as a replacement. Where significant parts of property, plant and equipment are required to be replaced at intervals, the Target Group recognises such parts as individual assets with specific useful lives and depreciates them accordingly.

Depreciation is calculated on the straight-line basis to write off the cost of each item of property, plant and equipment to its residual value over its estimated useful life. The principal annual rates used for this purpose are as follows:

Land rights	Not depreciated
Buildings	5%
Plant and machinery	6.25%
Furniture, fixtures and equipment	12.5%-25%
Motor vehicles	12.5%

Where parts of an item of property, plant and equipment have different useful lives, the cost of that item is allocated on a reasonable basis among the parts and each part is depreciated separately. Residual values, useful lives and the depreciation method are reviewed, and adjusted if appropriate, at least at each financial year end.

An item of property, plant and equipment including any significant part initially recognised is derecognised upon disposal or when no future economic benefits are expected from its use or disposal. Any gain or loss on disposal or retirement recognised in profit or loss in the year the asset is derecognised is the difference between the net sales proceeds and the carrying amount of the relevant asset.

Construction in progress represents plant and machinery under construction, which is stated at cost less any impairment losses, and is not depreciated. Cost comprises the direct costs of construction and capitalised borrowing costs on related borrowed funds during the period of construction. Construction in progress is reclassified to the appropriate category of property, plant and equipment when completed and ready for use.

– II-20 –

ACCOUNTANTS’ REPORT ON THE TARGET GROUP

APPENDIX II

II. NOTES TO FINANCIAL INFORMATION (continued)

2.4 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Leases

Leases that transfer substantially all the rewards and risks of ownership of assets to the Target Group, other than legal title, are accounted for as finance leases. At the inception of a finance lease, the cost of the leased asset is capitalised at the present value of the minimum lease payments and recorded together with the obligation, excluding the interest element, to reflect the purchase and financing. Land rights held under capitalised finance lease are included in property, plant and equipment, and not depreciated.

Investments and other financial assets

Initial recognition and measurement

Financial assets are classified, at initial recognition, as loans and receivables. When financial assets are recognised initially, they are measured at fair value plus transaction costs that are attributable to the acquisition of the financial assets, except in the case of financial assets recorded at fair value through profit or loss.

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

Subsequent measurement

Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. After initial measurement, such assets are subsequently measured at amortised cost using the effective interest rate method less any allowance for impairment. Amortised cost is calculated by taking into account any discount or premium on acquisition and includes fees or costs that are an integral part of the effective interest rate. The effective interest rate amortisation is included in other income and gains in profit or loss. The loss arising from impairment is recognised in profit or loss.

– II-21 –

ACCOUNTANTS’ REPORT ON THE TARGET GROUP

APPENDIX II

II. NOTES TO FINANCIAL INFORMATION (continued)

2.4 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Derecognition of financial assets

A financial asset (or, where applicable, a part of a financial asset or part of a group of similar financial assets) is primarily derecognised (i.e., removed from the Target Group’s consolidated statement of financial position) when:

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

When the Target Group has transferred its rights to receive cash flows from an asset or has entered into a pass-through arrangement, it evaluates if and to what extent it has retained the risk and rewards of ownership of the asset. When it has neither transferred nor retained substantially all the risks and rewards of the asset nor transferred control of the asset, the Target Group continues to recognise the transferred asset to the extent of the Target Group’s continuing involvement. In that case, the Target Group also recognises an associated liability. The transferred asset and the associated liability are measured on a basis that reflects the rights and obligations that the Target Group has retained.

Continuing involvement that takes the form of a guarantee over the transferred asset is measured at the lower of the original carrying amount of the asset and the maximum amount of consideration that the Target Group could be required to repay.

Impairment of financial assets

The Target Group assesses at the end of each reporting period whether there is objective evidence that a financial asset or a group of financial assets is impaired. An impairment exists if one or more events that occurred after the initial recognition of the asset have an impact on the estimated future cash flows of the financial asset or the group of financial assets that can be reliably estimated. Evidence of impairment may include indications that a debtor or a group of debtors is experiencing significant financial difficulty, default or delinquency in interest or principal payments, the probability that they will enter bankruptcy or other financial reorganisation and observable data indicating that there is a measurable decrease in the estimated future cash flows, such as changes in arrears or economic conditions that correlate with defaults.

– II-22 –

APPENDIX II ACCOUNTANTS’ REPORT ON THE TARGET GROUP

II. NOTES TO FINANCIAL INFORMATION (continued)

2.4 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Impairment of financial assets (continued)

For financial assets carried at amortised cost, the Target Group first assesses whether impairment exists individually for financial assets that are individually significant, or collectively for financial assets that are not individually significant. If the Target Group determines that no objective evidence of impairment exists for an individually assessed financial asset, whether significant or not, it includes the asset in a group of financial assets with similar credit risk characteristics and collectively assesses them for impairment. Assets that are individually assessed for impairment and for which an impairment loss is, or continues to be, recognised are not included in a collective assessment of impairment.

The amount of any impairment loss identified is measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows (excluding future credit losses that have not yet been incurred). The present value of the estimated future cash flows is discounted at the financial asset’s original effective interest rate (i.e., the effective interest rate computed at initial recognition).

The carrying amount of the asset is reduced through the use of an allowance account and the loss is recognised in profit or loss. Interest income continues to be accrued on the reduced carrying amount using the rate of interest used to discount the future cash flows for the purpose of measuring the impairment loss. Loans and receivables together with any associated allowance are written off when there is no realistic prospect of future recovery and all collateral has been realised or has been transferred to the Target Group.

If, in a subsequent period, the amount of the estimated impairment loss increases or decreases because of an event occurring after the impairment was recognised, the previously recognised impairment loss is increased or reduced by adjusting the allowance account. If a write-off is later recovered, the recovery is credited to other operating expenses in profit or loss.

Financial liabilities

Initial recognition and measurement

Financial liabilities are classified, at initial recognition, as loans and borrowings. All loans and borrowings are recognised initially at fair value and net of directly attributable transaction costs.

– II-23 –

APPENDIX II ACCOUNTANTS’ REPORT ON THE TARGET GROUP

II. NOTES TO FINANCIAL INFORMATION (continued)

2.4 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Financial liabilities (continued)

Subsequent measurement

After initial recognition, interest-bearing bank and other borrowings are subsequently measured at amortised cost, using the effective interest rate method unless the effect of discounting would be immaterial, in which case they are stated at cost. Gains and losses are recognised in profit or loss when the liabilities are derecognised as well as through the effective interest rate amortisation process.

Amortised cost is calculated by taking into account any discount or premium on acquisition and fees or costs that are an integral part of the effective interest rate. The effective interest rate amortisation is included in finance costs in profit or loss.

Derecognition of financial liabilities

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

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

Offsetting of financial instruments

Financial assets and financial liabilities are offset and the net amount is reported in the statement of financial position if there is a currently enforceable legal right to offset the recognised amounts and there is an intention to settle on a net basis, or to realise the assets and settle the liabilities simultaneously.

Inventories

Inventories are stated at the lower of cost and net realisable value. Cost is determined on the first-in, first-out basis and, in the case of finished goods, comprises direct materials, direct labour and an appropriate proportion of overheads. Net realisable value is based on estimated selling prices less any estimated costs to be incurred to completion and disposal.

– II-24 –

APPENDIX II ACCOUNTANTS’ REPORT ON THE TARGET GROUP

II. NOTES TO FINANCIAL INFORMATION (continued)

2.4 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Cash and bank balances

For the purpose of the consolidated statements of cash flows, cash and cash equivalents comprise cash on hand and demand deposits and form an integral part of the Target Group’s cash management.

Provisions

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

When the effect of discounting is material, the amount recognised for a provision is the present value at the end of each reporting period of the future expenditures expected to be required to settle the obligation. The increase in the discounted present value amount arising from the passage of time is included in finance costs in profit or loss.

Income tax

Income tax comprises current and deferred tax. Income tax relating to items recognised outside profit or loss is recognised outside profit or loss, either in other comprehensive income or directly in equity.

Current tax assets and liabilities are measured at the amount expected to be recovered from or paid to the taxation authorities, based on tax rates (and tax laws) that have been enacted or substantively enacted by the end of each reporting period, taking into consideration interpretations and practices prevailing in the countries in which the Target Group operates.

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

– II-25 –

ACCOUNTANTS’ REPORT ON THE TARGET GROUP

APPENDIX II

II. NOTES TO FINANCIAL INFORMATION (continued)

2.4 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Income tax (continued)

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

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 profit will be available to allow all or part of the deferred tax asset to be utilised. Unrecognised deferred tax assets are reassessed at the end of each reporting period and are recognised to the extent that it has become probable that sufficient taxable profit will be available to allow all or part of the deferred tax asset to be recovered.

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

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

Revenue recognition

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

(a) from the sale of goods, when the significant risks and rewards of ownership have been transferred to the buyer, provided that the Target Group maintains neither managerial involvement to the degree usually associated with ownership, nor effective control over the goods sold;
(b) from the sale of electricity, when electricity has been transmitted to the electricity purchasing company; and
(c) interest income, on an accrual basis using the effective interest method by applying the rate that exactly discounts the estimated future cash receipts over the expected life of the financial instrument or a shorter period, when appropriate, to the net carrying amount of the financial asset.

– II-26 –

ACCOUNTANTS’ REPORT ON THE TARGET GROUP

APPENDIX II

II. NOTES TO FINANCIAL INFORMATION (continued)

2.4 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Employee benefits

Pension schemes

The Target Company’s subsidiary which operates in Indonesia is required to recognise provisions in order to meet and cover the minimum benefits required to be paid to the qualified employees under the local labor law.

A defined benefit plan is a pension plan that is not a defined contribution plan. Typically, defined benefit plans define an amount of pension benefits that an employee will receive on retirement, usually dependent on one or more factors such as age, years of service and compensation.

The liability recognised in the consolidated statements of financial position in respect of defined benefit plan is the present value of the defined benefit obligation as the end of the each of Relevant Periods. The defined benefit obligation is calculated annually using the project unit credit method. The present value of the defined benefit obligation is determined by discounting future cash outflow, using interest rate of Indonesian government bonds, and that have terms to maturity approximating to the terms of the related pension liability.

Actuarial gains and losses arising from experience adjustments and changes in actuarial assumptions are charged or credited to equity in other comprehensive income in the period in which they arise. Past-service costs are recognised immediately in profit or loss.

Borrowing costs

Borrowing costs directly attributable to the acquisition, construction or production of qualifying assets, i.e., assets that necessarily take a substantial period of time to get ready for their intended use or sale, are capitalised as part of the cost of those assets. The capitalisation of such borrowing costs ceases when the assets are substantially ready for their intended use or sale. Investment income earned on the temporary investment of specific borrowings pending their expenditure on qualifying assets is deducted from the borrowing costs capitalised. All other borrowing costs are expensed in the period in which they are incurred. Borrowing costs consist of interest and other costs that an entity incurs in connection with the borrowing of funds.

– II-27 –

ACCOUNTANTS’ REPORT ON THE TARGET GROUP

APPENDIX II

II. NOTES TO FINANCIAL INFORMATION (continued)

2.4 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Foreign currencies

The Financial Information is presented in HK$. Each entity in the Target Group determines its own functional currency and items included in the financial statements of each entity are measured using that functional currency. Foreign currency transactions recorded by the entities in the Target Group are initially recorded using their respective functional currency rates prevailing at the dates of the transactions. Monetary assets and liabilities denominated in foreign currencies are translated at the functional currency rates of exchange ruling at the end of each reporting period. Differences arising on settlement or translation of monetary items are recognised in profit or loss.

Non-monetary items that are measured in terms of historical cost in a foreign currency are translated using the exchange rates at the dates of the initial transactions. Non-monetary items measured at fair value in a foreign currency are translated using the exchange rates at the date when the fair value was measured. The gain or loss arising on translation of a non-monetary item measured at fair value is treated in line with the recognition of the gain or loss on change in fair value of the item (i.e., translation difference on the item whose fair value gain or loss is recognised in other comprehensive income or profit or loss is also recognised in other comprehensive income or profit or loss, respectively).

The functional currency of the subsidiary is a currency other than HK$. As at the end of each reporting period, the assets and liabilities of this entity are translated into HK$ at the exchange rates prevailing at the end of each reporting period and their profit or loss are translated into HK$ at the weighted average exchange rates for each reporting period. The resulting exchange differences are recognised in other comprehensive income and accumulated in the exchange fluctuation reserve. On disposal of such operation, the component of other comprehensive income relating to that particular operation is recognised in profit or loss.

For the purpose of the consolidated statements of cash flows, the cash flows of operations with functional currency other than HK$ are translated into HK$ at the exchange rates ruling at the dates of the cash flows. Frequently recurring cash flows of such operation which arise throughout each reporting period are translated into HK$ at the weighted average exchange rates for each reporting period.

– II-28 –

ACCOUNTANTS’ REPORT ON THE TARGET GROUP

APPENDIX II

II. NOTES TO FINANCIAL INFORMATION (continued)

3. SIGNIFICANT ACCOUNTING JUDGEMENTS AND ESTIMATES

The preparation of the Financial Information requires management to make judgement, estimates and assumptions that affect the reported amounts of revenues, expenses, assets and liabilities, and their accompanying disclosures, and the disclosure of contingent liabilities. Uncertainty about these assumptions and estimates could result in outcomes that could require a material adjustment to the carrying amounts of the assets or liabilities affected in the future.

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

Impairment of receivables

The Target Group records impairment of receivables based on assessment of the recoverability of receivables. The identification of impairment requires management judgements and estimates. Where the actual outcome or expectation in future is different from the original estimate, such differences will impact on the carrying amount of the receivables and impairment losses/reversal of impairment losses in the period in which such estimate has been changed.

Useful lives of property, plant and equipment

The Target Group determines the useful lives and related depreciation charges for its property, plant and equipment based on the historical experience of the actual useful lives of property, plant and equipment of similar nature and functions. The estimated useful lives could change significantly as a result of technical innovations and competitor actions in response to severe industry cycles. Management will increase the depreciation charge where useful lives are less than previously estimated, or it will write off or write down technically obsolete or non-strategic assets that have been abandoned. Actual economic lives of property, plant and equipment may differ from estimated useful lives. Periodic review could result in a change in depreciable lives and therefore depreciation in the future periods.

– II-29 –

APPENDIX II ACCOUNTANTS’ REPORT ON THE TARGET GROUP

II. NOTES TO FINANCIAL INFORMATION (continued)

3. SIGNIFICANT ACCOUNTING JUDGEMENTS AND ESTIMATES (continued)

Impairment of property, plant and equipment

The Target Group assesses whether there are any indicators of impairment for its property, plant and equipment at the end of each reporting period. Property, plant and equipment are tested for impairment when there are indicators that the carrying amounts may not be recoverable. An impairment exists when the carrying value of an asset or a cash-generating unit exceeds its recoverable amount, which is the higher of its fair value less costs of disposal and its value in use. The calculation of the fair value less costs of disposal is based on available data from binding sales transactions in an arm’s length transaction of similar assets or observable market prices less incremental costs for disposing of the asset. When value in use calculations are undertaken, management must estimate the expected future cash flows from the asset or cash-generating unit and choose a suitable discount rate in order to calculate the present value of those cash flows.

Deferred tax assets

Deferred tax assets are recognised for unused tax losses to the extent that it is probable that taxable profit will be available against which the losses can be utilised. Significant management judgement is required to determine the amount of deferred tax assets that can be recognised, based upon the likely timing and level of future taxable profits together with future tax planning strategies. The carrying value of deferred tax assets relating to recognised tax losses at 31 December 2013, 2014 and 2015 and 30 June 2016 were HK$886,000, HK$4,629,000, HK$5,736,000 and HK$6,926,000 respectively. Further details are contained in note 18 to the Financial Information.

Pension benefits

The present of the pension obligations depends on a number of factors that are determined on an actuarial basis using a number of assumptions. The assumptions used in determining the net cost/(income) for pensions include the discount rate. Any changes in these assumptions will impact the carrying amount of the pension obligations. The Target Group determines the appropriate discount rate at the end of each reporting period. This is the discount rate that should be used to determine the present value of estimated future cash outflows expected to be required to settle the pension obligations. In determining the appropriate discount rate, the Target Group considers the interest rate of Indonesian government bonds, and that have terms to maturity approximating to the terms of the related pension liability.

– II-30 –

APPENDIX II ACCOUNTANTS’ REPORT ON THE TARGET GROUP

II. NOTES TO FINANCIAL INFORMATION (continued)

3. SIGNIFICANT ACCOUNTING JUDGEMENTS AND ESTIMATES (continued)

Pension benefits (continued)

Other key assumptions for pension obligations are based in part on current market conditions. Additional information is disclosed in note 19 to the Financial Information.

Land rights

The Target Group classified its land use rights in Indonesia as finance leases because management considered that substantially all risks and rewards are transferred to the Target Group, even if at the end of the lease term titles do not pass to the Target Group. Indonesian land rights are granted for a stated period of time, with an extension option at an immaterial cost. Land rights are also renewable after the extended period term expires. Given the fact that land rights can be extended at the Target Group’s option, management considered that term of land rights is sufficiently long to indicate the transfer of risks and rewards from the government to the Target Group and the government’s interest in the residual value of the underlying land are considered as insignificant. Also, management considered that the Target Group has the ability and intent to renew the land leases in perpetuity, the useful life of the land rights are in perpetuity and hence are not depreciated.

4. SEGMENT INFORMATION

For management purposes, the Target Group is organised into business units based on their products and has two reportable operating segments as follows:

(a) the power supply segment generates and supplies electricity; and
(b) the palm kernel oil segment produces and sells palm kernel oil.

Management monitors the results of the Target Group’s operating segments separately for the purpose of making decisions about resources allocation and performance assessment. Segment performance is evaluated based on reportable segment profit/loss, which is a measure of adjusted profit/loss before tax. The adjusted profit/loss before tax is measured consistently with the Target Group’s loss before tax except that interest income, finance costs, as well as head office and corporate expenses are excluded from such measurement.

– II-31 –

ACCOUNTANTS’ REPORT ON THE TARGET GROUP

APPENDIX II

II. NOTES TO FINANCIAL INFORMATION (continued)

4. SEGMENT INFORMATION (continued)

Year ended
Palm
Power
31 December 2013
kernel oil
supply
HK$’000
HK$’000
Segment revenue:
Sales to external customers
—
16,993
Segment results
—
(153)
Reconciliation:
Interest income
Unallocated gains
Corporate and other unallocated expenses
Finance costs
Loss before tax
Other segment information:
Depreciation
—
2,671
Capital expenditure
—
187,166

Capital expenditure consists of additions to property, plant and equipment.
Year ended
Palm
Power
31 December 2014
kernel oil
supply
HK$’000
HK$’000
Segment revenue:
Sales to external customers
1,151
3,421
Segment results
(239)
(9,930)
Reconciliation:
Interest income
Unallocated gains
Corporate and other unallocated expenses
Finance costs
Loss before tax
Other segment information:
Depreciation
76
5,532
Capital expenditure*
1,063
7,437

Total
HK$’000
16,993
(153)
152
669
(153)
(2,131)
(1,616)
2,671
187,166
Total
HK$’000
4,572
(10,169)
189
222
(33)
(5,879)
(15,670)
5,608
8,500

Capital expenditure consists of additions to property, plant and equipment.

– II-32 –

ACCOUNTANTS’ REPORT ON THE TARGET GROUP

APPENDIX II

II. NOTES TO FINANCIAL INFORMATION (continued)

4. SEGMENT INFORMATION (continued)

Year ended Palm Power 31 December 2015 kernel oil supply HK$’000 HK$’000 Segment revenue: Sales to external customers 1,825 25,429 Segment results (202) (2,549) Reconciliation: Interest income Unallocated gains Corporate and other unallocated expenses Finance costs Loss before tax Other segment information: Depreciation 69 4,983 Capital expenditure — 5,066 Capital expenditure consists of additions to property, plant and equipment. Six months ended Palm Power 30 June 2015 (unaudited) kernel oil supply HK$’000 HK$’000 Segment revenue: Sales to external customers 1,315 7,990 Segment results (138) (4,832) Reconciliation: Interest income Unallocated gains Corporate and other unallocated expenses Finance costs Loss before tax Other segment information: Depreciation 40 2,546 Capital expenditure* — 3,096		Total HK$’000 27,254 (2,751) 152 256 (37) (4,163) (6,543) 5,052 5,066 Total HK$’000 9,305 (4,970) 79 216 (1) (2,270) (6,946) 2,586 3,096

Capital expenditure consists of additions to property, plant and equipment.

– II-33 –

APPENDIX II ACCOUNTANTS’ REPORT ON THE TARGET GROUP

II. NOTES TO FINANCIAL INFORMATION (continued)

4. SEGMENT INFORMATION (continued)

Six months ended Palm Power 30 June 2016 kernel oil supply HK$’000 HK$’000 Segment revenue: Sales to external customers — 11,988 Segment results (29) (2,348) Reconciliation: Interest income Unallocated gains Corporate and other unallocated expenses Finance costs Loss before tax Other segment information: Depreciation 29 2,494 Capital expenditure* — 2,979		Total HK$’000 11,988 (2,377) 65 280 ( 45) (1,650) (3,727) 2,523 2,979

Capital expenditure consists of additions to property, plant and equipment.

Geographical information

All of the Target Group’s revenue is derived from customers located in Indonesia and all of the Target Group’s non-current assets are located in Indonesia.

Information about major customers

Revenue from each major customer which accounted for 10% or more of the Target Group’s revenue for each of the Relevant Periods, is set out below:

				Six months	Six months
	Year ended 31 December			ended 30 June
	2013	2014	2015	2015	2016
	HK$’000	HK$’000	HK$’000	HK$’000	HK$’000
				(Unaudited)
Customer A	16,993	3,421	25,429	7,990	11,988
Customer B	N/A*	951	N/A*	1,315	N/A*

Less than 10% of revenue for the year/period

Customer A and Customer B were from power supply segment and palm kernel oil segment, respectively.

– II-34 –

APPENDIX II ACCOUNTANTS’ REPORT ON THE TARGET GROUP

II. NOTES TO FINANCIAL INFORMATION (continued)

5. REVENUE, OTHER INCOME AND GAINS

Revenue represents the net invoiced value of electricity supplied and goods sold, after allowances for returns, discounts and value-added tax.

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

Revenue Sales of palm kernel oil Sales of electricity Other income and gains Bank interest income Foreign exchange gains, net Others	Six months Year ended 31 December ended 30 June 2013 2014 2015 2015 2016 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 (Unaudited) — 1,151 1,825 1,315 — 16,993 3,421 25,429 7,990 11,988 16,993 4,572 27,254 9,305 11,988 152 189 152 79 65 669 221 183 162 261 — 1 73 55 18 821 411 408 296 344	Six months Year ended 31 December ended 30 June 2013 2014 2015 2015 2016 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 (Unaudited) — 1,151 1,825 1,315 — 16,993 3,421 25,429 7,990 11,988 16,993 4,572 27,254 9,305 11,988 152 189 152 79 65 669 221 183 162 261 — 1 73 55 18 821 411 408 296 344
		11,988

		65 261 18
		344

6. LOSS BEFORE TAX

The Target Group’s loss before tax is arrived at after charging:

Notes Cost of inventories sold Depreciation 9 Employee benefit expense: Salaries, wages and benefits in kind Pension scheme expense (defined benefit plan) 19	Six months Year ended 31 December ended 30 June 2013 2014 2015 2015 2016 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 (Unaudited) 16,110 14,245 24,475 11,497 11,547 2,671 5,608 5,052 2,586 2,523 126 216 629 262 297 7 34 69 36 43 133 250 698 298 340	Six months Year ended 31 December ended 30 June 2013 2014 2015 2015 2016 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 (Unaudited) 16,110 14,245 24,475 11,497 11,547 2,671 5,608 5,052 2,586 2,523 126 216 629 262 297 7 34 69 36 43 133 250 698 298 340
		340

– II-35 –

APPENDIX II ACCOUNTANTS’ REPORT ON THE TARGET GROUP

II. NOTES TO FINANCIAL INFORMATION (continued)

7. FINANCE COSTS

An analysis of finance costs is as follows:

Interest on a bank loan Interest on other borrowings Total interest expense Less: Interest capitalised	Six months Year ended 31 December ended 30 June 2013 2014 2015 2015 2016 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 (Unaudited) 14,320 11,652 8,241 4,495 3,261 17 2 — — — 14,337 11,654 8,241 4,495 3,261 (12,206) (5,775) (4,078) (2,225) (1,611) 2,131 5,879 4,163 2,270 1,650	Six months Year ended 31 December ended 30 June 2013 2014 2015 2015 2016 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 (Unaudited) 14,320 11,652 8,241 4,495 3,261 17 2 — — — 14,337 11,654 8,241 4,495 3,261 (12,206) (5,775) (4,078) (2,225) (1,611) 2,131 5,879 4,163 2,270 1,650
		3,261 (1,611)
		1,650

8. INCOME TAX

No provision for Hong Kong profits tax had been made as the Target Group did not generate any assessable profits arising in Hong Kong during the Relevant Periods.

The provision for the Indonesian income tax is based on a corporate income tax rate of 25% during the Relevant Periods.

				Six months	Six months
	Year	ended 31 December		ended 30 June
	2013	2014	2015	2015	2016
	HK$’000	HK$’000	HK$’000	HK$’000	HK$’000
				(Unaudited)
Deferred tax credit for
the year/period_(note 18)_	434	3,961	1,669	1,757	947

– II-36 –

APPENDIX II ACCOUNTANTS’ REPORT ON THE TARGET GROUP

II. NOTES TO FINANCIAL INFORMATION (continued)

8. INCOME TAX (continued)

A reconciliation of the tax credit applicable to loss before tax at the statutory rates to the tax credit at the effective tax rate is as follows:

Loss before tax Tax at the statutory tax rates of different jurisdictions Income not subject to tax Expenses not deductible for tax Tax credit at the Target Group’s effective tax rate	Six months Year ended 31 December ended 30 June 2013 2014 2015 2015 2016 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 (Unaudited) (1,616) (15,670) (6,543) (6,946) (3,727) (403) (3,917) (1,635) (1,736) (931) (38) (47) (38) (22) (19) 7 3 4 1 3 (434) (3,961) (1,669) (1,757) (947)

For the years ended 31 December 2013, 2014 and 2015 and six months ended 30 June 2015 and 2016, the weighted average applicable tax rates were 24.9%, 25.0%, 25.0%, 25.0% and 25.0%, respectively.

– II-37 –

ACCOUNTANTS’ REPORT ON THE TARGET GROUP

APPENDIX II

II. NOTES TO FINANCIAL INFORMATION (continued)

9. PROPERTY, PLANT AND EQUIPMENT

31 December 2013 At 1 January 2013: Cost Accumulated depreciation Net carrying amount At 1 January 2013, net of accumulated depreciation Additions Depreciation provided during the year Exchange realignment At 31 December 2013, net of accumulated depreciation At 31 December 2013: Cost Accumulated depreciation Net carrying amount 31 December 2014 At 1 January 2014: Cost Accumulated depreciation Net carrying amount At 1 January 2014, net of accumulated depreciation Additions Depreciation provided during the year Exchange realignment At 31 December 2014, net of accumulated depreciation At 31 December 2014: Cost Accumulated depreciation Net carrying amount	Land rights HK$’000 2,479 — 2,479 2,479 — — (515) 1,964 1,964 — 1,964 1,964 — 1,964 1,964 — — (34) 1,930 1,930 — 1,930	Furniture, Plant and fixtures and Buildings machinery equipment HK$’000 HK$’000 HK$’000 — — 15 — — (1) — — 14 — — 14 7,768 91,457 943 (162) (2,388) (73) (1,120) (13,115) (131) 6,486 75,954 753 6,624 77,990 816 (138) (2,036) (63) 6,486 75,954 753 6,624 77,990 816 (138) (2,036) (63) 6,486 75,954 753 6,486 75,954 753 — 2,624 3 (340) (5,120) (105) (97) (1,205) (8) 6,049 72,253 643 6,510 79,154 805 (461) (6,901) (162) 6,049 72,253 643	Motor Construction vehicles in progress HK$’000 HK$’000 418 8,126 (46) — 372 8,126 372 8,126 — 86,998 (48) — (71) (14,499) 253 80,625 331 80,625 (78) — 253 80,625 331 80,625 (78) — 253 80,625 253 80,625 — 5,873 (43) — (3) (1,644) 207 84,854 326 84,854 (119) — 207 84,854	Total HK$’000 11,038 (47)
				10,991

				10,991 187,166 (2,671) (29,451)
				166,035

				168,350 (2,315)
				166,035

				168,350 (2,315)
				166,035

				166,035 8,500 (5,608) (2,991)
				165,936

				173,579 (7,643)
				165,936

– II-38 –

ACCOUNTANTS’ REPORT ON THE TARGET GROUP

APPENDIX II

II. NOTES TO FINANCIAL INFORMATION (continued)

9. PROPERTY, PLANT AND EQUIPMENT (continued)

31 December 2015 At 1 January 2015: Cost Accumulated depreciation Net carrying amount At 1 January 2015, net of accumulated depreciation Additions Depreciation provided during the year Exchange realignment At 31 December 2015, net of accumulated depreciation At 31 December 2015: Cost Accumulated depreciation Net carrying amount 30 June 2016 At 1 January 2016: Cost Accumulated depreciation Net carrying amount At 1 January 2016, net of accumulated depreciation Additions Depreciation provided during the period Exchange realignment At 30 June 2016, net of accumulated depreciation At 30 June 2016: Cost Accumulated depreciation Net carrying amount	Land rights HK$’000 1,930 — 1,930 1,930 — — (197) 1,733 1,733 — 1,733 1,733 — 1,733 1,733 — — 77 1,810 1,810 — 1,810	Furniture, Plant and fixtures and Buildings machinery equipment HK$’000 HK$’000 HK$’000 6,510 79,154 805 (461) (6,901) (162) 6,049 72,253 643 6,049 72,253 643 — 700 282 (301) (4,608) (105) (609) (7,266) (71) 5,139 61,079 749 5,845 71,740 997 (706) (10,661) (248) 5,139 61,079 749 5,845 71,740 997 (706) (10,661) (248) 5,139 61,079 749 5,139 61,079 749 — — — (150) (2,289) (65) 226 2,686 32 5,215 61,476 716 6,105 74,931 1,041 (890) (13,455) (325) 5,215 61,476 716	Motor Construction vehicles in progress HK$’000 HK$’000 326 84,854 (119) — 207 84,854 207 84,854 — 4,084 (38) — (20) (8,802) 149 80,136 291 80,136 (142) — 149 80,136 291 80,136 (142) — 149 80,136 149 80,136 — 2,979 (19) — 6 3,606 136 86,721 304 86,721 (168) — 136 86,721	Total HK$’000 173,579 (7,643)
				165,936

				165,936 5,066 (5,052) (16,965)
				148,985

				160,742 (11,757)
				148,985

				160,742 (11,757)
				148,985

				148,985 2,979 (2,523) 6,633
				156,074

				170,912 (14,838)
				156,074

– II-39 –

ACCOUNTANTS’ REPORT ON THE TARGET GROUP

APPENDIX II

II. NOTES TO FINANCIAL INFORMATION (continued)

9. PROPERTY, PLANT AND EQUIPMENT (continued)

As at 31 December 2013, 2014 and 2015 and 30 June 2016, certain property, plant and equipment of the Target Group with an aggregate carrying amount of HK$165,772,000, HK$165,716,000, HK$148,826,000 and HK$155,929,000, respectively, were pledged to secure a bank loan granted to the Target Group (note 16).

As at 31 December 2013, certain motor vehicles of the Target Group with an aggregate carrying amount of HK$140,000 were pledged to secure an other borrowing (note 16) granted to the Target Group.

10. INVENTORIES

Raw materials Finished goods	As at 31 December 2013 2014 2015 HK$’000 HK$’000 HK$’000 307 1,071 652 — 126 69 307 1,197 721	As at 30 June 2016 HK$’000 665 72
		737

11. TRADE RECEIVABLES

The Target Group’s trading terms with its customers are mainly on credit. The credit period is generally one month, extending up to three months. Each customer has a maximum credit limit. The Target Group seeks to maintain strict control over its outstanding receivables to minimise credit risk. Overdue balances are reviewed regularly by senior management. The Target Group does not hold any collateral or other credit enhancements over its trade receivable balances. Trade receivables are non-interestbearing.

An aged analysis of the trade receivables as at the end of each reporting period during the Relevant Periods, based on the invoice date and net of provisions, is as follows:

						As at
			As at	31 December		30 June
			2013	2014	2015	2016
			HK$’000	HK$’000	HK$’000	HK$’000
Within	3	months	3,362	174	2,162	2,118

– II-40 –

ACCOUNTANTS’ REPORT ON THE TARGET GROUP

APPENDIX II

II. NOTES TO FINANCIAL INFORMATION (continued)

11. TRADE RECEIVABLES (continued)

The aged analysis of the trade receivables that are not considered to be impaired is as follows:

ows:
				As at
	As at	31 December		30 June
	2013	2014	2015	2016
	HK$’000	HK$’000	HK$’000	HK$’000
Neither past due nor impaired	3,362	174	2,162	2,118

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

12. PREPAYMENTS AND OTHER RECEIVABLES

Notes Non-current Prepayments for purchase of items of property, plant and equipment (a) Current Prepayments Other receivables (b)	As at 31 December 2013 2014 2015 HK$’000 HK$’000 HK$’000 — 378 — 7 261 186 182 318 269 189 579 455	As at 30 June 2016 HK$’000 —

		146 427
		573

Notes:

(a) The balance represented prepayments made to PT. Global Inovasi Prima, a company controlled by Mr. Fadjar Suhendra, who is a beneficial owner of First Pacific, for purchases of items of property, plant and equipment.
(b) The other receivables included an amount of HK$194,000 receivable from PT. Growth Sumatra Industry (“GSI”), which is also controlled by Mr. Fadjar Suhendra, as at 31 December 2014. The amount was received by the Target Group in 2015. The maximum outstanding amounts due from GSI during the years ended 31 December 2014 and 2015 were HK$359,000 and HK$194,000, respectively.

None of the above assets is either past due or impaired. The financial assets included in the above balances relate to receivables for which there was no recent history of default.

– II-41 –

APPENDIX II ACCOUNTANTS’ REPORT ON THE TARGET GROUP

II. NOTES TO FINANCIAL INFORMATION (continued)

13. CASH AND BANK BALANCES

				As at
	As at	31 December		30 June
	2013	2014	2015	2016
	HK$’000	HK$’000	HK$’000	HK$’000
Cash and bank balances	10,818	9,152	7,842	13,794

Cash at banks earns interest at floating rates based on daily bank deposit rates. The bank balances are deposited with creditworthy banks with no recent history of default.

14. TRADE PAYABLES

An aged analysis of the trade payables as at the end of each reporting period, based on the invoice date, is as follows:

Within 1 month 1 to 3 months 4 to 6 months	As at 31 December 2013 2014 2015 HK$’000 HK$’000 HK$’000 2,902 518 3,063 — — 958 — — — 2,902 518 4,021	As at 30 June 2016 HK$’000 864 2 17
		883

The trade payables are non-interest-bearing and are normally settled on terms of 60 to 90 days.

15. OTHER PAYABLES AND ACCRUALS

Other payables Accruals	As at 31 December 2013 2014 2015 HK$’000 HK$’000 HK$’000 1,403 542 202 915 780 534 2,318 1,322 736	As at 30 June 2016 HK$’000 50 418
		468

– II-42 –

ACCOUNTANTS’ REPORT ON THE TARGET GROUP

APPENDIX II

II. NOTES TO FINANCIAL INFORMATION (continued)

16. INTEREST-BEARING BANK AND OTHER BORROWINGS

Current — secured Long-term bank loan Other borrowing Analysed into: Bank borrowing Other borrowing			As at 31 December
	2013		2014	2015

The bank loan as at 31 December 2013, 2014 and 2015 and 30 June 2016 was denominated in Indonesian Rupiah (“IDR”) and was a floating rate loan with effective interest rates of 10.75% per annum as at 31 December 2013, 10.88% per annum as at 31 December 2014 and 2015 and 10.86% per annum as at 30 June 2016. The bank loan was secured by certain property, plant and equipment of the Target Group (note 9), 100% equity interest of RPSL, unlimited personal guarantees provided by Mr. Fadjar Suhendra and Mr. Sugih Suhendra, and an unlimited corporate guarantee provided by PT. Growth Sumatra Industry which is a company controlled by Mr. Fadjar Suhendra. Both Mr. Fadjar Suhendra and Mr. Sugih Suhendra are the beneficial shareholders of First Pacific.

Pursuant to the requirements of the bank loan, RPSL, the subsidiary of the Target Group, is obliged to comply with certain financial and non-financial covenants. Throughout the Relevant Periods, RPSL had breached certain financial covenants to maintain the required financial ratios and breached a non-financial covenant by making repayments of shareholders’ loans. The bank loan became repayable on demand and the non-current portion of the bank loan was classified as current. As at 31 December 2013, 2014 and 2015 and 30 June 2016, the carrying amount of the bank loan in breach of covenants was HK$110,375,000, HK$87,826,000, HK$60,308,000, and HK$53,306,000 respectively.

– II-43 –

ACCOUNTANTS’ REPORT ON THE TARGET GROUP

APPENDIX II

II. NOTES TO FINANCIAL INFORMATION (continued)

16. INTEREST-BEARING BANK AND OTHER BORROWINGS (continued)

The other borrowing as at 31 December 2013 was an IDR-denominated fixed interest rate loan of 0.88% per annum and was fully repaid in 2014. The other borrowing was secured by certain motor vehicles of the Target Group (note 9).

17. DUE TO RELATED PARTIES

An analysis of the amounts due to related parties is as follows:

Notes Carlton Asia Limited (“Carlton Asia”) (a)(e) Fusion Joy (a)(e) Mr. Fadjar Suhendra (b)(e) Mr. Sugih Suhendra (b)(e) Sanlion International Investment Limited (c)(e) PT. Growth Sumatra Industry (d)(e) PT. Global Inovasi Prima (d)(e)	As at 31 December 2013 2014 2015 HK$’000 HK$’000 HK$’000 11,680 31,660 — 41,129 54,779 — — 16,526 14,219 — 10,036 8,616 7 28 66 20,848 15 3 1,705 3,136 8,460 75,369 116,180 31,364	As at 30 June 2016 HK$’000 6,474 — 2,745 1,831 68 — 10,125
		21,243

– II-44 –

APPENDIX II ACCOUNTANTS’ REPORT ON THE TARGET GROUP

II. NOTES TO FINANCIAL INFORMATION (continued)

17. DUE TO RELATED PARTIES (continued)

Notes:

(a) These entities are the shareholders of the Target Company during the Relevant Periods.

On 31 December 2015, Carlton Asia and Fusion Joy unconditionally and irrevocably waived all rights, claims and entitlements in connection with the balances of HK$45,669,000 and HK$61,656,000, respectively, owed by the Target Company to Carlton Asia and Fusion Joy, respectively and these balances were capitalised in equity of the Target Group. The capitalisation of these balances represented major non-cash transactions in the consolidated statement of cash flows for the year ended 31 December 2015.

(b) Mr. Fadjar Suhendra and Mr. Sugih Suhendra are the beneficial shareholders of First Pacific. In addition, each of Mr. Fadjar Suhendra and Mr. Sugih Suhendra held 3% and 2% of equity interests in the Target Company’s subsidiary during the Relevant Periods.
(c) Mr. Chan Chun Keung, a director of the Target Company, is a director of this entity.
(d) These entities are controlled by Mr. Fadjar Suhendra, a beneficial shareholder of First Pacific.
(e) The amounts are unsecured, interest-free and have no fixed terms of repayments.

– II-45 –

APPENDIX II ACCOUNTANTS’ REPORT ON THE TARGET GROUP

II. NOTES TO FINANCIAL INFORMATION (continued)

18. DEFERRED TAX

The components of deferred tax asset and liability with the net balance recognised in the consolidated statements of financial position and the movements during the Relevant Periods are as follows:

Losses available for offsetting against future taxable profits HK$’000 At 1 January 2013 686 Credited to profit or loss during the year_(note 8) 402 Charged to other comprehensive income during the year — Exchange realignment (202) At 31 December 2013 and 1 January 2014 886 Credited to profit or loss during the year(note 8) 3,927 Charged to other comprehensive income during the year — Exchange realignment (184) At 31 December 2014 and 1 January 2015 4,629 Credited to profit or loss during the year(note 8) 1,630 Charged to other comprehensive income during the year — Exchange realignment (523) At 31 December 2015 and 1 January 2016 5,736 Credited to profit or loss during the period(note 8)_ 926 Exchange realignment 264 At 30 June 2016 6,926	Defined benefit plan HK$’000 3 2 (1) (1) 3 8 — — 11 18 (5) (2) 22 11 1 34	Bank borrowing costs HK$’000 (170) 30 — 31 (109) 26 — 1 (82) 21 — 8 (53) 10 (2) (45)	Total HK$’000 519 434 (1) (172) 780 3,961 — (183) 4,558 1,669 (5) (517) 5,705 947 263 6,915

– II-46 –

ACCOUNTANTS’ REPORT ON THE TARGET GROUP

APPENDIX II

II. NOTES TO FINANCIAL INFORMATION (continued)

18. DEFERRED TAX (continued)

For presentation purposes, deferred tax asset and liability have been offset in the consolidated statements of financial position and reported as follows:

				As at
	As at	31 December		30 June
	2013	2014	2015	2016
	HK$’000	HK$’000	HK$’000	HK$’000
Net deferred tax assets	780	4,558	5,705	6,915

19. DEFINED BENEFIT PLAN

Under the Indonesia Labor Law, companies are required to pay separation, appreciation and compensation benefits to their employees if the conditions specified in the Indonesia Labor Law are met. The Target Company’s subsidiary, RPSL, estimates its liability for employee service entitlement benefits in order to meet and cover the minimum benefits requirement to be paid to employees under the Indonesia Labor Law.

(a) Net benefit expense

Current service cost Interest cost Net benefit expense recognised in administrative expense	Six months Year ended 31 December ended 30 June 2013 2014 2015 2015 2016 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 (Unaudited) 6 33 67 35 40 1 1 2 1 3 7 34 69 36 43

(b) Changes in present value of the defined benefit obligations

At beginning of the year/period Net benefit expense recognised in profit or loss Net actuarial gain or loss before tax Exchange realignment At end of the year/period	As at 31 December 2013 2014 2015 HK$’000 HK$’000 HK$’000 10 11 44 7 34 69 (4) 1 (20) (2) (2) (5) 11 44 88	As at 30 June 2016 HK$’000 88 43 — 5
		136

– II-47 –

ACCOUNTANTS’ REPORT ON THE TARGET GROUP

APPENDIX II

II. NOTES TO FINANCIAL INFORMATION (continued)

19. DEFINED BENEFIT PLAN (continued)

(c) Principal assumptions

The actuarial valuations of the present values of the defined benefit obligations were carried out at 31 December 2013, 2014 and 2015 and 30 June 2016, using the projected unit credit method. The material actuarial assumptions used in determining the defined benefit obligations for the Target Group’s plan are as follow:

:
				As at
	As at	31 December		30 June
	2013	2014	2015	2016
	HK$’000	HK$’000	HK$’000	HK$’000
Discount rate	9%	8%	9%	8%
Expected rate of salary increase	5%	5%	5%	5%

A quantitative sensitivity analysis for significant assumptions is shown below:

31 December 2013 Discount rate Expected rate of salary increase 31 December 2014 Discount rate Expected rate of salary increase 31 December 2015 Discount rate Expected rate of salary increase	Increase in rate % 1 1 1 1 1 1	Increase/ (decrease) in net defined benefit obligations HK$’000 (2) 2 (5) 7 (7) 9	Decrease in rate % 1 1 1 1 1 1	Increase/ (decrease) in net defined benefit obligations HK$’000 2 (2) 6 (7) 8 (8)

– II-48 –

APPENDIX II ACCOUNTANTS’ REPORT ON THE TARGET GROUP

II. NOTES TO FINANCIAL INFORMATION (continued)

19. DEFINED BENEFIT PLAN (continued)

(c) Principal assumptions (continued)

		Increase/		Increase/
		(decrease)		(decrease)
		in net		in net
		defined		defined
	Increase	benefit	Decrease	benefit
	in rate	obligations	in rate	obligations
	%	HK$’000	%	HK$’000
30 June 2016
Discount rate	1	(11)	1	13
Expected rate of
salary increase	1	14	1	(12)

The sensitivity analyses above have been determined based on a method that extrapolates the impact on net defined benefit obligation as a result of reasonable changes in key assumptions occurring at the end of each reporting period during the Relevant Periods.

– II-49 –

APPENDIX II ACCOUNTANTS’ REPORT ON THE TARGET GROUP

II. NOTES TO FINANCIAL INFORMATION (continued)

19. DEFINED BENEFIT PLAN (continued)

(c) Principal assumptions (continued)

Expected contributions to be made in the future years out of the defined benefit obligations are as follows:

Within the next 12 months Between 2 and 5 years Between 5 and 10 years Over 10 years Total expected payments	As at 31 December 2013 2014 2015 HK$’000 HK$’000 HK$’000 — — — — — 35 — 15 15 11 29 38 11 44 88	As at 30 June 2016 HK$’000 — 43 34 59
		136

The average duration of the defined benefit obligation as at 31 December 2013, 2014 and 2015 and 30 June 2016 are 18, 16, 15 and 14 years, respectively.

20. SHARE CAPITAL

					As at
		As at 31 December			30 June
		2013	2014	2015	2016
		HK$’000	HK$’000	HK$’000	HK$’000
Issued	and fully paid:
250	ordinary shares	—	—	—	—

There were no movements in the Target Company’s share capital during the Relevant Periods.

– II-50 –

ACCOUNTANTS’ REPORT ON THE TARGET GROUP

APPENDIX II

II. NOTES TO FINANCIAL INFORMATION (continued)

21. RESERVES

The amounts of the Target Group’s reserves and the movements therein for each of the reporting period during the Relevant Periods are presented in the consolidated statements of changes in equity.

(i) Other reserve

The other reserve comprises the capitalisation of balances owed by the Target Company to shareholders of the Target Company (note 17(a)) and shareholder’s capital contributions of HK$34,682,000 from Fusion Joy without increase in its shareholding in the Target Company.

(ii) Defined benefit plan

The defined benefit plan represents the accumulative net change in fair value of defined benefit plan at the end of each reporting period during the Relevant Periods.

(iii) Exchange fluctuation reserve

The exchange fluctuation reserve comprises all relevant exchange differences arising from the translation of the financial statements of an entity not using HK$ as its functional currency.

22. PARTLY-OWNED SUBSIDIARY WITH MATERIAL NON-CONTROLLING INTERESTS

Details of the Target Group’s subsidiary that has material non-controlling interests are set out below:

			Percentage of	Percentage of
			equity interest held by			Loss for the year/period allocated					Accumulated	balance of
			non-controlling interest as at				to non-controlling interest				non-controlling	interest as at
									Six
									months
	Place of						Year ended		ended
	incorporation		31 December	30	June		31 December		30 June		31 December		30 June
Name of	and	2013	2014	2015	2016	2013	2014	2015	2016	2013	2014	2015	2016
subsidiary	business	%	%	%	%	HK$’000	HK$’000	HK$’000	HK$’000	HK$’000	HK$’000	HK$’000	HK$’000
RPSL	Indonesia	5	5	5	5	(59)	(585)	(243)	(139)	2,279	1,680	1,274	1,305

– II-51 –

APPENDIX II ACCOUNTANTS’ REPORT ON THE TARGET GROUP

II. NOTES TO FINANCIAL INFORMATION (continued)

22. PARTLY-OWNED SUBSIDIARY WITH MATERIAL NON-CONTROLLING INTERESTS (continued)

The following tables illustrate the summarised financial information of the above subsidiary. The amounts disclosed are before any inter-company eliminations:

Revenue
Total expenses
Loss for the year/period
Total comprehensive income for
the year/period
Current assets
Non-current assets
Current liabilities
Non-current liabilities
Net cash flows from/(used in)
operating activities
Net cash flows used in investing
activities
Net cash flows from/(used in)
financing activities
Net increase/(decrease) in cash
and cash equivalents

Six months
Year ended 31 December
ended 30 June
2013
2014
2015
2015
2016
HK$’000
HK$’000
HK$’000
HK$’000
HK$’000
(Unaudited)
16,993
4,572
27,254
9,305
11,988
(19,420)
(20,643)
(34,191)
(16,544)
(16,055)
(1,172)
(11,698)
(4,860)
(5,186)
(2,775)
(7,615)
(11,991)
(8,129)
(7,445)
634
As at
As at 31 December
30 June
2013
2014
2015
2016
HK$’000
HK$’000
HK$’000
HK$’000
14,668
11,089
11,168
17,214
169,077
170,872
154,690
162,989
(138,161)
(148,328)
(96,354)
(69,350)
(11)
(44)
(88)
(136)
Six months
Year ended 31 December
ended 30 June
2013
2014
2015
2015
2016
HK$’000
HK$’000
HK$’000
HK$’000
HK$’000
(Unaudited)
22,086
(25,548)
10,159
(2,294)
(1,706)
(37,152)
(3,959)
(2,862)
(1,357)
(1,987)
23,140
27,954
(7,683)
2,604
9,223
8,074
(1,553)
(386)
(1,047)
5,530

– II-52 –

APPENDIX II ACCOUNTANTS’ REPORT ON THE TARGET GROUP

II. NOTES TO FINANCIAL INFORMATION (continued)

23. CONTINGENT LIABILITIES

At the end of each reporting period during the Relevant Periods, the Target Group did not have any significant contingent liabilities.

24. CAPITAL COMMITMENTS

The Target Group had the following capital commitments at the end of each reporting period during the Relevant Periods:

Contracted, but not provided for	As at 31 December 2013 2014 2015 HK$’000 HK$’000 HK$’000 20,848 868 —	As at 30 June 2016 HK$’000 1,160

25. RELATED PARTY TRANSACTIONS

(a) In addition to the transactions and balances detailed elsewhere in the Financial Information, the Target Group had the following material transactions with related parties during the Relevant Periods:

PT. Growth Sumatra Industry Purchases of items of property, plant and equipment PT. Global Inovasi Prima Provision of management services Purchases of items of property, plant and equipment Provision of operation and maintenance services Purchases of spare parts used in repairs Provision of labour Provision of consultancy services Provision of general administrative expenses	Year ended 31 December 2013 2014 2015 HK$’000 HK$’000 HK$’000 32,576 16 7 616 — — 1,394 2,478 507 — 665 5,220 — 1,512 — — 1,468 — — — 3,480 — — 1,079	Six months ended 30 June 2015 2016 HK$’000 HK$’000 (Unaudited) 5 3 — — 442 — 2,691 2,606 — — — — 1,794 1,737 556 538

The above related parties are companies controlled by Mr. Fadjar Suhendra, a beneficial shareholder of First Pacific. The transactions were conducted on terms and conditions mutually agreed between the relevant parties.

– II-53 –

ACCOUNTANTS’ REPORT ON THE TARGET GROUP

APPENDIX II

II. NOTES TO FINANCIAL INFORMATION (continued)

25. RELATED PARTY TRANSACTIONS (continued)

(b) Other transaction with related parties:
(i) During the Relevant Periods, the Target Group’s bank loan was secured by unlimited personal guarantees provided by Mr. Fadjar Suhendra and Mr. Sugih Suhendra and the unlimited corporate guarantee provided by PT. Growth Sumatra Industry. Further details are included in note 16 to the Financial Information.
(ii) On 31 December 2015, Carlton Asia and Fusion Joy unconditionally and irrevocably waived all rights, claims and entitlements in connection with the balances of HK$45,669,000 and HK$61,656,000, respectively, owed by the Target Company to Carlton Asia and Fusion Joy, respectively.
(iii) During the six months ended 30 June 2016, Fusion Joy has made contributions of HK$34,682,000 (“Capital Contribution”) to the Target Company without increase in its shareholding in the Target Company, and the Capital Contribution is not subject to claims from repayment.
(c) Commitments with related parties

On 4 January 2016, RPSL entered into a service agreement (the “Service Agreement”) with PT. Global Inovasi Prima, a company controlled by Mr. Fadjar Suhendra, a beneficial shareholder of First Pacific, to procure (i) outsourcing service to operate, monitor and maintain the two power plant units of RPSL from 1 January 2016 to 31 December 2018; and (ii) consultancy service from 1 January 2016 to 31 December 2016. Based on terms of the Service Agreement, it is expected that the maximum aggregate fees payable by RPSL to PT. Global Inovasi Prima under the Service Agreement for each of the years ending 31 December 2016, 2017 and 2018 will be not more than IDR24.4 billion (approximately HK$14.3 million), IDR19.1 billion (approximately HK$11.2 million) and IDR20.9 billion (approximately HK$12.3 million), respectively.

(d) Outstanding balances with related parties

Other than balances with related parties as disclosed in notes 12 and 17 to the Financial Information, the Target Group had no outstanding balances with related parties as at the end of each reporting period during the Relevant Periods.

– II-54 –

APPENDIX II ACCOUNTANTS’ REPORT ON THE TARGET GROUP

II. NOTES TO FINANCIAL INFORMATION (continued)

25. RELATED PARTY TRANSACTIONS (continued)

(e) Compensation of key management personnel of the Target Group

Short term employee benefits Post-employment benefits Total compensation paid to key management personnel	Six months Year ended 31 December ended 30 June 2013 2014 2015 2015 2016 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 (Unaudited) — 29 288 106 137 — 15 50 26 30 — 44 338 132 167

26. FINANCIAL INSTRUMENTS BY CATEGORY

The carrying amounts of each of the categories of financial instruments as at the end of each reporting period during the Relevant Periods are as follows:

Financial assets

Trade receivables Financial assets included in prepayments, and other receivables Cash and bank balances	Loans and receivables As at 31 December 2013 2014 2015 HK$’000 HK$’000 HK$’000 3,362 174 2,162 182 196 — 10,818 9,152 7,842 14,362 9,522 10,004	As at 30 June 2016 HK$’000 2,118 — 13,794
		15,912

– II-55 –

APPENDIX II ACCOUNTANTS’ REPORT ON THE TARGET GROUP

II. NOTES TO FINANCIAL INFORMATION (continued)

26. FINANCIAL INSTRUMENTS BY CATEGORY (continued)

Financial liabilities

Financial liabilities at amortised cost

Trade payables Financial liabilities included in other payables and accruals Interest-bearing bank and other borrowings Due to related parties	As at 31 December 2013 2014 2015 HK$’000 HK$’000 HK$’000 2,902 518 4,021 2,300 1,292 615 110,427 87,826 60,308 75,369 116,180 31,364 190,998 205,816 96,308	As at 30 June 2016 HK$’000 883 427 53,306 21,243
		75,859

27. FAIR VALUE AND FAIR VALUE HIERARCHY OF FINANCIAL INSTRUMENTS

The carrying amounts and fair values of the Target Group’s financial instruments reasonably approximate to fair values.

Management has assessed that the fair values of cash and bank balances, trade receivables, financial assets included in prepayments and other receivables, trade payables, financial liabilities included in other payables and accruals, interest-bearing bank and other borrowings and amounts due to related parties approximate to their carrying amounts largely due to the short term maturities of these instruments.

The fair values of the financial assets and liabilities are included at the amount at which the instrument could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale.

– II-56 –

ACCOUNTANTS’ REPORT ON THE TARGET GROUP

APPENDIX II

II. NOTES TO FINANCIAL INFORMATION (continued)

28. FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES

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

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

Interest rate risk

The Target Group’s exposure to the risk of changes in market interest rates relates primarily to the Target Group’s debt obligations with floating interest rates.

For the floating rate bank borrowing, a 50 basis point increase/decrease in interest rate at 31 December 2013, 2014 and 2015 and 30 June 2016 would have increased/decreased the Target Group’s loss before tax for the years ended 31 December 2013, 2014 and 2015 and the six months ended 30 June 2016 by HK$552,000, HK$439,000 and HK$302,000 and HK$133,000, respectively.

Foreign currency risk

Foreign currency risk is the risk that the value of a financial instrument will fluctuate because of changes in foreign exchange rates. Individual companies within the Target Group have limited foreign currency risk as most of the transactions are denominated in the same currency as the functional currency of the operations in which they relate. However, as the subsidiary mainly carried out transactions in IDR, therefore any appreciation or depreciation of HK$ against IDR affect the Target Group’s consolidated financial position and be reflected in the exchange fluctuation reserve.

– II-57 –

APPENDIX II ACCOUNTANTS’ REPORT ON THE TARGET GROUP

II. NOTES TO FINANCIAL INFORMATION (continued)

28. FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES (continued)

Credit risk

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

The main credit risk exposure to the Target Group arises from the default or delinquency in payment of trade receivables. The Target Group has concentration of credit risk in relation to trade receivables as the Target Group trades only with one customer to sell electricity. The trade receivables are monitored on an ongoing basis. In the opinion of the Directors, the credit risk is not significant.

With respect to credit risk arising from the other financial assets of the Target Group, which comprise cash and bank balances and financial assets included in other receivables, the Target Group’s exposure to the credit risk arises from the default of the counterparties, with a maximum exposure equal to the carrying amounts of these financial assets in the consolidated statements of financial position.

Liquidity risk

The Target Group’s objective is to maintain a balance between the continuity of funding and flexibility through the use of bank borrowings and financing by related parties.

– II-58 –

ACCOUNTANTS’ REPORT ON THE TARGET GROUP

APPENDIX II

II. NOTES TO FINANCIAL INFORMATION (continued)

28. FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES (continued)

Liquidity risk (continued)

The maturity profile of the Target Group’s financial liabilities as at the end of each reporting period durinig the Relevant Periods, based on the contractual undiscounted payments and the earliest date the Target Group could be required to pay, was as follows:

Notes Trade payables 14 Other payables and accruals 15 Due to related parties 17 Interest-bearing bank and other borrowings 16	Within 1 year or on demand As at 31 December 2013 2014 2015 HK$’000 HK$’000 HK$’000 2,902 518 4,021 2,318 1,322 736 75,369 116,180 31,364 110,427 87,826 60,308 191,016 205,846 96,429	As at 30 June 2016 HK$’000 883 468 21,243 53,306
		75,900

Capital management

The primary objectives of the Target Group’s capital management are to safeguard the Target Group’s ability to continue as a going concern and to maintain healthy capital ratios in order to support its business and maximise shareholders’ value.

The Target Group manages its capital structure and makes adjustments to it in light of changes in economic conditions. To maintain or adjust the capital structure, the Target Group may adjust the dividend payment to shareholders or issue new shares. No changes were made in the objectives, policies or processes for managing capital during the Relevant Periods.

– II-59 –

ACCOUNTANTS’ REPORT ON THE TARGET GROUP

APPENDIX II

II. NOTES TO FINANCIAL INFORMATION (continued)

29. STATEMENTS OF FINANCIAL POSITION OF THE TARGET COMPANY

Information about the statements of financial position of the Target Company at the end of each reporting period during the Relevant Periods is as follows:

NON-CURRENT ASSET Investment in a subsidiary CURRENT ASSETS Due from a subsidiary Bank balances Total current assets CURRENT LIABILITIES Accruals Due to related parties Total current liabilities NET CURRENT LIABILITIES Net assets/(liabilities) EQUITY/(DEFICIENCY IN ASSETS) Share capital Reserves (note) Total equity/(deficiency in assets)	As at 31 December 2013 2014 2015 HK$’000 HK$’000 HK$’000 52,829 55,594 99,551 — 28,985 — 7 13 11 7 28,998 11 26 35 9 52,816 86,467 66 52,842 86,502 75 (52,835) (57,504) (64) (6) (1,910) 99,487 — — — (6) (1,910) 99,487 (6) (1,910) 99,487	As at 30 June 2016 HK$’000 140,707 — 8 8 9 6,542 6,551 (6,543) 134,164 — 134,164 134,164

– II-60 –

APPENDIX II ACCOUNTANTS’ REPORT ON THE TARGET GROUP

II. NOTES TO FINANCIAL INFORMATION (continued)

29. STATEMENTS OF FINANCIAL POSITION OF THE TARGET COMPANY (continued)

Note:

A summary of the Target Company’s reserves is as follows:

At 1 January 2013 Loss for the year and total comprehensive income for the year At 31 December 2013 and 1 January 2014 Loss for the year and total comprehensive income for the year At 31 December 2014 and 1 January 2015 Loss for the year and total comprehensive income for the year Capitalisation of shareholders’ loans At 31 December 2015 and 1 January 2016 Loss for the period and total comprehensive income for the period Shareholder’s capital contributions At 30 June 2016	Other Accumulated reserve losses HK$’000 HK$’000 — 4 — (10) — (6) — (1,904) — (1,910) — (5,928) 107,325 — 107,325 (7,838) — (5) 34,682 — 142,007 7,843	Total HK$’000 4 (10) (6) (1,904) (1,910) (5,928) 107,325 99,487 (5) 34,682 134,164

– II-61 –

APPENDIX II ACCOUNTANTS’ REPORT ON THE TARGET GROUP

III. SUBSEQUENT FINANCIAL STATEMENTS

No audited financial statements have been prepared by the Target Company or its subsidiary in respect of any period subsequent to 30 June 2016.

Yours faithfully,

Ernst & Young Certified Public Accountants Hong Kong

– II-62 –

APPENDIX III UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

The information set out in this appendix does not form part of the accountants’ report prepared by the reporting accountants of our Company, Ernst & Young, Certified Public Accountants, Hong Kong, set out in Appendix II “Accountants’ Report on the Target Group” to this circular and is included herein for information only.

==> picture [86 x 70] intentionally omitted <==

22nd Floor CITIC Tower 1 Tim Mei Avenue Central Hong Kong 24 August 2016

The Board of Directors ELL Environmental Holdings Limited Units 1-3, 11/F Westlands Centre 20 Westlands Road, Quarry Bay Hong Kong

Dear Sirs,

Independent Reporting Accountants’ Assurance Report on the Compilation of Pro Forma Financial Information

We have completed our assurance engagement to report on the compilation of pro forma financial information of ELL Environmental Holdings Limited (the “Company”) and its subsidiaries (hereinafter collectively referred to as the “Group”) together with Weal Union Limited (the “Target Company”) and its subsidiary (the “Target Group”) by the directors of the Company (the “Directors”) for illustrative purposes only. The pro forma financial information consists of the unaudited pro forma consolidated statement of assets and liabilities as at 31 December 2015 and related notes as set out on pages III-5 to III-8 of the circular dated 24 August 2016 (the “Circular”) issued by the Company (the “Pro Forma Financial Information”) in connection with the proposed acquisition of 100% of the issued share capital of the Target Company by a wholly-owned subsidiary of the Company (the “Proposed Acquisition”). The applicable criteria on the basis of which the Directors have compiled the Pro Forma Financial Information are described in Section A of Appendix III to the Circular.

The Pro Forma Financial Information has been compiled by the Directors to illustrate the impact of the Proposed Acquisition on the Group’s assets and liabilities as at 31 December 2015 as if the Proposed Acquisition had taken place on 31 December 2015. As part of this process, information about the Group’s assets and liabilities have been extracted by the Directors from the Group’s financial statements for the year ended 31 December 2015, on which an audit report has been issued. Information about the Target Group’s assets and liabilities have been extracted by the Directors from the Target Group’s financial information as at 30 June 2016, on which an accountants’ report has been published in Appendix II to the Circular.

– III-1 –

UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

APPENDIX III

Directors’ responsibility for the Pro Forma Financial Information

The Directors are responsible for compiling the 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 (“AG”) 7 Preparation of Pro Forma Financial Information for Inclusion in Investment Circulars issued by the Hong Kong Institute of Certified Public Accountants (the “HKICPA”).

Our independence and quality control

We have complied with the independence and other ethical requirements of the Code of Ethics for Professional Accountants issued by the HKICPA, which is founded on fundamental principles of integrity, objectivity, professional competence and due care, confidentiality and professional behavior.

Our firm applies Hong Kong Standard on Quality Control 1 Quality Control for Firms that Perform Audits and Reviews of Financial Statements, and Other Assurance and Related Services Engagements , and accordingly maintains a comprehensive system of quality control including documented policies and procedures regarding compliance with ethical requirements, professional standards and applicable legal and regulatory requirements.

Reporting Accountants’ responsibilities

Our responsibility is to express an opinion, as required by paragraph 4.29(7) of the Listing Rules, on the 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 Pro Forma Financial Information beyond that owed to those to whom those reports were addressed by us at the dates of their issue.

We conducted our engagement in accordance with Hong Kong Standard on Assurance Engagements 3420 Assurance Engagements to Report on the Compilation of Pro Forma Financial Information Included in a Prospectus issued by the HKICPA. This standard requires that the reporting accountants comply with ethical requirements and plan and perform procedures to obtain reasonable assurance about whether the Directors have compiled the Pro Forma Financial Information in accordance with paragraph 4.29 of the Listing Rules and with reference to AG7 issued by the HKICPA.

For purposes of this engagement, we are not responsible for updating or reissuing any reports or opinions on any historical financial information used in compiling the Pro Forma Financial Information, nor have we, in the course of this engagement, performed an audit or review of the financial information used in compiling the Pro Forma Financial Information.

– III-2 –

UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

APPENDIX III

The purpose of the Pro Forma Financial Information included in the Circular is solely to illustrate the impact of the Proposed Acquisition on unadjusted financial information of the Group as if the Proposed Acquisition had been undertaken at an earlier date selected for purposes of the illustration. Accordingly, we do not provide any assurance that the actual outcome of the Proposed Acquisition would have been as presented.

A reasonable assurance engagement to report on whether the Pro Forma Financial Information has been properly compiled on the basis of the applicable criteria involves performing procedures to assess whether the applicable criteria used by the Directors in the compilation of the Pro Forma Financial Information provide a reasonable basis for presenting the significant effects directly attributable to the Proposed Acquisition, and to obtain sufficient appropriate evidence about whether:

The related pro forma adjustments give appropriate effect to those criteria; and
The Pro Forma Financial Information reflects the proper application of those adjustments to the unadjusted financial information.

The procedures selected depend on the reporting accountants’ judgement, having regard to the reporting accountants’ understanding of the nature of the Group, the Proposed Acquisition in respect of which the Pro Forma Financial Information has been compiled, and other relevant engagement circumstances.

The engagement also involves evaluating the overall presentation of the Pro Forma Financial Information.

We believe that the evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.

Opinion

In our opinion:

(a) the Pro Forma Financial Information has been properly compiled on the basis stated;
(b) such basis is consistent with the accounting policies of the Group; and
(c) the adjustments are appropriate for the purpose of the Pro Forma Financial Information as disclosed pursuant to paragraph 4.29(1) of the Listing Rules.

Yours faithfully,

Ernst & Young Certified Public Accountants Hong Kong

– III-3 –

APPENDIX III UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

A. UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

(1) Introduction

The following is an illustrative unaudited pro forma consolidated statement of assets and liabilities of the Enlarged Group as at 31 December 2015 (the “Unaudited Pro Forma Financial Information”) which has been prepared on the basis of the notes set forth below for the purpose of illustrating the effects of the proposed acquisition of the entire issued share capital of the Target Company (the “Proposed Acquisition”), as if the Proposed Acquisition had been completed on 31 December 2015.

The Unaudited Pro Forma Financial Information has been prepared by the Directors for illustrative purposes only, based on their judgements, estimations and assumptions, and because of its hypothetical nature, it may not give a true picture of the assets and liabilities of the Enlarged Group had the Proposed Acquisition been completed on 31 December 2015 or any future date.

The Unaudited Pro Forma Financial Information has been prepared based on the audited consolidated statement of financial position of the Group as at 31 December 2015 included in the published 2015 annual report of our Company and the audited consolidated statement of financial position of the Target Group as at 30 June 2016 as set out in the Accountant’s Report in Appendix II to this circular after giving effect to the unaudited pro forma adjustments as described in the accompanying notes.

The Unaudited Pro Forma Financial Information should be read in conjunction with other financial information included elsewhere in this circular.

– III-4 –

UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

APPENDIX III

(2) UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF ASSETS AND LIABILITIES OF THE ENLARGED GROUP

NON-CURRENT ASSETS Property, plant and equipment Receivables under service concession arrangements Available-for-sale investments Goodwill Deferred tax assets Total non-current assets CURRENT ASSETS Inventories Trade receivables Receivables under service concession arrangements Prepayments and other receivables Income tax recoverable Cash and cash equivalents Total current assets CURRENT LIABILITIES Trade payables Other payables and accruals Due to related parties Derivative financial instrument Interest-bearing bank borrowings Income tax payables Total current liabilities	The Group as at 31 December 2015 HK$’000 Note1 2,310 349,807 127,921 — — 480,038 246 — 40,410 1,289 693 87,763 130,401 12,186 3,543 — 794 32,864 627 50,014	The Target Group as at 30 June 2016 Pro forma adjustments HK$’000 HK$’000 HK$’000 Note 2 Note 3 Note 4 156,074 6,757 — — — — — — — — 57,660 — 6,915 — — 162,989 737 — — 2,118 — — — — — 573 — — — — — 13,794 (93,000) (2,443) 17,222 883 — — 468 — — 21,243 — — — — — 53,306 — — — — — 75,900	Unaudited pro forma total for the Enlarged Group as at 31 December 2015 HK$’000 165,141 349,807 127,921 57,660 6,915
			707,444
			983 2,118 40,410 1,862 693 6,114
			52,180
			13,069 4,011 21,243 794 86,170 627
			125,914

– III-5 –

UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

APPENDIX III

NET CURRENT ASSETS/(LIABILITIES) TOTAL ASSETS LESS CURRENT LIABILITIES NON-CURRENT LIABILITIES Interest-bearing bank borrowing Deferred tax liabilities Provision for major overhauls Defined benefit liability Total non-current liabilities Net assets	The Group as at 31 December 2015 HK$’000 Note1 80,387 560,425 2,336 36,514 6,440 — 45,290 515,135	The Target Group as at 30 June 2016 Pro forma adjustments HK$’000 HK$’000 HK$’000 Note 2 Note 3 Note 4 ( 58,678) 104,311 — — — — 1,689 — — — — 136 — — 136 104,175	Unaudited pro forma total for the Enlarged Group as at 31 December 2015 HK$’000 ( 73,734)
			633,710
			2,336 38,203 6,440 136
			47,115
			586,595

– III-6 –

APPENDIX III UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

(3) NOTES TO THE UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

The balances are extracted from the consolidated statement of financial position of the Group as at 31 December 2015 as set out in the published annual report of the Group for the year ended 31 December 2015.
The balances are extracted from the consolidated statement of financial position of the Target Group as at 30 June 2016 as set out in the accountants’ report of the Target Group in Appendix II to this circular.
Upon the completion of the Proposed Acquisition, the identifiable assets and liabilities of the Target Group will be accounted for in the consolidated financial statements of the Enlarged Group at their fair values under the acquisition method in accordance with Hong Kong Financial Reporting Standard 3 Business Combinations issued by the Hong Kong Institute of Certified Public Accountants. The goodwill arising from the Proposed Acquisition is calculated as follows:

Notes Cash consideration (i) Fair value of Consideration Shares issued (ii) Total consideration for the Proposed Acquisition Less: Fair value of the net assets acquired (iii) Goodwill arising from the Proposed Acquisition (the “Goodwill”) (iv)	HK$’000 93,000 72,345 165,345 (107,685) 57,660

Notes:

(i) In accordance with the SPA (as defined in this circular), the cash consideration for the Proposed Acquisition is US$12,000,000 (equivalent to approximately HK$93,000,000).
(ii) The fair value of Consideration Shares issued is calculated based on the closing price of HK$0.455 per Share as quoted on the Stock Exchange on 16 June 2016 (the date of the SPA) and 159,000,000 Consideration Shares.

– III-7 –

UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

APPENDIX III

(iii) The Directors have determined that the fair values of the identifiable assets and liabilities (other than property, plant and equipment) of the Target Group approximate their carrying amounts as at 30 June 2016. The fair value of property, plant and equipment as at 30 June 2016 are assumed by the Directors to be HK$162,831,000, which represents the aggregation of US$20,626,000 (equivalent to approximately HK$159,852,000) with reference to the valuation as at 31 December 2015 (the “Valuation”) performed by AVISTA Valuation Advisory Limited, an independent valuer, and the additions of property, plant and equipment of HK$2,979,000 during the six months ended 30 June 2016. The fair values of the identifiable assets and liabilities of the Target Group are reconciled as follows:

Net assets of the Target Group as at 30 June 2016 Less: Property, plant and equipment of the Target Group as set out in the accountants’ report in Appendix II to this circular Add: Property, plant and equipment with reference to the Valuation Less: Deferred tax liabilities on fair value adjustment Total identifiable net assets at fair value Non-controlling interests	HK$’000 104,175 (156,074) 162,831 (1,689) 109,243 (1,558) 107,685

(iv) For the purpose of the Unaudited Pro Forma Financial Information of the Enlarged Group, fair values of net assets of the Target Group of HK$107,685,000 and fair value of Consideration Shares issued of HK$72,345,000 were used to determine the goodwill of the Proposed Acquisition. Upon completion of the Proposed Acquisition, the fair value of the net assets of the Target Group and fair value of Consideration Shares issued as at the date of completion will be used to determine the actual amount of goodwill of the Proposed Acquisition. Such actual amount may be different for the amount presented herein and such difference may be significant.

The Directors confirm that consistent policies and assumptions have been applied for the purpose of assessing impairment of goodwill under HKAS 36 Impairment of Assets , and the Directors are not aware of any indication that an impairment of the Enlarged Group’s goodwill is required after considering the nature, prospects, financial condition and business risks of the Enlarged Group.

For the purpose of the Unaudited Pro Forma Financial Information of the Enlarged Group, the transaction expenses, such as professional services and printing costs, that are directly attributable to the Proposed Acquisition are estimated to be HK$2,443,000.
The translation between HK$ and US$ had been made at the rate of HK$7.75 to US$1. No representation is made that HK$ have been, could have been or could be converted to US$, or vice versa, at that rate or at any other rates or at all.
No other adjustment has been made to the Unaudited Pro Forma Financial Information to reflect any trading results or other transactions of the Group and the Target Group entered into subsequent to 31 December 2015 and 30 June 2016, respectively.

– III-8 –

MANAGEMENT DISCUSSION AND ANALYSIS ON THE TARGET GROUP

APPENDIX IV

Set out below is the management discussion and analysis of the Target Group for FY2013, FY2014, FY2015 and the six months ended 30 June 2016. As at 30 June 2016, the Target Group comprised Weal Union and RPSL. The following financial information is based on the financial information of the Target Group as set out in Appendix II to this circular.

BUSINESS AND FINANCIAL REVIEW

For the three years ended 31 December 2015 and the six months ended 30 June 2016, the principal activity of Weal Union was investment holding, and the principal activities of RPSL included the operation of the Mill, as well as the operation and construction of the Ancillary Power Plant.

The major assets of Weal Union is the entire issued share capital of RPSL and the major assets of RPSL is the leasehold property and buildings that comprised the Mill and the Ancillary Power Plant.

FINANCIAL AND BUSINESS PERFORMANCE

RPSL operates the Mill, being a palm kernel oil mill that produces palm kernel expeller at a capacity of 33,750 tons per year and palm kernel oil at a capacity of 41,250 tons, in Jambi City, Indonesia. The Mill crushes palm kernel to render palm kernel oil for sale and the palm kernel expeller for use as additional fuel for the Ancillary Power Plant. The operation of the Mill is supported by the Ancillary Power Plant, being a power plant that comprises two power units constructed and owned by RPSL. As at the date of this circular, one power unit having a power output capacity of 15 Megawatt is in operation and supplies power to the Mill for up to around 2 Megawatt. The excess power generated is sold to PLN pursuant to the PLN Contract. PLN has a de facto monopoly over the supply of power in Indonesia, with rights of first refusal to any activity in the sector.

Revenue

The Target Group had two principal segments, the power supply segment generates and supplies electricity, and the palm kernel oil segment produces and sells palm kernel oil. For FY2013, FY2014, FY2015 and the six months ended 30 June 2015 and 2016, the Target Group generated revenue of approximately HK$17.0 million, HK$4.6 million, HK$27.3 million, HK$9.3 million and HK$12.0 million, respectively. An analysis of the Target Group’s revenue is as follows:

Revenue Sales of palm kernel oil Sales of electricity	Six months ended Year ended 31 December 30 June 2013 2014 2015 2015 2016 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 (Unaudited) — 1,151 1,825 1,315 — 16,993 3,421 25,429 7,990 11,988 16,993 4,572 27,254 9,305 11,988	Six months ended Year ended 31 December 30 June 2013 2014 2015 2015 2016 HK$’000 HK$’000 HK$’000 HK$’000 HK$’000 (Unaudited) — 1,151 1,825 1,315 — 16,993 3,421 25,429 7,990 11,988 16,993 4,572 27,254 9,305 11,988
		11,988

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MANAGEMENT DISCUSSION AND ANALYSIS ON THE TARGET GROUP

APPENDIX IV

Revenue generated from sales of electricity accounted for 100%, 74.8%, 93.3%, 85.9% and 100%, respectively, of the Target Group’s revenue for FY2013, FY2014, FY2015 and the six months ended 30 June 2015 and 2016, respectively.

The Target Group had not commenced commercial production of the Mill and did not record any revenue from the sales of palm kernel oil in FY2013. In FY2014, the Target Group commenced commercial production of the Mill and began generating revenue from sales of palm kernel oil. In addition, the revenue generated from the sales of electricity decreased significantly in FY2014 as it was not able to renew its power supply contract with PLN for a material part of FY2014 due to an over-supply of electricity by diesel fuel oil power plants in vicinity. The revenue of the Target Group increased significantly in FY2015 as RPSL secured the PLN Contract for the sales of electricity to PLN in 2015 as the demand for biomass generated electricity increased significantly and diesel fuel oil power plants in vicinity in Jambi City were closed down as a result of both PLN’s and Indonesian Government’s policies to speed up renewable energy exploitation and to replace utilisation of diesel fuel oil with non-diesel fuel oil power plants in late 2014 and 2015. In the six months ended 30 June 2016, the Target Group did not sell any palm kernel oil due to the unfavourable palm kernel oil selling prices, which makes the sales of palm kernel oil unprofitable. The sales of electricity increased by 50.0% as compared with the amount of sales generated in the six months ended 30 June 2015 primarily due to (i) the increase of amount of sales of electricity to PLN, and (ii) increase in the per unit selling price of electricity from IDR750 per kilowatt-hour (equivalent to approximately HKD0.422 per kilowatt-hour) to IDR900 per kilowatt-hour (equivalent to approximately HKD0.509 per kilowatt-hour) pursuant to an amendment agreement signed between PLN and RPSL on 2 July 2015.

Gross profit

For FY2013, FY2014, FY2015 and the six months ended 30 June 2015 and 2016, the Target Group generated gross profit of approximately HK$0.9 million, gross loss of approximately HK$9.7 million, gross profit of approximately HK$ 2.8 million, gross loss of approximately HK$2.2 million and gross profit of approximately HK$0.4 million, respectively. The significant gross loss incurred in FY2014 was due to the loss of revenue generated from sales of electricity to PLN as aforementioned while continuing to incur costs of sales for the operation of the Mill and the Ancillary Power Plant. The Target Group recognized gross profit in FY2015 as RPSL resumed its supply of electricity to PLN under the PLN Contract. The Target Group recorded gross profit in the six months ended 30 June 2016, instead of a gross loss in the six months ended 30 June 2015 primarily due to (i) the increase of amount of sales of electricity to PLN, and (ii) increase in the per unit selling price of electricity from IDR750 per kilowatthour to IRD900 per kilowatt-hour pursuant to an amendment agreement signed between PLN and RPSL on 2 July 2015.

– IV-2 –

MANAGEMENT DISCUSSION AND ANALYSIS ON THE TARGET GROUP

APPENDIX IV

Administrative expenses

For FY2013, FY2014, FY2015 and the six months ended 30 June 2015 and 2016, the Target Group incurred administrative expenses of approximately HK$1.2 million, HK$0.5 million, HK$5.6 million, HK$2.8 million and HK$2.9 million, respectively. The decrease in administrative expenses incurred in FY2014 was resulted from the reduced scale of production of the Ancillary Power Plant due to RPSL’s failure to secure a power supply contract with PLN as aforementioned. The increase in administrative expenses incurred in FY2015 was resulted from the resumption of supply of electricity to PLN under the PLN Contract. The amount of administrative expenses incurred in the six months ended 30 June 2016 remained stable as compared to the amount incurred in the six months ended 30 June 2015.

Finance costs

For FY2013, FY2014, FY2015 and the six months ended 30 June 2015 and 2016, the Target Group incurred finance costs of approximately HK$2.1 million, HK$5.9 million, HK$4.2 million, HK$2.3 million and HK$1.7 million, respectively. Finance costs increased significantly in FY2014 as a large proportion of interest expenses of approximately HK$12.2 million were capitalized for the construction of the Mill and the Ancillary Power Plant for FY2013. For FY2014 and FY2015, only approximately HK$5.8 million and HK$4.1 million, respectively, of interest expenses were capitalized with the construction work of the Mill and the first unit of the Ancillary Power Plant having been completed. The amount of finance costs incurred in the six months ended 30 June 2016 decreased by around 27.3% from the six months ended 30 June 2015 primarily due to the reduced carrying amount of the outstanding bank loan and hence the reduced amount of interest paid.

Net loss before tax

For FY2013, FY2014, FY2015 and the six months ended 30 June 2015 and 2016, the Target Group incurred net loss before tax of approximately HK$1.6 million, HK$15.7 million, HK$6.5 million, HK$6.9 million and HK$3.7 million, respectively. The fluctuations of the net loss before tax were attributed to the fluctuations of revenue, gross profit/loss, administrative expenses and finance costs as set out above.

Tax credit

For FY2013, FY2014, FY2015 and the six months ended 30 June 2015 and 2016, the Target Group incurred income tax credit of approximately HK$0.4 million, HK$4.0 million, HK$1.7 million, HK$1.8 million and HK$0.9 million, respectively. Under the applicable tax laws, the weighted average applicable tax rates were 24.9%, 25.0%, 25.0%, 25.0% and 25.0%, respectively. Accordingly, for FY2013, FY2014, FY2015 and the six months ended 30 June 2015 and 2016, the Target Group incurred net loss after tax of approximately HK$1.2 million, HK$11.7 million, HK$4.9 million, HK$5.2 million and HK$2.8 million, respectively.

– IV-3 –

MANAGEMENT DISCUSSION AND ANALYSIS ON THE TARGET GROUP

APPENDIX IV

Net loss attributable to shareholders

The consolidated loss attributable to shareholders of the Weal Union for FY2013, FY2014, FY2015 and the six months ended 30 June 2015 and 2016 amounted to approximately HK$1.1 million, HK$11.1 million, HK$4.6 million, HK$4.9 million and HK$2.6 million, primarily for reasons set forth above.

CAPITAL STRUCTURE, LIQUIDITY AND FINANCIAL RESOURCES

The Target Group relies primarily on bank borrowing and the support of its related parties to obtain funding. The maturity profile of the Target Group’s financial liabilities as at 31 December 2013, 2014 and 2015 and 30 June 2016, based on the contractual undiscounted payments and the earliest date the Target Group could be required to pay, was as follows:

Trade payables Other paybles and accruals Due to related parties Interest-bearing bank and other borrowings	Within 1 year or on demand as at 31 December 30 June 2013 2014 2015 2016 HK$’000 HK$’000 HK$’000 HK$’000 2,902 518 4,021 883 2,318 1,322 736 468 75,369 116,180 31,364 21,243 110,427 87,826 60,308 53,306 191,016 205,846 96,429 75,900	Within 1 year or on demand as at 31 December 30 June 2013 2014 2015 2016 HK$’000 HK$’000 HK$’000 HK$’000 2,902 518 4,021 883 2,318 1,322 736 468 75,369 116,180 31,364 21,243 110,427 87,826 60,308 53,306 191,016 205,846 96,429 75,900
		75,900

As at 31 December 2013, 2014 and 2015 and 30 June 2016, the Target Group held cash and bank balances of approximately HK$10.8 million, HK$9.2 million, HK$7.8 million and HK$13.8 million, respectively.

GEARING RATIO

As at 31 December 2015 and 30 June 2016, the gearing ratio of the Target Group was 127.7% and 59.7%. The gearing ratio is calculated as net debt divided by total capital. Net debt is calculated as total debt less cash and bank balances (excluding restricted cash) and the total capital is the total equity as shown in the consolidated statements of financial position. As at 31 December 2013 and 2014, the Target Group recorded a deficiency in assets of approximately HK$9.5 million and HK$23.9 million, respectively.

– IV-4 –

MANAGEMENT DISCUSSION AND ANALYSIS ON THE TARGET GROUP

APPENDIX IV

LIQUIDITY RISKS

The financial liabilities of the Target Group included primarily trade payables, other payables and accruals, interest-bearing bank and other borrowings, amounts due to related parties company which are due within one year at each of the end of the three years ended 31 December 2015 and the six months ended 30 June 2016.

Approximately HK$191.0 million, HK$205.8 million, HK$96.4 million and HK$75.9 million was payable within one year or on demand as at 31 December 2013, 2014 and 2015 and 30 June 2016, respectively. As at 30 June 2016, the Target Group held cash and bank balances of HK$13.8 million.

The Target Group recorded net current liabilities of approximately HK$176.3 million, HK$194.7 million, HK$85.2 million and HK$58.7 million as at 31 December 2013, 2014 and 2015 and 30 June 2016.

As part of the conditions precedent to the completion of the SPA, the Target Group is required to undergo a restructuring of its capital to capitalise the amounts due from its related parties to reduce its liabilities. Based on the information available to the Company, an aggregate of approximately HK$21.2 million was due to related parties as at 30 June 2016. An aggregate HK$4.6 million is expected to be capitalised by 30 August 2016. For details, please refer to the paragraph headed “Letter from the Board – 2. The Share Purchase Agreement – Conditions precedent to Completion” in this circular. Upon Completion, the Directors will closely monitor the Target Group’s liquidity position and financial performance and have taken steps to improve the Target Group’s cash flows and liquidity position.

INTEREST RATE RISKS

The Target Group’s interest rate risk arises primarily from bank borrowing. The bank loan as at 31 December 2013, 2014 and 2015 and 30 June 2016 was denominated in IDR and was a floating rate loan with effective interest rates of 10.75% per annum as at 31 December 2013, 10.88% per annum as at 31 December 2014 and 2015 and 10.86% per annum as at 30 June 2016.

Such bank loan was secured by certain property, plant and equipment of the Target Group as described above, 100% equity interest of RPSL, unlimited personal guarantees provided by Mr. Fadjar Suhendra and Mr. Sugih Suhendra and an unlimited corporate guarantee provided by PT. Growth Sumatra Industry which is a company controlled by Mr. Fadjar Suhendra and Mr. Sugih Suhendra.

Other than the bank loan, the Target Group had a borrowing of approximately HK$0.05 million as at 31 December 2013. Such borrowing amount was denominated in IDR at an effective interest rate of 0.88% per annum and was fully repaid in 2014. Such borrowing was secured by certain motor vehicles of the Target Group.

– IV-5 –

MANAGEMENT DISCUSSION AND ANALYSIS ON THE TARGET GROUP

APPENDIX IV

CREDIT RISKS

The main credit risk exposure to the Target Group arises from the default or delinquency in payment of trade receivables. The Target Group has concentration of credit risk in relation to trade receivables as the Target Group trades only with PLN to whom it sells it excess power. The trade receivables are monitored on an ongoing basis. In the opinion of the Directors, the credit risk is not significant.

FOREIGN CURRENCY RISKS

RPSL has limited foreign currency risk as it mainly carried out transactions in IDR, which is the functional currency of their operations. However, as the Target Group’s consolidated financial position is reported in HK$, any appreciation or depreciation of HK$ against IDR affect the Target Group’s consolidated financial position and be reflected in the exchange fluctuation reserve. The management manages its foreign currency risk by closely reviewing the movement of the foreign currency rate and by considering hedging significant foreign currency exposure as necessary. For FY2013, FY2014, FY2015 and the six months ended 30 June 2016, the Target Group had not utilized any financial instruments for hedging purposes.

CONTINGENT LIABILITIES

As at 31 December 2013, 2014 and 2015 and 30 June 2016, the Target Group did not have any significant contingent liabilities.

CAPITAL COMMITMENT

As at 31 December 2013, 2014 and 2015 and 30 June 2016, the capital commitments of the Target Group as follows:

				As at
	As	at 31 December		30 June
	2013	2014	2015	2016
	HK$’000	HK$’000	HK$’000	HK$’000
Contracted, but not provided for	20,848	868	—	1,160

– IV-6 –

MANAGEMENT DISCUSSION AND ANALYSIS ON THE TARGET GROUP

APPENDIX IV

CHARGE OF ASSETS

As at 31 December 2013, 2014 and 2015 and 30 June 2016, certain property, plant and equipment of the Target Group with an aggregate carrying amount of HK$165.8 million, HK$165.7 million, HK$148.8 million and HK$155.9 million, respectively, were pledged to secure a bank loan granted to the Target Group, of which approximately HK$110.4 million, HK$87.8 million, HK$60.3 million and HK$53.3 million was outstanding as at 31 December 2013, 2014 and 2015, and 30 June 2016, respectively.

As at 31 December 2013, certain motor vehicles of the Target Group with an aggregate carrying amount of HK$0.1 million were pledged to secure another borrowing granted to the Target Group which was fully repaid in 2014.

MATERIAL INVESTMENTS, ACQUISITIONS OR DISPOSALS

The Target Group did not make any significant investment or acquisition or dispose of any subsidiary or associated company during FY2013, FY2014, FY2015 and the six months ended 30 June 2016. To the best of the knowledge of the Company, there is no future plans for material investments or acquisition of capital assets by the Target Group.

FUTURE PLANS

The Target Group is in the process of constructing interconnection facilities for the second power unit, the cost of which is expected to be approximately IDR3,952 million (equivalent to approximately HK$2.2 million). It has no plans for other material investments for the twelve months from the date of this circular. We expect the aforesaid construction costs to be funded by the Target Group’s internal funds.

EMPLOYEES AND REMUNERATION POLICIES

As at 31 December 2013, 2014 and 2015, and 30 June 2016 the Target Group had a total of 2, 4, 6 and 6 employees, respectively. Remuneration packages (including salaries, allowances, benefits-in-kind, discretionary bonuses and pension scheme expenses) are structured by reference to market rates, terms of employment, and employees’ contributions based on performance appraisals.

LITIGATION

As at 30 June 2016, the Target Group had no material pending litigation.

– IV-7 –

APPENDIX V(A)

BUSINESS VALUATION REPORT

The following is the text of the valuation report of Avista for the purpose of incorporation into this circular.

��

The Board of Directors

Unit 907, 9th Floor Westlands Centre 20 Westlands Road Quarry Bay, Hong Kong

Ref No.: J16-0176

24 August 2016

Dear Sirs,

In accordance with your instructions, we have performed a fair value analysis in connection with the potential acquisition of Weal Union Limited (the “ Target ”) as of 31 December 2015 (the “ Analysis Date ”). We understand that ELL Environmental Holdings Limited (the “ Company ”, “ ELL ” or “ you ”) intends to acquire the entire issued share capital of the Target (the “ Proposed Acquisition ”).

It is our understanding that this appraisal is strictly addressed to the directors of the Company (the “ Directors ”) and used for the Proposed Acquisition solely for your internal reference purpose. This report (the “ Report ”) does not constitute an opinion on the commercial merits and structure of the Proposed Acquisition. We are not responsible for unauthorized use of the Report.

We accept no responsibility for the realization and completeness of any estimated data, or estimates furnished by or sourced from any third parties which we have used in connection with this Report. We assumed that financial and other information provided to us are accurate and complete.

This Report presents the summary of the business appraised, describes the basis of analysis and assumptions, explains the analysis methodology adopted in this appraisal process to calculate the value, also the additional supporting documentation has been retained as a part of our work papers.

BASIS OF ANALYSIS

We have appraised the fair value of 100% equity interest of the Target.

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

– V(A)-1 –

APPENDIX V(A)

BUSINESS VALUATION REPORT

COMPANY BACKGROUND

ELL is a wastewater treatment services provider with three wastewater treatment facilities in Jiangsu Province, China. The Company covers the whole spectrum of activities from the design of wastewater treatment facilities, through the procurement of suitable equipment and materials, to the supervision of their construction as well as the on-going operation and maintenance of the facilities throughout long-term concession periods.

Weal Union is a limited liability company incorporated under the laws of Hong Kong, the issued capital of which is held as to 80% by Fusion Joy Holdings Inc. (“ Fusion Joy ”) and 20% by Carlton Asia Limited (“ Carlton Asia ”) as of the Analysis Date. Weal Union is an investment holding company holding 95% of the issued shares in PT Rimba Palma Sejahtera Lestari (“ RPSL ”, together with Weal Union as the “ Target Group ”), which in turn, operates a palm kernel oil mill with a capacity of production of palm kernel expeller of 33,750 tons per year and a capacity of production of palm kernel oil of 41,250 tons in Jambi City, Indonesia (the “ Mill ”). The operation of the Mill is supported by a power plant that comprises two power units owned and constructed by RPSL in order to ensure stable power supply (the “ Ancillary Power Plant ”). As of the Analysis Date, one power unit having a current power output of 15 Megawatt (“ MW ”) is in operation, supplying power to the Mill and excess power of 10 Megawatt to Indonesia’s state-owned power company, Perusahaan Listrik Negara (“ PLN ”), pursuant to a power supply contract dated 28 November 2014 between RPSL and PLN.

We understand that the Company intends to acquire the entire issued share capital of the Target. As such, the Company would like to assess the fair value of the 100% equity interest of the Target as of the Analysis Date.

INDUSTRY OVERVIEW

Overview of Indonesia Economy

In recent years, the economic growth of Indonesia has slowed down continuously. Its GDP growth in 2015 faltered to 4.8%, the slowest since the year 2011, as a result of a lack of government spending and investment. Despite this, Indonesia remains as one of the fastest growth economy in the emerging market. The World Bank recently projected that the Indonesian economy will return to a gradual growth path after the 5 years declining growth. It is forecasted that the GDP growth will be 5.3% in 2016 and reached 5.5% in 2017 owing to Indonesia’s commitment to increase foreign investment and government spending on infrastructure as a

– V(A)-2 –

APPENDIX V(A)

BUSINESS VALUATION REPORT

result of the President Joko Widodo’s reform. Even though it remains a net energy exporter due to the expansion of its coal and liquid biofuel production, the country is consuming more energy as a result of rising living standards, population growth and rapid urbanisation.

==> picture [417 x 149] intentionally omitted <==

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

Global Real GDP Growth
2015 2016 2017
Forecast
7.8 7.9
6.9 6.7 6.5 7.3
5.3 5.5
4.7
2.5 2.0 2.4 2.5 2.7 2.4 2.4 2.4 2.2
0.8 1.3 0.9
China India Indonesia Japan Thiland United States United Kingdom
----- End of picture text -----

Source: The World Bank

Overview of the Indonesian Biomass Energy Industry

Increase in supply from renewable sources, such as biomass, in the future energy mix is one of the reform agenda in the Indonesia’s energy sector. The government aims to speed up the exploitation of renewable energy and to increase its share of primary energy to 23% by 2025. In particular, Indonesia has significant potential for biomass energy generation from agricultural residues including rice husk, bagasse, rubber and especially palm oil.

Indonesia is the biggest producer of biomass among ASEAN Countries. According to an article “ Biomass Energy in Indonesia ” written by Salman Zafar, it is estimated that Indonesia produces 146.7 million tons of biomass per year. This makes biomass an attractive renewable energy source in Indonesia. However, it was reported that Indonesia is currently exploiting only around 5% of its renewable energy capacity. This makes Indonesia the lowest user of biomass as renewable energy source among ASEAN Countries.

The favorable government policies and the continually growing power demands of the country signal opportunities for increased exploitation of biomass wastes for power generation.

Overview of the Indonesian Palm Kernel Oil Industry

Palm kernel oil is the oil rendered from the edible seed of oil palm tree. It may be used as edible oils for pastry and confectionary, or industrially.

Indonesia consumes a large share of its domestic production of palm kernel oil, in which oleochemical product manufacturers are the main users of palm kernel oil, some of which can be used to produce fatty acid, fatty alcohol and glycerol.

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APPENDIX V(A)

BUSINESS VALUATION REPORT

According to the analysis of world consumption of vegetable oils during the period from 1980 to 2009 as illustrated in “ The Economic Benefit of Palm Oil to Indonesia ” published by World Growth, an international non-profit organization, in February 2011, the world consumption of palm kernel oil has increased from 2.7 million tonnes in 2000 to 5.2 million tonnes in 2009.

The increasing trend of world’s demand for palm kernel oil is considered as a favorable factor to the industry.

SCOPE OF WORKS

Our investigation included the discussions with the management of the Company and the Target Group (the “ Management ”) to understand the transaction background and the business operations of the Target Group.

We reviewed the historical financial information and the financial projection (the “ Projection ”) of the Target Group (the “ Information ”) provided by the Management without further verification and assumed these data we obtained from the Management during the course of analysis are true and accurate. We also assumed that the Projection provided by the Management was prepared with due care.

Excluded from the investigation are all inventories and all other tangible assets of a current nature or any intangible assets that might exist.

LIMITATIONS OF THE REPORT

The Report is addressed strictly to the Directors for their internal reference only. Accordingly, the Report may not be used nor relied upon in any other connection by, and are not intended to confer any benefit on, any person (including without limitation the respective shareholders of the Company and the Target).

The Report does not constitute an opinion on the commercial merits and structure of the Proposed Acquisition. The Report does not purport to contain all the information that may be necessary or desirable to fully evaluate the Proposed Acquisition. We are not required to and have not conducted a comprehensive review of the business, technical, operational, strategic or other commercial risks and merits of the Proposed Acquisition and such remain the sole responsibility of the Directors and the management of the Company.

We understand that the independent financial advisor may require the Report for their internal reference only. They will perform their own separate analysis to satisfy their role and responsibility. Our work and the Report are not meant to substitute their own procedures to substantiate the opinion they are required to render.

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APPENDIX V(A)

BUSINESS VALUATION REPORT

We have assumed and relied upon, and have not independently verified the accuracy, completeness and adequacy of the information provided or otherwise made available to us or relied upon by us in the Report, whether written or verbal, and no representation or warrant, expressed or implied, is made and no responsibility is accepted by us concerning the accuracy, completeness or adequacy of all such information.

ANALYSIS METHODOLOGY

In arriving at our appraised value, we have considered three accepted approaches. They are Market Approach, Cost Approach and Income Approach.

In this appraisal, the Market Approach is not appropriate to form a respective basis for our opinion of value as there is neither comparable transaction nor any relevant guideline companies which principally engage in the same business as the Target Group. The Cost Approach is not appropriate as it ignores the economic benefits of ownership of the business. We considered the consolidated book value of the Target as of 31 December 2015 may not truly reflect the value of its equity interests, as part of value will be attributed to future benefit of the Target, deriving from the income from the sales of palm kernel oil and excess power. We have therefore relied solely on the Income Approach in determining our opinion value.

We considered that the Income Approach, a commonly accepted approach to value the business enterprise value of the Target, to be appropriate for this exercise. In particular, we have adopted the Discounted Cash Flow (“ DCF ”) method as the primary method.

Under the DCF method, the value depends on the present value of future economic benefits to be derived from ownership of the enterprise. Thus, an indication of the equity value is calculated as the present value of the future free cash flow of the Target less outstanding interest-bearing debt, if any. The future cash flow is discounted at the market-derived rate of return appropriate for the risks and hazards of investing in a similar business.

A major requirement of the discounted cash flow approach is an earnings forecast, in particular a cash flow projection, which was provided by the Management.

The fair value of the equity interest of the Target Group was then calculated by adding the present values of the projected yearly free cash flow in the projection period. The present values were derived by discounting the free cash flow by a discount rate that was appropriate for the risk of investing in the project.

While the DCF method gives an indicative business enterprise value (“ BEV ”) as a whole, the equity value is derived from BEV after adjustment of interest bearing debt, lack of marketability discount (“ LoMD ”) and excess assets/liabilities.

– V(A)-5 –

APPENDIX V(A)

BUSINESS VALUATION REPORT

The concept of marketability deals with the liquidity of ownership interests, that is, how quickly and easily it can be converted into cash if the owner chooses to sell. The lack of marketability discount reflects the fact that there is no ready market for shares in a closely held corporation. Ownership interests in closely held companies are typically not readily marketable compared to similar interests in public companies. Therefore, a share of stock in a privately held company is usually worth less than an otherwise comparable share in a publicly held company.

VALUATION ASSUMPTIONS OF BUSINESS ENTERPRISE VALUE ANALYSIS

Before arriving at our opinion of value, we have considered the following principal factors:

The Target Group will be operated with the corporate structure and operation model as projected by the Management;
The financial and operating results of the Target Group;
The economic outlook in general and the specific economic and competitive elements affecting the Target Group’s businesses, its industry and its market;
The nature and prospects of the industry of the Target Group is operating;
The market-derived investment returns of entities engaged in a similar line of business and returns from other similar types of business;
The stage of development of the Target Group’s operation; and
The business risks of the Target Group (including default risk, legislation risk and economy risk).

Due to the changing environment in which the Target is operating, a number of assumptions have to be established in order to sufficiently support our fair value analysis of the 100% equity interest of the Target. The major assumptions adopted in this appraisal are:

There will be no major changes in the existing political, legal, fiscal and economic conditions in the countries that the Target Group is operating;
There will be no major changes in the current taxation law in the countries that the Target Group is operating, that the rates of tax payable remain unchanged and that all applicable laws and regulations will be complied with;
Exchange rates and interest rates will not differ materially from those presently prevailing;

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APPENDIX V(A)

BUSINESS VALUATION REPORT

The Projection has been prepared on a reasonable basis, reflecting estimates (i.e. assumptions and parameters adopted in the financial projection) which have been arrived at after due and careful consideration by the Management;
The availability of finance will not be a constraint on the forecast growth of the Target Group’s operation in accordance with the Projection;
The Target Group will retain and have competent management, key personnel, and technical staff to support their ongoing operation;
Industry trends and market conditions for related industries will not deviate significantly from economic forecasts including but not limit to market relative factors adopted in the discount rate;
The amounts due to shareholders of Weal Union and RPSL as of the Analysis Date are assumed to be fully waived as capital injection to the Target Group;
The Target Group will be able to re-finance its bank loans with the existing terms as of the Analysis Date;
The 2nd power unit with designed power output of 15 MW will commence its operation in Q4 2016 as planned;
Fusion Joy will provide an additional capital injection of US$2 million to Weal Union before completion of the acquisition; and
The Target Group will be capable of supplying its excess power to PLN on a going concern basis.

MAJOR ASSUMPTIONS OF BUSINESS ENTERPRISE VALUE ANALYSIS

Forecast Period and Terminal Growth Rate

With reference to the Projection, the forecast period for this valuation analysis is 8 years from 1 January 2016 to 31 December 2023. The forecast period is determined to be 8 years since the Target Group is expected to have significant revenue growth until year 2018, and the parameters are projected for an additional five years beyond year 2018 in order to reach its stable level of operation according to the management. Based on our valuation experience, we consider the adoption of forecast period of 8 years not unreasonable[1] . Beyond this forecast period, we have assumed a terminal growth rate. With reference to the CPI year-on-year average growth rates for 5 years in Indonesia according to Bloomberg, a long-term growth rate of 5% was adopted.

Revenue

Part of the projected revenue comes from the sales of crude palm kernel oil. On the other hand, majority of revenue is generated from the sales of excess power to PLN.

1 Under the DCF method, in practice, it is rare to forecast individual years further than 5 to 10 years according to “Bernstrom, Seth. Valuation: The Market Approach. John Wiley & Sons, 2014, Chapter 9.1”.

– V(A)-7 –

APPENDIX V(A)

BUSINESS VALUATION REPORT

As of the Analysis Date, the Target has completed construction of two electric steam power plants (“ PLTU 1 ” and “ PLTU 2 ” respectively, together as the “ PLTUs ”), with each unit having a power output of 15 MW supplying power to the Mill and excess power of 10 MW to PLN. PLTU 1 has been in operation since 2013, while PLTU 2 is expected to commence its operation since September 2016.

The significant increase in revenue from year 2016 to year 2017 is principally due to: (i) full year operation of PLTU 2 in 2017 compared with 4-month operation of the plant in 2016 which annual production capacity is increase in 2017; (ii) an expected increase in selling price of excess power to PLN up to IDR1,150 per kilowatt-hour (equivalent to approximately HKD0.65 per kilowatt-hour) according to the regulation “Permen ESDM 27/2014” issued by the Minister of Energy and Mineral Resources (“ MEMR ”).

Subsequently, revenue is expected to grow at a rate of 5%, which is in line with the assumed terminal growth rate with reference to the CPI year-on-year average growth rates in Indonesia according to Bloomberg. This assumption is also consistent with our observations towards the historical growth rates of electricity prices for industry and commercial use in Indonesia and the historical Indonesian electricity price index movements according to “2015 Handbook of Energy & Economic Statistics of Indonesia” published by MEMR.

The revenue for the period 2016 to 2023 is projected as follows:

HK$’000	2016E	2017E	2018E	2019E
Net Revenue	43,607	98,352	103,269	108,433
Growth Rate	65.1%	125.5%	5.0%	5.0%
HK$’000	2020E	2021E	2022E	2023E
Net Revenue	113,854	119,547	125,524	131,800
Growth Rate	5.0%	5.0%	5.0%	5.0%

Cost of Sales (Excluding Depreciation) (“COS”)

The cost of sales represents cost of materials, direct labor cost, spare parts and other costs.

The decrease in cost of sales in terms of percentage over revenue from year 2016 to year 2017 is principally due to the assumption that raw material prices will stay relatively static compared with the selling price of excess power to PLN. In addition, the Target is expected to enjoy certain economy of scale upon commencement of operation of PLTU 2 given the similar operations of PLTU 1 and PLTU 2.

– V(A)-8 –

APPENDIX V(A)

BUSINESS VALUATION REPORT

The cost of sales for the period 2016 to 2023 is projected as follows:

HK$’000	2016E	2017E	2018E	2019E
COS	(25,543)	(44,480)	(47,050)	(49,405)
% of Revenue	-58.6%	-45.2%	-45.6%	-45.6%
HK$’000	2020E	2021E	2022E	2023E
COS	(51,856)	(54,472)	(57,192)	(60,021)
% of Revenue	-45.5%	-45.6%	-45.6%	-45.5%

Operating Expenses (Excluding Depreciation)

Operating expenses mainly include staff salaries, management fee, repair & maintenance, administrative expenses, insurance, professional fees, electricity, etc. The decrease in operating expenses in terms of percentage over revenue from year 2016 to year 2017 is principally due to the completion of construction of PLTU2 during year 2016, in which the corresponding consultancy fee for PLTU2’s construction can be saved in year 2017.

The operating expenses for the period 2016 to 2023 are projected as follows:

HK$’000	2016E	2017E	2018E	2019E
Operating Expenses	(5,603)	(3,507)	(3,828)	(4,021)
% of Revenue	-12.8%	-3.6%	-3.7%	-3.7%
HK$’000	2020E	2021E	2022E	2023E
Operating Expenses	(4,217)	(4,433)	(4,654)	(4,879)
% of Revenue	-3.7%	-3.7%	-3.7%	-3.7%

Other income/expenses

Historical other income/expenses mainly represent gain on foreign currency, bank interest income and other penalty expenses. Given that these items are non-operating in nature, they are not included in the Projection.

– V(A)-9 –

APPENDIX V(A)

BUSINESS VALUATION REPORT

Finance Cost

Finance cost represents the interest expense for the loan borrowed by the Target Group. It is assumed that the loan balance will be repaid according to the repayment schedules with the current effective interest rate of 11.25%. The decrease in finance cost in terms of percentage over revenue from year 2016 to year 2017 is principally due to the repayment of bank loan according to the expected repayment schedules and also the increase in revenue base.

The finance cost for the period 2016 to 2023 is projected as follows:

HK$’000	2016E	2017E	2018E	2019E
Finance Cost	(2,874)	(3,734)	(1,630)	(271)
% of Revenue	-6.6%	-3.8%	-1.6%	-0.2%
HK$’000	2020E	2021E	2022E	2023E
Finance Cost	—	—	—	—
% of Revenue	-0.0%	-0.0%	-0.0%	-0.0%

Depreciation & Amortization (“D&A”) Expenses and Capital Expenditure (“CAPEX”)

Routine maintenance CAPEX will be required for the ongoing operation of the Target Group, while D&A expenses are projected according to the remaining useful lives of existing assets and the expected useful lives of future CAPEX in accordance with the Target Group’s accounting policies.

The D&A and CAPEX for the period 2016 to 2023 are projected as follows:

HK$’000	2016E	2017E	2018E	2019E
D&A	(6,342)	(10,423)	(10,618)	(10,822)
CAPEX	6,753	2,960	3,108	3,263
HK$’000	2020E	2021E	2022E	2023E
D&A	(11,037)	(11,262)	(11,347)	(11,595)
CAPEX	3,427	3,598	3,778	3,967

– V(A)-10 –

APPENDIX V(A)

BUSINESS VALUATION REPORT

Change in Working Capital (“WC”)

The estimation on WC balances from the period of 2016 to 2023 is based on the turnover days of key balance sheet items such as accounts receivables, inventory, accounts payables and tax payable. The change in WC is shown as the following table:

HK$’000	2016E	2017E	2018E	2019E
Net WC Investment	(1,364)	(1,155)	134	(89)
HK$’000	2020E	2021E	2022E	2023E
Net WC Investment	(106)	(112)	(118)	(127)

Income Tax

The general Indonesian corporate income tax rate of 25% have been adopted in the Projection.

DETERMINATION OF DISCOUNT RATE

In instances where we have applied the Income Approach to value the equity interests, it is necessary to determine an appropriate discount rate at which to discount the future expected cash flows relating to the business enterprises. The starting point for establishing an appropriate discount rate for the business enterprise value is the cost of capital for the entire business. The Weighted Average Cost of Capital (“ WACC ”) represents the weighted average return attributable to all of the capital of the business.

WACC is computed with the below formula:

**WACC = Ke * (Eq/IC) + Kd * (D/IC)**

Where:

Ke	=	Cost of equity
Eq	=	Equity
IC	=	Invested capital (equity plus all interest bearing debt)
Kd	=	Tax adjusted cost of debt
D	=	Debt

WACC comprises two components: the cost of equity and the cost of debt. The cost of equity was determined using the Capital Asset Pricing Model (“ CAPM ”). The CAPM considers only systematic risk of a company which is captured by beta. The modified CAPM further incorporates nonsystematic risks which are specific to a company. Non-systematic risks of the Target, such as relatively small size and risk of not achieving the expected growth rate, were considered by adding other risk premiums including size premium and company-specific risk premium.

– V(A)-11 –

APPENDIX V(A)

BUSINESS VALUATION REPORT

Cost of Equity

The cost of equity under the modified CAPM was computed using the following formula:

**Re = Rf + β * MRP + RPS + RPU**

Where:

Re = Cost of equity Rf = Risk-free rate β = Beta coefficient MRP = Market risk premium RPS = Size premium RPU = Company-specific risk premium

Risk-free Rate

The yield rates of bonds issued by a government or agency where the risks of default are so low as to be negligible are commonly applied as the risk-free rate. The yield rate of the 10year Indonesian Government Bond[1] of 8.75% as of the Analysis Date, as extracted from S&P Capital IQ terminal, was adopted as the risk-free rate in the analysis.

Beta Coefficient

Beta is a measure for the systematic risk. As the Target is not a listed company, its beta could not be calculated from its historical share prices. We have therefore searched for listed companies as comparable companies based on the similarity of industry, business and financial characteristics. However, given the specific operating location, business and financial characteristics of the Target Group, limited comparable companies can be identified. We have therefore adopted the unlevered beta of “Green & Renewable Energy” industry as published in “Betas by Sector” annual study (the “ Study ”) conducted by Professor Aswath Damodaran (“ Professor Damodaran ”) in 2015 in this analysis. Professor Damodaran is well-known as author of several widely used academic textbooks on valuation and related subjects.

In our analysis, the unlevered beta for the Target Group was determined as 0.70 based on the Study. The unlevered beta disregards the differences in corporate tax rates and leverage compositions among the companies, which removes the effects of the use of leverage on the capital structure of a firm. Removing the debt component allows an investor to compare the base level of risk between various companies.

The unlevered beta was then being relevered based on the specific corporate tax rate and the expected debt-to-equity ratio applicable to the Target Group.

1 Damodaran, Aswath. What is the riskfree rate? A Search for the Basic Building Block. Stern School of Business, New York University, December 2008, page 9-10. http://people.stern.nyu.edu/adamodar/pdfiles/ papers/riskfreerate.pdf

– V(A)-12 –

APPENDIX V(A)

BUSINESS VALUATION REPORT

The relevered beta was computed using the following formula:

**β relevered = β unlevered * [1 + (1 – Tc) (D/E)]**

Where:

β relevered = relevered beta β unlevered = unlevered beta Tc = corporate tax rate D = value of the firm’s debt E = value of the firm’s equity D/E = debt-to-equity ratio

By applying the applicable corporate income tax rate of RPSL of 25%, with the expected debt-to-equity ratio (“ D/E ratio ”) of 133% (which is discussed below), the relevered beta is derived as 1.40.

Market Risk Premium

Market risk premium is the implied risk premium expected from the market which represents the additional return required by an investor as compensation for investing in equities rather than a risk-free instrument. The equity market of the United States (“ U.S. ”) is more mature and stable. The market risk premium of the United States represents the required return required by a rational investor investing in a mature equity market. The Indonesian equity market is more risky than the United States, which requires for a higher return. The market risk premium of Indonesia is 9.05% as of the Analysis Date, which was computed using the market risk premium of the United States and the country risk premium of Indonesia.

Market Risk Premium = U.S. market risk premium + Indonesia country risk premium

The market risk premium of the United States of 5.75% was determined with reference to “Country Default Spreads and Risk Premiums” annual study conducted and published by Professor Damodaran. The country risk premium is based upon the default spread of the bond issued by the country. The Indonesia country risk premium of 3.30% was also determined with reference to the abovementioned study conducted by Professor Damodaran.

Size Premium

Size premium is the return in excess of CAPM estimation. The size premium adopted was referenced to the “2015 Valuation Handbook – Guide to Cost of Capital” published by Duff & Phelps Corp. Duff & Phelps Corp. is a listed company in the United States, providing global valuation and corporate finance services.

– V(A)-13 –

APPENDIX V(A)

BUSINESS VALUATION REPORT

	Market	Market
	Capitalization of	Capitalization of
Decile	Smallest Company	Largest Company	Size Premium
	(in millions)	(in millions)
Mid-cap	US$2,552.441	US$3,724.186	1.60%
Low-cap	US$190.860	US$300.725	4.22%

Source: 2015 Valuation Handbook – Guide to Cost of Capital

Considering the relatively small size of the Target Group, the size premium of 4.22% for low-cap companies was adopted.

Company-specific Risk Premium

Apart from the size of the Target Group, other company specific factors should be considered. The Target Group is expected to experience strong growth in the upcoming two years given the commencement of operation of PLTU 2 since September 2016. In addition, there is uncertainty on the future performance of the Target Group and may imply additional risk to the actualization of the Projection. A higher discount rate is required to reflect these specific risk factors. This company specific risk, which has not been captured by the beta estimated from the market data, should be considered in the modified CAPM. By assessing the additional risks associated with the business of the Target Group, based on the abovementioned factors, we consider a company-specific risk premium of 3.0% is appropriate according to our professional judgment.

Cost of Equity Computation

In the analysis, the adopted values of the abovementioned valuation analysis parameters are summarized as follows:

Parameters	Value
1. Risk-free Rate	8.75%
2. Beta Coefficient	1.40
3. Market Risk Premium	9.05%
4. Size Premium	4.22%
5. Company-specific Risk Premium	3.00%

Based on the above, the cost of equity under the modified CAPM was calculated as 28.62%.

– V(A)-14 –

APPENDIX V(A)

BUSINESS VALUATION REPORT

Cost of Debt

Pre-tax cost of debt represents the expected long-term borrowing rate of the Target Group, which is estimated based on the existing borrowing rate applicable to the Target as of the Analysis Date. Based on the Information provided by the Management, the applicable pre-tax borrowing rate of the Target as of the Analysis Date was 11.25%.

For determining the after-tax cost of debt, we have to determine the corporate income tax rate applicable to the Target. According to the Management, the Indonesian corporate income tax rate of 25% was adopted for the assessment of the tax shield.

The after-tax cost of debt was computed using the following formula:

After-tax cost of debt = Cost of debt × (1 – applicable enterprise income tax rate)

This resulted after-tax cost of debt is 8.44%.

D/E Ratio

The computation of WACC requires the determination of the optimal level of debt-toequity ratio.

As the Target is a private company as of the Analysis Date, it may have limited access to capital market to reach the optimal level of debt-to-equity ratio. According to Professor Damodaran[2] , adopting the industry average market debt ratio, obtained by looking at financial information of publicly traded companies, is suggested for estimating the weight of debt of a private company, as it is assumed that the capital structure of a private company will move to the industry average debt ratio. Therefore, we have adopted the industry average D/E ratio according to the “Betas by Sector” annual study conducted Professor Damodaran in 2015 to estimate the applicable WACC.

According to the abovementioned study, the adopted D/E ratio is 133%.

WACC Computation

The required rates of return on equity and debt determined as illustrated above have been weighted according to the industry average capital structure based on our analysis. Based on the calculations above, we have estimated the post-tax nominal WACC of the Target Group to be approximately 17.1%.

2 Presentation “The Cost of Capital” by Professor Damodaran; Available from: http://pages.stern.nyu.edu/~adamodar/

– V(A)-15 –

APPENDIX V(A)

BUSINESS VALUATION REPORT

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 in a publicly held company.

While there is no available empirical study on marketability discount for companies specifically located in Indonesia, reference has been made to “Determining Discounts for Lack of Marketability: A Companion Guide to The FMV Restricted Stock Study (2016 Edition)” published by FMV Opinions, Inc. The overall average discount for lack of marketability as observed in The FMV Study based on data from July 1980 through September 2015 is 19.27%. By excluding transactions with premiums, the average discount observed is 20.89%.

We have further adopted the option-pricing method to cross-check and estimate the LoMD. Under option-pricing method, the cost of put option, which can hedge the price change before the privately held shares can be sold, was considered as a basis to determine the lack of marketability discount. Based on our analyses, the LoMD of 20% was applied in this analysis.

CONCLUSION OF VALUE

Based on the investigation and analysis stated above and on the analysis method employed, by adopting the exchange rate of HKD per IDR of 0.000562 and HKD per USD of 7.75, it is our opinion that the fair value of the 100% equity interest of the Target as of 31 December 2015 is US DOLLAR TWENTY-TWO MILLION TWO HUNDRED AND TWENTY-THREE THOUSAND ONLY (USD 22,223,000) OR HK DOLLAR ONE HUNDRED AND SEVENTY-TWO MILLION TWO HUNDRED AND TWENTY-EIGHT THOUSAND ONLY (HKD 172,228,000).

The conclusion of the fair value was based on generally accepted valuation procedures and practices that rely extensively on the use of numerous assumptions and the consideration of many uncertainties, not all of which can be easily quantified or ascertained.

We hereby certify that we have neither present nor prospective interests in ELL Environmental Holdings Limited nor the value reported.

Yours faithfully, For and on behalf of AVISTA Valuation Advisory Limited

Vincent C B Pang CFA, HKICPA, CPA (Aus.) Managing Director

Note: Mr. Vincent Pang is a member of CFA Institute, Hong Kong Institute of Certified Public Accountants and CPA Australia. Vincent has over 15-year experience in financial valuation and business consulting in Hong Kong and China.

– V(A)-16 –

APPENDIX V(A)

BUSINESS VALUATION REPORT

APPENDIX I — GENERAL LIMITATIONS AND CONDITIONS

This Report was prepared based on the following general assumptions and limiting conditions:

All data, including historical financial data, which we relied upon in reaching opinions and conclusions or set forth in the Report are true and accurate to our best knowledge. Whilst reasonable care has been taken to ensure that the information contained in the Report is accurate, we cannot guarantee its accuracy and we assume no liability for the truth or accuracy of any data, opinions, or estimates furnished by or sourced from any third parties which we have used in connection with the Report.
We also assume no responsibilities in the accuracy of any legal matters. In particular, we have not carried out any investigation on the title of or any encumbrances or any interest claimed or claimable against the property appraised. Unless otherwise stated in the Report, we have assumed that the owner’s interest is valid, the titles are good and marketable, and there are no encumbrances that cannot be identified through normal processes.
We have not verified particulars of property, including their areas, sizes, dimensions, and descriptions, which we have used or have referred to in connection with the preparation of this Report, unless otherwise stated in this Report. Any information regarding areas, sizes, dimensions, and descriptions of property mentioned in this Report are for identification purposes only, and no one should use such information in any conveyance or other legal document. Any plans or graphical illustrations presented in this Report are intended only for facilitating the visualization of the property and its surroundings and such plans or graphical illustrations should not be regarded as a survey or a scale for size.
The value opinion presented in this Report is based on the prevailing or then prevailing economic conditions and on the purchasing power of the currency stated in the Report as of the date of analysis. The date of value on which the conclusions and opinions expressed apply is stated in this Report.
This Report has been prepared solely for the use or uses stated. Except for extraction of or reference to the Report by the Company, its financial advisor and/or its independent financial advisor for their respective work in relation to the Proposed Acquisition, it is not intended for any other use or purpose or use by any third parties. We hereby disclaim that we are not liable for any damages and/or loss arisen in connection with any such unintended use.

– V(A)-17 –

APPENDIX V(A)

BUSINESS VALUATION REPORT

Prior written consent must be obtained from AVISTA Valuation Advisory Limited for publication of this Report. Except for disclosure in the Circular in relation to the Proposed Acquisition, no part of this Report (including without limitation any conclusion, the identity of any individuals signing or associated with this Report or the firms/companies with which they are connected, or any reference to the professional associations or organizations with which they are affiliated or the designations awarded by those organizations) shall be disclosed, disseminated or divulged to third parties by any means of publications such as prospectus, advertising materials, public relations, news.
No environmental impact study has been carried out, unless otherwise stated in this Report. We assume all applicable laws and governmental regulations are being complied with unless otherwise stated in this Report. We have also assumed responsible ownership and that all necessary licenses, consents, or other approval from the relevant authority or private organizations have been or to be obtained or renewed for any use that is relevant to value analysis in this Report.
Unless otherwise stated in this Report, the value estimate set out in this Report excludes the impact of presence of any harmful substances such as asbestos, ureaformaldehyde foam insulation, other chemicals, toxic wastes, or other potentially hazardous materials or of structural damage or environmental contamination. For purposes of evaluating potential structural and/or environmental defects, where their existence could have a material impact on value of the property, we would recommend that advices from the relevant experts, such as a qualified structural engineer and/or industrial hygienist, should be sought.

– V(A)-18 –

APPENDIX V(B)

LETTERS ON THE VALUATION

The following is the text of a report received from the reporting accountants of the Company, Ernst & Young, Certified Public Accountants, Hong Kong, prepared for the purpose of incorporation in this circular.

==> picture [86 x 70] intentionally omitted <==

22nd Floor CITIC Tower 1 Tim Mei Avenue Central Hong Kong

24 August 2016

The Board of Directors ELL Environmental Holdings Limited Units 1-3, 11/F Westlands Centre 20 Westlands Road, Quarry Bay Hong Kong

Dear Sirs,

Independent Reporting Accountants’ Assurance Report on calculations of discounted future estimated cash flows in connection with the business valuation of Weal Union Limited

We have examined the arithmetical accuracy of the calculations of the discounted future estimated cash flows on which the business valuation dated 24 August 2016 prepared by AVISTA Valuation Advisory Limited in respect of the appraisal of the fair value of 100% equity interest of Weal Union Limited (the “Target Company”) as at 31 December 2015 (the “Valuation”) is based. The Valuation is set out in Appendix V(A) of the circular (the “Circular”) of ELL Environmental Holdings Limited (the “Company”, together with its subsidiaries collectively as the “Group”) dated 24 August 2016 in connection with the proposed acquisition of 100% equity interest in the Target Company by the Group. The Valuation based on the discounted future estimated cash flows is regarded as a profit forecast under paragraph 14.61 of the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited (the “Listing Rules”).

Directors’ responsibilities for the discounted future estimated cash flows

The directors of our Company (the “Directors”) are solely responsible for the preparation of the discounted future estimated cash flows in accordance with the bases and assumptions determined by the Directors and set out in Appendix V(A) of the Circular (the “Assumptions”). This responsibility includes carrying out appropriate procedures relevant to the preparation of the discounted future estimated cash flows for the Valuation and applying an appropriate basis of preparation; and making estimates that are reasonable in the circumstances.

– V(B)-1 –

APPENDIX V(B)

LETTERS ON THE VALUATION

Our independence and quality control

We have complied with the independence and other ethical requirements of the Code of Ethics for Professional Accountants issued by the Hong Kong Institute of Certified Public Accountants (the “HKICPA”), which is founded on fundamental principles of integrity, objectivity, professional competence and due care, confidentiality and professional behavior.

Reporting accountants’ responsibilities

It is our responsibilities to draw a conclusion, based on our work on the arithmetical accuracy of the calculations of the discounted future estimated cash flows on which the Valuation is based and to present our conclusion solely to you, as a body, for the purpose of the requirement under paragraph 14.62(2) of the Listing Rules and for no other purpose. We are not reporting on the appropriateness and validity of the Assumptions on which the Valuation is based and our work does not constitute any valuation of the Target Company. The Valuation does not involve the adoption of accounting policies. The Assumptions used in the preparation of the Valuation include hypothetical assumptions about future events and management actions that may or may not occur. Even if the events and actions anticipated do occur, actual results are still likely to be different from the Valuation and the variation may be material. We have not reviewed, considered or conducted any work on the completeness, reasonableness and the validity of the Assumptions and thus express no opinion whatsoever thereon. Our work is more limited than for a reasonable assurance engagement, and therefore less assurance is obtained than in a reasonable assurance engagement. We also accept no responsibility to any other person in respect of, arising out of, or in connection with our work.

Basis of our conclusion

We conducted our work in accordance with Hong Kong Standard on Assurance Engagements 3000 (Revised) Assurance Engagements Other Than Audits or Reviews of Historical Financial Information issued by the HKICPA. Our work consisted primarily of checking the arithmetical accuracy of the calculations of the discounted future estimated cash flows on which the Valuation is based which is prepared based on the Assumptions made by the Directors. Our work has been undertaken solely to assist the Directors in evaluating whether the discounted future estimated cash flows on which the Valuation is based, so far as the arithmetical accuracy of the calculations is concerned, has been properly compiled in accordance with the Assumptions made by the Directors. Our work is substantially less in scope than an audit conducted in accordance with Hong Kong Standards on Auditing issued by the HKICPA. Accordingly, we do not express an audit opinion.

– V(B)-2 –

APPENDIX V(B)

LETTERS ON THE VALUATION

Conclusion

Based on the foregoing, nothing has come to our attention that causes us to believe that the discounted future estimated cash flows, so far as the calculations are concerned, have not been properly compiled, in all material respects, in accordance with the Assumptions.

Yours faithfully,

Ernst & Young Certified Public Accountants Hong Kong

– V(B)-3 –

APPENDIX V(B)

LETTERS ON THE VALUATION

The following is the text of a letter prepared for the purpose of incorporation in this circular received from Euto financial, adviser of our Company, in connection with the valuation report issued by Avista, which is included as Appendix V(A) to this circular.

==> picture [152 x 61] intentionally omitted <==

Euto Capital Partners Limited Room 2418, Wing On Centre, T +852 3106 2393 111 Connaught Road Central, F +852 3582 4722 Hong Kong www.eutocapital.com

The Board of Directors

ELL Environmental Holdings Limited

Units 1-3, 11th Floor Westlands Centre 20 Westlands Road Hong Kong

24 August 2016

Dear Sirs,

We refer to the valuation report prepared by AVISTA Valuation Advisory Limited (the “ Independent Valuer ”) in respect of the fair value of 100% equity interest of Weal Union Limited as at 31 December 2015 (the “ Valuation ”). The principal assumptions upon which the Valuation is based are included in the circular of ELL Environmental Holdings Limited (the “ Company ”) dated 24 August 2016 (the“ Circular ”), of which this letter forms part. Capitalised terms used herein shall have the same meanings as those defined in the Circular unless the context requires otherwise.

We note that the Valuation has been developed based on the discounted cash flow method which is regarded as profit forecast (the “ Profit Forecast ”) under Rule 14.61 of the Listing Rules. We have discussed with the management of the Company and the Independent Valuer regarding the bases and assumptions of the Profit Forecast to arrive at the Valuation and have reviewed the letter dated 24 August 2016 issued by Ernst & Young, Certified Public Accountants, the reporting accountants of the Company, as set out in Appendix V(B) to the Circular in regard to their work performed on the Profit Forecast. On the basis of the foregoing, we are of the opinion that the Profit Forecast underlying the Valuation, for which the directors of the Company are solely responsible, has been made after due and careful enquiry.

Yours faithfully, For and on behalf of Euto Capital Partners Limited Manfred Shiu Director

– V(B)-4 –

GENERAL INFORMATION

APPENDIX VI

1. RESPONSIBILITY STATEMENT

This circular, for which the Directors collectively and individually accept full responsibility, includes particulars given in compliance with the Listing Rules for the purposes of giving information with regard to our Company. The Directors, having made all reasonable enquires, 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.

2. DISCLOSURE OF INTERESTS

(a) Interests of Directors and Chief Executive Officer

As at the Latest Practicable Date, the interests and short positions of our Directors and Chief Executive Officer in the shares, underlying shares or debentures of our Company or its associated corporations (within the meaning of Part XV of the SFO), which were required (a) 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 they were taken or deemed to have under such provisions of the SFO); or (b) pursuant to section 352 of the SFO, to be entered in the register referred to therein; or (c) to be notified to the Company and the Stock Exchange pursuant to the Model Code, were as follows:

Long positions in the Shares of our Company

			% of
			the issued
			share capital
			as at
		Number of	the Latest
	Capacity/Nature	issued	Practicable
Name of Directors	of interest	Shares held	Date
Mr. Chau_(note 1)_	Interest in a controlled	225,000,000	23.44
corporation
Mr. Chan_(note 2)_	Interest in a controlled	390,700,000	41.04
corporation

Note 1: Mr. Chau owns 90% of the issued shares in Wealthy Sea, which in turn holds 225,000,000 Shares.

Note 2: Mr. Chan owns 20% of the issued shares in and is the sole director of Everbest Environmental, which in turn holds 375,000,000 Shares. He also owns 25% of the issued shares in Carlton Asia, which is regarded to be interested in 15,700,000 Shares that are expected to be issued and allotted to it upon completion of the SPA for the purpose of Part XV of the SFO. Carlton Asia is accustomed to act in accordance with the directions of Mr. Chan.

– VI-1 –

GENERAL INFORMATION

APPENDIX VI

Save as disclosed above, as at the Latest Practicable Date, none of our Directors and Chief Executive Officer had any interests or short positions in the shares, underlying shares or debentures of our Company or any of its associated corporations (within the meaning of Part XV of the SFO) which were required (a) 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 they were taken or deemed to have under such provisions of the SFO); or (b) pursuant to section 352 of the SFO, to be entered in the register referred to therein; or (c) to be notified to the Company and the Stock Exchange pursuant to the Model Code.

(b) Interests of Substantial Shareholders

As at the Latest Practicable Date, so far as known to our Directors and Chief Executive Officer, persons who/entities which had interests or short positions in the Shares or underlying Shares which would fall to be disclosed under the provisions of Divisions 2 and 3 of Part XV of the SFO, or were directly or indirectly interested in 10% or more of the nominal value of any class of share capital carrying rights to vote in all circumstances at general meetings of any member of the Group or in any options in respect of such capital, were as follows:

Long position in the Shares of our Company

			% of
			the issued
			share capital
			as at
		Number of	the Latest
Name of	Capacity/Nature	issued	Practicable
Shareholders	of interest	Shares held	Date
Everbest	Beneficial interest	375,000,000	39.06
Environmental
(note 1)
Ms. Wong	Interest in controlled	380,790,000	40.00
(notes 1 and 2)	corporations
Mr. Chan Chun Keung	Interest in a controlled	380,790,000	40.00
(note 3)	corporation and
	interest held by spouse
Wealthy Sea_(note 4)_	Beneficial interest	225,000,000	23.44
Ms. Wong Mei Ling	Interest held by spouse	225,000,000	23.44
(note 4)

– VI-2 –

GENERAL INFORMATION

APPENDIX VI

			% of
			the issued
			share capital
			as at
		Number of	the Latest
Name of	Capacity/Nature	issued	Practicable
Shareholders	of interest	Shares held	Date
First Pacific (Asia)	Trustee	143,300,000	15.05
Pte Ltd_(note 5)_
Fusion Joy_(note 5)_	Beneficial interest	143,300,000	15.05
Mr. Fadjar Suhendra	Beneficiary of a trust	143,300,000	15.05
(note 5)
Mr. Sugih Suhendra	Beneficiary of a trust	143,300,000	15.05
(note 5)

Note 1: Everbest Environmental is owned as to 50%, 30% and 20% by Ms. Wong, Ms. Chan and Mr. Chan, respectively and, therefore, Ms. Wong is deemed to be interested in the 375,000,000 Shares held by Everbest Environmental pursuant to the SFO.
Note 2: Hightop was owned as to 50% by Ms. Wong and 50 % by Mr. Chan Chun Keung, the husband of Ms. Wong and therefore, each of Ms. Wong and Mr. Chan Chun Keung was deemed to be interested in the 5,790,000 Shares held by Hightop pursuant to the SFO. Together with 375,000,000 Shares held through Everbest Environmental, Ms. Wong was deemed to be interested in a total of 380,790,000 Shares pursuant to the SFO.
Note 3: Mr. Chan Chun Keung was deemed to be interested in a total of 380,790,000 Shares pursuant to the SFO as he was deemed to be interested in the Shares held by Hightop and deemed to be held by Ms. Wong, his wife.
Note 4: Wealthy Sea is owned as to 90% and 10% by Mr. Chau and Ms. Wong Mei Ling, the wife of Mr. Chau, respectively. Ms. Wong Mei Ling is, therefore, deemed to be interested in the 225,000,000 Shares held by Wealthy Sea controlled by Mr. Chau pursuant to the SFO.
Note 5: Fusion Joy is regarded as interested in 143,300,000 Share that are expected to be issued and alloted to it upon completion of the SPA for the purpose of Part XV of the SFO. Fusion Joy is legally and wholly owned by First Pacific (Asia) Pte Ltd as trustee, on behalf of Mr. Fadjar Suhendra and Mr. Sugih Suhendra (as beneficial owners) as to 60% and 40%, respectively.

Save as disclosed above, as at the Latest Practicable Date, so far as known to our Directors and Chief Executive Officer, no other person/entity (other than our Directors and Chief Executive Officer) had interests or short positions in the Shares or underlying Shares which would fall to be disclosed under the provisions of Divisions 2 and 3 of Part XV of the SFO, or was directly or indirectly interested in 10% or more of the nominal value of any class of share capital carrying rights to vote in all circumstances at general meeting of any member of the Group or in any options in respect of such capital.

– VI-3 –

GENERAL INFORMATION

APPENDIX VI

3. DIRECTORS’ INTEREST IN CONTRACTS AND ASSETS

Except for the SPA, in which Mr. Chan, our executive Director and Chief Executive Officer and Mr. Brian Chan, our non-executive Director, have material interests and as at the Latest Practicable Date, none of the Directors was materially interested in any contract or arrangement subsisting which was significant in relation to the business of the Enlarged Group taken as a whole; and none of the Directors had any direct or indirect interest in any assets which had been, since 31 December 2015 (the date to which the latest published audited consolidated financial statements of our Company were made up), acquired or disposed of by or leased to any member of the Enlarged Group, or were proposed to be acquired or disposed of by or leased to any member of the Enlarged Group.

Please refer to the “Letter from the Board” set out on pages 8 to 44 of this circular for details relating to the SPA.

4. COMPETING INTERESTS

As at the Latest Practicable Date, none of the Directors and his or her respective associates was considered to have an interest in a business which competed or was likely to compete, directly or indirectly, with the business of the Enlarged Group other than those businesses to which the Directors and his or her associates were appointed to represent the interests of our Company and/or the Enlarged Group.

5. QUALIFICATION AND CONSENT OF EXPERTS

The following is the qualification of the experts who have given opinion or advice, which are contained or referred to in this circular:

Name Qualification

Southwest Securities Euto Capital Avista a professional valuer Ernst & Young certified public accountants

a corporation licensed to carry out type 6 (advising on corporate finance) regulated activity under the SFO

Each of Southwest Securities, Euto Capital, Avista and Ernst & Young has given and has not withdrawn its written consent to the issue of this circular with the inclusion herein of their letter, report and/or reference (as the case may be) to its names in the form and context in which they appear.

– VI-4 –

GENERAL INFORMATION

APPENDIX VI

As at the Latest Practicable Date, each of Southwest Securities, Euto Capital, Avista and Ernst & Young had no shareholding interest in any member of the Group or the right (whether legally enforceable or not) to subscribe for or to nominate persons to subscribe for securities of any member of the Group.

As at the Latest Practicable Date, each of Southwest Securities, Euto Capital, Avista and Ernst & Young was not interested, directly or indirectly, in any assets which had since 31 December 2015 (being the date to which the latest published audited financial statements of our Company were made up) been acquired or disposed of by or leased to any member of the Group or which were proposed to be acquired or disposed of by or leased to any member of the Group.

6. SERVICE CONTRACTS

As at the Latest Practicable Date, none of the Directors had entered or proposed to enter into any service contract with any member of the Enlarged Group, which was not determinable by the employer within one year without payment of compensation (other than statutory compensation).

7. MATERIAL CONTRACTS

The following contracts (not being contracts entered into in the ordinary course of business) have been entered into by the members of the Enlarged Group within the two years immediately preceding the issue of this circular and are material:

(i) the SPA;
(ii) the letter of intent dated 16 April 2015 and entered into between our Company and Fujian Wuping State-Owned Investment Group Co., Ltd., in relation to a proposed acquisition of Wuping Second Waste Water Treatment Facility by our Company and its subsidiaries. For details, please refer to the announcement of our Company dated 16 April 2015;
(iii) the agreements dated 15 April 2015 entered into between Everbest Water and Rugao Economic and Technological Development Zone Administrative Committee, in relation to, among other things, the increase of the registered capital of Rugao Hengfa by US$4.0 million (equivalent to approximately HK$31.2 million) in the form of cash on or before 31 December 2015 and the project to design and construct the improvement works to the Rugao Hengfa Facility. For details, please refer to the announcement of our Company dated 15 April 2015; and
(iv) the top-up subscription agreement dated 22 April 2015 entered into between our Company and Wealthy Sea, in relation to an aggregate of up to 160,000,000 top-up subscription shares, representing approximately 16.7% of the enlarged issued share capital of the Company after the issue of the top-up subscription shares, issued and allotted to Wealthy Sea, at the top-up subscription price of HK$0.98 per share.

– VI-5 –

GENERAL INFORMATION

APPENDIX VI

8. LITIGATION

As at the Latest Practicable Date, no member of the Enlarged Group was engaged in any litigation or claims of material importance and there was no litigation or claims of material importance known to the Directors to be pending or threatened by or against any member of the Enlarged Group.

9. GENERAL

(a) The registered office of our Company is situated at P.O. Box 309, Ugland House, Grand Cayman, KY1-1104, Cayman Islands.
(b) The branch share registrar and transfer office of our Company is Boardroom Share Registrars (HK) Limited, at 31/F., 148 Electric Road, North Point, Hong Kong.
(c) The company secretary of our Company is Mr. Kwok Siu Man, who is a fellow member of each of the Institute of Chartered Secretaries and Administrators and the Institute of Financial Accountants in England, The Hong Kong Institute of Chartered Secretaries, The Association of Hong Kong Accountants, The Hong Kong Institute of Directors and the Institute of Public Accountants in Australia and possesses other professional qualifications in taxation, arbitration, securities and investment, financial planning, etc.
(d) This circular has been prepared in English and Chinese, but in the event of inconsistency, the English version shall prevail.

10. DOCUMENTS AVAILABLE FOR INSPECTION

Copies of the following documents will be available for inspection during normal business hours at the principal place of business of our Company in Hong Kong at Units 1-3, 11th Floor, Westlands Centre, 20 Westlands Road, Hong Kong from the date of this circular up to and including the date of the EGM:

(a) the Articles;
(b) the annual reports of our Company for the two years ended 31 December 2014 and 31 December 2015;
(c) the letter from the Independent Board Committee, the text of which is set out on pages 45 and 46 of this circular;
(d) the letter from the Independent Financial Adviser to the Independent Board Committee and the Independent Shareholders, the text of which is set out on pages 47 to 87 of this circular;

– VI-6 –

GENERAL INFORMATION

APPENDIX VI

(e) the letter from the Financial Adviser to our Company, the text of which is set out on pages V(B)-4 of this circular;
(f) the accountant’s report, the text of which is set out in Appendix II to this circular;
(g) the assurance report prepared by Ernst & Young on the compilation of unaudited pro forma financial information, the text of which is set out in Appendix III to this circular;
(h) the business valuation report prepared by the Valuer, the text of which is set out in Appendix V(A) to this circular;
(i) the letters on the valuation from the Reporting Accountants and the Financial Adviser, the texts of which are set out in Appendix V(B) to this circular;
(j) the letters of consent from each of the Independent Financial Adviser, the Reporting Accountants, the Valuer and the Financial Adviser referred to in the paragraph headed “5. Qualification and Consent of Experts” of this appendix;
(k) the material contracts referred to in the paragraph headed “7. Material Contracts” of this appendix; and
(l) this circular.

– VI-7 –

NOTICE OF EXTRAORDINARY GENERAL MEETING

ELL ENVIRONMENTAL HOLDINGS LIMITED 強泰環保控股有限公司 *

(Incorporated in the Cayman Islands with limited liability)

(Stock Code: 1395)

NOTICE IS HEREBY GIVEN that the extraordinary general meeting of ELL Environmental Holdings Limited (the “Company”) will be held at Units 1-3, 11th Floor, Westlands Centre, 20 Westlands Road, Hong Kong on Thursday, 8 September 2016 at 10:00 a.m. for the purpose of considering and, if thought fit, pass with or without amendments, the following resolutions as ordinary resolutions:

“ THAT :

the share purchase agreement (the “SPA”) (a copy of which has been produced to the meeting marked “A” and initialled by the chairman of the meeting for the purpose of identification) entered into between our Company, as issuer, Eternity Time Group Limited (“Eternity Time”), as purchaser, and Fusion Joy Holdings Inc. (“Fusion Joy”) and Carlton Asia Limited (“Carlton Asia”), both as vendors, pursuant to which Eternity Time has conditionally agreed to acquire 200 issued shares and 50 issued shares in Weal Union Limited from Fusion Joy and Carlton Asia, respectively, at an aggregate consideration of approximately US$22.258 million (equivalent to approximately HK$172.500 million), to be satisfied by our Company paying US$8,561,000 (equivalent to approximately HK$66,347,750) in cash and issuing and allotting 143,300,000 Consideration Shares (as defined below) to Fusion Joy, and paying US$3,439,000 (equivalent to approximately HK$26,652,250) in cash and issuing and allotting 15,700,000 Consideration Shares to Carlton Asia, and all the transactions contemplated thereunder, be and are hereby approved;
subject to completion of the transactions contemplated under the SPA and conditional upon the Listing Committee of The Stock Exchange of Hong Kong Limited granting the listing of, and the permission to deal in, the Consideration Shares, the directors of our Company (the “Directors”) be and are hereby specifically authorised to issue and allot 143,300,000 and 15,700,000 ordinary shares of HK$0.001 each in the share capital of our Company (the “Consideration Shares”), to Fusion Joy and Carlton Asia, respectively, at an issue price of HK$0.50 for each Consideration Share subject to adjustments as set out in the SPA, in accordance with the terms and conditions of the SPA and THAT such specific mandate shall be in addition to, and shall not prejudice nor revoke, the existing

* For identification purpose only

– EGM-1 –

NOTICE OF EXTRAORDINARY GENERAL MEETING

general mandate granted to the Directors by the shareholders of our Company in the annual general meeting of our Company held on 20 May 2016 or such other general or specific mandate(s) which may from time to time be granted to the Directors prior to the passing of this resolution; and

any one of the Directors be and is hereby authorised to do all such acts and things and sign, agree, ratify, execute, perfect or deliver all such documents or instruments under hand (or where required, under the common seal of our Company together with another Director or any person authorised by the board of Directors) and take all such steps as the Director in his/her discretion may consider necessary, appropriate, desirable or expedient to implement, give effect to or in connection with the SPA and any of the transactions contemplated thereunder.”

By order of the Board Chau On Ta Yuen Chairman and Executive Director

Hong Kong, 24 August 2016

Notes:

(1) A member of our Company (the “Member”) entitled to attend and vote at the meeting convened by this notice (or the adjourned meeting (as the case may be)) is entitled to appoint one (or if he/she/it holds two or more shares in the Company (the “Shares”), more than one) proxy to attend and, on a poll, vote instead of him/her/ it. A proxy need not be a Member.
(2) A form of proxy for use in connection with the meeting is enclosed with the circular of the Company dated 24 August 2016 (the “Circular”) to be despatched to the Shareholders. Completion and return of the form of proxy will not preclude a Member from attending and voting in person at the meeting, adjoined meeting, or poll concerned if he/she/it so wishes. In the event of a Member who has lodged a form of proxy attending the meeting, his/her/its form of proxy will be deemed to have been revoked.
(3) In order to be valid, the instrument appointing a proxy together with a power of attorney or other authority (if any) under which it is signed, or a notarially certified copy of such power of attorney or authority, must be deposited at our Company’s branch share registrar in Hong Kong, Boardroom Share Registrars (HK) Limited at 31/F., 148 Electric Road, North Point, Hong Kong, not later than 48 hours before the time appointed for the holding of the meeting (or the adjourned meeting or of the poll, as the case may be).
(4) In the case of joint holders of a Share, any one of such holders may vote at the meeting, either personally or by proxy, in respect of such Shares as if he/she/it were solely entitled thereto; but if more than one of such joint holders is present at the meeting personally or by proxy, that one of such holders so present whose name stands first on the register of members in respect of such Share shall alone be entitled to vote in respect thereof.
(5) In relation to agenda item 1 of this notice, the Directors propose to seek independent shareholders’ approval of the SPA, as described in the Circular.
(6) In relation to agenda item 2 of this notice, the Directors propose to seek independent shareholders’ approval of the specific mandate to issue the Consideration Shares, as described in the Circular.

– EGM-2 –

NOTICE OF EXTRAORDINARY GENERAL MEETING

(7) The translation into Chinese language of this notice is for reference only. In case of any inconsistency, the English version shall prevail.
(8) (a) Subject to paragraph (b) below, if a tropical cyclone warning signal No. 8 or above is expected to be hoisted or a black rainstorm warning signal is expected to be in force at any time between 9:00 a.m. and 6:00 p.m. on the date of the meeting, the meeting will be postponed and Members will be informed of the date, time and venue of the postponed meeting by a supplemental notice posted on the respective websites of the Stock Exchange and the Company.
(b) If a tropical cyclone warning signal No. 8 or above or a black rainstorm warning signal is lowered or cancelled 3 hours before the time appointed for holding the meeting and where conditions permit, the meeting will be held as scheduled.
(c) The meeting will be held as scheduled when an amber or red rainstorm warning signal is in force. After considering their own situations, Members should decide on their own whether or not they would attend the meeting under any bad weather condition and if they do so, they are advised to exercise care and caution.

Registered Office: P.O. Box 309, Ugland House Grand Cayman, KY1-1109 Cayman Islands

Principal Place of Business in Hong Kong: Units 1-3, 11th Floor Westlands Centre 20 Westlands Road Hong Kong

As at the date of this notice, the board of Directors comprises Mr. Chau On Ta Yuen (Chairman) and Mr. Chan Kwan (Chief Executive Officer) as executive Directors, Mr. Chan Pak Lam Brian and Mr. Chau Chi Yan Benny as non-executive Directors, and Ms. Ng Chung Yan Linda, Mr. Ng Man Kung and Mr. Sze Yeuk Lung Benedict as independent non-exeucitve Directors.

– EGM-3 –

AI assistant

ELL Environmental Holdings Limited — Proxy Solicitation & Information Statement 2016

49895_rns_2016-08-23_bdcb40a0-f2f3-46d1-b134-5c3fc8578239.pdf

ELL ENVIRONMENTAL HOLDINGS LIMITED 強泰環保控股有限公司 *

(A) MAJOR TRANSACTION AND CONNECTED TRANSACTION IN RELATION TO THE ACQUISITION OF ALL THE ISSUED SHARES OF WEAL UNION LIMITED INVOLVING THE ISSUE OF CONSIDERATION SHARES TO A CONNECTED PERSON AND AN INDEPENDENT THIRD PARTY UNDER A SPECIFIC MANDATE AND

(B) NOTICE OF EXTRAORDINARY GENERAL MEETING

Financial Adviser

TABLE OF CONTENTS

DEFINITIONS

DEFINITIONS

DEFINITIONS

DEFINITIONS

DEFINITIONS

DEFINITIONS

DEFINITIONS

ELL ENVIRONMENTAL HOLDINGS LIMITED 強泰環保控股有限公司 *

(B) NOTICE OF EXTRAORDINARY GENERAL MEETING

A. THE ACQUISITION

1. INTRODUCTION

2. THE SHARE PURCHASE AGREEMENT

Date:

Parties:

Assets being acquired:

Consideration for the Sale Shares:

LETTER FROM THE BOARD

Consideration Shares:

Conditions precedent to Completion:

LETTER FROM THE BOARD

Completion:

Termination:

Indemnity:

Changes in corporate structure of the Target Group

3. INFORMATION ON THE PARTIES TO THE SPA

4. INFORMATION ON THE TARGET GROUP

Weal Union and RPSL

The Mill and the Ancillary Power Plant

The Outstanding Industrial Business Licence

LETTER FROM THE BOARD

Compliance with Indonesian Laws

No. Non-compliance incidents

Rectification measures undertaken by RPSL as at the Latest Practicable Date

Legal consequences

LETTER FROM THE BOARD

No. Non-compliance incidents

Rectification measures undertaken by RPSL as at the Latest Practicable Date

Legal consequences

Financial Performance

PLN Contract

Profitability

Prospective Renewal of the PLN Contract

Capital Expenditure

Possible Continuing Connected Transaction

Management of RPSL

LETTER FROM THE BOARD

Directors’ Remuneration

5. REASONS FOR AND BENEFITS OF THE ACQUISITION

Indonesia

Palm Kernel Oil Production

Excess Biomass Power Supply

Energy policy

LETTER FROM THE BOARD

6. MATERIAL RISK FACTORS

Heavy Reliance on PLN and the PLN Contract

Currency Risks

Subcontracting and purchases

Operating in Indonesia

LETTER FROM THE BOARD

7. DIRECTORS’ VIEWS

8. FUNDING

Date of

LETTER FROM THE BOARD

9. CHANGES IN THE SHAREHOLDING STRUCTURE OF OUR COMPANY AS A RESULT OF THE ACQUISITION

10. IMPLICATIONS UNDER THE LISTING RULES

B. SPECIFIC MANDATE TO ISSUE AND ALLOT THE CONSIDERATION SHARES

C. EXTRAORDINARY GENERAL MEETING

D. RECOMMENDATION

E. ADDITIONAL INFORMATION

ELL ENVIRONMENTAL HOLDINGS LIMITED 強泰環保控股有限公司 *

MAJOR TRANSACTION AND CONNECTED TRANSACTION IN RELATION TO THE ACQUISITION OF ALL THE ISSUED SHARES OF WEAL UNION LIMITED INVOLVING THE ISSUE OF CONSIDERATION SHARES TO A CONNECTED PERSON AND AN INDEPENDENT THIRD PARTY UNDER A SPECIFIC MANDATE

RECOMMENDATION

ELL Environmental Holdings Limited Proxy Solicitation & Information Statement 2016