Honghua Group Limited - Annual Report 2020

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(incorporated in the Cayman Islands with limited liability) Stock Code: 196

2020 ANNUAL REPORT

CONTENTS
Corporate Information	02
Financial Highlights	04
Chairman’s Statement	06
Management Discussion and Analysis	08
Biographical Details of Directors and Senior Management	23
Corporate Governance Report	29
Environmental, Social and Governance Report	47
Report of The Directors	68
Independent Auditor’s Report	86
Consolidated Statement of Proft or Loss	95
Consolidated Statement of Comprehensive Income	96
Consolidated Balance Sheet	97
Consolidated Statement of Changes in Equity	100
The Consolidated Financial Statement of Cash Flows	102
Notes to the Consolidated Financial Statements	104
Five-Year Financial Highlights	226

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HONGHUA GROUP LIMITED 2020 ANNUAL REPORT 01
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CORPORATE INFORMATION

BOARD OF DIRECTORS

EXECUTIVE DIRECTORS

Jin Liliang (Chairman) Zhang Mi (Vice Chairman) Ren Jie

NON-EXECUTIVE DIRECTORS

Han Guangrong Chen Wenle

STRATEGIC INVESTMENT AND RISK CONTROL COMMITTEE

Jin Liliang (Committee Chairman) Zhang Mi Ren Jie Liu Xiaofeng Poon Chiu Kwok Chang Qing

JOINT COMPANY SECRETARIES

INDEPENDENT NON-EXECUTIVE DIRECTORS

Liu Xiaofeng Chen Guoming Su Mei Poon Chiu Kwok Chang Qing Wei Bin

Zhuang Wenmin Lee Mei Yi

LEGAL ADVISOR

AS TO HONG KONG LAW HERBERT SMITH FREEHILLS LLP

PRINCIPAL BANKERS

SECRETARY OF BOARD OF DIRECTORS

Zhuang Wenmin

BOARD COMMITTEES

AUDIT COMMITTEE

Wei Bin (Committee Chairman) Liu Xiaofeng Chen Guoming Su Mei Poon Chiu Kwok Chang Qing

Bank of China Limited Industrial Bank Co., Ltd. Agricultural Bank of China China Citic Bank Co., Ltd. Ping An Bank Co., Ltd. Evergrowing Bank Co.,Ltd. Industrial and Commercial Bank of China Limited The Export-Import Bank of China China Development Bank Industrial and Commercial Bank of China (Asia) Limited China Citic Bank International Limited China Development Fund Co., Ltd.

REMUNERATION COMMITTEE

Liu Xiaofeng (Committee Chairman) Zhang Mi Jin Liliang Su Mei Wei Bin

AUDITOR

PricewaterhouseCoopers Certified Public Accountants 22nd Floor, Prince’s Building Central Hong Kong

REGISTERED OFFICE

Clifton House, 75 Fort Street PO Box 1350 Grand Cayman, KY1-1108 Cayman Islands

HONGHUA GROUP LIMITED 2020 ANNUAL REPORT

CORPORATE INFORMATION

HEAD OFFICE

99 East Road, Information Park Jinniu District Chengdu, Sichuan, PRC Post code: 610036

PLACE OF BUSINESS IN HONG KONG

Room 2508, Harcourt House 39 Gloucester Road Wan Chai Hong Kong

PRINCIPAL SHARE REGISTRAR AND TRANSFER OFFICE

Ocorian Trust (Cayman) Limited Windward 3, Regatta Office Park PO Box 1350 Grand Cayman KY1-1108 Cayman Islands

HONG KONG BRANCH SHARE REGISTRAR AND TRANSFER OFFICE

Computershare Hong Kong Investor Services Limited Shops 1712-1716 17th Floor Hopewell Centre 183 Queen’s Road East Wan Chai Hong Kong

STOCK CODE

The Stock Exchange of Hong Kong Limited: 0196

WEBSITE

http://www.hh-gltd.com

HONGHUA GROUP LIMITED 2020 ANNUAL REPORT

FINANCIAL HIGHLIGHTS

	Year ended 31 December
	2020 2019 RMB’ 000 RMB’ 000	Changes
Operating results
Revenue Operating profit/(loss)	3,931,492 4,425,686 227,416 378,391	-11.2% -39.9%
Profit/(Loss) before income tax	86,090 166,265	-48.2%
Profit/(Loss)attributable to owners of the company	49,660 107,472	-53.8%
Profit/(Loss) per share from continuing and discontinued
operations attributable to owners of the Company
(expressed in RMB cents per share)
Basic profit/(loss) per share	0.94 2.03	-53.7%
Diluted profit/(loss) per share	0.94 2.03	-53.7%
Financial position
Total non-current assets Total current assets Total assets	4,240,975 5,298,467 7,771,402 6,455,861 12,012,377 11,754,328	-20.0% 20.4% 2.2%
Total current liabilities Total non-current liabilities Total liabilities Total equity	5,170,292 5,033,409 2,347,458 2,240,542 7,517,750 7,273,951 4,494,627 4,480,377	2.7% 4.8% 3.4% 0.3%

HONGHUA GROUP LIMITED 2020 ANNUAL REPORT

FINANCIAL HIGHLIGHTS

	Year	ended 31 December	ended 31 December
	2020	2019	Changes
Key financial ratios*
Gross Margin	30.0%	29.7%	0.3 percentage
			points
Net Margin	1.3%	2.4%	-1.1 percentage
			points
Return on average assets	0.4%	1.0%	-0.6 percentage
			points
Return on average equity	1.2%	2.6%	-1.4 percentage
			points
Current ratio	1.50	1.28	17.2%
Quick ratio	1.24	1.03	20.4%
Total debt/Total assets	37.3%	34.1%	3.2 percentage
			points
Total liabilities/Total assets	62.6%	61.9%	0.7 percentage
			points

HONGHUA GROUP LIMITED 2020 ANNUAL REPORT

CHAIRMAN’S STATEMENT

DEAR SHAREHOLDERS AND FRIENDS,

Firstly, on behalf of the Board of Directors of Honghua Group Limited, I would like to express my sincere gratitude to all shareholders and friends for their attention and support.

2020 was an extraordinary year, with the COVID-19 pandemic causing a public health crisis that was unprecedented in a century. The lockdowns and quarantine measures led to a sharp drop in energy demand, which also brought unprecedented challenges to the energy industry. Due to such headwind, international oil and gas companies cut capital expenditures and reduced oil and gas drilling activities. Honghua’s overseas projects faced multiple difficulties, including short-term development delays, the inability to sign up new contracts, and the inability to implement shift rotation of personnel. In the face of such sudden crisis, Honghua adopted proactive measures to nurture new opportunities amid the crisis and explored new horizons in the changing situation. We took effective measures to prevent and control the pandemic in order to ensure the safety and health of personnel at home and abroad. In terms of operations, we strengthened cost control, established a strict project access system, and carried out risk control on newly signed projects. Meanwhile, leveraging our advantages as a manufacturer and our existing production capacity, we actively developed new businesses to hedge against the risks of cyclical fluctuations in the traditional petrochemical industry. In 2020, Honghua entered into the offshore wind power industry. Seizing the opportunities arising from the rapid development of the offshore wind power market, we signed new orders exceeding RMB1 billion in aggregate throughout the year.

In 2020, despite the sluggish performance of the oil and gas market in general due to the pandemic, Honghua demonstrated various bright spots in its principal business. Honghua concentrated on its principal business from three aspects, namely “focusing on market expansion and industrial structure adjustment, key core technology research and market transformation, and resource integration and industrial coordinated development”. As a pioneer of electric oil and gas equipment, to advance the development of unconventional oil and gas, Honghua has been taking the lead in deploying electric fracturing equipment since 2009. After nearly a decade of hard work, Honghua has realized the transformation from single leading product, drilling rigs, to the bipartite of drilling rigs and electric fracturing pumps. With the development model of “exploiting gas by using electricity, combining gas and electricity”, Honghua realized the industrial layout of overall electric development from drilling to fracturing. Insisting on technology innovation, Honghua launched the first set of electric coiled tubing in China, which became another essential equipment in the development of electric fracturing. Honghua completed the industrial testing on the high-pressure choke manifold automatic control system, and basically formed a complete set of electric fracturing equipment with fracturing pumps as core equipment. With the transition towards low-carbon, green and environmental-friendly operation in the industry, Honghua’s electric green development model was recognized by the market, triggering explosive growth in electric fracturing pumping services, which recorded a 48.5% increase in stages of pumping services as compared to the corresponding period of last year. Following the launch of fracturing engineering services in 2019, Honghua once again undertook multiple all-electric fracturing engineering service projects in the Sichuan-Chongqing block during the Period, which further consolidated Honghua’s leading position in the field of electric fracturing service.

HONGHUA GROUP LIMITED 2020 ANNUAL REPORT

CHAIRMAN’S STATEMENT

In 2020, we continued to set the goal of promoting high-quality development, and conducted work centering on the three aspects consisting of improving the quality and efficiency of operations, preventing operational risks, and improving management capabilities. We constantly optimized the supply chain, promoted the full life cycle management model of suppliers, improved the ability to deliver on time and of high quality, and enhanced our own refined management level. With the comprehensive promotion of the integrated construction of legal compliance and risk control, we strengthened the front-loaded management and control of risks, and achieved full coverage of the management mechanism for existing operational risks. We also strengthened cost and expense management and control, and promoted the construction of a cost management system. At the same time, we focused on promoting the effective operation of R&D management as well as quality control systems, and carried out in-depth digital transformation.

In 2020, dampened by the black swan events, Honghua’s operating results declined compared with the previous year. In particular, the sales of drilling rigs, our dominant business overseas, fell dramatically. In the second half of 2020, the market gradually recovered from the impacts of the pandemic and oil prices, and market fundamentals improved considerably. The “darkest moment” of the oil and gas industry had already passed. In the new year, Honghua will grasp the opportunity of market recovery by taking advantage of its overseas drilling rig business, and strengthening the implementation of large-scale drilling rig projects to advance the recovery of Honghua’s overseas business. Secondly, Honghua will continue to consolidate the equipment technology and service capabilities of fracturing, its core business, and expand the equipment and service for coid tubing well intervention in an orderly manner. Finally, Honghua will roll out a rational layout in the energy industry, and build its competitiveness in the offshore wind power industry through measures such as manufacturing process improvement, delivery plan optimization, and design capability cultivation. To make a good start at the beginning of the “14th Five-Year Plan”, Honghua will innovate and seek changes, coordinate development, and fully embark on a new journey of becoming a world-class and domestically leading supplier of integrated solutions for energy development.

Lastly, we would like to extend our sincere gratitude to our shareholders and friends for their long-term support. We are also grateful to the Directors, the management team and all the staff of Honghua for their commitment. Your perseverance will see Honghua pursuing a new stage in its development.

Chairman

Jin Liliang

29 March 2021

HONGHUA GROUP LIMITED 2020 ANNUAL REPORT

MANAGEMENT DISCUSSION AND ANALYSIS

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08 HONGHUA GROUP LIMITED 2020 ANNUAL REPORT
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MANAGEMENT DISCUSSION AND ANALYSIS

In 2020, the Group’s revenue amounted to RMB3,931 million, representing a decrease of 11.2% from RMB4,426 million for Previous Year. Gross profit was approximately RMB1,180 million, representing a decrease of 10.3% from RMB1,316 million for Previous Year. The profit attributable to equity shareholders of the company was approximately RMB50 million.

MARKET REVIEW

International oil prices experienced a roller coaster-like rise and fall in 2020. At the beginning of the year, international oil prices were rising all the way as boosted by the risk premium brought by geopolitical events in the Middle East. In early March, hit by the unprecedented black swan events – the global outbreak of COVID-19 and superimposed on the oil price war between the Organization of the Petroleum Exporting Countries (OPEC) and Russia, the oil price plummeted to a historic low. With the exhaustion of market pessimism and the reduced pressure on crude oil inventories, OPEC began to reduce oil outputs together, allowing oil price recovery. Throughout the year, oil prices demonstrated a deep-V trend of rebounding from a steep fall. In 2020, the annual average spot price of West Texas Intermediate crude oil (“WTI”) was USD39.28 per barrel, a 31.1% decrease from the same period of Previous Year; while the annual average spot price of North Sea Brent crude oil was USD41.78 per barrel, a decrease of 34.9% from the same period Previous Year. According to the data released by Baker Hughes Inc., an American oil service company, the number of active oil wells in the United States at the end of 2020 decreased by 403 in total from the beginning of the year, which was the largest decline since 2015. According to the information from the U.S. Energy Information Administration, the crude oil production of the United States decreased from 12.25 million barrels per day in 2019 to 11.31 million barrels per day in 2020.

In 2020, despite the plunge in international oil prices, China still attached great importance to national energy security. Domestic crude oil production amounted to 195 million tons, an increase of 1.6% over the same period of Previous Year, while natural gas production amounted to 188.8 billion cubic meters, an increase of 9.8% over the same period of Previous Year. In order to further stabilize and increase production, China needs to overcome multiple problems, such as resource replacement, technology innovation and cost reduction, and also needs to seek strategic breakthroughs in new alternative resources such as shale oil.1 The National Development and Reform Commission and the National Energy Administration jointly promulgated the Guiding Opinions on Energy Security for 2020 (《關於做好 2020 年能源安全保障工作的指導意見》), which called for improving energy production and supply capacity, promoting stable and increased production of domestic oil and gas fields, strengthening domestic oil and gas exploration and development efforts, and accelerating the exploration and development of unconventional oil and gas resources. During the Period, PipeChina fully took over the operation of oil and gas pipeline network assets, separated the operation of pipeline transportation as the intermediate link from upstream resources and downstream sales, and opened it up to third-party market entities in a fair manner, which would be conducive to more marketoriented development of oil and gas resources, diversifying domestic oil and gas supply entities, and promoting the market-oriented development of upstream exploration and development as well as the import links.

In 2020, nationwide newly-installed grid-connected wind power capacity was 71.67 million kW, of which newlyinstalled onshore wind power capacity was 68.61 million kW and newly-installed offshore wind power capacity was 3.06 million kW. The cumulative nationwide installed wind power capacity amounted to 281 million kW, of which the cumulative installed onshore wind power capacity was 271 million kW and the cumulative installed offshore wind power capacity was approximately 9 million kW.2

1 National Energy Administration

2 National Energy Administration

HONGHUA GROUP LIMITED 2020 ANNUAL REPORT

MANAGEMENT DISCUSSION AND ANALYSIS

BUSINESS REVIEW

In 2020, affected by the global outbreak of COVID-19 and the plunge in oil prices, Honghua encountered numerous challenges in its operations. For the staff safety, Honghua reduced domestic and overseas sales visit activities, increased the proportion of online marketing activities and orderly organized the staff to receive COVID-19 vaccination in order to keep the staff safe. For the markets business, the COVID-19 epidemic resulted in a sudden reduction in energy demand. Honghua swiftly adjusted its mindset, kept up with the changes in overseas client’ demand, and actively explored the new model of after-sales service driving sales for parts and components, and resource-integrated development driving collaborative sales. Relying on the background advantages of our major shareholder CASIC, Honghua entered into the offshore wind power industry to hedge against cyclical fluctuations of the oil and gas industry and find a new direction for the layout of the energy industry.

In 2020, despite the impacts of the COVID-19 pandemic and the plunge in oil prices on the global oil and gas market, we still benefited from the domestic energy security strategy. Honghua’s revenue generated from China recorded significant growth of 29.5%, representing 73.9% of business structure and reached a record high since its listing. During the Period, Honghua’s equipment-driven electric fracturing pumping service achieved a sizeable and explosive development, and obtained a number of shale gas fracturing engineering service contracts, which further expanded the scope of fracturing services and consolidated Honghua’s leading position in the field of electric fracturing. In addition to the complete set electric fracturing equipment with 6000HP electric fracturing pump as core equipment that has been continuously improving, Honghua launched the nation’s first set of electric drive coiled tubing, which became an important part of “all electric drive, smart fracturing”.

1. Drilling Rigs and Related Product Business Segment

In 2020, Honghua sold 12 drilling rigs with sales of approximately RMB622 million, representing a decrease of 51.0% from RMB1,269 million in the corresponding period of Previous Year. Total sales for parts and components amounted to RMB1,722 million, representing an increase of 6.5% from RMB1,617 million in the corresponding period of Previous Year.

In the international market, impacted by factors such as the global outbreak of COVID-19 and low oil prices, the overseas sales of Honghua’s complete set drilling rigs declined. Nevertheless, thanks to the good reputation and market influence of the Group in traditional advantageous locations, namely the Middle East and Russia, Honghua entered into another order for 4 sets of DBS drilling rigs and an order for 2 sets of retrofit rigs with customers in the region. In West Asia, Honghua successfully entered into an order for 2 sets of workover rigs. During the Period, Honghua succeeded in developing the nation’s first “one-key linkage” automatic machine tool system, which upgraded the multi-person distributed operation of the traditional machine tool system to an automatic batch operation process, realizing single driller operation and parallel linkage of the iron driller, pipe arranging machine and drill floor manipulator on the drilling rig. The successful development of “one-key linkage” was a giant leap for Honghua’s drilling rigs towards automation.

HONGHUA GROUP LIMITED 2020 ANNUAL REPORT

MANAGEMENT DISCUSSION AND ANALYSIS

In respect of parts and components, although the overseas market was affected by factors including the pandemic and oil prices, Honghua managed to adopt a flexible sales mechanism to seize the needs of customers for parts and components updates and upgrades, and deepened the long-term partnerships. In Russia, relying on the long-term cooperative relationship with existing customers, Honghua signed a framework agreement for the procurement of oilfield stimulation equipment worth USD30 million, which included several sets of top drives, direct drive pumps, retrofit rigs and other products independently developed by Honghua. In Europe, subsequent to the completion of the previous drilling rig and renovation project, Honghua signed a new rig upgrading and after-sales service framework contract with the customer. During the Period, the sales of Honghua’s core components achieved relatively rapid growth. The independent sales of mud pumps increased by 83% as compared to the corresponding period of Previous Year, mainly attributable to the achievement of mass sales of mud pumps due to the shortlisting of Sinopec’s annual drilling mud pump framework agreement this year.

In 2020, leveraging its background advantages as a state-owned enterprise and utilizing its existing manufacturing capacity, Honghua successively entered into offshore wind power construction agreements with state-owned enterprises including Huadian Heavy Industry, Guangzhou Salvage Bureau and Guangdong Thermal Power, and entered into orders totaling more than RMB1 billion throughout the year. Honghua took this opportunity to actively deploy the new energy industry.

As at 31 December 2020, Honghua’s total contract backlog of drilling rigs and related products amounted to approximately RMB1,362 million, including onshore drilling rigs of approximately RMB107 million.

2. Fracturing Business

In 2020, Honghua had a total of 17 pumping teams to provide 4,357 stages for pumping service during the Period, representing an increase of 48.5% in the corresponding period of Previous Year. The total realized sales of equipment and engineering services provided during the Period amounted to approximately RMB1,340 million, representing an increase of 24.6 % from RMB1,075 million in the corresponding period of Previous Year.

In respect of fracturing equipment for unconventional oil and gas development, Honghua realized the sales of 4 sets of electric fracturing pumps in 2020. With the in-depth development of fracturing business, Honghua continued to expand its product lines of complete fracturing equipment. During the Period, Honghua launched the China’s first set of electric coiled tubing, which completed industrial testing in early 2021. Compared with traditional diesel-driven coiled tubing, electric coiled tubing innovated and improved in three aspects, i.e. performance and efficiency, automation, and synchronization control. The electric automatic sand transportation and storage device was successfully rolled off the production line and realized the first well site operation. Adhering to the concept of the overall development of electric fracturing and taking 6000HP electric fracturing pump as core equipment, Honghua launched numerous complete sets of electric fracturing equipment in turn, including electric fluid supply skid, command control center, flexible tank, high pressure manifold, electric coiled tubing, and automatic sand transportation and storage device.

HONGHUA GROUP LIMITED 2020 ANNUAL REPORT

MANAGEMENT DISCUSSION AND ANALYSIS

In 2020, under the impact of the global outbreak of the COVID-19 pandemic, the overall demand in the oil and gas market declined. During the oil price downturn, the industry actively explored cost-reducing and efficiency-enhancing development models. Compared with traditional diesel-driven fracturing equipment, Honghua’s electric fracturing development model better met the requirements of eco-friendly and highefficiency development, receiving recognition from the market. Honghua’s pumping service achieved explosive growth, with stages of pumping service offered throughout the year amounting to 4,357, an increase of 48.5% over the Previous Year. Through years of accumulation, Honghua’s electric pumping crews supported PetroChina and Sinopec to achieve sizeable all-electric fracturing in multiple blocks in Sichuan and Chongqing. And Honghua assisted clients in breaking multiple records throughout the year. At Fuling block, an average daily fracturing construction record of 5.6 stages and a daily fracturing construction record of 8 stages were achieved, which marked the legendary “Fuling speed”. At Sichuan shale gas block, Honghua also achieved a breakthrough of 24-hour all-electric zipper-like operation, which reduced costs and increased efficiency, contributing to the shale gas development.

Following Honghua’s first shale gas fracturing engineering service contract in 2019, after expanding the scope of operations from single pumping service to comprehensive electric fracturing services, Honghua obtained a complete set of electric fracturing equipment leasing and service contract in Changning that worth RMB325 million from CNPC Western Drilling, a subsidiary of PetroChina, as well as all-electric fracturing engineering service contracts for three shale gas platforms in a block in Chongqing that worth RMB288 million. The project was a key project in the pilot test area for shale gas, with the drilling depth exceeding 6,000 meters, the horizontal drilling exceeding 1,500 meters, and the pressure exceeding 100MPa. Honghua’s fracturing crews created a record of 366.7 tons of sand addition during operation, setting a new sand addition record following PetroChina’s sand addition record during deep shale gas single-stage reservoir reconstruction.

As at 31 December 2020, Honghua’s total contract backlog of fracturing business amounted to approximately RMB236 million.

3. Drilling Engineering Service Business

In 2020, Honghua’s 11 drilling crews completed a footage of approximately 87,635 meters during the year, representing a decrease of 6.8% for the same period of Previous Year, providing engineering services with a total sales amount of approximately RMB248 million, representing a decrease of 46.6% from RMB464 million in the same period of Previous Year.

HONGHUA GROUP LIMITED 2020 ANNUAL REPORT

MANAGEMENT DISCUSSION AND ANALYSIS

In 2020, despite the global impact of the COVID-19 pandemic, the domestic market benefited from the national energy security strategy, which still placed increasing reserves and production on the agenda. Honghua signed domestic drilling service contracts totaling RMB240 million. A service contract for directional wells that worth RMB50 million was newly signed. In the Changning block, Honghua’s oil service crews created a record of the longest horizontal drilling of a shale gas well in China, with a completion depth of 4,850 meters and a horizontal drilling of 3,100 meters. In respect of technological breakthroughs, the oil service crews utilized advanced downhole tools in operations to improve the efficiency of drilling rigs. For directional drilling projects, Honghua put near-bit azimuth gamma into use for the first time, which improved the accuracy of drilling data and reduced the failure rate. At the same time, the torsion-pendulum top drive system was adopted in directional constructions, and periodical rotation of drill tools was achieved through multi-parameter intelligent algorithm, which reduced the friction resistance and solved the problem of inability to drill due to sliding directional decompression. And the utilization of the hydraulic oscillator independently developed by Honghua reduced the friction and increased the mechanic drilling speed. In respect of operation efficiency, the production efficiency for the Year was 85.6%, up by 4.8 percentage point over the same period of Previous Year, and the organizational downtime was 1.8%, down by 0.75 percentage point year-on-year. For the directional service of horizontal wells in Yibin area, the average daily footage increased by 16% year-on-year.

In 2020, regardless of the impacts of the global outbreak of COVID-19 pandemic on the overseas market, Honghua renewed drilling service framework contracts with international oilfield service companies based on its high-quality overseas operation capability, with an estimated value reaching USD9 million. In the Middle East, the operation crews also created a footage record of 16.2 m/h, and set the record of drilling speed in this block twice. Meanwhile, the actual operation cycle of the crews under the well ZB-469 was 20.8 days, breaking the record of drilling completion cycle of the block that lasted for around four years.

As at 31 December 2020, Honghua’s total contract backlog of drilling engineering service business amounted to approximately RMB121 million.

ENVIRONMENTAL POLICIES AND PERFORMANCE

For the year ended 31 December 2020, Honghua’s business operation made continuous efforts in mitigating pollution of the environment and conserving natural resources through its policies and guidelines. No noncompliance in relation to environmental and social aspects was recorded. Engagement with stakeholders has resulted in heightened concerns on key material issues, which include (i) Product/Service Quality, (ii) Customer Service, (iii) Data Protection, (iv) Intellectual Property, and (v) Supplier Management. These aspects had already been managed by Honghua and Honghua will continue to keep close communication with stakeholders for advancing environmental, social and governance management. Details of Honghua’s environmental policies and performance are set out in the Environmental, Social and Governance Report of this annual report.

HONGHUA GROUP LIMITED 2020 ANNUAL REPORT

MANAGEMENT DISCUSSION AND ANALYSIS

QUALITY MANAGEMENT AND RESEARCH & DEVELOPMENT

During the Year, Honghua continued to ensure the effective operation of its quality control system and made steady improvement in product quality. We successfully passed the annual assessment of the quality system, and obtained new ISO 9001: 2015 certification for compression equipment, skid-mounted equipment and pressure equipment, further adding new members to the products with CE certification, CCC certification and ATEX certification. We also added 81 CNAS inspection standards and 66 CMA inspection standards, and obtained QESHSE certificate for four systems of quality control. After tackling the key problems in proprietary technologies, we made significant progress in the quality issues of our key products such that the number of quality issues and losses reduced by more than 10% compared with Previous Year, and product quality has been further improved. Honghua actively participated in the revision of industry standards to reinforce our discourse power in the industry. In 2020, a total of 5 national and industry standards were issued. We participated in the formulation and revision of 4 national and industry standards, took lead in the formulation of a group standard, and actively applied for the approval of a national standard.

In 2020, Honghua made overall plans on and coordinate relevant resources to push forward the progress of R&D projects affected by the COVID-19 pandemic and stayed focused on solving the problems of getting stuck during project R&D, so as to promote the implementation of projects with high quality. With respect to smart rigs, we established a digital drilling control simulation laboratory for the integrated smart drilling system UNISON, with a plan to gradually promote our official products.

In respect of unconventional oil and gas development equipment, Honghua successfully introduced the electric coiled tubing and completed its industrial testing during the Period, which became an important component of complete set of electric fracturing equipment. We also launched the automatic sand transportation and storage system and completed its industrial testing. We completed the development of the centralized control system of fracturing auxiliary equipment for the intelligence electric fracturing system, which achieved the automation of the whole process of major fracturing equipment and auxiliary equipment.

In terms of offshore development, the offshore natural gas hydrate project has been rated as a special research project for natural gas hydrate development technology of the Ministry of Science and Technology. Honghua undertook the research of technology development of hydrates in shallow surface layers as well as development of equipment system, and completed the design of the prototype for development of equipment system. The hydrate trial dredger project has completed the task of high-tech shipping technology research project of the Ministry of Industry and Information Technology by tackling the key technical problems. The deep-sea mining project maintained close communication with CSSC on technical issues, and commenced the development of China’s first deep-sea ore slurry lift system. The automation and localization of offshore drilling equipment were carried out in an orderly manner. We won the bid for the automation equipment system of a drilling platform in Bohai Bay, which has been installed on the platform and commenced drilling operations, achieving a breakthrough in the localization alternative of offshore automation drilling equipment.

As at 31 December 2020, Honghua has a total of 518 effective patents, including a total of 173 effective invention patents. During the Period, Honghua applied for 189 new patents, including 105 invention patents. 82 patents were granted, including 3 invention patents.

HONGHUA GROUP LIMITED 2020 ANNUAL REPORT

MANAGEMENT DISCUSSION AND ANALYSIS

HUMAN RESOURCES MANAGEMENT

During the Year, Honghua continued to implement the strategy of a thriving enterprise backed by stronger talents, and further optimized the personnel structure. The proportion of professional and technical personnel increased by 2.5 percentage points compared with the same period of Previous Year. Honghua improved the incentive policies for Honghua’s staff, and strengthened the linkage between the income level of the management and business performance. Honghua promoted stability in our core talent team through policies and mechanisms such as extra incentives, technological incentives, and sales incentives, and continued to strengthen the reserve and training of strategic and innovative young talents. As at 31 December 2020, the total number of employees of Honghua was 3,570, decreased by 225 as compared to the corresponding period of Previous Year, with 523 being R&D staff. The total headcount decreased by 5.9% compared with the same period of Previous Year, mainly due to the reduction and optimization of non-key business and non-key positions. The number of R&D staff increased by 10.1% over the same period of Previous Year, mainly due to the replenishment and reserve of scientific and technological talents centering on the strategic business layout.

During the Year, Honghua implemented a total of 849 training projects, to a total of 47,540 trainees – which was 41 hours per trainee. Making a point of improving the professional and technical competence as well as comprehensive quality of its employees, Honghua focused on planning and implementing technical marketing elite exchanges, capacity improvement of sales staff, supply chain and other special trainings, so as to further enhance the training of key and core talents. In 2021, in view of its strategic layout and business priorities, Honghua will continue to optimize the structure of its talents pool, and will also step up its effort to retain industry leaders and young scientific and technological talents in the fields of electrical, automation, intelligence, cloud computing, big data and fracturing industry. Honghua will accelerate the digital transformation of training and promote the construction and the use of online education platforms, in order to enhance the effectiveness of training and improve management efficiency. The performance evaluation mechanism will be optimized in an all-round way by establishing a sound evaluation and allocation mechanism based on value creation. With a sound talent introduction, training and incentive system, Honghua Group’s scientific and technological innovation capabilities and core competitiveness will be enhanced.

HONGHUA GROUP LIMITED 2020 ANNUAL REPORT

MANAGEMENT DISCUSSION AND ANALYSIS

OUTLOOK

At the beginning of 2021, the COVID-19 pandemic remains not yet fully under control, and there are still many uncertainties in the oil and gas market. The COVID-19 pandemic has further accelerated the process of energy transition worldwide. In the long run, low-carbon and clean energy will be the direction of future development, which will pose challenges to the traditional petrochemical industry. Nevertheless, we still see many positive factors are emerging in the short term. With the expected large-scale vaccination programs, and the oil prices in stable recovery as a result of the ongoing joint production cuts by the Organization of the Petroleum Exporting Countries, the “darkest moment” of the oil and gas industry had passed. In the domestic market, by virtue of the national energy security strategy, the reform of the energy system will bring more market opportunities. As a leading supplier of oil and gas equipment and services, Honghua will safeguard the national economic security and development interests, adapt to the transition of China from a major energy consumer to a powerhouse of energy technology and equipment, and provide the industry with green, environmentally friendly, efficient and safe energy equipment and service solutions.

In terms of markets, first of all, against the backdrop of the pursuit of high efficiency and environmental protection in the market, Honghua’s comprehensive electric fracturing solutions conforms to the market trend of green development and meets the needs of customers for cost reduction and efficiency enhancement. Honghua will further consolidate its core competitive advantages in fracturing equipment and services, accelerate the marketoriented development of complete fracturing equipment, and realize large-scale and piecemeal development of unconventional oil and gas by driving its services with equipment. Secondly, in light of the bottoming out in the overseas market, Honghua will seize the strong demand arising from the recovery of the overseas market, adapt to the transformation and upgrade needs of customers, meet customer demand for customized products, further strengthen its principal business of drilling rigs, and promote the execution of major domestic and overseas orders. At the same time, leveraging the advantages of leading rig products, we will allocate more resources for high valueadded businesses, enhance the R&D efforts in the upgrade of drilling rigs automation, and further complete the upgrade of smart drilling rigs. Lastly, adhering to the development concepts of platform construction, ecology cultivation and resource coordination, Honghua will strengthen the coordination of industry and resources in cooperation with its major shareholder CASIC. The offshore wind power industry has empowered Honghua with successful experience and confidence in entering new industries. Honghua will further create new growth points for the offshore wind power business and expand the offshore equipment business.

HONGHUA GROUP LIMITED 2020 ANNUAL REPORT

MANAGEMENT DISCUSSION AND ANALYSIS

In terms of management, focusing on the two core indicators consisting of net profit and cash flows, Honghua will strengthen cost control, strictly monitor the level of total liabilities, optimize supply chain management, and improve the ability to deliver on time and of high quality, so as to achieve higher quality and efficiency in operation management. An overall plan will be made to promote the integration and intensification of legal compliance and risk control. During the recovery of the oil and gas industry, Honghua has to strengthen the construction of the risk control and compliance system and focus on preventing and resolving major risks. Centering on product data model integration, digital equipment network connection, digital technology improvement and other key indicators, we will continue to promote digital transformation, and initiate digital transformation and upgrading with “smart manufacturing” as the core. In 2021, Honghua will strengthen its corporate governance and make good use of its institutional advantages as an enterprise under mixed ownership, striving to become a world-class and domestically leading supplier of integrated solutions for energy development.

FINANCIAL REVIEW

During the Year, the Group’s gross profit and profit attributable to shareholders of the Company amounted to approximately RMB1,180 million and RMB50 million respectively, and gross margin and net margin amounted to approximately 30.0% and 1.3% respectively. While gross profit and profit attributable to shareholders of the Company in the Previous Year amounted to approximately RMB1,316 million and RMB107 million respectively, gross margin and net margin amounted to approximately 29.7% and 2.4% respectively.

During the Year, due to the COVID-19 and the significant fluctuation in the international oil price, the global oil and gas service market demand declined. At the same time, based on the principle of prudence, the impact of nonrecurring gains and losses such as financial asset impairment losses and other losses is fully considered, which makes the Group’s net profit margin decrease.

Turnover

During the Year, the Group’s revenue amounted to approximately RMB3,931 million, representing a decrease of RMB495 million or 11.2% from RMB4,426 million for Previous Year. The decrease in revenue mainly came from the international market. Affected by the COVID-19 pandemic and oil price fluctuation, overseas drilling rig orders decreased and some projects were delayed, resulting in a decrease compared with Previous Year in terms of sales revenue of the Group.

(1) Revenue by geographical locations

The Group’s revenue by geographical segment during the Year: (1) revenue generated from the PRC amounted to approximately RMB2,906 million, accounting for approximately 73.9% of the total revenue, representing an increase of RMB663 million as compared to Previous Year; (2) The Group’s export revenue amounted to approximately RMB1,025 million, accounting for approximately 26.1% of the total revenue, representing a decrease of RMB1,156 million as compared to Previous Year.

HONGHUA GROUP LIMITED 2020 ANNUAL REPORT

MANAGEMENT DISCUSSION AND ANALYSIS

The regional distribution of the Group’s sales revenue is affected by changes in oil and gas production activities in various regions of the world. In the face of market shocks in the oil industry, the Group continues to adhere to technological innovation, improve the quality of products and services, strictly control operating costs, and focus on developing international business; at the same time, the domestic shale gas market has developed rapidly, and the Group entered into offshore wind power construction agreements and took the opportunity to actively deploy the new energy industry, promoting the continuous growth of the domestic market.

Revenue by geographical locations

Ended 31 December 2020 （Expressed in RMB'million)

Ended 31 December 2019

（Expressed in RMB'million)

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119 (3%) 140 (3%) 25 (1%) 59 (1%)
306 (8%) 884 (20%)
418 (11%) 2,906 (74%) 2,243 (51%)
42 (1%)
900 (20%)
313 (7%)
PRC (country Europe and PRC (country Europe and
of domicile) Central Asia of domicile) Central Asia
South Asia and South Asia and
Americas Americas
South East Asia South East Asia
Middle East Africa Middle East Africa
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(2) Revenue by operating segments

The Group’s business is divided into land drilling rigs, parts and components and others, drilling engineering service business and fracturing business.

During the Year, external revenue from land drilling rigs amounted to approximately RMB622 million, representing a decrease of RMB647 million or 51.0% from approximately RMB1,269 million for Previous Year.

During the Year, external revenue from parts and components and others amounted to approximately RMB1,722 million, representing an increase of RMB105 million or 6.5% from approximately RMB1,617 million for Previous Year.

During the Year, external revenue from drilling engineering service business amounted to approximately RMB248 million, representing a decrease of RMB216 million or 46.6% from approximately RMB464 million for Previous Year.

HONGHUA GROUP LIMITED 2020 ANNUAL REPORT

MANAGEMENT DISCUSSION AND ANALYSIS

During the Year, external revenue from fracturing business amounted to approximately RMB1,339 million, representing an increase of RMB264 million or 24.6% from approximately RMB1,075 million for Previous Year.

Revenue by operating segments

Ended 31 December 2020

（Expressed in RMB’million）

Ended 31 December 2019

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（Expressed in RMB’million）
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248 (6%) 622 (16%)
1,722 (44%)
1,339 (34%)
Land drilling rigs Fracturing business
Parts and components Drilling engineering
and others service business
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464 (10%) 1,269 (29%)
1,617 (37%)
1,075 (24%)
Land drilling rigs Fracturing business
Parts and components Drilling engineering
and others service business
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Cost of Sales

During the Year, the Group’s cost of sales amounted to approximately RMB2,751 million, representing a decrease of RMB359 million or approximately 11.5%,while it was approximately RMB3,110 million in the Previous Year. Mainly affected by the reduction of sales scale, the sales cost of each sector has also decreased. Meanwhile, the Group has continued to promote cost-cutting and efficiency-improving work, strictly controlled the cost and expenses, optimized the cost structure, and continuously improved the operating level.

Gross Profit and Gross Margin

During the Year, the Group’s gross profit amounted to approximately RMB1,180 million, representing a decrease of RMB136 million or 10.3% from RMB1,316 million for Previous Year.

During the Year, the Group’s overall gross margin was 30.0%, representing an increase of 0.3 percentage points from 29.7% for Previous Year. The main reason is that the Group actively promoted new products with high added value. In addition, under the influence of positive measures such as cost reduction, cost control and cost structure optimization, the gross profit has increased.

HONGHUA GROUP LIMITED 2020 ANNUAL REPORT

MANAGEMENT DISCUSSION AND ANALYSIS

Expenses in the Year

During the Year, the Group’s distribution expenses amounted to approximately RMB178 million, representing a decrease of RMB179 million or 50.1% from RMB357 million for Previous Year. It is mainly due to the decrease of sales revenue that leads to the decrease of project related expenses.

During the Year, the Group’s administrative expenses amounted to approximately RMB548 million, representing an increase of RMB45 million or 8.9% from RMB503 million for Previous Year. It is mainly due to the increase of R & D investment, while improving competitiveness for sustainable development.

During the Year, the Group’s net finance expenses amounted to approximately RMB126 million, representing a decrease of RMB83 million or 39.7% from RMB209 million for Previous Year. The main reason is that being affected by the fluctuation of RMB exchange rate, the exchange income in the debt securities increased in the year.

Profit before Income Tax

During the Year, the Group’s profit before income tax amounted to approximately RMB86 million, representing a decrease of RMB80 million or 48.2% from RMB166 million for Previous Year.

Income Tax Expense

During the Year, the Group’s income tax expense amounted to approximately RMB26 million, compared with the income tax expense of approximately RMB34 million for Previous Year.

Profit for the year

During the Year, the profit for the Year amounted to approximately RMB60 million compared with approximately RMB132 million for Previous Year. Specifically, profit attributable to equity shareholders of the Company was approximately RMB50 million, while profit attributable to non-controlling interests was approximately RMB10 million. During the Year, net margin amounted to 1.3%, compared with a net margin of 2.4% for Previous Year.

Earnings before Interest, Taxes, Depreciation and Amortization (“EBITDA”) and EBITDA Margin

EBITDA for the Year amounted to RMB408 million compared with approximately RMB558 million for Previous Year. The main reason is that affected by the COVID-19 pandemic and oil price fluctuation, the income decreased. The EBITDA margin amounted to 10.4%, compared with 12.6% for Previous Year.

HONGHUA GROUP LIMITED 2020 ANNUAL REPORT

MANAGEMENT DISCUSSION AND ANALYSIS

Dividends

As at 31 December 2020, the Board did not recommend distribution of annual dividends.

Source of Capital and Borrowings

The Group’s principal sources of capital include cash from operations, bank borrowings and debt securities financing.

As at 31 December 2020, the Group’s bank borrowings and senior notes amounted to approximately RMB4,485 million, representing an increase of RMB476 million as compared to 31 December 2019. Among which, borrowings repayable within one year amounted to approximately RMB2,255 million, representing an increase of RMB337 million or 17.6%, as compared to 31 December 2019.

Deposits and Cash Flow

As at 31 December 2020, the Group’s cash and cash equivalents amounted approximately RMB952 million, representing an increase of approximately RMB62 million as compared to 31 December 2019.

During the Year, the Group’s net cash outflow from operating activities amounted to approximately RMB166 million; net cash outflow from investing assets amounted to approximately RMB79 million; and net cash inflow from financing activities amounted to approximately RMB326 million.

Assets Structure and Changes

As at 31 December 2020, the Group’s total assets amounted to approximately RMB12,012 million. Specifically, current assets amounted to approximately RMB7,771 million, accounting for 64.7% of total assets, representing an increase of RMB1,315 million as compared to 31 December 2019, which is due to the increase in contract assets, account receivable and other receivable; and non-current assets amounted to approximately RMB4,241 million, accounting for 35.3% of total assets, representing a decrease of approximately RMB1,057 million as compared to 31 December 2019, which is due to a decrease in long-term receivables.

HONGHUA GROUP LIMITED 2020 ANNUAL REPORT

MANAGEMENT DISCUSSION AND ANALYSIS

Liabilities

As at 31 December 2020, the Group’s total liabilities amounted to approximately RMB7,518 million. Specifically, current liabilities amounted to approximately RMB5,170 million, accounting for approximately 68.8% of total liabilities, representing an increase of approximately RMB137 million as compared to 31 December 2019; and non-current liabilities amounted to approximately RMB2,348 million, accounting for approximately 31.2% of total liabilities, representing an increase of approximately RMB107 million as compared to 31 December 2019. As at 31 December 2020, the Group’s total liabilities/total assets ratio was 62.6%, representing an increase of 0.7 percentage points as compared to 31 December 2019.

Equity

As at 31 December 2020, total equity amounted to approximately RMB4,495 million, representing an increase of 15 million as compared to 31 December 2019. Total equity attributable to equity shareholders of the Company amounted to approximately RMB4,270 million, representing an increase of 4 million as compared to 31 December 2019. Non-controlling interests amounted to approximately RMB225 million, representing an increase of RMB11 million as compared to 31 December 2019. During the Year, the Group’s basic earnings per share was RMB0.94 cent, and diluted earnings per share was RMB0.94 cent.

Capital Expenditure, Major Investment and Capital Commitments

During the Year, capital expenditure of the Group on infrastructure and technical improvements amounted to approximately RMB183 million, representing a decrease of approximately RMB91 million as compared to Previous Year.

As at 31 December 2020, capital commitment of the Group amounted to approximately RMB3 million.

Principal Risks and Uncertainties

The Group provides development equipment and engineering services of oil and gas fields. Due to the geopolitical uncertainties and all kinds of derivative risks under the impact of Covid-19, the Group’s business is exposed to the risk of fluctuations in oil and gas prices and a reduction in oil and gas development activities. The Board of the Company pays close attention to the market conditions and will change the Group’s market strategy in a timely manner according to the market changes to ensure a stable business development of the Group.

Meanwhile, the Group’s activities are exposed to various financial risks: market risk (including foreign exchange risk, cash flow and fair value interest rate risk), credit risk and liquidity risk. Details of these financial risks are set out in note 3 to the Consolidated Financial Statements for the year ended 31 December 2020.

HONGHUA GROUP LIMITED 2020 ANNUAL REPORT

BIOGRAPHICAL DETAILS OF DIRECTORS AND SENIOR MANAGEMENT

EXECUTIVE DIRECTORS

Mr. Jin Liliang (金立亮先生) , aged 54, has been an Executive Director of the Company and chairman of the Board since 24 August 2018. Mr. Jin joined in China Aerospace Science and Industry Corporation Limited (“CASIC”) in 1993. He was a vice president of a subsidiary of CASIC. Mr. Jin has rich experience of corporate operation and management. He holds a master’s degree of Engineering from Harbin Institute of Technology. Positions held by Mr. Jin in the Company’s subsidiaries are set forth in the table below.

Subsidiary	Position	Term of Office
Honghua Holdings Limited	Chairman	Since 29 December 2018
Honghua (China) Investment Co., Ltd.	Chairman	Since 10 October 2018

Mr. Zhang Mi (張弭先生) , aged 64, has been an Executive Director of the Company since June 2007, the chairman of the Board from June 2007 to March 2017 and the vice Chairman of the Board since March 2017. He is also President of the Company. Positions held by Mr. Zhang in the Company’s subsidiaries are set forth in the table below.

Subsidiary	Position	Term of Office
Honghua Holdings Limited	Director	Since 18 August 2006
	Chief Executive Officer	Since 8 September 2009
Sichuan Honghua Petroleum Equipment Co.,Ltd.	Director	Since 31 December 1997
Honghua International Co., Ltd.	Director	Since 13 January 2004
Honghua (China) Investment Co., Ltd.	Director	Since 19 October 2009
	General manager	Since 15 October 2009
Honghua Oil & Gas Engineering Services Co., Ltd.	Director	Since 14 April 2009
Honghua America, LLC.	Chairman	Since 11 October 2004
Gansu Hongteng Oil & Gas Equipment Co, Ltd.	Director	Since 28 December 2011

Mr. Zhang graduated from the Sichuan Petroleum Administration Vocational University in 1982, with a diploma in machinery manufacture, design and equipment. He graduated from the Party Institute of Sichuan Provincial Committee Correspondence College in 1998, with a degree in Economics and Management. In 2004 he then obtained a senior engineer qualification granted by the Committee for Evaluation of Senior Technical Positions of the China National Petroleum Corp. He has been receiving special subsidies granted by the State Council of the PRC government since February 2007, for his significant contribution to the development of machinery engineering in the PRC.

In 2005, Mr. Zhang was awarded the Sichuan Province Prize for Outstanding Talent in Innovation (四川省第三屆傑出創新人才獎), by the Sichuan Provincial Party Committee and the Sichuan Provincial People’s Government. In 2007, he was granted the May 1 Labor Medal of Sichuan Province (四川省五一勞動獎章) by the Sichuan Provincial Federation of Trade Unions in 2007. Mr. Zhang was rewarded as Leading Entrepreneur of Foreign Trading and Export Enterprises in Sichuan for 2009. In 2015, he was rewarded as a national model worker.

HONGHUA GROUP LIMITED 2020 ANNUAL REPORT

BIOGRAPHICAL DETAILS OF DIRECTORS AND SENIOR MANAGEMENT

Mr. Ren Jie (任杰先生) , aged 54, has been an Executive Director of the Company since 18 January 2008. He has been the senior vice-president of the Company since 1 January 2016. In 1990, Mr. Ren earned a Bachelor’s degree in mining machinery from Southwest Petroleum University, located in Sichuan Province, specializing in petroleum and natural gas. In 1995, Mr. Ren obtained an engineering qualification, granted by the China National Petroleum Corp., Sichuan Petroleum Administration. In November 2007, he also became a member of the 5th Edition Committee of the Oil Field Equipment Journal, and in 2012, he earned a Doctor’s degree in Mechanical Design and Theory from Southwest Petroleum University. Mr. Ren is employed as an engineer by Sichuan Honghua Petroleum Equipment Co., Ltd. Positions held by Mr. Ren in the Company’s subsidiaries are set forth in the table below.

Subsidiary	Position	Term of Office
Honghua Holdings Limited	Director	Since 18 August 2006
Sichuan Honghua Petroleum Equipment Co.,Ltd.	Director	Since 31 December 1997
	Chairman	Since 1 January 2018
Honghua International Co., Ltd.	Director	Since 13 January 2004
Sichuan Honghua Electric Co.,Ltd.	Director	Since 1 August 2009
Honghua (China) Investment Co., Ltd.	Director	Since 19 October 2009
Honghua America, LLC.	Director	Since 10 October 2008

NON-EXECUTIVE DIRECTORS

Mr. Han Guangrong (韓廣榮先生) , aged 59, has been a Non-executive Director of the Company since 29 March 2017. Mr. Han is currently the deputy director of the international-business department of CASIC and the vice chairman of Aerospace Hi-tech Holding Group Co., Ltd. Mr. Han joined in CASIC since 1984 and had leaderships in The Third Academy of CASIC and CASIC Headquarters. Mr. Han obtained Bachelor of engineering degree from Harbin Institute of Technology and Master of engineering degree from Beihang University in 1984 and 1997 respectively.

Mr. Chen Wenle (陳文樂先生) , aged 41, has been a Non-executive Director of the Company since 29 March 2017. Mr. Chen is currently the vice general manager of Shenzhen Aerospace Industry Technology Research Institute Co., Ltd. Mr. Chen has worked in Shum Yip Group Limited and joined in CASIC in 2011. Mr. Chen obtained Bachelor of finance degree from Shandong University in 2003 and Master of economics degree from Shanghai University of Finance and Economics in 2006.

HONGHUA GROUP LIMITED 2020 ANNUAL REPORT

BIOGRAPHICAL DETAILS OF DIRECTORS AND SENIOR MANAGEMENT

INDEPENDENT NON-EXECUTIVE DIRECTORS

Mr. Liu Xiaofeng (劉曉峰先生) , aged 58, has been an Independent Non-executive Director of the Company since 18 January 2008. He is currently an independent non-executive director of Kun Lun Energy Company Limited, Cinda International Holdings Limited, Sunfonda Group Holdings Limited and AAG Energy Holdings Limited. He was a managing director of China Resources Capital Holdings Company Limited. He has years of experience in corporate finance and has worked with various international financial institutions since 1993, including, NM Rothschild & Sons, JP Morgan and DBS. Mr. Liu obtained a Master’s degree and a Ph.D. from the Faculty of Economics, University of Cambridge in 1988 and 1993 respectively, a Master of Science degree in Development Studies from the University of Bath, England, in 1987, and a Bachelor of Economics degree from Southwest University of Finance and Economics in 1983.

Mr. Chen Guoming (陳國明先生) , aged 58, has been an Independent Non-executive Director of the Company since 18 January 2008. Mr. Chen is now a Professor, a Ph.D. candidate supervisor, a member of the Academic Committee, the Chief officer of Research Centre of Security technique of the Offshore Oil & Gas Equipment, the Chief officer of Professor Committee in the Department of Mechanical and Electrical Engineering of China University of Petroleum. Mr. Chen is Currently the Chief officer of Shandong Key Laboratory of Petroleum Mechanical Engineering; a member of the Quality & Reliability Committee of the China Petroleum Society, the Offshore Engineering Committee of China Naval Architects and Marine Engineers’ Society and China Mechanical Engineering Society. He has been receiving special subsidies granted by the State Council of the PRC government (政府特殊津貼) since August 2005. In 1982, Mr. Chen graduated from the Mechanical Department of the East China Petroleum Institute with a Bachelor’s Degree. He earned his Master’s degree in 1986, from the Beijing Graduate School of East China Petroleum Institute. He obtained his Ph.D. degree in 1999, and was promoted to Ph.D. candidate supervisor in 2000.

Ms. Su Mei (蘇梅女士) , aged 52, has been an Independent Non-executive Director of the Company since 29 March 2017. Ms. Su is currently the chief executive officer of Beijing YaMeiHeZhong Consultanting Co., Ltd.. Ms. Su once had leaderships in Discipline Inspection Commission of Sichuan Province and Sichuan Development and Reform Commission and State-owned Assets Supervision and Administration Commission of State Council, worked as the vice-president in Sichuan Provincial Investment Group, the chairman of Sichuan Chuantou Water Group and vice president of Joneson Group. Ms. Su obtained Doctor’s degree in finance from Sichuan University in 2013, and obtained Bachelor’s degree of Chinese from Shandong University in 1991.

HONGHUA GROUP LIMITED 2020 ANNUAL REPORT

BIOGRAPHICAL DETAILS OF DIRECTORS AND SENIOR MANAGEMENT

Mr. Poon Chiu Kwok (潘昭國先生) , aged 59, has been an Independent Non-executive Director of the Company since 15 June 2017. Mr. Poon is currently an executive director, vice president and company secretary of Huabao International Holdings Limited. Mr. Poon has years of experience in finance, compliance and listed companies management. Mr. Poon is currently the independent non-executive director of Sany Heavy Equipment International Holdings Company Limited, Greentown Service Group Co., Ltd., Sunac China Holdings Limited, Yuanda China Holdings Limited, Changan Minsheng APLL Logistics Co. Ltd., Jinchuan Group International Resources Co. Ltd., AUX International Holdings Limited and Yanzhou Coal Mining Company Limited. Mr. Poon retired as an independent non-executive director of TUS International Limited on July 17, 2020. Mr. Poon was an independent non-executive director of Tonly Electronics Holdings Limited (a company withdrawn from listing on the Stock Exchange in March 2021). Mr. Poon is a fellow member of CPA Australia, The Chartered Governance Institute (formerly known as The Institute of Chartered Secretaries and Administrators) in the U.K., The Hong Kong Institute of Chartered Secretaries and a member of its Technical Consultation Panel, Audit Committee and China Focus Group. He was granted postgraduate diploma in laws from the University of London. He holds a Master’s degree in international accounting, Master’s and Bachelor’s degree in laws and a Bachelor’s degree in business studies.

Mr. Chang Qing (常清先生) , aged 64, has been an Independent Non-executive Director of the Company since 15 June 2017. Mr Chang is currently the chairman of Jinpeng International Futures Co., Ltd. and a professor of College of Economics and Management of China Agricultural University. Mr. Chang is now acting as an independent nonexecutive director of Kangda International Environmental Company Limited and China Chengtong Development Group Limited. He previously served as independent non-executive directors of Tibet Summit Resources Co., Ltd., TBEA Co., Ltd., Shenwu Environmental Technology Co., Ltd. and Yuan Long Ping High-Tech Agriculture Co., Ltd. respectively. Mr. Chang graduated from the Chinese Academy of Social Sciences with a doctorate degree in agricultural economics and management in 2001, graduated from Jilin University with both a master’s degree in national economics in 1985 and a bachelor’s degree in economics in 1982.

Mr. Wei Bin (魏斌先生) , aged 51, has been an Independent Non-executive Director of the Company since 29 August 2019. Mr. Wei is currently the asset management senior partner of CDH Investments Management (Hong Kong) Limited and executive director of OCI International Holdings Limited. Mr. Wei was the chief accountant and the chief financial officer of the China Resources (Holdings) Company Limited. In the past three years, he has been a non-executive director of two listed companies of the Stock Exchange of Hong Kong. He was a non-executive director of China Resources Cement Holdings Limited (stock code: 01313) from August 2008 to January 2018, a non-executive director of China Resources Gas Group Limited (stock code: 01193) from November 2008 to January 2018. Mr. Wei holds a Bachelor’s degree in Auditing from Zhongnan University of Economics in China and a Master’s degree in Finance from Jinan University in China, and is a Senior Accountant and a Senior Auditor in China. He is also a non-practicing member of the Chinese Institute of Certified Public Accountants.

HONGHUA GROUP LIMITED 2020 ANNUAL REPORT

BIOGRAPHICAL DETAILS OF DIRECTORS AND SENIOR MANAGEMENT

SENIOR MANAGEMENT

Mr. Yang Yunqing (楊運青先生) , aged 43, has been the Vice-president of the Company since August 2018. Mr. Yang had been working at the CASIC Group since 2001. Before joining the Company, Mr. Yang once served as the Deputy Director of the Development and Planning Department of the CASIC and has rich experiences in planning and operation management. Mr. Yang holds a Bachelor’s degree from Harbin Engineering University.

Mr. Dang Nan (黨楠先生) , aged 56, has been the Vice-president of the Company since March 2017. Mr. Dang had been working at the CASIC Group since 1989. Before joining the company, Mr. Dang once served as the Vice president of a subordinate unit of the CASIC. Mr. Dang holds a Master’s degree from Beihang University.

Ms. Xu Xiufang (許秀芳女士) , aged 49, has been the Chief Financial Officer of the Company since March 2017. Ms. Xu had been working at the CASIC Group since August 1994 and was engaged in accounting and financing. Before joining the Company, Ms. Xu once served as the chief accountant of a subordinate unit of the CASIC. Ms. Xu holds a Master’s degree from Huazhong University of Science and Technology and a Bachelor’s degree from Beijing Forestry University.

Ms. Yao Yuhong (姚宇紅女士) , aged 52, has been the Vice president of the Company since August 2018. Ms. Yao had been working at the CASIC since 1991. Before joining the Company, Ms. Yao once served as the Deputy Director of the Asset Operation Department of the CASIC. She has rich experiences in asset operation, investment, mergers and acquisitions and financial management. Ms. Yao holds a Master’s degree from the Business School of Renmin University of China.

Ms. Xu Chuan (徐川女士) , aged 55, has been the Human Resources Director of the Company since December 2016. Ms. Xu joined the Company in 2001 and once served as the vice general manager of Honghua International Co., Ltd. (四川宏華國際科貿有限公司) and the vice general manager of Sichuan Honghua Petroleum Equipment Co., Ltd (四川宏華石油設備有限公司). Ms. Xu holds a bachelor’s degree from Southwestern Petroleum University.

Mr. He Bin (何斌先生) , aged 47, has been the Vice-president since August 2018. He joined the Group in 2008 as the director of Strategic Investment Department and assistant president and the secretary of Board and a Joint Company Secretary of the Company. Mr. He has more than 10 years of investment and management experience, once was engaged in venture capital, investment consulting and other related work in Samsung Company. He holds a Bachelor’s degree from Renmin University of China and a Master’s degree in Business Administration from University of Alberta in Canada.

Mr. Di Xiaohong (狄曉宏先生) , aged 57, has been the Senior Administration Director of the Company since September 2018. Mr. Di joined the Company in January 2000 and once served as the vice general Manager of Sichuan Honghua Petroleum Equipment Co., Ltd (四川宏華石油設備有限公司). He has rich experiences in corporate management and administration.

HONGHUA GROUP LIMITED 2020 ANNUAL REPORT

BIOGRAPHICAL DETAILS OF DIRECTORS AND SENIOR MANAGEMENT

Mr. Yuan Hai (袁海先生) , aged 43, has been the Financial Controller of the Company since March 2015 to August 2020. Mr. Yuan joined the Company in 2007. Mr. Yuan has over 14 years of experience in financial management and has been a member of Certified Management Accountant (CMA) of America since January 2016. Mr. Yuan was engaged in PricewaterhouseCoopers from 2000 to 2004 as senior tax consultant. From 2004 to 2007, he worked in Bayer Animal Health China as financial controller. Mr. Yuan holds a Bachelor’s degree from Southwestern University of Finance and Economics.

Ms. Zhuang Wenmin (莊文敏女士) , aged 40, has been the secretary of Board and a Joint Company Secretary of the Company since August 2018. Ms. Zhuang Joined the Company since 2009, has been the director of the Legal & Securities Department of the Company since January 2016. She is responsible for corporate governance and compliance, risk management and legal affairs of the Company. Ms. Zhuang holds a master’s degree in Law from Southwestern University of Finance and Economics.

Ms. Lee Mei Yi (李美儀女士) , aged 53, has been a Joint Company Secretaries of the Company since 7 July 2015. Ms. Lee is an executive director of corporate services division of Tricor Services Limited and a fellow member of both The Hong Kong Institute of Chartered Secretaries and The Chartered Governance Institute (formerly known as The Institute of Chartered Secretaries and Administrators). Ms. Lee has over 27 years’ experience in company secretarial area.

HONGHUA GROUP LIMITED 2020 ANNUAL REPORT

CORPORATE GOVERNANCE REPORT

The Board presents this Corporate Governance Report in the Group’s annual report for the year ended 31 December 2020.

CORPORATE GOVERNANCE PRACTICES OF THE COMPANY

The Group is committed to achieving high standards of corporate governance to safeguard the interests of Shareholders and to enhancing corporate value and accountability.

The Group strives to attain and maintain high standards of corporate governance to enhance Shareholder value and safeguard Shareholder interests. The Group’s corporate governance principles emphasize a quality Board, effective internal controls and accountability to Shareholders.

The Board believes that good corporate governance practices are increasingly important for maintaining and promoting Shareholder value and investor confidence.

The Company has adopted the principles and code provisions of the Corporate Governance Code (the “CG Code”) contained in Appendix 14 to the Listing Rules as basis of the company’s corporate governance practices.

The CG Code set out the principles of good corporate governance and two levels of corporate governance practices:

a) code provisions, which listed issuers are expected to comply with or to give considered reasons for any deviation; and
b) recommended best practices for guidance only, which listed issuers are encouraged to comply with or to give considered reasons for deviation.

The Company has devised its own code of corporate governance based on the principles and practices as set out in the CG Code.

The Company has complied with the code provisions as set out in the CG Code throughout the year ended 31 December 2020, save for certain deviation from the code provision in respect of the dismissal of the nomination committee of the Company, details of which will be explained below.

The Company reviews its corporate governance practices regularly to ensure compliance with the CG Code.

The Company is committed to enhancing its corporate governance practices appropriate to the conduct and growth of its business and to reviewing its corporate governance practices from time to time to ensure that they comply with the statutory and professional standards and align with the latest developments.

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MODEL CODE FOR SECURITIES TRANSACTIONS

The Company has adopted its own code of conduct regarding Directors’ dealings in the Company’s securities (the “Company’s Code”) on terms no less exacting than the Model Code for Securities Transactions by Directors of Listed Issuers (the “Model Code”) as set out in Appendix 10 to the Listing Rules.

Specific enquiry has been made of all the Directors and all Directors have confirmed that they have complied with the Company’s Code and the Model Code throughout the year ended 31 December 2020.

The Company has also established written guidelines no less exacting than the Model Code (the “Employees Written Guidelines”) for securities transactions by employees who are likely to be in possession of unpublished inside information of the Company.

No incident of non-compliance of the Employees Written Guidelines by the employees was noted by the Company.

BOARD OF DIRECTORS

The Board oversees the Group’s businesses, strategic decisions and performance and should take decisions objectively in the best interests of the Company.

The Board should regularly review the contribution required from a Director to perform his responsibilities to the Company, and whether the Director is spending sufficient time performing them.

BOARD COMPOSITION

The Board currently comprises 11 Directors, consisting of 3 Executive Directors, namely Mr. Jin Liliang, Mr. Zhang Mi and Mr. Ren Jie, 2 Non-executive Directors, namely Mr. Han Guangrong and Mr. Chen Wenle and 6 Independent Non-executive Directors, namely Mr. Liu Xiaofeng, Mr. Chen Guoming, Ms. Su Mei, Mr. Poon Chiu Kwok, Mr. Chang Qing and Mr. Wei Bin. The biographical details of Directors are set out under Biographical Details of Directors and Senior Management on pages 23 to 28.

None of the members of the Board is related to one another.

CHAIRMAN AND PRESIDENT (CHIEF EXECUTIVE)

The positions of Chairman and President are held by Mr Jin Liliang and Mr. Zhang Mi respectively. The Chairman provides leadership and is responsible for the effective functioning and leadership of the Board. The President focuses on the Company’s business development and daily management and operations generally.

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INDEPENDENT NON-EXECUTIVE DIRECTORS

During the year ended 31 December 2020, the Board at all times met the requirements of the Listing Rules relating to the appointment of at least four Independent Non-executive Directors representing one-third of the Board.

During the year ended 31 December 2020, the Company had six Independent Non-executive Directors with three of whom possessing appropriate professional qualifications or accounting or related financial management expertise so that there is a strong independent element on the Board, which can effectively make independent judgment.

The Company has received written annual confirmation from each of the Independent Non-executive Directors in respect of his independence in accordance with the independence guidelines set out in Rule 3.13 of the Listing Rules. The Company considers all Independent Non-executive Directors are independent.

APPOINTMENT AND RE-ELECTION OF DIRECTORS

Code provision A.4.1 of the CG Code stipulates that non-executive directors shall be appointed for a specific term, subject to re-election, whereas code provision A.4.2 states that all directors appointed to fill a casual vacancy shall be subject to election by shareholders at the first general meeting after appointment and that every director, including those appointed for a specific term, shall be subject to retirement by rotation at least once every three years.

Each of the Directors of the Company is appointed for a specific term of not exceeding 3 years and is subject to retirement by rotation at least once every three years.

RESPONSIBILITIES, ACCOUNTABILITIES AND CONTRIBUTIONS OF THE BOARD AND MANAGEMENT

The Board is responsible for leadership and control of the Company; is collectively responsible for directing and supervising the Company’s affairs; and oversees the Group’s businesses, strategic decisions and performance.

The senior management was delegated the authority and responsibility by the Board for the day-to-day management and operations of the Group. In addition, the Board directly, and indirectly through its committees, leads and provides direction to management by laying down strategies and overseeing their implementation, monitors the Group’s operational and financial performance, and ensures that sound internal control and risk management systems are in place. The Board has delegated to these Board committees various responsibilities as set out in their terms of reference.

All Directors have carried out duties in good faith, in compliance with the standards of applicable laws and regulations, and act in the interests of the Company and its Shareholders at all times.

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All Directors, including Non-executive Directors and Independent Non-executive Directors, have brought a wide spectrum of valuable business experience, knowledge and professionalism to the Board for its efficient and effective functioning.

The Independent Non-executive Directors are responsible for ensuring a high standard of regulatory reporting of the Company and providing a balance in the Board for bringing effective independent judgement on corporate actions and operations.

All Directors have full and timely access to all the information of the Company as well as the services and advice from the company secretary and senior management. The Directors are always provided in a timely manner with comprehensive, accurate and detailed information on the Company’s operation through monthly report, business operation report, important projects report and financial report so as to enable the Directors to make decisions and perform their duties and responsibilities. The Directors may, upon request, seek independent professional advice in appropriate circumstances, at the Company’s expenses for discharging their duties to the Company.

The Directors shall disclose to the Company details of other offices held by them.

The Board reserves for its decision all major matters relating to policy matters, strategies and budgets, internal control and risk management, material transactions (in particular those that may involve conflict of interests), financial information, appointment of directors and other significant operational matters of the Company. Responsibilities relating to implementing decisions of the Board, directing and co-ordinating the daily operation and management of the Company are delegated to the management.

BOARD DIVERSITY

The Company has adopted Board Diversity Policy for setting out the approach to achieve diversity on the Board and the board diversity policy has been made available on the Company’s website. The Company recognizes and embraces the benefits of having a diverse Board and sees increasing diversity at the Board level as an essential element in maintaining the Company’s competitive advantage.

Pursuant to the Board Diversity Policy, the Board will review annually the structure, size and composition of the Board and where appropriate, make recommendations on changes to complement the Company’s corporate strategy and to ensure that the Board maintains a balanced diverse profile. In relation to reviewing and assessing the Board composition, the Board is committed to diversity at all levels and will consider a number of aspects, including but not limited to gender, age, cultural and educational background, professional qualifications, skills, knowledge and regional and industry experience.

The Company aims to maintain an appropriate balance of diversity perspectives that are relevant to the Company’s business growth and is also committed to ensuring that recruitment and selection practices at all levels (from the Board downwards) are appropriately structured so that a diverse range of candidates are considered.

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The Board will consider setting measurable objectives to implement the Board Diversity Policy and review such objectives from time to time to ensure their appropriateness and ascertain the progress made towards achieving those objectives.

The Board will review the Board Diversity Policy, as appropriate, to ensure its effectiveness.

DIRECTOR NOMINATION POLICY

The Company has adopted a Director Nomination Policy which sets out the selection criteria and process and the Board succession planning considerations in relation to nomination and appointment of Directors of the Company and aims to ensure that the Board has a balance of skills, experience and diversity of perspectives appropriate to the Company and the continuity of the Board and appropriate leadership at Board level.

The Director Nomination Policy sets out the factors for assessing the suitability and the potential contribution to the Board of a proposed candidate, including but not limited to the following:

Character and integrity;
Qualifications including professional qualifications, skills, knowledge and experience that are relevant to the Company’s business and corporate strategy;
Diversity in all aspects, including but not limited to gender, age, cultural and educational background, ethnicity, professional experience, skills, knowledge and length of service;
Requirements of Independent Non-executive Directors on the Board and independence of the proposed Independent Non-executive Directors in accordance with the Listing Rules; and
Commitment in respect of available time and relevant interest to discharge duties as a member of the Board and Board committees of the Company.

The Director Nomination Policy also sets out the procedures for the selection and appointment of new Directors and re-election of Directors at general meetings.

The Board will review the Director Nomination Policy, as appropriate, to ensure its effectiveness.

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TRAINING INDUCTION AND CONTINUOUS PROFESSIONAL DEVELOPMENT OF DIRECTORS

Directors shall keep abreast of regulatory developments and changes in order to effectively perform their responsibilities and to ensure that their contribution to the Board remains informed and relevant.

Every newly appointed director will receive formal, comprehensive and tailored made induction on the first occasion of his/her appointment, so as to ensure that he/she has adequate understanding of the business and operations and governance of the Company and that he/she is fully aware of his/her responsibilities and obligations under the Listing Rules and relevant statutory requirements.

Directors should participate in appropriate continuous professional development to develop and refresh their knowledge and skills to ensure that their contribution to the Board remains informed and relevant. Internallyfacilitated briefings for Directors would be arranged and reading material on relevant topics will be issued to Directors where appropriate. All Directors are encouraged to attend relevant training courses at the Company’s expenses.

All the Directors have actively participated in the continuous professional development by way of attending seminar and/or conferences and/or forums and/or reading materials.

During the year ended 31 December 2020, the following Directors attended seminars/training sessions/in-house briefing/reading materials:

	Attending seminar	Reading journals,
	and/or conferences	updates, articles
Directors	and/or forums	and/or materials, etc.
Executive Directors
Jin Liliang	✓	✓
Zhang Mi	✓	✓
Ren Jie	✓	✓
Non-Executive Directors
Han Guangrong	✓	✓
Chen Wenle	✓	✓
Independent Non-Executive Directors
Liu Xiaofeng	✓	✓
Chen Guoming	✓	✓
Su Mei	✓	✓
Poon Chiu Kwok	✓	✓
Chang Qing	✓	✓
Wei Bin	✓	✓

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BOARD COMMITTEES

The Board has established 3 committees, namely, the Audit Committee, Remuneration Committee and Strategic Investment and Risk Control Committee for overseeing particular aspects of the Company’s affairs. All Board committees of the Company are established with specific written terms of reference which deal clearly with their authority and duties. The terms of reference of the Board committees are posted on the Company’s website and the Stock Exchange’s website and are available to shareholders upon request.

The list of the chairman and members of each Board committee is set out under “Corporate Information” on page 2.

AUDIT COMMITTEE

The Audit Committee comprises six Independent Non-executive Directors, namely Mr. Wei Bin (Chairman), Mr. Liu Xiaofeng, Mr. Chen Guoming, Ms. Su Mei, Mr. Poon Chiu Kwok and Mr. Chang Qing. Three of Independent Non-executive Directors possess the appropriate professional qualifications or accounting or related financial management expertise.

The main duties of the Audit Committee include the following:

To review the financial statements and reports and consider any significant or unusual items raised by the staff responsible for the accounting and financial reporting function or external auditors before submission to the Board;
To review the relationship with the external auditors by reference to the work performed by the auditors, their fees and terms of engagement, and make recommendations to the Board on the appointment, reappointment and removal of external auditors;
To review the adequacy and effectiveness of the Company’s financial reporting system, internal control system and risk management system and associated procedures and internal audit function; and
To review the compliance of the corporate governance issues, the corporate governance report and the corporate governance policy.

The Audit Committee provides supervision on the internal control system of the Group and reports to the Board on any material issues, and makes recommendations to the Board.

During the Year under review, the Audit Committee has reviewed the Group’s annual results and annual report for the year ended 31 December 2020, the financial reporting and compliance procedures, the report from the management on the Company’s internal control and risk management systems and processes, the compliance of the corporate governance issues, the corporate governance report and the corporate policy.

The Audit Committee held two meetings during the year ended 31 December 2020 and the attendance records are set out under “Directors’ Attendance Records” on page 38.

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REMUNERATION COMMITTEE

The Remuneration Committee comprises five members, Mr. Liu Xiaofeng (Chairman), Mr. Zhang Mi, Mr. Jin Liliang, Ms. Su Mei and Mr. Wei Bin, the majority of them are Independent Non-executive Directors.

The primary objectives of the Remuneration Committee include the following:

To make recommendations to the Board on the remuneration policy and structure of the Directors and the senior management, the incentive mechanism, and the establishment of procedures for developing the remuneration policy and the incentive mechanism;
To review and approve the remuneration packages of the Executive Directors and the senior management by reference to the performance of the individual and the Company as well as market practice and conditions; and
To review and approve the compensation arrangements for the Executive Directors and the senior management in connection with (i) any loss or termination of their office or appointment and (ii) any dismissal or removal of directors for misconduct to ensure such arrangements are determined in accordance with contractual terms and that such compensation is reasonable and appropriate.

The Remuneration Committee normally meets at least once a year for reviewing and making recommendation to the Board on the remuneration policy and structure and determining the annual remuneration packages of the Executive Directors and the senior management and other related matters.

The Remuneration Committee held a meeting during the year ended 31 December 2020 and the attendance records are set out under “Directors’ Attendance Records” on page 38.

Details of the remuneration of the senior management by band are set out in note 36 in the Notes to the Audited Financial Statements for the year ended 31 December 2020.

The remuneration policies of the Group focus on the efficiency of the employees and the position-value index, with reference to the individual ability and experience of an employee as well as the market value of the labour market, and emphasize on incentive-orientation and also the establishment of a fair and competitive remuneration system. For long-term incentive policies, the Company has adopted the Share Option Scheme and Restricted Share Award Scheme for eligible participants. Details are set out under the paragraphs headed “Share Option Scheme” and “Restricted Share Award Scheme” in the Report of the Directors.

The basis of determining the emolument of Directors is on various considerations, including Directors’ capability, knowledge and experience, participation to the Board, job duties and responsibilities and is also made reference to the market practices and conditions. Except Mr. Jin Liliang, the Chairman of the Board, whose remuneration consists of annual basic remuneration and annual performance appraisal remuneration, the remuneration of the Executive Directors is based on their administrative management positions. Independent Non-executive Directors are entitled to a fixed emolument package. Non-executive Directors may be entitled to a fixed remuneration under the service contract.

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STRATEGIC INVESTMENT AND RISK CONTROL COMMITTEE

The Strategic Investment and Risk Control Committee comprises six members, Mr. Jin Liliang (Chairman), Mr. Zhang Mi, Mr. Ren Jie, Mr. Liu Xiaofeng, Mr. Poon Chiu Kwok and Mr. Chang Qing.

The main duties of the Strategic Investment and Risk Control Committee include the following:

To review the investment strategies of the Company;
To review the investment risk control of the Company; and
To recommend investment strategies and risk control policy and practices to the Board.

The Strategic Investment and Risk Control Committee normally meets at least once a year for reviewing the investment and risk control issues. The Strategic Investment and Risk Control Committee held a meetings during the year ended 31 December 2020 and the attendance records are set out under “Directors’ Attendance Records” on page 38.

DISMISSAL OF NOMINATION COMMITTEE

Code provision A.5.1 of the CG Code stipulates that issuers should establish a nomination committee which is chaired by the chairman of the board or an independent non-executive director and comprises a majority of independent non-executive directors.

The Nomination Committee was dismissed on 19 March 2013. The Board has taken over the duties of Nomination Committee in reviewing its own structure, size and composition regularly and taken into consideration of the board diversity policy to ensure that it has a balance of expertise, skills, experience and diversity board members appropriate for the requirements of the business of the Company.

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ATTENDANCE RECORDS OF DIRECTORS AND COMMITTEE MEMBERS

During the year ended 31 December 2020, seven Board meetings were held for reviewing and approving the financial and operating performance, and considering and approving the overall strategies and policies of the Company.

The summary of the attendance record of each Director at the meetings of the Board, the Audit Committee, the Remuneration Committee, and the Strategic Investment and Risk Control Committee and the General Meetings during the year ended 31 December 2020 are set out below:

Attendance/Number of Meetings

				Strategic
				Investment and	Annual
Name of		Audit	Remuneration	Risk Control	General
Director	Board	Committee	Committee	Committee	Meeting
Jin Liliang	07/07	–	01/01	01/01	01/01
Zhang Mi	07/07	–	01/01	01/01	01/01
Ren Jie	07/07	–	–	01/01	0/01
Han Guangrong	07/07	–	–	–	0/01
Chen Wenle	07/07	–	–	–	0/01
Liu Xiaofeng	07/07	02/02	01/01	01/01	01/01
Chen Guoming	07/07	02/02	–	–	0/01
Su Mei	07/07	02/02	01/01	–	0/01
Poon Chiu Kwok	07/07	02/02	–	01/01	01/01
Chang Qing	07/07	02/02	–	01/01	0/01
Wei Bin	07/07	02/02	01/01	–	01/01

Apart from regular Board meetings, the Chairman also held meetings with the Independent Non-executive Directors during the year.

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DIRECTORS’ RESPONSIBILITY IN RESPECT OF THE FINANCIAL STATEMENTS

The Directors acknowledge their responsibility for preparing the financial statements of the Company for the year ended 31 December 2020.

The Directors are not aware of any material uncertainties relating to events or conditions that may cast significant doubt upon the Company’s ability to continue as a going concern.

The statement of the independent auditors of the Company about their reporting responsibilities on the financial statements is set out in the Independent Auditors’ Report on pages 86 to 94.

Where appropriate, a statement from the Audit Committee explaining its recommendation regarding the selection, appointment, resignation or dismissal of external auditors and the reasons why the Board has taken a different view from that of the Audit Committee.

AUDITORS’ REMUNERATION

During the year ended 31 December 2020, the remuneration paid to the Company’s external auditors, Messrs PricewaterhouseCoopers, is set out below:

Service Category	Fees (in Renminbi)
Audit Services	4,707,000
Non-audit Services	150,000
Total	4,857,000

The auditors’ remuneration disclosed in note 8 to the consolidated financial statements included the remuneration paid to PricewaterhouseCoopers as detailed above. Audit services include the review of financial information.

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RISK MANAGEMENT AND INTERNAL CONTROLS

The Board acknowledges its responsibility for the risk management and internal control systems and reviewing their effectiveness. Such systems are designed to manage rather than eliminate the risk of failure to achieve business objectives, and can only provide reasonable and not absolute assurance against material misstatement or loss.

The Board has the overall responsibility for evaluating and determining the nature and extent of the risks it is willing to take in achieving the Company’s strategic objectives, and establishing and maintaining appropriate and effective risk management and internal control systems.

The Audit Committee assists the Board in leading the management and overseeing their design, implementation and monitoring of the risk management and internal control systems.

The Company has established and formulated appropriate policies and checks to ensure that there is no unauthorized use or disposal of asset. Reliable financial and accounting records are maintained in accordance with relevant rules and regulations, relevant accounting standards and regulatory reporting requirements. Material risks which may affect the performance of the Company are properly identified and managed. Such systems and internal controls can only provide reasonable and not absolute assurance against material misstatement or loss and are designed to manage rather than eliminate the risk of failure to achieve business objectives.

RISK MANAGEMENT AND INTERNAL CONTROL FRAMEWORK

The Company has established a risk management organizational structure with clear responsibility rank and reporting program. The risk and internal control department and the audit and monitoring department assist the Board and the Audit Committee in the continuous review of effectiveness of the Company’s risk management and internal control system. The Directors regularly receive information on material risks which may affect the performance of the Company from these Committees.

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The Company has adopted the following “three lines of defense” model as the guideline of risk management structure:

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First line of defense
Second line of defense Third line of defense
Department responsible
Risk and internal control Audit and monitoring
for operation and for
department department
management-related
functions
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As the first line of defense, each department and subsidiary of the Company responsible for operation and management and internal control-related functions are the frontline of risk exposure and shall actively analyze the possibility and severity of potential/actual risks in the course of ordinary business activity. They also carry out preliminary risk information collection and identification, actively implement risk solution, participate in the development of risk management culture and receive guidance and supervision from the risk and internal control department. The management of the Company, as supported by the risk and internal control department and the audit and monitoring department, is responsible for the design, execution and monitoring of the risk management and internal control system and submits regular report on the effectiveness of such systems to the Board. The management has confirmed to the Board the effectiveness of the issuer’s risk management and internal control system.

As the second line of defense, the risk and internal control department and the risk control panel of the Company are primarily responsible for the coordinated planning and development, maintenance and improvement of the risk management and internal control system. They evaluate and formulate ongoing enhancement on the compliance and reasonableness of the principal business procedures and the risk management mechanism and risk control capability of the Company and its subordinated entities. In accordance with the Company’s strategic goal and business plan, they devise or arrange relevant department to devise risk management system, internal control system, risk management and internal control manual and management measures, including setting up evaluation mechanism of risk management, evaluation mechanism of effectiveness of internal control, recommendation of risk management strategy and internal control improvement, and report to the management and the Audit Committee.

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As the third line of defense, the Audit Committee and the audit and monitoring department of the Company are primarily responsible for the follow-up scrutiny, audit and monitoring of the tasks assigned to the first and second line of defense and reporting to the Board. The audit and monitoring department is responsible for performing independent review of the adequacy and effectiveness of the risk management and internal control systems, examining key issues in relation to the accounting practices and all material controls and providing its findings and recommendations for improvement to the Audit Committee.

The risk and internal control department and the audit and monitoring department have adopted an audit method based on risk and control. With their operation plan throughout the year, the audit and monitoring department and the risk and internal control department cover every major task and program of the operation and business of the Company and service units. They also conduct extraordinary review as requested by the management and the result of audit work is submitted to the Audit Committee and the executive and senior management of the Company. The risk and internal control department and the audit and monitoring department conduct examination and follow-up on audit matters to strive for proper execution and report to the management of the Company (as the case may be) and the Audit Committee regularly.

RISK MANAGEMENT AND INTERNAL CONTROL MEASURES

The Company has adopted several policies and programs to evaluate and prudently boost the effectiveness of the risk management and internal control system, including the requirement on the executive management of the Company to conduct evaluation and verify in person the proper and effective operation of such matters every year. The Company believes that such measure shall strengthen future corporate governance and business practice.

In 2020, the Company achieved the following key results in order to strengthen the risk management system:

The Company optimized a series of corporate governance policies to consolidate the foundation of corporate governance, including bylaw management regulations, procedural rules of the president office, tender and non-tender procurement management measures, connected transaction management guidelines, etc.;
The Company’s internal audit and internal control assessment incorporated risk management to the state of audit planning, and prepared the sufficiency and effectiveness assessment report for the year based on the Company’s comprehensive risk analysis;
The Company optimized the overall risk management system, improved the risk surveillance method for major business decision-making matters, and methods of division of responsibility for categorization and mitigation of and assessment for major business risks, amended the Internal Control Manual and the Risk Database, and promoted the integration of risk management requirements and operating activity commencement. In the next step, the key work of risk management and control was continuously promoting the establishment of risk control and compliance integration, and enhancing the professional synergy of the second line of defense in order to achieve the goal of “strengthening internal control, preventing risks, and promoting compliance”.

The risk and internal control department and the audit and monitoring department report their work in respect of the sufficiency and effectiveness of the risk management and internal control for the previous period to the Board and the Audit Committee at every regular meeting throughout the year, including but not limited to highlighting any failure in the implementation of these control procedures or any material deficiencies of the procedures.

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The risk and internal control department takes the lead in the risk management process of the Company by identifying and assessing the material risks within the Group. The management will then discuss, agree and implement relevant risk management measures and corresponding responsive measures. Relevant risk assessment results are reported to the Board and the Audit Committee.

REVIEW OF RISK MANAGEMENT AND INTERNAL CONTROL EFFECTIVENESS

The Audit Committee and the Board were not aware of any key findings that would have any substantive impact on the business or financial condition of the Company, and of the opinion that the existing risk management and internal control system is appropriate and effective in terms of sufficiency of resources, qualification and experience of staff, training program and financial budget, internal audit and financial report.

The Management reported to the Board and the Audit Committee on the effectiveness of the risk management and internal control system of the year as at 31 December 2020.

The Board, as supported by the Audit Committee as well as the management report and the internal audit findings, reviewed the risk management and internal control systems, including the financial, operational and compliance controls, for the year ended 31 December 2020, and considered that such systems are effective and adequate. The annual review also covered the financial reporting and internal audit function and staff qualifications, experiences and relevant resources.

INTERNAL AUDIT

The Company has specially established an internal audit and supervision department responsible for the internal control of the Group.

The internal audit and supervision department conducts regular supervision and examination over the business of the Group and also carries out the special supervision and examination for significant projects to regulate the management of the Group.

The internal audit and supervision department reports its work to the Audit Committee on a periodical basis while the Audit Committee reviews and approves the internal audit reports and the annual plan for internal audit annually. The audit opinions will be reported to the Board through the Audit Committee.

The Company has set up an independent reporting channel through which the staff of the Company can report the corrupt conducts of other staffs of the Company directly to the internal audit and supervision department, so that the Company can be held harmless from frauds and other misconducts.

INFORMATION DISCLOSURE

The Company has formulated a set of continuing disclosure obligation procedures in response to the inside information provisions under the SFO and the Listing Rules.

The Company proactively publishes voluntary announcements for the matters of significance involving the current development status of the Company so that Shareholders and investors can be timely aware of the current status of the business development of the Company.

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COMPANY SECRETARY

Lee Mei Yi of Tricor Services Limited, an external service provider, has been appointed by the Company as one of its Joint Company Secretaries since 7 July 2015. The primary contact person at the Company is Zhuang Wenmin, one of the Joint Company Secretaries of the Company.

All Directors have access to the advice and services of the Joint Company Secretaries on corporate governance and board practices and matters.

Ms. Zhuang Wenmin and Ms. Lee Mei Yi, the current Joint Company Secretaries, have complied with Rule 3.29 of the Listing Rules by taking no less than 15 hours of the relevant professional training during the Year.

SHAREHOLDERS’ RIGHTS

To safeguard Shareholder interests and rights, separate resolutions are proposed for each substantially separate issue at Shareholders’ meetings, including the election of individual Directors.

All resolutions put forward at Shareholders’ meetings will be taken by poll pursuant to the Listing Rules and poll results will be posted on the websites of the Company and of the Stock Exchange after Shareholders’ meeting.

CONVENING AN EXTRAORDINARY GENERAL MEETING BY SHAREHOLDERS

The Board may, whenever it thinks fit, convene an extraordinary general meeting. Extraordinary general meetings may be convened by the Board on requisition of one or more Shareholders’ holding, at the date of deposit of the requisition, not less than one tenth of the paid up capital of the Company having the right of voting at general meetings. Such requisition shall be made in writing to the Board or the Secretary for the purpose of requiring an extraordinary general meeting to be called by the Board for the transaction of any business specified in such requisition. Such meeting shall be held within 2 months after the deposit of such requisition. If within 21 days of such deposit, the Board fails to proceed to convene such meeting, the requisitionist(s) himself (themselves) may do so in the same manner, and all reasonable expenses incurred by the requisitionist(s) as a result of the failure of the Board shall be reimbursed to the requisitionist(s) by the Company.

PUTTING FORWARD PROPOSALS AT GENERAL MEETINGS

There is no provision allowing Shareholders to move new resolutions at general meetings under the Cayman Islands Companies Law or the Articles of Association of the Company. Shareholders who wish to move a resolution may request the Company to convene a general meeting following the procedures set out in the preceding paragraph.

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PUTTING FORWARD ENQUIRIES TO THE BOARD

For putting forward any enquiries to the Board of the Company, shareholders may send written enquiries to the Company.

Note: The Company will not normally deal with verbal or anonymous enquiries.

CONTACT DETAILS

Shareholders may send their enquiries or requests as mentioned above to the following:

Address: Room 2508, Harcourt House, 39 Gloucester Road, Wan Chai, Hong Kong

Email: [email protected]

For the avoidance of doubt, Shareholders must deposit and send the original duly signed written requisition, notice or statement, or enquiry (as the case may be) to the above address or 99 East Road, Information Park, Jinniu District, Chengdu, Sichuan, People’s Republic of China and provide their full name, contact details and identification in order to give effect thereto. Shareholders’ information may be disclosed as required by law.

COMMUNICATION WITH SHAREHOLDERS AND INVESTORS

The general meetings of the Company provide a forum for communication between the Board and the Shareholders. The Chairman of the Board as well as chairmen of the Audit Committee, Remuneration Committee and Strategic Investment and Risk Control Committee or, in their absence, other members of the respective committees normally attend the annual general meetings and other relevant Shareholders’ meetings to answer questions of Shareholders. Notices to Shareholders for annual general meetings and all other general meetings will be sent to the Shareholders before such meetings pursuant to the requirement of the Listing Rules.

Information relating to the Company’s financial results, corporate details, major projects and events are disseminated through publications of interim and annual reports, announcements, circulars and other corporate communications and publications available on the websites of the Stock Exchange and the Company.

During the Year under review, the Company has not made any changes to its Articles of Association. An up-to-date version of the Company’s Articles of Association is also available on the websites of the Stock Exchange and the Company.

To promote effective communication, the Company maintains a website at http://www.hh-gltd.com, where up-to-date information and updates on the Company’s business operations and developments, financial information, corporate governance practices and other information are available for public access.

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DIVIDEND POLICY

The Company has adopted a dividend policy (the “Dividend Policy”). With an emphasis on providing reasonable investment return to its Shareholders, the Company strives to implement a sustained and stable dividend policy by considering the current actual operating conditions of the Company, the sustainability and the interests of the Shareholders as a whole.

The Company may distribute dividends to the Shareholders in cash, in shares or in other forms as the Board considers appropriate.

According to the Dividend Policy, subject to the relevant criteria, based on the audited annual statements and the net profit attributable to the Shareholders for the Year and on the premise that the distributable profit is positive and there is sufficient working capital, the Company may distribute annual dividends to the Shareholders in cash in proportion to at least 30% of the annual distributable profit in principle.

In deciding whether to propose a dividend and in determining the dividend amount, the Board shall consider the following factors as a whole: the financial results, the cash flows, the future operations and revenue, the capital requirements and capital expenditure plan, the Shareholders’ interests of the Company and its subsidiaries as well as any other relevant factors.

The Board will review the Dividend Policy from time to time and may exercise at its sole and absolute discretion to update, amend and/or modify the Dividend Policy at any time as it seems fit and necessary. There is no assurance that dividends will be paid in any particular amount for any given period.

HONGHUA GROUP LIMITED 2020 ANNUAL REPORT

ENVIRONMENTAL, SOCIAL AND GOVERNANCE REPORT

SCOPE AND REPORTING PERIOD

This is the fifth Environmental, Social and Governance (“ESG”) report by the Honghua Group Limited (“the Group”), highlighting its ESG performance, with disclosure reference made to the ESG Reporting Guide as described in Appendix 27 of the Listing Rules and Guidance set out by The Stock Exchange of Hong Kong Limited.

The Group is a large-scale equipment manufacturer and drilling service provider, specializing in research, design, manufacture and set-assembly of drilling rigs, offshore engineering and oil & gas exploitation and production equipment.

This ESG report covers the Group’s overall environmental and social performances of its major business operations which contribute to the Group’s most significant environmental and social impacts. These include the business operations Honghua Group Limited and its subsidiaries Honghua (China) Investment Co., Ltd., Honghua International Co., Ltd, Honghua Oil & Gas Engineering and Technology Services Ltd., Sichuan Honghua Electric Co., Ltd. and Sichuan Honghua Petroleum Equipment Co., Ltd. in (i) the head office in Chengdu, (ii) the office and (iii) the manufacturing plant in Guanghan, Sichuan Province of the People’s Republic of China (“PRC”), from 1 January 2020 to 31 December 2020 (the “Reporting Period”), unless otherwise stated. Honghua Oil & Gas Engineering Services Ltd., a principal subsidiary of the Group, is newly covered in this report.

THE GROUP’S SUSTAINABILITY VISION AND COMMITMENT

As one of the largest land drilling rig manufacturers in the world, the Group is committed to leading the industry with the highest standards. The Group will continue to enhance collaboration and integration of industrial resources, expand market share, consolidate the international leading position of the oil and gas equipment supplier and service provider.

China’s economy has been shifting from a stage of high-speed growth to high-quality development. The country will promote the realization of a more optimized economic structure, significant improvement in innovation capabilities, and substantial increase in utilization efficiency. In accordance with the requirements of the unprecedented stage, the Group will develop and promote new materials and high-end equipment, and take the initiative to achieve industrial upgrade. The Group will implement the “One Belt One Road” initiative, strengthening international capacity cooperation. To adapt to the low-carbon blueprint and meet the country’s urgent needs for state-of-the-art technology and products, the Group will take its advantages of equipment manufacturing enterprises to develop and enhance the capability of clean energy equipment and components.

HONGHUA GROUP LIMITED 2020 ANNUAL REPORT

ENVIRONMENTAL, SOCIAL AND GOVERNANCE REPORT

ESG management is of great importance in the Group’s business operation. The Group incorporates ESG considerations into its operation and is devoted to:

Ensuring occupational health and safety of employees;
Creating a green work environment;
Enhancing the capabilities of employees;
Improving the quality of asset operation and the efficiency of human resources;
Promoting industry diversification in an orderly manner; and
Enriching corporate culture to strengthen bond among employees.

The Board of the Group understands that a sound ESG management structure is essential to the Group’s development. Apart from pursuing continuous growth and success, the Group strives for excellence in its ESG management. The Group also communicates with its stakeholders in an open and transparent manner to enhance stakeholders’ understanding towards the Group’s operation.

STANDARDS AND CERTIFICATIONS

As a licensed manufacturer under the American Petroleum Institute (“API”) Monogram program, the Group conforms to the specifications set out by the API. The Group’s quality management system complies with the ISO 9001: 2008 and GB/T 19001-2008 standards. Its design, manufacture and service of drilling rigs and associated components conform with the API Specification Q1.

HONGHUA GROUP LIMITED 2020 ANNUAL REPORT

ENVIRONMENTAL, SOCIAL AND GOVERNANCE REPORT

STAKEHOLDER ENGAGEMENT AND MATERIALITY

The Group values feedback of its stakeholders as they bring invaluable directions for continuous development to the Group. Internal and external stakeholders have been involved in regular engagement activities to share views regarding the Group’s operation and performances. The Group has specifically engaged the board members, senior management, frontline staff, regulators, clients and suppliers to gain further insights on ESG material aspects and challenges in the Reporting Period. The Materiality Matrix below shows the result of our materiality assessment process:

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Materiality of Different Topics from Stakeholder Engagement
13 14 15
9/10 11
12
8 16
7 6
2 17
5
1 4
3 18
LOWER Internal Assessment on Importance to Business HIGHER
HIGHER
External Interests
LOWER
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Environmental

Social Others

1 Energy 2 Water
3 Air Emission
7 Employment 18 Food Safety and Health
8 Occupational Health and Safety
9 Development and Training
4 Waste and Effluent 10 Labour Standards
5 Other Raw Materials 11 Supplier Management Consumption 12 Intellectual Property
6 Environmental Protection 13 Data Protection Measures 14 Customer Service
11 Supplier Management
12 Intellectual Property
15 Product/Service Quality
16 Anti-corruption
17 Community Investment

HONGHUA GROUP LIMITED 2020 ANNUAL REPORT

ENVIRONMENTAL, SOCIAL AND GOVERNANCE REPORT

Among the environmental and social aspects, the followings were the most material aspects of the Group’s operation:

Product/Service Quality
Customer Service
Data Protection
Intellectual Property
Supplier Management

The above aspects were strictly managed through strict compliance with the relevant laws and regulations, the Group’s policies and guidelines. Management of the aspects has been described in separate sections below. The Group will continue to identify areas of improvement for the concerned aspects and keep close communication with its stakeholders to exchange ideas for advancing the Group’s ESG management.

STAKEHOLDERS’ FEEDBACK

The Group welcomes stakeholders’ feedback its our ESG approach and performance. Please give your suggestions or share your views with the Group via email at [email protected].

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ENVIRONMENTAL, SOCIAL AND GOVERNANCE REPORT

A. ENVIRONMENTAL

The Group operates in accordance with its environmental and resources management policies, which are also in compliance with all applicable national laws and regulations including the Environmental Protection Law of the PRC, the Atmospheric Pollution Prevention and Control Law of the PRC, the Water Pollution Prevention and Control Law of the PRC, Soil Pollution Prevention and Control Law of the PRC, the Law of the PRC on the Prevention, Control of Environmental Pollution Caused by Solid Wastes, and Regulation on Urban Drainage and Sewage Treatment. All emissions and discharges meet the national statutory standards. During the Reporting Period, there was no material non-compliance issues relating to the environment.

A1. EMISSIONS

A1.1. Air Pollutant Emissions

The Group consumed natural gas, liquefied petroleum gas (“LPG”), petrol and diesel in the Reporting Period, which contributed to the emission of 975.10 kg of nitrogen oxides (“NOx”), 2.52 kg sulphur oxides (“SOx”) and 18.32 kg respiratory suspended particles (“PM”). Emissions from the Group’s operation were treated before release.

A1.2. Greenhouse Gas Emissions

		Emission
		(in tonnes of
		carbon dioxide
		equivalent	Total Emission
Scope of Greenhouse Gas Emissions	Emission Sources	“tCO2e”)	(in percentage)
Scope 1 Direct Emission
Combustion of fuel for stationary source	Natural gas	2,526.53	19%
	Diesel	950.08
Combustion of fuel for mobile sources	Petrol	57.46
	Diesel	309.53
Scope 2 Energy Indirect Emission
Purchased electricity		15,850.47	77%
Scope 3 Other Indirect Emission
Paper waste disposal		58.36	4%
Electricity used for freshwater processing		106.48
Electricity used for sewage processing		20.64
Business air travel		607.97
Total		20,487.53	100%

HONGHUA GROUP LIMITED 2020 ANNUAL REPORT

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Note 1: Emission factors were referred to Appendix 27 of the Main Board Listing Rules and their referred documentation as set out by Hong Kong Exchanges and Clearing Limited, unless stated otherwise.
Note 2: Emission factors for combustion of natural gas and LPG for stationary source were referred to GHG Emissions from Stationary Combustion (Chinese), provided by the Greenhouse Gas Protocol.

Note 3: Combined margin emission factor of 0.86 tCO2/MWh was used for purchased electricity in Sichuan Province of the PRC.

The Group’s activities contributed to 20,487.53 tonnes of carbon dioxide equivalent (including carbon dioxide, methane and nitrous oxides), representing 0.08 tCO2e/m[2] , in the Reporting Period.

A1.3. Hazardous Waste

Hazardous wastes generated were stored in designated area and collected by licensed collectors. During the Reporting Period, a total of 50.13 tonnes of hazardous wastes, with an intensity of 0.19 kg/m[2] , was generated. The amount of hazardous waste was 64% less than the last Reporting Period. Hazardous waste was collected by qualified collectors for treatment and recycling.

	Wastes Generated	Wastes Generated
Hazardous Wastes	in 2020 (in tonnes)	(in percentage)
Waste mineral oil	10.65	21%
Waste oil paint containers	36.16	72%
Paint residue	2.32	5%
Waste activated carbon	1.0	2%
TOTAL	50.13	100%

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A1.4. Non-hazardous Waste

A total of 5,717.32 tonnes of non-hazardous wastes, representing an intensity of 22.04 kg/m[2] , was generated by the Group during the Reporting Period. The amount of non-hazardous waste was 37% less than that of the last Reporting Period. Non-hazardous waste was collected by qualified collectors.

	Wastes Generated	Wastes Generated
Non-hazardous Wastes	in 2020 (in tonnes)	(in percentage)
Waste steel	3,349.29	59%
Waste iron	558.22	10%
Scrap iron	1,675.65	29%
Ash from sandblasting	122.00	2%
Wastepaper	12.16	<1%
TOTAL	5,717.32	100%

A1.5. Measures to Mitigate Emissions

The health, safety and environmental (“HSE”) policies of the Group were formulated with the objectives of pursuing occupational health and production safety, minimizing environmental pollution, and sustaining continuous improvement. Emissions and discharges are closely monitored, analysed, and inspected regularly by qualified specialists. If any accidents causing disruption or damages to the surrounding communities or the environment occurred, persons in charge will be subject to disciplinary actions.

The Group monitors emissions of dust and smoke, sulphur dioxide, nitrogen oxides, volatile organic compounds (“VOCs”), benzene, toluene and xylene. In the manufacturing plant, dusts are filtered by filter bags, water-based paint are used to reduce VOCs emission, and smoke generated from welding is purified by appropriate ventilation and fume extractors. The Group also adopts advanced technologies, such as activated carbon adsorption, plasma adsorption and plasma-UV catalysis treatment, to control emissions. The collection and treatment facilities have efficiencies of 95% or above.

Apart from emission control, the Group centralises coordination of vehicle arrangements to ensure that vehicles are used in the most efficient way. Engines are turned off when idling. The Group avoids air travels whenever possible, and business air travels are tracked.

HONGHUA GROUP LIMITED 2020 ANNUAL REPORT

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A1.6. Waste Handling and Reduction Initiatives

When collecting, storing, transporting, using and treating solid wastes, the Group avoids diffusion and leakage, and does not allow any unpermitted disposal of wastes. Waste generated by the Group is stored in specified areas with strict monitoring. All kinds of waste are collected by licensed collectors. Records of waste collection are kept according to the document control procedures. Training is given to the warehouse keepers to enhance their knowledge in waste management.

The Group avoids and reduces paper use to promote a paperless office. It encourages doublesided printing and provides recycling collection trays to collect recyclable paper separately. Apart from saving paper, distribution of office resources (e.g. stationeries) is strictly monitored through a registration system. When waste is inevitably generated, the Group recycles wastes to minimize the environmental impacts.

With the Group’s effort in paper recycling, a total of 0.5 tonnes of paper had been recycled during the Reporting Period.

A2. USE OF RESOURCES

To reduce utilization of resources, the Group has formulated management policies regarding energy and resources use, which manages consumption of natural gas, electricity, water, raw materials, packaging materials, office paper and other office necessities.

A2.1. Energy Consumption

The energy consumption involved in the Group’s operation includes the use of natural gas, petrol, diesel and electricity. Natural gas was used for central air conditioning, canteen operation, heating and forging; petrol and diesel were used for drilling rig testing and the Group’s vehicles.

The Group consumed a total of 35,585,601 kWh energy, representing an intensity of 137.18 kWh/m[2] , in the Reporting Period. During the Reporting Period, breakfast was not provided to prevent gathering. As a result, the consumption of natural gas was reduced.

The detailed energy consumption is summarized in the table below:

Energy Consumption Sources	Direct Consumption	Consumption (in kWh)
Natural Gas	1,240,204 m3	12,255,800
Diesel (stationary)	363,093 L	3,630,327
Petrol (mobile)	116,370 L	1,031,230
Diesel (mobile)	20,960 L	209,564
Electricity	18,458,680	18,458,680
TOTAL		35,585,601

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A2.2. Water Consumption

A total of 251,131.24 m[3] of water, supplied by the municipal water suppliers, was consumed, with a water consumption intensity of 0.97 m[3] /m[2] during the Reporting Period. There was no significant issue in sourcing water during the Reporting Period.

Wastewater Treatment

A total of 103,182.78 m[3] of wastewater, representing an intensity of 0.40 m[3] /m[2] , was generated during the Reporting Period. The Group ensures that wastewater is treated and meets the standard of the PRC before discharge. Discharging pollutants or wastewater into the surface water drainage is prohibited. Wastewater treatment facilities are regularly cleaned to enhance effectiveness. The Group holds valid discharge permit and keeps track of its discharges. It also continuously improves its production process, upgrades equipment, adopts new technologies, reinforces existing on-site wastewater treatment facilities and reuses production water after sedimentation. The Group complied with the Integrated Wastewater Discharge Standard (GB8978-1996) of the PRC during the Reporting Period.

A2.3. Energy Use Efficiency Initiatives

The Group keeps track of its monthly electricity consumption and controls consumption by:

Developing electricity consumption systems to calculate, compare and analyse total electricity consumption;
Adopting energy-saving lightings whenever possible;
Choosing vehicles and equipment with high energy efficiency;
Controlling the temperature of air-conditioners at the range of 23-25°C;
Conserving fuel consumption by enforcing regulations;
Combining trips to reduce fuel use;
Educating employees to optimize productivity and reduce unnecessary electricity use;
Promoting electricity conservation behaviours among employees; and
Regularly inspecting and maintaining transmission pipelines. When leakage is identified, pipelines are repaired immediately.

HONGHUA GROUP LIMITED 2020 ANNUAL REPORT

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A2.4. Water Use Efficiency Initiatives

The Group keeps track of its monthly water consumption and controls consumption by:

Reusing production water after treating by sedimentation;
Recycling toner cartridges, tube lights and other wastes whenever possible;
Maintaining taps, fire hydrants and pipe network to avoid wastage due to leakage; and
Promoting water conservation behaviours among employees.

A2.5. Packaging Materials

At product design stage, the Group reduces the use of raw materials whenever possible. Raw materials in stock shall be used before ordering new materials. The Group consumed mainly plastic, steel, and wooden materials for packaging during the Reporting Period. Packaging materials were mostly made up of recyclable materials. Welded parts and machined parts for packaging are processed in-house. The rest of the packaging materials are coordinated by the supply department to purchase from external suppliers. The Group repurposes waste packaging materials on site whenever possible. For instance, waste wooden boxes and scrap iron were used to make brackets and transferral trays. The amount of packaging material consumed is presented in the table below.

Packaging Materials

Consumption

Paper box	2,630 Pieces
Packing straps	12,150 Pieces
Zip bags	26,000 Pieces
Cable ties	43,400 Pieces
Woven bags	1,0200 Pieces
Nails	15,000 Pieces
Plastic pipes	31,950 m
Plastic film	21,600 m2
Wooden packages	568 m3
Steel materials	364,616 kg

HONGHUA GROUP LIMITED 2020 ANNUAL REPORT

ENVIRONMENTAL, SOCIAL AND GOVERNANCE REPORT

A3. THE ENVIRONMENT AND NATURAL RESOURCES

A3.1. Significant Impacts of Activities on the Environment

The Group’s production generates exhaust gas, dust and smoke, hazardous waste, wastewater and noise nuisance. The Group has also formulated the “Honghua Group Co., Ltd. Energy Saving and Environmental Protection Management regulations”, which states the management systems, rewards and punishment scheme, and structures and responsibilities of different teams. It states clearly that units directly or indirectly discharging air emissions, wastewater, noise and solid waste during production and business operations must register the pollutant discharged at the time specified by the Environmental Protection Department of the local government and apply for pollutant discharge permits in accordance with regulations.

The Group has taken the following actions to minimize impacts on the environment and natural resources:

Treating exhaust gas by activated carbon, UV photolysis and plasma purification;
Treating dust and smoke by bag filters;
Extracting ash from welding machines by purifier;
Conducting cleaner production audits;
Employing only licenced collectors to collect and treat hazardous waste;
Treating wastewater through sedimentation before discharge;
Reducing production noise level and vibration by sound insulation wall;
Digitalizing documents to reduce paper use;
Performing double-sided printing; and
Recycling wastepaper.

The abovementioned emissions, hazardous waste and wastewater generation, and noise level has been monitored and assessed annually.

The Group is committed to managing its production and operations with sensitivity to environmental protection. The Group will continue to minimize its adverse impact on the environment through regular monitoring, assessment and evaluation of performances.

HONGHUA GROUP LIMITED 2020 ANNUAL REPORT

ENVIRONMENTAL, SOCIAL AND GOVERNANCE REPORT

B. SOCIAL

1. EMPLOYMENT AND LABOUR PRACTICES

B1. Employment

The Group believes that employees are important assets. The Group complies with the Labour Law of the PRC, the Labour Contract Law of the PRC, and the Social Insurance Law of the PRC. During the Reporting Period, the Group was not aware of any material non-compliance with the relevant laws and regulations relating to employment.

Employee Benefits and Welfare

The Group’s remuneration packages and fringe benefits include basic salary, overtime work compensation, allowance, award and bonus. Salary is reviewed every two years and adjusted in accordance with the overall cost of living, industrial salary trend, market trend, the Group’s remuneration strategies and performance. The Group also provides social insurances (including pension, medical, work-related injury, unemployment and maternity insurances), housing fund contributions and other welfare according to the statutory requirement. Major benefits provided by the Group cover all members of the Group and vary depending on job positions. Benefits provided by the Group are listed below:

Insurance: mandatory social insurance, supplementary medical, employer’s liability and accident insurance
Allowances: service, night shift, health care, heatstroke prevention, food, consolation, lactation and training allowances
Bonuses: performance and examination bonuses

There was no material non-compliance with laws and regulations relating to compensation and dismissal, recruitment and promotion, working hours, rest periods, and other benefits and welfare was recorded during the Reporting Period.

Equal Opportunity

The Group respects diversity in the workplace and treats employees equally regardless of their age, nationality, ethnicity, race, sex, religious belief and cultural background. To provide support to breastfeeding mothers when they return to work, the Group has set up a lactation room for expressing breast milk. There was no material non-compliance with laws and regulations relating to equal opportunity, diversity and anti-discrimination was recorded during the Reporting Period.

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Communication with Employees

The Group attaches great importance to employees’ health and satisfaction. During the Reporting Period, the Group organized a series of activities including Spring Festival visits, competitions, volunteering activities, and office exercise, etc to engage its employees. The Group strives to create a motivating work environment and share common values between employees and the Group.

Workforce

There were 3,272 employees as of 31 December 2020. All of them were full-time employees from the PRC. The total workforce by employment category, age group and gender are as follows:

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Gender Age
18-25
33%
16% 26-35
Male 19%
36-45
39%
84% Female 2% 46-55
7% 56 or above
Category
95%
Frontline and Other Staff
Middle Management
4%
1% Senior Management
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A total of 450 employees left the Group, representing a turnover rate of 13.8%, during the Reporting Period. The turnover rate by gender, age group are as follows:

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Turnover Rate
0.0% 5.0% 10.0% 15.0% 20.0% 25.0% 30.0% 35.0%
Senior Management 6.1%
Middle Management 2.2%
Frontline and Other Employees 13.8%
18-25 27.6%
26-35 13.2%
36-45 9.4%
46-55 15.3%
56 or above 30.4%
Male 14.1%
Female 11.9%
Category
Age
Gender
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B2. Employee Health and Safety

Occupational Health and Safety

The Group is committed to providing a healthy and safe environment. The Group complies with the Work Safety Law of the PRC and the Law of the PRC on the prevention and Control of Occupational Diseases. Occupational health and safety issues are managed by the Group’s HSE committee. Management on occupational health and safety has met the OHSAS 18001:2007 standard. To pursue occupational health and production safety, the Group has established separate policies on different aspects, including safe production, occupational hazards, hazardous chemical, fire safety, accident prevention and emergency response plan. The policies and practice are reviewed yearly. During the Reporting Period, the Group has formulated the Notice of Production Safety. The Group hopes to create a healthy and safe work environment by incorporating technologies, strengthen monitoring and inspection and providing training.

All employees are required to follow the safety measurements and guidelines strictly. Their safety practices and performances are examined regularly to ensure that they are competent for safe operation. Any staff who failed to follow the safety precautions can be subject to disciplinary actions. In contrast, departments and individuals performing well in occupational safety, or providing suggestions that help to improve operational safety are awarded. Production safety education and training are provided to employees to further equip them with knowledge of safe production regulations, technology, tools and skills. Innovative measures such as VR, simulation, experiential training methods are used to improve the training effect. The Group also checks the certificates of and provides induction training to new employees.

HONGHUA GROUP LIMITED 2020 ANNUAL REPORT

ENVIRONMENTAL, SOCIAL AND GOVERNANCE REPORT

The Group provides health check to its employees and organizes health seminars and consultation sessions annually. Fire drill are arranged to familiarize employees the proper evacuation routes and practices in case a fire, power outage or another disaster occurs during working hours. Personal protective equipment (PPE) is provided to employees and inspections are conducted to ensure the proper use of PPE.

There was no material non-compliance with the laws and regulations relating to providing a safe working environment and protecting employees from occupational hazards during the Reporting Period.

Occupational Health and Safety Data	2020	2019
Work related fatality	0	0
Work injury cases >3 days	0	10
Work injury cases <=3 days	0	0
Lost days due to work injury	0	2,009

Food Health and Safety

The Group has explicit contract terms with its contractors to ensure food safety. Food ingredients were tested before cooking. Samples of each dish are kept for record and testing if necessary. Food premises are sanitized regularly and inspected every day.

COVID-19

To cope with COVID-19, the Group has implemented risk mitigation precautions to maintain a healthy work environment. Cleaning and disinfection of the work environment, such as offices, bathrooms, common areas, and shared equipment, was conducted daily to minimize the potential for cross contamination. On-site symptom assessment, including temperature screening, was performed daily. Employers must wear masks and practice social distance to reduce gathering and the chances of workers infecting one another.

B3. Development and Training

The Group believes that development and training are crucial for employees to discharge their duties more effectively and efficiently. During the Reporting Period, employees partook in various types of training including induction, operational, safety, quality, and management training. For instance, electrical work and welding project training courses were provided to enhance the professional skills and quality of practice. To nurture talents, the Group has established online and offline training system and conducted skills evaluation for employees. The Group provides training according to their training needs. An internal training team is established to improve and ensure the training quality.

HONGHUA GROUP LIMITED 2020 ANNUAL REPORT

ENVIRONMENTAL, SOCIAL AND GOVERNANCE REPORT

During the Reporting Period, 82,290 hours of training had been provided to 1,364 employees. The average training hours per employee was 25.15 hours. The details of staff training for 2020 are as follows:

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% of employees trained受訓僱百分比
0%0% 10%10% 20%20% 30%30% 40%40% 50%50% 60%60% 70%70% 80%80% 90%90%
Senior
高級管理人員 85%85%
Management
Middle
中級管理人員 42%42%
Management
Frontline &
前線及其他僱員 41%41%
Other Staff
Male男 40%40%
Female女 50%50%
Average training hours per employee
0.00 20.00 40.00 60.00 80.00 100.00 120.00 140.00 160.00
Senior
145.24
Management
Middle
56.67
Management
Frontline &
22.47
Other Staff
Male 24.21
Female 29.93
職級
Employee Category
性別Gender
Employee Category
Gender
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B4. Labour Standards

In pursuance of the Labour Law and the Labour Contract Law of the PRC, there were no child labour nor forced labour in the Group. The Group stringently verify their information with documents, including identity card and academic certificates, during the recruitment process to guard against child labour. No teenagers under 16 years old shall be employed by the Group. All employees have signed the employment contract and agreed on the stipulated employment terms and conditions. The rights and interests of women and teen workers are protected under the Group’s policies and all the applicable national regulations. There was no material noncompliance with applicable laws and regulations in relation to the prevention of child and forced labour during the Reporting Period.

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2. OPERATING PRACTICES

B5. Supply Chain Management

The Group believes that proper management of its supply chain could bring positive impact to the natural environment and the society. Policies and procedures have been established for the management of the environmental and social impact of its supply chain.

The Group only selects qualified suppliers that have passed supplier assessments. Selected suppliers are evaluated against different performance criteria monthly and annually. According to the Group’s scoring system, suppliers are assessed and scored with respect to their qualifications, productivity, technology, performances, and quality management. Suggestions will be given to suppliers with unsatisfactory score for rectification. Supplier failed to meet the standard will have the cooperation suspended until improvements are made.

The Group also aims to improve the environmental and social risk management level of its suppliers through audits, training, and other activities, and takes active measures to encourage suppliers to prevent, mitigate and remediate existing and potential negative environmental and social impacts.

The Group had 361 qualified suppliers in the Reporting Period. More than 90% suppliers of the Group were from the PRC.

To manage the environmental and social risks of its supply chain, the Group articulates its HSE policies to suppliers through the procurement agreement and has implemented measures to assess and monitor the environmental and social performances of suppliers as shown in the table below.

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Management of Supply Chain

Environmental Aspects	•	Through procurement agreement or oral
		communication, the Group requires suppliers to use
		environmentally friendly materials for packaging and
		minimise the adverse impact on the environment if
		possible.
	•	The Group assesses the discharge permits of its
		suppliers when applicable. Suppliers without valid
		discharge permits will not pass the Group’s supplier
		assessment.
	•	When assessing suppliers, the Group considers
		whether the suppliers have been certified to any
		environmental management system. Suppliers with
		certified environmental management system attain
		higher scores in the scoring system.
	•	The Group requires selected suppliers to sign the
		Safety, Fire and Environmental Protection Agreement.
Social Aspects	•	Suppliers supplying PPE shall possess valid LA
		certificates and fulfil qualification requirements set
		by the Group. Selected suppliers are evaluated by
		the safety management department and production
		department of the Group annually.
	•	Before entering the manufacturing plants, suppliers
		must read and sign the Entry Terms or the Entry Safety
		Notice. They will be reminded to put on appropriate
		PPE and comply with the safety requirements set out
		by the Group.
	•	Through agreement, the Group requires suppliers to
		safeguard their employees’ health and safety.

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B6. Product Responsibility

The Group is committed to providing products and services with high standard of quality, safety and security, and protect the intellectual property right and personal data. To provide qualified products and services to customers, the Group has established a quality management system, which follows the ISO 9000 standards and complies strictly with the API specification Q1. The quality management department establishes, implements and maintains the quality management system to promote continuous improvement.

There was no material non-compliance relating to health and safety, advertising, labelling and privacy matters regarding products and services provided and method of redress during the Reporting Period.

Product Assurance and Recall

Product quality is assured through compliance with the international standards and the stringent inspection processes. Apart from meeting the ISO 9000 standards, main components of the drilling rigs obtained the CE markings, fulfilled the state Gosstandart (“GOST”) standards, API standards and all product requirements of the export markets.

The Group manages its manufacturing process and its contractors’ performances effectively. Defective incoming materials, intermediate products and final products are eliminated from the production line immediately after noticed. Substandard products are analysed and handled with corrective or preventive measures according to the Group’s policy.

Complaints

During the Reporting Period, the Group has updated several product and service related documents, such as the “Implementation Rules for Processing Product and Service Information Feedback”, “Customer Satisfaction Evaluation Rules”, and “Customer Complaint Classification Management System”. Changes included redefining the major quality issues, updating the responsibilities of the after-sales service department and marketing department, setting up of “Customer (Service) Satisfaction Survey Form”, and adjusting the international after-sales service.

During the Reporting Period, 5 customer product complaints were received. The number of complaints received was reduced by 90%. The flawed equipment was repaired or replaced. All complains were resolved according to the “Customer Complaint Classification Management System”.

No product was recalled due to safety and health reasons and no material non-compliance with laws and regulations in relation to product health and safety was recorded during the Reporting Period.

HONGHUA GROUP LIMITED 2020 ANNUAL REPORT

ENVIRONMENTAL, SOCIAL AND GOVERNANCE REPORT

Intellectual Property (“IP”) Rights

The Group protects self-owned IP rights and makes certain that its suppliers and other business partners respect the IP rights of the third parties. All drawings, ideas, manuals, designs, models, formulas provided by the Group to suppliers and other business partners shall not be copied or leaked to third parties without the Group’s consent. The Group respects IP rights and prudently eliminates the risk of infringement through research and analysis. Suppliers and other business partners shall not infringe copyrights, patent rights, trademarks and other IP rights in the process of design, research and development, and manufacturing. They can be held responsible for all costs if the infringement has caused loss to the Group.

An intellectual property management team has been established for enhancing the Group’s IP management, identifying risks and dealing with infringement cases. After investigation and analysis by the intellectual property management team and the legal department, the Group will take appropriate actions, including legal actions, against infringers depending on the circumstances.

During the Reporting Period, the Group had obtained 175 new IP rights, of which 117 are invention, 53 are utility model, and 5 are design patents. No material non-compliance with the laws and regulations in relation to IP rights was recorded.

Information Security Management

The Group has developed and implemented a comprehensive range of policies for information security management. To safeguard internal information and data assets, the Group adopted measures including:

Control of authorities and accessibilities, USB ports and optical drive uses;
Prohibition of the use of peer-to-peer file sharing services and installation of software at user level;
Audit of internet access and activities; and
Encryption of core data.

By signing the employment contract, employees also undertake to protect IP rights and not to disclose any confidential information (including customer information). Customer information includes but not limited to customers’ ideas, inventions, data and models, content of documents and correspondences, financial information, marketing strategies and trade secrets. Employees in breach of the contract can be dismissed. No substantiated complaints regarding breach of client privacy, identified leak, theft, or loss of customer information was received during the Reporting Period.

HONGHUA GROUP LIMITED 2020 ANNUAL REPORT

ENVIRONMENTAL, SOCIAL AND GOVERNANCE REPORT

B7. Anti-corruption

The Group believes that honesty, integrity and fairness are fundamental elements in the Group. It is committed to protecting the legitimate rights of shareholders and investors. Any bribery, theft, fraud and misappropriation are prohibited. Improper benefits including banquets, entertainment, cash, stocks, equities, securities, valuables and properties, etc. shall not be accepted. The Group established policies and regulations, including Regulations on the Integrity of Employees, Interim Measures for Discipline Inspection and Supervision, and Implementation Plan on the Safeguard of Supervision System, etc. The policies and regulations are regularly reviewed. This applies to all processes of its business operation including procurement, manufacturing, marketing and communication.

The group has a discipline inspection department, which is fully responsible for the company’s discipline inspection and supervision, internal audit and integrity system construction. It supervises and inspects whether its employees comply with laws and regulations, and conducts supervision and inspection of the Group’s financial income, expenditure, and asset management, reducing business risks.

The Group has established a whistleblowing system. All employees are encouraged to assist in tackling fraud, corruption and other malpractice, and report any suspected cases to the auditing department through email ([email protected]) or hotline (028-68176829). When there are alleged cases in violation of laws, regulations or the Group’s policy, the Group will investigate and impose disciplinary actions (including warning, record of demerit, demotion and dismissal) upon offenders after verification.

During the Reporting Period, the Group organized anti-corruption related talks to raise employees’ awareness. “Red Line Bottom Line” training, which explains the state-owned assets control requirements, was provided to more than 40 senior management. A total of 1,280 employees had also participated in the “Red Line Bottom Line” online knowledge contest. The leadership team planned 4 training sessions regarding the implementation of “Three Important and One Large” decision-making mechanism, building of a financial control system, and compliances. In total, 41 sessions were held, and 674 employees had participated in the trainings.

During the Reporting Period, there was no material non-compliance with applicable laws and regulations relating to anti-corruption that could have a significant impact on the Group.

B8. Community Investment

The Group had no particular policy on community investment, but it actively supports poverty alleviation and talent incubation. During the Reporting Period, the Group donated RMB900,000 to the Honghua Foreign Language School and spent over RMB170,000 to purchase agricultural products produced from the state’s poverty counties. The Group also cooperated with government labour unions to help people who are affected by the epidemic to harvest and sell products and formed a flood fighting rescue team to provide disaster relief and condolences to the employees’ families who have suffered losses from torrential rains and floods. The Group co-organized the apprenticeship systems for enterprises with Sichuan Aerospace Vocational and Technical College to foster young talents, and organized management training for 2020 college students.

HONGHUA GROUP LIMITED 2020 ANNUAL REPORT

REPORT OF THE DIRECTORS

The Board presents this annual report, together with the audited consolidated financial statements of the Group for the year ended 31 December 2020.

PRINCIPAL ACTIVITIES

The Company is an investment holding company. The Group principally engages in research, design, manufacture, setting and sale of land rigs and related parts and components, design and manufacture the offshore drilling module. Meanwhile it also provides clients with technical support services and drilling engineering services. During the Year, the nature of principal activities of the Group has no substantial change.

RESULTS AND DISTRIBUTION

The results of the Group for the year ended 31 December 2020 are set out in the consolidated financial statements on pages 95 to 225 of this annual report.

The Board did not recommend a final dividend for the year ended 31 December 2020.

CLOSURE OF REGISTER OF THE MEMBERS

The register of members of the Company will be closed from Friday, 21 May 2021 to Wednesday, 26 May 2021, both days inclusive, for the purpose of ascertaining shareholders’ entitlement to attend and vote at the Annual General Meeting. In order to be eligible to attend and vote at the Annual General Meeting, all transfer documents accompanied by the relevant share certificates must be lodged for registration with the Hong Kong branch share registrar and transfer office of the Company, Computershare Hong Kong Investor Services Limited, at Shops 17121716, 17th floor, Hopewell Centre, 183 Queen’s Road East, Wanchai, Hong Kong for registration not later than 4:30 p.m. on Thursday, 20 May 2021.

SHARE CAPITAL

Changes in the share capital of the Company during the Year are set out in note 22 to the consolidated financial statements.

PRE-EMPTIVE RIGHT

There is no provision of pre-emptive right under the Articles of Association and the laws of the Cayman Islands stipulating that the Company shall offer new Shares to existing Shareholders in proportion.

HONGHUA GROUP LIMITED 2020 ANNUAL REPORT

REPORT OF THE DIRECTORS

PURCHASE, SALE OR REPURCHASE OF THE LISTED SECURITIES OF THE COMPANY

Neither the Company nor any of its subsidiaries has purchased, sold or redeemed any of the Company’s shares during the year ended 31 December 2020.

RESERVES

As of 31 December 2020, the Group has a total of approximately RMB3,781 million worth of reserve. Details of movements in the reserves of the Group during the Year are set out in the consolidated statement of changes in equity in the consolidated financial statements.

SUBSIDIARIES

Details of the Company’s principal subsidiaries as of 31 December 2020 are set out in note 11 to the consolidated financial statements.

DIRECTORS

The existing Directors of the Company during the Year and as of the date of this annual report are set out on page 2 the section “Corporate Information” of this annual report.

The status of all the Directors of the Company holding their offices during the year is set out in the section “Corporate Information”.

In accordance with the Articles of Association, one third of the Directors (or closest to but not less than one third if the number is not three or a multiple of three) shall retire from office by rotation at each annual general meeting and each Director is required to retire at least once every three years and any Director appointed by the Board shall hold office only until the next general meeting and shall then be eligible for re-election at the meeting. Mr. Jin Liliang, Mr. Zhang Mi, Ms. Su Mei and Mr. Poon Chiu Kwok will retire from office by rotation at the forthcoming annual general meeting and will be eligible for re-election.

According to the independent guidelines under the Listing Rules, the Company has received the annual confirmation of their independence from each Independent Non-executive Director, and the Company still considers such Independent Non-executive Directors as independent.

HONGHUA GROUP LIMITED 2020 ANNUAL REPORT

REPORT OF THE DIRECTORS

DIRECTORS’ SERVICE CONTRACTS

Each of the Director of the Company is engaged on a service contract for a term of 3 years. The appointment may be terminated by not less than 3 months’ written notice. The Directors shall retire by rotation and be eligible for reelection subject to the Articles of Association.

None of the Directors has a service contract with the Company which is not determinable within one year without payment of compensation, other than statutory compensation.

PERMITTED INDEMNITY

Pursuant to the Company’s Articles of Association, subject to the Companies Law, every Director shall be indemnified out of the assets of the Company against all costs, charges, expenses, losses and liabilities which he/ she may sustain or incur in the execution of his/her office or otherwise in relation thereto. The Company has taken out insurance against the liability and costs associated with defending any proceedings which may be brought against directors of the Group.

DIRECTORS’ INTERESTS IN CONTRACTS

Save as disclosed under the following “Connected connected transactions”, none of the Directors directly or indirectly had any material interest in the contracts of significance in relation to the Group’s business to which the Company or its holding company or any of its subsidiaries was a party at the end of the Year or at any time during the Year.

REMUNERATION FOR DIRECTORS AND SENIOR MANAGEMENT

For the year ended 31 December 2020, details of remuneration for the Directors and Senior Management of the Company are set out in notes 33(g) and 36 to the consolidated financial statements.

The emoluments of the Executive Director and Senior Management by bands are as follows:

	2020 Number of individuals
RMB0 to RMB1,000,000 RMB1,000,001 to RMB2,000,000 RMB2,000,001 to RMB3,000,000 RMB3,000,001 to RMB4,000,000 RMB4,000,001 to RMB5,000,000 RMB5,000,001 to RMB6,000,000	1 11 – – – –

HONGHUA GROUP LIMITED 2020 ANNUAL REPORT

REPORT OF THE DIRECTORS

DIRECTORS’ AND CHIEF EXECUTIVES’ INTERESTS AND/OR SHORT POSITIONS IN THE SHARES, UNDERLYING SHARES AND DEBENTURES OF THE COMPANY OR ANY ASSOCIATED CORPORATION

At 31 December 2020, the interests and short positions of each Director and Chief Executive in the Shares, underlying Shares and debentures of the Company and its associated corporations (within the meaning of the SFO), as recorded in the register required to be kept by the Company under Section 352 of Part XV of the SFO or as notified to the Company and the Stock Exchange pursuant to the Model Code contained in Appendix 10 to the Listing Rules were as follows:

(A) ORDINARY SHARES OF HK$0.1 EACH OF THE COMPANY

				% of the issued
	Long/Short		Number of	share capital
	position	Nature of interest	shares held	of the Company
Mr. Zhang Mi	Long	Personal interest, corporate	323,408,548(1)	6.03%
		interest and settlor of a
		discretionary trust
Mr. Ren Jie	Long	Personal interest, corporate	124,530,240(2)	2.32%
		interest and settlor of a
		discretionary trust
Ms. Su Mei	Long	Personal interest	150,000(3)	0.002%

(1) Zhang Mi individually owns 3,050,000 Shares. Yi Langlin, spouse of Zhang Mi owns 2,156,000 Shares. Zhang Mi is the settlor of a discretionary trust, The ZYL Family Trust, whose trustee, through Wealth Afflux Limited, holds 318,202,548 Shares.
(2) Ren Jie individually owns 1,549,000 Shares. He is the settlor of a discretionary trust. The Trustee of The RJDJ Victory Trust owns 122,981,240 Shares.
(3) Su Mei individually owns 150,000 Shares.

HONGHUA GROUP LIMITED 2020 ANNUAL REPORT

REPORT OF THE DIRECTORS

(B) SHARE OPTIONS OF THE COMPANY

		Number of
		options held –
	Long/Short Position	Personal interest
Mr. Zhang Mi	Long	1,190,000
Mr. Ren Jie	Long	2,885,000
Mr. Liu Xiaofeng	Long	2,450,000
Mr. Chen Guoming	Long	1,800,000

Saved as disclosed above, at 31 December 2020, none of the Directors and Chief Executives (including their spouse and children under 18 years of age) had any interest in, or had been granted, or exercised, any rights to subscribe for Shares (or warrants or debentures, if applicable) of the Company and its associated corporations required to be disclosed pursuant to the SFO.

SUBSTANTIAL SHAREHOLDERS’ INTERESTS OR/AND SHORT POSITIONS IN THE SHARES AND UNDERLYING SHARES OF THE COMPANY

The register of substantial shareholders required to be kept under section 336 of Part XV of the SFO shows that, at 31 December 2020, the Company had been notified of the following substantial shareholders’ interests and short positions, being 5% or more of the Company’s issued share capital. These interests are in addition to those disclosed above in respect of the Directors and Chief Executives of the Company.

			Number of	shares held
				Corporate
		Personal		Interest and		% of the
		interest		Settlor of a		issued share
	Long/Short	Shares	Corporate	discretionary		capital of
Name	Position	Interest	Interest	Trust	Total	the Company
Wealth Afflux Limited	Long	318,202,548	–	–	318,202,548(1)	5.94%
Tricor Equity Trustee Limited	Long	–	–	919,390,005	919,390,005(2)	17.16%
Yi Langlin	Long	2,156,000	–	–	324,598,548(3)	6.06%
		322,442,548
		(family interest)
Kehua Technology Co., Limited	Long	1,606,000,000	–	–	1,606,000,000(4)	29.98%
Shenzhen Aerospace Industry Technology	Long	–	1,606,000,000	–	1,606,000,000(4)	29.98%
Research Institute
China Aerospace Science and Industry	Long	–	1,606,000,000	–	1,606,000,000(4)	29.98%
Corporation Limited

HONGHUA GROUP LIMITED 2020 ANNUAL REPORT

REPORT OF THE DIRECTORS

Notes:

(1) Wealth Afflux Limited is held by Tricor Equity Trustee Limited (as the trustee of The ZYL Family Trust). The ZYL Family Trust is a discretionary trust established by Zhang Mi (as the settlor), with Tricor Equity Trustee Limited (as the trustee). The beneficiaries under The ZYL Family Trust are Zhang Mi and his family members.
(2) Tricor Equity Trustee Limited, as the trustee of The ZYL Family Trust and the 8 other Trusts, holds 919,390,005 Shares in total.
(3) Yi Langlin, spouse of Zhang Mi, is deemed to be interested in 324,598,548 Shares in which Zhang Mi holds 1,190,000 share options.
(4) Kehua Technology Co., Limited is owned 40% by Shenzhen Aerospace Industry Technology Research Institute and 60% by China Aerospace Science and Industry Corporation Limited and holds 1,606,000,000 Shares.

Save as disclosed above, to the best of the Directors and the Chief Executives of the Company’s knowledge, as at 31 December 2020, none of the persons, other than the Directors or the Chief Executives of the Company, had interests or short positions in the Shares and underlying Shares of the Company which would fall to be disclosed to the Company under the provisions of Divisions 2 and 3 of Part XV of the SFO or recorded in the register as required under Section 336 of the SFO.

SHARE OPTION SCHEME

(A) SHARE OPTION SCHEME AFTER LISTING

Upon conditional approval by resolution in writing by all shareholders of the Company on 21 January 2008, the Company adopted a share option scheme (the “Share Option Scheme”). The vesting period of the PreIPO Share Option Scheme is ten years from the date of grant until 20 January 2018.

Details of the grant under the Share Option Scheme ended 31 December 2020 were as follows:

	Number of	Exercise price		Valid period
	grant	per Share		of the share
Date of grant	(shares)	(HK$)	Exercise period of share options	options
15 April 2009	60,000,000	1.27	up to 30% of the share options granted to each grantee from	up to 14 April 2019
			1 December 2009 to 14 April 2010; up to 60% of the share
			options granted to each grantee on or before 14 April 2011; all
			the remaining share options granted to each grantee on or after
			15 April 2011
11 October 2010	2,200,000	1.05	up to 40% of the share options granted to each grantee from	up to 10 October 2020
			25 October 2010 to 10 October 2011; up to 70% of the share
			options granted to each grantee on or before 10 October 2012;
			all the remaining share options granted to each grantee on or
			after 11 October 2012

HONGHUA GROUP LIMITED 2020 ANNUAL REPORT

REPORT OF THE DIRECTORS

	Number of	Exercise price		Valid period
	grant	per Share		of the share
Date of grant	(shares)	(HK$)	Exercise period of share options	options
20 June 2011	7,600,000	0.83	up to 30% of the share options granted to each grantee from	up to 19 June 2021
			19 July 2011 to 19 June 2012; up to 60% of the share options
			granted to each grantee on or before 19 June 2013; all the
			remaining share options granted to each grantee on or after 20
			June 2013
5 April 2012	15,400,000	1.19	up to 30% of the share options granted to each grantee from	up to 4 April 2022
			5 April 2013 to 4 April 2014; up to 60% of the share options
			granted to each grantee on or before 4 April 2015; all the
			remaining share options granted to each grantee on or after 5
			April 2015
24 March 2014	3,200,000	2.024	up to 30% of the share options granted to each grantee from	up to 23 March 2024
			24 April 2014 to 23 April 2015; up to 60% of the share options
			granted to each grantee on or before 23 April 2016; all the
			remaining share options granted to each grantee on or after 24
			April 2016
2 July 2014	40,575,000	1.96	vesting of the share options is conditional upon the	up to 1 July 2024
			achievement of corporate goals of the Company and the
			individual performance of the respective Grantees. The share
			options or any portion thereof shall lapse if the relevant
			corporate goals cannot be achieved. Up to 30% of the share
			options granted to each grantee after April 2015; up to 60% of
			the share options granted to each grantee after April 2016; all
			the remaining share options granted to each grantee after April
			2017
21 September 2016	41,350,000	0.44	up to 30% of the Share Options granted to each Grantee	up to 20 September
			from 21 September 2017 to 20 September 2018;up to 60%	2026
			of the Share Options granted to each Grantee on or before 20
			September 2019;all the remaining Share Options granted to
			each Grantee on or after 21 September 2019

HONGHUA GROUP LIMITED 2020 ANNUAL REPORT

REPORT OF THE DIRECTORS

Particulars and movements of share options under the Share Option Scheme during the year ended 31 December 2020 were as follows:

Number of share options

										Price
										immediately
									Exercise	preceding the
	Outstanding	Granted	Exercised	Lapsed	Cancelled	Outstanding			price per	grant date of
Name or category	as at	during the	during the	during the	during the	as at	Date of grant	Exercise period	Share	share options
of participant	01/01/2020	Year	Year	Year	Year	31/12/2020	(DD/MM/YY)	(DD/MM/YY)	HK$	HK$
Directors
Mr. Zhang Mi	1,190,000	–	–	–	–	1,190,000	02/07/2014	02/07/2014-01/07/2024	1.96	1.92
Mr. Ren Jie	885,000	–	–	–	–	885,000	02/07/2014	02/07/2014-01/07/2024	1.96	1.92
	2,000,000	–	–	–	–	2,000,000	21/09/2016	21/09/2017-20/09/2026	0.44	0.435
Mr. Chen Guoming	750,000	–	–	–	–	750,000	20/06/2011	19/07/2011-19/06/2021	0.83	0.79
	550,000	–	–	–	–	550,000	24/03/2014	24/04/2014-23/03/2024	2.024	2.02
	500,000	–	–	–	–	500,000	21/09/2016	21/09/2017-20/09/2026	0.44	0.435
Mr. Liu Xiaofeng	1,000,000	–	–	–	–	1,000,000	20/06/2011	19/07/2011-19/06/2021	0.83	0.79
	750,000	–	–	–	–	750,000	24/03/2014	24/04/2014-23/03/2024	2.024	2.02
	700,000	–	–	–	–	700,000	21/09/2016	21/09/2017-20/09/2026	0.44	0.435
Sub-total	8,325,000	–	–	–	–	8,325,000
Other
Employee	5,543,000	–	–	–	–	5,543,000	20/06/2011	19/07/2011-19/06/2021	0.83	0.79
Employee	10,906,000	–	–		–	10,906,000	05/04/2012	05/04/2013-04/04/2022	1.19	1.20
Employee	1,900,000	–	–	–	–	1,900,000	24/03/2014	24/04/2014-23/03/2024	2.024	2.02
Employee	14,037,436	–	–		470,900	13,566,536	02/07/2014	02/07/2014-01/07/2024	1.96	1.92
Employee	34,202,000	–	–		900,000	33,302,000	21/09/2016	21/09/2017-20/09/2026	0.44	0.435
Sub-total	66,588,436	–	–		1,370,900	65,217,536
Total	74,913,436	–	–		1,370,900	73,542,536

HONGHUA GROUP LIMITED 2020 ANNUAL REPORT

REPORT OF THE DIRECTORS

(B) SHARE OPTION SCHEME OF 2017

The 2017 Share Option Scheme is adopted by the Shareholders at the annual general meeting proposed to be held on 14 June 2017. As at 31 December 2020, no options were granted under the 2017 Share Option Scheme. Details of the Share Option Scheme are as follows:

Purpose

The purpose of the Scheme is to provide incentives or rewards to Participants for their contribution to the Group and/or to enable the Group to recruit and retain high caliber employees and attract human resources that are available to the Group. The Scheme will give the Participants an opportunity to have a personal stake in the Company and will (a) motivate the Participants to optimise their performance and efficiency; and(b) attract and retain the Participants whose contributions are important to the long-term growth and profitability of the Group.

Participants

(a) any Executive Director, employee or proposed employee (whether full time or part time) of any member of the Group; (b) any Non-executive Director (including Independent Non-executive Director) of any member of the Group; (c) any supplier of goods or services to any member of the Group; (d) any customer of any member of the Group; (e) any advisor, consultant, any person or entity with professional or other services who provides research, development or other technical support to any member of the Group; (f) any joint venture, business or strategic alliance partner of any member of the Group; (g) discretionary trust whose discretionary objects are as follows: any Executive Director, employee or prospective employee (whether full time or part time) and any Non- executive Director (including Independent Non-executive Director) of any member of the Group, any supplier of goods or services to any member of the Group, any customer of any member of the Group, any advisor, consultant, any person or entity with professional or other services who provides research, development or other technical support to any member of the Group, and any joint venture, business or strategic alliance partner of any member of the Group.

Total number of Shares available for issue under the Share Option Scheme and % of issued share capital as at the date of this annual report

As at the date of this annual report, no options were granted under the 2017 Share Option Scheme.

HONGHUA GROUP LIMITED 2020 ANNUAL REPORT

REPORT OF THE DIRECTORS

Maximum entitlement of each participant

The total number of Shares issued and to be issued upon exercise of options granted to any Participant (including both exercised and outstanding options) under the Share Option Scheme, in any 12-month period up to the date of grant shall not exceed 1% of the Shares in issue. Any further grant of options in excess of such limit must be separately approved by Shareholders in general meeting with such Participant and his associates (as defined under the Listing Rules) abstaining from voting. In such event, the Company must send a circular to the Shareholders containing the identity of the Participant, the number and terms of the options to be granted (and options previously granted to such Participant), and all other information required under the Listing Rules. The number and terms (including the exercise price) of the options to be granted must be fixed before the approval of the Shareholders and the date of the Board meeting proposing such further granted should be taken as the date of grant for the purpose of calculating the subscription price.

The period in which Shares must be taken up for under the Share Option Scheme

An offer for the grant of options must be made to a Participant on a trading day by letter in such form as the Board may from time to time determine, requiring the Participant to undertake to hold the option on the terms on which it is to be granted and to be bound by the provisions of the Share Option Scheme and shall remain open for acceptance by the Participant concerned within seven days inclusive of the day on which such offer was made.

The minimum period, if any, for which a share option must be held before it can be exercised

Unless otherwise determined by the Board and stated in the offer of grant of share options to the grantee, there is no minimum period for which a share option must be held before it can be exercised.

Amounts to be paid on acceptance of share options

Grantee of share option must pay HK$1.00 to the Company upon acceptance of share option offer.

Basis of determining the exercise price

The subscription price of the share option granted under the Share Option Scheme is solely determined and notified to the participants by the Board of Directors, but not less than the highest of (i) the closing price of the Company’s Shares as stated in the daily quotations sheet of the Stock Exchange on the date of the grant; (ii) the average closing price of the Company’s Shares as stated in the Stock Exchange’s daily quotations sheet for the five trading days immediately preceding the date of the grant; and (iii) the nominal value of the Company’s Shares as at date of grant.

The remaining life of the Share Option Scheme

Subject to early termination of the Share Option Scheme pursuant to the terms thereof, the Share Option Scheme shall remain valid and effective for 10 years commencing on the date of its adoption on 14 June 2017.

HONGHUA GROUP LIMITED 2020 ANNUAL REPORT

REPORT OF THE DIRECTORS

RESTRICTED SHARE AWARD SCHEME

On 30 December 2011, the Board approved and adopted a restricted share award scheme in which Selected Participant(s) including any Employee or Director (including, without limitation, any Executive Directors, Nonexecutive Directors or Independent Non-executive Directors), any consultant or adviser (whether on any employment or contractual or honorary basis and whether paid or unpaid) of the Company or any member of the Group, who in the absolute opinion of the Board, have contributed to the Company or the Group. Pursuant to the Scheme Rules, existing Shares will be purchased by the Trustee from the market out of cash contributed by the Company and be held in trust for the relevant Selected Participant until such Shares are vested with the relevant Selected Participants in accordance with the Scheme Rules. The Scheme shall be effective for a term of 10 years commencing on the Adoption Date subject to any early termination as may be determined by the Board. The Board will implement the Scheme in accordance with the Scheme Rules including providing necessary funds to the Trustee to purchase for Shares up to 5% of the issued share capital of the Company from time to time. The Selected Participant is not entitled to receive any income or distribution, such as dividend derived from the Restricted Shares allocated to him, prior to the vesting of the Restricted Shares in the Selected Participants. As at 31 December 2020, the Trustee has purchased 97,817,000 of the Company’s Shares, accounting for 1.82% of the issued share capital of the Company and total of 36,917,700 shares were granted to the Selected Participants and out of which 190,000 Shares were subsequently cancelled.

Particulars and movements of the Restricted Share Award Scheme during the year ended 31 December 2020 were as follows:

	Number of Shares
	Outstanding during 01/01/2020 Purchased during the Year Granted during the Year Vested during the Year Cancelled during the Year Outstanding as at 31/12/2020
Total	61,089,300 – – – – 61,089,300

CONNECTED TRANSACTIONS

During the Year, the Group has the following connected transactions which are required to be disclosed in this report in accordance with Chapter 14A of the Listing Rules. Certain related parties transactions disclosed in note 33 to the consolidated financial statements were not disclosed below as they fulfilled the exemption requirements in Chapter 14A of the Listing Rules.

HONGHUA GROUP LIMITED 2020 ANNUAL REPORT

REPORT OF THE DIRECTORS

DEBT ARRANGEMENT FOR OFFSHORE SEGMENT AND SIIC GUARANTEE

(1) On 28 October 2018, Honghua (China) Investment Co., Ltd. (“Honghua Investment”) entered into the Domestic Debt Repayment Agreement with Honghua Offshore Oil & Gas Equipment (Jiangsu) Co., Ltd. (“Jiangsu Offshore”), and Shanghai Honghua Offshore Oil & Gas Equipment Co. (“Shanghai Offshore”), pursuant to which Jiangsu Offshore shall repay an existing debt of an aggregated amount of RMB1,989.5049 million, together with relevant interest to Honghua Investment.
(2) On 28 October 2018, Honghua Holdings Limited (“Honghua Holdings”) entered into the Overseas Debt Repayment Agreement with Honghua Holdings Limited (“Honghua Holdings”), pursuant to which Tank Tek shall repay an existing debt of an aggregated amount of USD16.9291 million, together with relevant interest to Honghua Holdings.
(3) On 5 August 2015, Honghua Investment issued an irrevocable guarantee in favor of SIIC Shanghai International Trade (Group) Co., Ltd. (“SIIC”) for the debt owed by Jiangsu Offshore to SIIC (“SIIC Guarantee”).

Jiangsu Offshore is owned as to 51% equity interest by Jiangsu Hongjieding Energy Technology Co., Ltd (“Jiangsu Hongjieding”). Mr. Zhang Mi, an executive director of the Company, through his sole proprietorship, holds 53.85% of equity interests in Jiangsu Hongjieding as of the date of this report. Accordingly, Jiangsu Offshore is a connected person of the Company. Therefore, the Domestic Debt and Overseas Debt constitute financial assistance provided by the Group to Jiangsu Offshore and Tank Tek, thus connected transactions for the Company. In addition, Jiangsu Offshore is a subsidiary of Jiangsu Hongjieding and therefore the SIIC Guarantee constitutes financial assistance provided by the Group to a connected person.

LEASE FRAMEWORK AGREEMENT BETWEEN ASIFL AND THE GROUP

On 1 June 2018, Honghua (China) Investment Co., Ltd. (“Honghua Investment”), Honghua Financial Leasing (Shenzhen) Co., Ltd. (“Honghua Shenzhen”), Honghua Financial Leasing (Shanghai) Co., Ltd. (“Honghua Shanghai”) and Aerospace Science & Industry Financial Leasing Co., Ltd. (“ASIFL”) entered into between the Lease Framework Agreement (2018 Revised edition) (the “Lease Framework Agreement”), to amend the relevant contents of the 2017 Framework Agreement and the supplemental agreement to the Framework Agreement. Term of the Lease Framework Agreement starts from the date of entering into the agreement (“1 June 2018”) to 6 November 2020.

The annual cap for the sales transaction under the Finance Lease Transaction model was RMB0 according to the Lease Framework Agreement, and the actual amount was RMB0 during the Year. The maximum daily balance of the Leasing principal was RMB867.196 million for the Finance Lease Transactions according to the Lease Framework Agreement, and the actual amount of the connected transaction was RMB0. The maximum outstanding interest for 2020 was RMB130.866 million according to the Lease Framework Agreement, and the actual amount of the connected transaction was RMB 0.The maximum one-off handling fee was RMB 0, and the actual amount of the connected transaction was RMB 0 during the year. The annual cap for the sales transaction under the Operating Lease Transaction model was RMB 0 according to the Lease Framework Agreement, and the actual amount of the connected transaction was RMB 0 during the Year. The amount of rental to be paid for the Operating Lease Transaction was 119.245 million, and the actual amount of the connected transaction was RMB0.

HONGHUA GROUP LIMITED 2020 ANNUAL REPORT

REPORT OF THE DIRECTORS

CASIC indirectly holds 29.98% of the shares in the Company and therefore is a substantial shareholder and connected person of the Company. CASIC and its subsidiaries together hold a 46.5% equity interest in ASIFL, thus ASIFL is an associate of CASIC and in turn a connected person of the Company. Therefore, these transactions constitute connected transactions.

FINANCIAL COOPERATION AGREEMENT BETWEEN AEROSPACE ASIFC AND THE GROUP

On 1 June 2018, the Company and Aerospace Science and Industry Financial Corporation (“ASIFC”) entered into the Financial Cooperation Agreement. According to the Financial Cooperation Agreement, ASIFC will provide the Group with deposit and settlement services. Term of the Financial Cooperation Agreement was 3 years from the date of entering into the agreement (“1 June 2018”).During the year, the daily maximum balance of deposits (including accrued interests) under the Financial Cooperation Agreement was RMB1.5 billion, and the actual balance of deposits was RMB515.183 million.

CASIC indirectly holds 29.98% of the shares in the Company and therefore is a substantial shareholder and connected person of the Company. CASIC and its subsidiaries together hold a 100% equity interest in Aerospace Science and Industry Financial Corporation, thus Aerospace Science and Industry Financial Corporation is an associate of CASIC and in turn a connected person of the Company. Therefore, the deposit transactions under the Financial Cooperation Agreement constitute connected transactions.

PURCHASE FRAMEWORK AGREEMENT AND SALES FRAMEWORK AGREEMENT BETWEEN AEROSPACE JIANGNAN, AEROSPACE CLOUD,AEROSPACE SANJIANG AND THE GROUP

On 17 July 2019, the Company and Aerospace Jiangnan (Aerospace Jiangnan Group Co., Ltd., formerly known as Guizhou Aerospace Industry Co., Ltd.) entered into the Purchase Framework Agreement, pursuant to which the Company will purchase equipment and products including rig parts, forged parts of solution tanks and blanks from Aerospace Jiangnan. The annual cap under the Purchase Framework Agreement for the year ended 31 December 2020 is RMB10 million. During the Year, the actual amount was RMB0.031 million;

the Company and Aerospace Cloud entered into the Purchase Framework Agreement, pursuant to which the Company will purchase products including servers and related technology services from Aerospace Cloud. The annual cap under the Purchase Framework Agreement for the year ended 31 December 2020 is RMB5 million. During the Year, the actual amount was RMB2.46 million;

and the Company and Aerospace Sanjiang entered into the Purchase Framework Agreement, pursuant to which the Company will purchase products including whole towing devices, LNG auxiliary equipment and downhole testing equipment and related services from Aerospace Sanjiang. The annual cap under the Purchase Framework Agreement for the year ended 31 December 2020 is RMB52.5 million. During the Year, the actual amount was RMB9.61 million;

and the Company and Aerospace Jiangnan entered into the Sales Framework Agreement, pursuant to which the Company will sell products including steel structure and related processing services to Aerospace Jiangnan. The annual cap under the Purchase Framework Agreement for the year ended 31 December 2020 is RMB10 million. During the Year, the actual amount was RMB0.087 million.

HONGHUA GROUP LIMITED 2020 ANNUAL REPORT

REPORT OF THE DIRECTORS

The term of each of the Purchase Framework Agreements and the Sales Framework Agreement will commence on the date of the agreement and expire on 31 December 2021.

CASIC indirectly holds approximately 29.98% of the shares in the Company through its wholly-owned subsidiary Kehua, and therefore is a substantial shareholder and connected person of the Company. CASIC directly holds 100%, 49.51% and 100% equity interest in Aerospace Jiangnan, Aerospace Cloud and Aerospace Sanjiang, respectively, thus Aerospace Jiangnan, Aerospace Cloud and Aerospace Sanjiang are all Associates of CASIC and in turn connected persons of the Company. Therefore, the Purchase Transactions and the Sales Transactions constitute continuing connected transactions of the Company under Chapter 14A of the Listing Rules.

PURCHASE FRAMEWORK AGREEMENT BETWEEN SHANGHAI OFFSHORE AND SICHUAN HONGHUA

On 22 January 2020, Sichuan Honghua Petroleum Equipment Co., Ltd. (“Sichuan Honghua”), entered into a purchase framework agreement (“Original Purchase Framework Agreement”) with Shanghai Honghua Offshore Oil & Gas Equipment Co., Ltd. (“Shanghai Offshore”). On 25 May 2020, Sichuan Honghua and Shanghai Offshore entered into a written agreement to make amendments to the Original Purchase Framework Agreement, pursuant to which Shanghai Offshore will provide Sichuan Honghua with drilling and exploiting equipment, automation systems, vessels, other ancillary equipment and related services (including but not limited to installation, commissioning and maintenance services); large-scale steel structure processing, construction, installation and commissioning services. The term of the Purchase Framework Agreement commences at the date of the agreement and expires on 31 December 2022. The annual cap under the Purchase Framework Agreement for the year ended 31 December 2020 is RMB400 million. During the Year, the actual amount was RMB201.939 million.

Shanghai Offshore is owned as to 51% equity interest by Jiangsu Hongjieding. Mr. Zhang Mi, an executive director of the Company, through his sole proprietorship, holds 53.85% of equity interests in Jiangsu Hongjieding. Accordingly, Shanghai Offshore is a connected person of the Company, and the transactions between Sichuan Honghua and Shanghai Offshore constitute the continuing connected transaction of the Company under Chapter 14A of the Listing Rules.

STRATEGIC COOPERATION FRAMEWORK AGREEMENT BETWEEN ASIFL AND HONGHUA INVESTMENT

On 25 May 2020, Honghua (China) Investment Co., Ltd. (“Honghua Investment”) and Aerospace Science & Industry Financial Leasing Co,. Ltd. (“ASIFL”) entered into the Strategic Cooperation Framework Agreement, pursuant to which, ASIFL will purchase certain equipment and products from Honghua Investment and its subsidiaries for the three years ending 31 December 2022 starting from the effective date of the Strategic Cooperation Framework Agreement. The annual cap under the Strategic Cooperation Framework Agreement for the year ended 31 December 2020 is RMB400 million. During the Year, the actual amount was RMB0 million.

CASIC indirectly holds 29.98% of the shares in the Company through its wholly-owned subsidiary, Kehua, and therefore is a substantial shareholder and a connected person of the Company. CASIC and its subsidiaries together hold a 46.5% equity interest in ASIFL, thus ASIFL is an associate of CASIC and in turn a connected person of the Company. Therefore, the transactions under the Strategic Cooperation Framework Agreement constitute connected transactions of the Company under Chapter 14A of the Listing Rules.

HONGHUA GROUP LIMITED 2020 ANNUAL REPORT

REPORT OF THE DIRECTORS

SALES FRAMEWORK AGREEMENT BETWEEN CHINA AEROSPACE CONSTRUCTION AND THE GROUP

On 24 June 2020, the Company and China Aerospace Construction Group Co., Ltd. (“China Aerospace Construction”) entered into the Sales Framework Agreement, pursuant to which the Group will sell equipment, parts, components or finished products and other related or similar goods, steel structure processing, construction and related services to China Aerospace Construction and its associates. The term of the Sales Framework Agreement will commence on the date of the agreement and expire on 31 December 2021. The annual cap under the Sales Framework Agreement for the year ended 31 December 2020 is RMB30 million. During the Year, the actual amount was RMB20 million.

CASIC indirectly holds approximately 29.98% of the Shares in the Company through its wholly-owned subsidiary Kehua, and therefore is a substantial Shareholder and connected person of the Company. CASIC directly holds 72.85% equity interest in China Aerospace Construction, thus China Aerospace Construction is an associate of CASIC, and in turn a connected person of the Company. Therefore, the Sales Transactions constitute continuing connected transactions of the Company under Chapter 14A of the Listing Rules.

ENGINEERING EQUIPMENT SALES CONTRACT, RAW MATERIALS SALES CONTRACT, SALES FRAMEWORK AGREEMENT AND EQUIPMENT LEASING FRAMEWORK AGREEMENT BETWEEN JIANGSU OFFSHORE AND SICHUAN HONGHUA

On 11 December 2020, Sichuan Honghua and Jiangsu Offshore entered into the Engineering Equipment Sales Contract, pursuant to which Sichuan Honghua will sell finished engineering equipment to Jiangsu Offshore with a consideration of RMB9,153,549.46.

On 11 December 2020, Sichuan Honghua and Jiangsu Offshore entered into the Raw Materials Sales Contract, pursuant to which Sichuan Honghua will sell raw materials including steel sheets and steel pipes to Jiangsu Offshore with a consideration of RMB2,474,217.62.

On 11 December 2020, Sichuan Honghua and Jiangsu Offshore entered into the Sales Framework Agreement with a term commencing on 1 January 2021 and expiring on 31 December 2021, pursuant to which Sichuan Honghua and its associates will sell finished products including equipment, parts, components or raw materials and engineering equipment and other related or similar goods and provide technical testing and related services to Jiangsu Offshore and its associates.

On 11 December 2020, Sichuan Honghua and Jiangsu Offshore entered into the Equipment Leasing Framework Agreement with a term commencing on 1 January 2021 and expiring on 31 December 2021, pursuant to which Sichuan Honghua and its associates will lease general equipment related to production and operation, such as transportation equipment, production equipment, construction machinery and instrument meters to Jiangsu Offshore and its associates.

Jiangsu Offshore is owned as to 51% equity interest by Jiangsu Hongjieding and as to 49% indirectly by the Company. Mr. Zhang Mi, an executive Director of the Company, through his sole proprietorship, holds 53.85% equity interests in Jiangsu Hongjieding. Accordingly, Jiangsu Offshore is aconnected person of the Company, and the transactions under the Engineering Equipment Sales Contract, the Raw Materials Sales Contract, the Sales Framework Agreement and the Equipment Leasing Framework Agreement constitute connected transactions of the Company under Chapter 14A of the Listing Rules.

HONGHUA GROUP LIMITED 2020 ANNUAL REPORT

REPORT OF THE DIRECTORS

All the Independent Non-executive Directors have reviewed the above continuing connected transactions and confirmed that these transactions have been entered into are:

(1) in the ordinary and usual course of the business of the Group;
(2) either on normal commercial terms or on terms no less favourable to the Group than terms available to or from independent third parties; and
(3) in accordance with the relevant agreements governing them on terms that are fair and reasonable and in the interest of the Shareholders as a whole.

In accordance with Rule 14A.56 of the Listing Rules, the Company is required to obtain a letter from its auditor to confirm that nothing has come to their attention that causes them to believe that these continuing connected transactions:

(1) have not been approved by the board of directors of the company;
(2) were not made in accordance with the pricing policy of the Company;
(3) were not conducted, in all material respects, in accordance with the relevant agreement governing those transactions;
(4) have exceeded the cap disclosed in previous announcements.

The Company’s auditors were engaged to report on the Group’s continuing connected transactions in accordance with Hong Kong Standard on Assurance Engagements 3000 “Assurance Engagements Other Than Audits or Reviews of Historical Financial Information” and with reference to Practice note 740 “Auditor’s Letter on Continuing Connected Transactions under the Hong Kong Listing Rules” issued by the Hong Kong Institute of Certified Public Accountants. The auditors have issued to the Board an unqualified letter containing their findings and conclusions in respect of the continuing connected transactions disclosed by the Group in pages 212 to 218 of this annual report in accordance with Rule 14A.56 of Listing Rules. A copy of the auditor’s letter has also been provided to the Stock Exchange.

BANK LOANS

Details of our bank loans and other borrowings are set out in note 26 to the consolidated financial statements.

FINANCIAL SUMMARY

Our financial summary for the past five years are set out in the section headed “Five-Year Financial Highlights” of this annual report.

HONGHUA GROUP LIMITED 2020 ANNUAL REPORT

REPORT OF THE DIRECTORS

STAFF RETIREMENT AND BENEFIT SCHEME

Details of the staff retirement and benefit scheme are set out in notes 9 and 33(g) to the consolidated financial statements.

FIXED ASSETS

Details of the changes of the fixed assets of the Group are set out in note 15 to the consolidated financial statements.

MAJOR CUSTOMERS AND SUPPLIERS

During the Year, the Group’s five largest suppliers in total accounted for approximately 12.2% of total purchase, and the largest supplier accounted for approximately 4.2% of total purchase.
During the Year, the Group’s five largest customers accounted for approximately 29.4% of total sales and the largest customer accounted for approximately 7.0% of revenue.
None of the Directors of the Company, their associates or any Shareholder (which to the knowledge of the Directors owns more than 5% of the Company’s share capital) had an interest in the above suppliers or customers.

ENTRUST DEPOSITS AND ENTRUST LOANS

As at 31 December 2020, the Company has no entrust deposits or entrust loans being placed with commercial banks or non-commercial banks and other finance institutions.

TAXATION POLICY

The details of the Group’s applicable income taxation policy and income tax rate are set out in note 13 to the consolidated financial statements.

SUFFICIENCY OF PUBLIC FLOAT

Based on the information that is publicly available to the Company and within the knowledge of the Directors as at the date of this report, the Company has maintained sufficient public float since its Listing Date.

MANAGEMENT CONTRACTS

There was no contract concerning the management or administration of the whole or any substantial part of the business of the Company which was entered into or existed during the Year.

HONGHUA GROUP LIMITED 2020 ANNUAL REPORT

REPORT OF THE DIRECTORS

AUDITOR

The financial statements of the Group for the year ended 31 December 2020 have been audited by PricewaterhouseCoopers who will retire at the forthcoming annual general meeting and being eligible, offer themselves for re-appointment. A resolution to renew the appointment of PricewaterhouseCoopers as auditor of the Company will be proposed at the forthcoming annual general meeting of the Company.

By the order of the Board Honghua Group Limited Chairman

Jin Liliang

PRC, 29 March 2021

HONGHUA GROUP LIMITED 2020 ANNUAL REPORT

INDEPENDENT AUDITOR’S REPORT

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To the Shareholders of Honghua Group Limited

(incorporated in the Cayman Islands with limited liability)

Opinion

What we have audited

The consolidated financial statements of Honghua Group Limited (the “Company”) and its subsidiaries (the “Group”) set out on pages 95 to 225, which comprise:

the consolidated balance sheet as at 31 December 2020;
the consolidated statement of profit or loss for the year then ended;
the consolidated statement of comprehensive income for the year then ended;
the consolidated statement of changes in equity for the year then ended;
the consolidated statement of cash flows for the year then ended; and
the notes to the consolidated financial statements, which include a summary of significant accounting policies.

Our opinion

In our opinion, the consolidated financial statements give a true and fair view of the consolidated financial position of the Group as at 31 December 2020, and of its consolidated financial performance and its consolidated cash flows for the year then ended in accordance with International Financial Reporting Standards (“IFRSs”) and have been properly prepared in compliance with the disclosure requirements of the Hong Kong Companies Ordinance.

86 HONGHUA GROUP LIMITED 2020 ANNUAL REPORT

INDEPENDENT AUDITOR’S REPORT

Basis for Opinion

We conducted our audit in accordance with Hong Kong Standards on Auditing (“HKSAs”) issued by the Hong Kong Institute of Certified Public Accountants (“HKICPA”). Our responsibilities under those standards are further described in the Auditor’s Responsibilities for the Audit of the Consolidated Financial Statements section of our report.

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

Independence

We are independent of the Group in accordance with the HKICPA’s Code of Ethics for Professional Accountants (“the Code”), and we have fulfilled our other ethical responsibilities in accordance with the Code.

Key Audit Matters

Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the consolidated financial statements of the current period. These matters were addressed in the context of our audit of the consolidated financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters.

Key audit matters identified in our audit are summarised as follows:

Impairment of property, plant and equipment
Valuation of inventory
Valuation of trade receivables

HONGHUA GROUP LIMITED 2020 ANNUAL REPORT 87

INDEPENDENT AUDITOR’S REPORT

Key Audit Matter

How our audit addressed the Key Audit Matter

Impairment of property, plant and equipment

Refer to note 15 to the consolidated financial statements.

As at 31 December 2020, the total balance of property, plant and equipment (“PP&E”) is RMB1,736,605,000, including RMB592,552,000 relating to the Drilling engineering services segment (formerly known as the “Oil and gas engineering service segment”, note 5) which was loss making in prior years and recorded a profit for the year ended 31 December 2020.

PP&E is carried at the lower of historical cost less accumulated depreciation and value in use based on discounted future cash flows of cash generating units (“CGU”). Significant judgements are required for determination of key assumptions, including discount rates, revenue growth rates and gross margins. As a result of management assessment, an additional provision for impairment of RMB1,035,000 was made in relation to the PP&E under the Drilling engineering services segment for the year ended 31 December 2020.

We obtained an understanding of the management’s internal control and assessment process of impairment of PP&E and assessed the inherent risk of material misstatement by considering the degree of estimation uncertainty and level of other inherent risk factors, such as complexity, subjectivity, changes and susceptibility to management bias or fraud.

We evaluated the outcome of prior period assessment of the impairment of PP&E to assess the effectiveness of the management’s estimation process.

We evaluated and tested the key controls over the impairment of PP&E.

We evaluated the appropriateness of the discounted future cash flow model adopted by management.

We challenged the management’s key assumptions by:

comparing the revenue growth rates with historical data, assessing future customer demand with reference to our knowledge of economic and industry trend;

We focused on this area because of (a) the significance of PP&E balance; and (b) the estimation of discounted future cash flows of CGUs is subject to high degree of estimation uncertainty. The inherent risk in relation to the impairment assessment of PP&E is considered significant due to the complexity of the models, subjectivity of significant assumptions used, and significant judgements involved in selecting data.

comparing the gross margin with the historical data and considering the future product mix and production volume;
comparing the discount rate with the cost of capital for the CGUs.

We tested the mathematical accuracy of the calculations of the discounted cash flows.

We independently performed sensitivity analysis about the key drivers of growth, including revenue growth and expected changes in gross margins.

HONGHUA GROUP LIMITED 2020 ANNUAL REPORT

INDEPENDENT AUDITOR’S REPORT

Key Audit Matter

How our audit addressed the Key Audit Matter

We assessed the adequacy of the disclosures related to valuation of PP&E in the context of the applicable financial reporting framework.

We also considered whether the judgements made in selecting the methodology and the key assumptions would give rise to indicators of possible management bias.

We found that the risk assessment of impairment of PP&E remained appropriate and management’s judgements in determining the value in use of PP&E are supported by the evidence we gathered.

Valuation of inventory

Refer to note 20 to the consolidated financial statements.

As at 31 December 2020, the Group had gross inventory balance of RMB1,495,161,000, against which a provision for inventory write-down of RMB148,343,000 was made.

Inventories are carried at the lower of cost and net realisable value (“NRV”). NRV is determined based on the estimated selling price less the estimated costs to completion, if relevant, other costs necessary to make the sale and related taxes.

We focused on this area because of (a) the significance of inventory balance and (b) the estimation of NRV is subject to high degree of estimation uncertainty. The inherent risk in relation to the valuation of inventory is considered significant due to subjectivity of significant assumptions used, and significant judgements involved in selecting data.

We obtained an understanding of the management’s internal control and assessment process of valuation of inventory and assessed the inherent risk of material misstatement by considering the degree of estimation uncertainty and level of other inherent risk factors, such as complexity, subjectivity, changes and susceptibility to management bias or fraud.

We evaluated the outcome of prior period assessment of the valuation of inventory to assess the effectiveness of the management’s estimation process.

We evaluated and tested the key controls over the valuation of inventory.

We evaluated and challenged the methodology adopted by management for identifying inventories subject to write-down based on our independent assessment of write-down indicators.

We compared the estimated selling prices with the selling prices of the recent orders from customers. We challenged management’s future sales projections for the prices and quantities by checking historical sales information and considering market trend.

HONGHUA GROUP LIMITED 2020 ANNUAL REPORT

INDEPENDENT AUDITOR’S REPORT

Key Audit Matter

How our audit addressed the Key Audit Matter

We independently evaluated the future market trend factors management considered in determining the estimated selling prices, including possible changes of customer demands and technology development, by corroborating with research information, checking subsequent outcomes of these factors and making reference to our industry knowledge.

We assessed the reasonableness of the estimated costs to completion by comparing with the historical costs to completion of the similar inventories.

We assessed the adequacy of the disclosures related to valuation of inventory in the context of the applicable financial reporting framework.

We also considered whether the judgements made in selecting the data and the key assumptions would give rise to indicators of possible management bias.

We found that the risk assessment of valuation of inventory remained appropriate and management’s judgements in determining the NRV of inventory are supported by the evidence we gathered.

Valuation of trade receivables

Refer to note 18 to the consolidated financial statements.

The gross balance of trade receivables as at 31 December 2020 is RMB3,185,678,000 against which a provision for impairment of RMB504,198,000 was made.

When assessing the impairment of trade receivables, judgement is required for determining the lifetime expected credit losses, taking into consideration the ageing of the trade receivables, their repayment history, current financial position as well as the expected operating results and ability to meet the obligation.

We obtained an understanding of the management’s internal control and assessment process of valuation of trade receivables and assessed the inherent risk of material misstatement by considering the degree of estimation uncertainty and level of other inherent risk factors, such as complexity, subjectivity, changes and susceptibility to management bias or fraud.

We evaluated the outcome of prior period assessment of the valuation of trade receivables to assess the effectiveness of the management’s estimation process.

We evaluated and tested the controls over the collectability of the trade receivables, including the monthly review of ageing analysis, repayment and impairment assessment of trade receivables performed by management.

90 HONGHUA GROUP LIMITED 2020 ANNUAL REPORT

INDEPENDENT AUDITOR’S REPORT

Key Audit Matter

How our audit addressed the Key Audit Matter

We focused on this area because of (a) the significance of trade receivables balance and (b) the estimation of recoverable amount is subject to high degree of estimation uncertainty. The inherent risk in relation to the valuation of trade receivables is considered significant due to the complexity of the models, and subjectivity of significant assumptions used.

We sent confirmations to customers on a sample basis, focusing on material balances.

We obtained management’s assessment on the recoverability of the trade receivables and performed our independent evaluation. We corroborated management’s assessment by reviewing individual customer’s credit profile and payment history on a sample basis.

We obtained management’s assessment on the expected credit losses of trade receivables, challenged and assessed its reasonableness by considering the historical cash collection performance and ageing profile, evaluated adjustment made to the historical loss rates based on current economic conditions and forward-looking information with reference to our industry knowledge, market information including macroeconomic factors.

We assessed the appropriateness of key assumptions with the involvement of our internal valuation experts.

We assessed the adequacy of the disclosures related to impairment of trade receivables in the context of the applicable financial reporting framework.

We also considered whether the judgements made in determine the expected credit losses of trade receivables would give rise to indicators of possible management bias.

We found that the risk assessment of valuation of trade receivables remained appropriate and management’s judgements relating to the recoverability of trade receivable are supported by the evidence we gathered.

HONGHUA GROUP LIMITED 2020 ANNUAL REPORT

INDEPENDENT AUDITOR’S REPORT

Other Information

The directors of the Company are responsible for the other information. The other information comprises all of the information included in the annual report other than the consolidated financial statements and our auditor’s report thereon.

Our opinion on the consolidated financial statements does not cover the other information and we do not express any form of assurance conclusion thereon.

In connection with our audit of the consolidated financial statements, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the consolidated financial statements or our knowledge obtained in the audit or otherwise appears to be materially misstated.

If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard.

Responsibilities of Directors and the Audit Committee for the Consolidated Financial Statements

The directors of the Company are responsible for the preparation of the consolidated financial statements that give a true and fair view in accordance with IFRSs and the disclosure requirements of the Hong Kong Companies Ordinance, and for such internal control as the directors determine is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.

In preparing the consolidated financial statements, the directors are responsible for assessing the Group’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the directors either intend to liquidate the Group or to cease operations, or have no realistic alternative but to do so.

The Audit Committee is responsible for overseeing the Group’s financial reporting process.

Auditor’s Responsibilities for the Audit of the Consolidated Financial Statements

Our objectives are to obtain reasonable assurance about whether the consolidated financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. We report our opinion solely to you, as a body, and for no other purpose. We do not assume responsibility towards or accept liability to any other person for the contents of this report. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with HKSAs will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these consolidated financial statements.

HONGHUA GROUP LIMITED 2020 ANNUAL REPORT

INDEPENDENT AUDITOR’S REPORT

As part of an audit in accordance with HKSAs, we exercise professional judgement and maintain professional scepticism throughout the audit. We also:

Identify and assess the risks of material misstatement of the consolidated financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control.
Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Group’s internal control.
Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by the directors.
Conclude on the appropriateness of the directors’ use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Group’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the consolidated financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions may cause the Group to cease to continue as a going concern.
Evaluate the overall presentation, structure and content of the consolidated financial statements, including the disclosures, and whether the consolidated financial statements represent the underlying transactions and events in a manner that achieves fair presentation.
Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the Group to express an opinion on the consolidated financial statements. We are responsible for the direction, supervision and performance of the group audit. We remain solely responsible for our audit opinion.

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INDEPENDENT AUDITOR’S REPORT

We communicate with the Audit Committee regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit.

We also provide the Audit Committee with a statement that we have complied with relevant ethical requirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, actions taken to eliminate threats or safeguards applied.

From the matters communicated with the Audit Committee, we determine those matters that were of most significance in the audit of the consolidated financial statements of the current period and are therefore the key audit matters. We describe these matters in our auditor’s report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication.

The engagement partner on the audit resulting in this independent auditor’s report is Lee Chung Bor.

PricewaterhouseCoopers Certified Public Accountants

Hong Kong, 29 March 2021

HONGHUA GROUP LIMITED 2020 ANNUAL REPORT

CONSOLIDATED STATEMENT OF PROFIT OR LOSS

FOR THE YEAR ENDED 31 DECEMBER 2020 (All amounts in RMB unless otherwise stated)

Year ended 31 December 2020 2019 Notes RMB’ 000 RMB’ 000	Year ended 31 December 2020 2019 Notes RMB’ 000 RMB’ 000
Revenue 5 3,931,492 Cost of sales 8 (2,751,127)	4,425,686 (3,109,852)
Gross profit 1,180,365 Distribution costs 8 (177,878) Administrative expenses 8 (547,597) Net impairment losses on financial assets and contract assets 3.1(b) (267,752) Other income/(expense) 6 87,612 Other(losses)/gains, net 7 (47,334)	1,315,834 (357,273) (503,486) (190,989) (11,954) 126,259
Operating profit 227,416	378,391
Finance income 10 96,154 Finance expenses 10 (222,513)	23,035 (231,938)
Finance expenses – net (126,359) Share of net losses of associates and joint ventures accounted for usingthe equitymethod 12 (14,967)	(208,903) (3,223)
Profit before income tax 86,090 Income tax expense 13 (25,950)	166,265 (33,776)
Profit for the year 60,140	132,489
Profit attributable to: – Owners of the Company 49,660 – Non-controllinginterests 10,480	107,472 25,017
60,140	132,489
Profit per share attributable to owners of the Company (expressed in RMB cents per share) Basic and diluted 14 0.94	2.03

The notes on pages 104 to 225 form an integral part of these consolidated financial statements.

HONGHUA GROUP LIMITED 2020 ANNUAL REPORT

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

FOR THE YEAR ENDED 31 DECEMBER 2020

(All amounts in RMB unless otherwise stated)

		Year ended 31 December
	Notes	2020 2019 RMB’ 000 RMB’ 000
Profit for the year		60,140 132,489
Other comprehensive income
Items that may be reclassified to profit or loss
Currency translation differences		(43,364) 19,090
Items that will not be reclassified to profit or loss
Change in the fair value of equity investments at fair value
through other comprehensive income		(1,052) 10,806
Income tax relatingto these items		151 (1,792)
Other comprehensive income for the year, net of tax		(44,265) 28,104
Total comprehensive income for the year		15,875 160,593
Total comprehensive income attributable to:
– Owners of the Company		4,170 135,964
– Non-controllinginterests		11,705 24,629
		15,875 160,593

The notes on pages 104 to 225 form an integral part of these consolidated financial statements.

HONGHUA GROUP LIMITED 2020 ANNUAL REPORT

CONSOLIDATED BALANCE SHEET

AS AT 31 DECEMBER 2020

(All amounts in RMB unless otherwise stated)

		As at 31	December
		2020	2019
	Notes	RMB’ 000	RMB’ 000
ASSETS
Non-current assets
Right of use assets	16	185,008	187,769
Property, plant and equipment	15	1,736,605	1,641,678
Intangible assets	17	230,823	180,342
Debt investments	19	53,950	97,906
Investments accounted for using the equity method	12	28,785	31,259
Deferred income tax assets	27	287,900	273,347
Financial assets at fair value through other comprehensive income	3.3(c)	89,204	87,129
Term deposit	21	40,000	–
Trade and other receivables	18	803,428	1,281,354
Loan to an associate and other related party	3.1(b)	731,565	1,450,181
Other non-current assets		53,707	67,502
Total non-current assets		4,240,975	5,298,467
Current assets
Inventories	20	1,346,818	1,267,356
Contract assets	5	687,791	219,937
Trade and other receivables	18	3,699,407	3,593,152
Debt investments	19	43,956	24,915
Loan to an associate and other related party	3.1(b)	683,827	88,278
Current tax recoverable		4,985	8,341
Financial assets at fair value through other comprehensive income	3.3(c)	72,071	95,407
Pledged bank deposits	21	280,163	268,673
Cash and cash equivalents	21	952,384	889,802
Total current assets		7,771,402	6,455,861
Total assets		12,012,377	11,754,328

HONGHUA GROUP LIMITED 2020 ANNUAL REPORT

CONSOLIDATED BALANCE SHEET

AS AT 31 DECEMBER 2020

(All amounts in RMB unless otherwise stated)

		As at 31 December
		2020 2019
	Notes	RMB’ 000 RMB’ 000
EQUITY
Equity attributable to owners of the Company
Share capital	22	488,023 488,023
Other reserves	24	4,223,282 4,253,108
Accumulated losses		(441,939) (475,551)
		4,269,366 4,265,580
Non-controlling interests		225,261 214,797
Total equity		4,494,627 4,480,377
LIABILITIES
Non-current liabilities
Deferred income	29	47,621 54,464
Borrowings	26	2,229,719 2,091,779
Lease liabilities	16	70,118 94,299
Total non-current liabilities		2,347,458 2,240,542

HONGHUA GROUP LIMITED 2020 ANNUAL REPORT

CONSOLIDATED BALANCE SHEET

AS AT 31 DECEMBER 2020

(All amounts in RMB unless otherwise stated)

		As at 31	December
		2020	2019
	Notes	RMB’ 000	RMB’ 000
Current liabilities
Contract liabilities	5	139,608	163,799
Deferred income	29	4,492	10,497
Trade and other payables	25	2,655,744	2,826,518
Current income tax liabilities		63,865	46,297
Borrowings	26	2,255,142	1,917,590
Lease liabilities	16	18,199	16,673
Provisions for other liabilities and charges	28	33,242	52,035
Total current liabilities		5,170,292	5,033,409
Total liabilities		7,517,750	7,273,951
Total equity and liabilities		12,012,377	11,754,328

The notes on pages 104 to 225 form an integral part of these consolidated financial statements.

The consolidated financial statements on pages 95 to 225 were approved by the Board of Directors on 29 March 2021 and were signed on its behalf.

Jin Liliang

Director

Zhang Mi

Director

HONGHUA GROUP LIMITED 2020 ANNUAL REPORT 99

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

FOR THE YEAR ENDED 31 DECEMBER 2020

(All amounts in RMB unless otherwise stated)

Notes	Attributable to owners of the Company Share capital Share premium Other reserve Capital reserve Surplus reserve Exchange reserve Fair value reserve Shares held for share award scheme Accumulated losses Total Non- controlling interests Total Equity RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 (Note 22) (Note 24) (Note 24) (Note 24) (Note 24) (Note 24) (Note 24) (Note 23)
Balance at 1 January 2019	488,015 3,597,096 60,588 535,560 437,655 (283,255) 885 (124,618) (583,183) 4,128,743 190,168 4,318,911
Profit for the year Other comprehensive income	– – – – – – – – 107,472 107,472 25,017 132,489 – – – – – 19,478 9,014 – – 28,492 (388) 28,104
Total comprehensive income	– – – – – 19,478 9,014 – 107,472 135,964 24,629 160,593
Transactions with owners Equity-settled share-based transactions Shares issued under share option scheme Options lapsed under share option schemes Appropriation to surplus reserve	– – – 839 – – – – – 839 – 839 8 83 – (57) – – – – – 34 – 34 – – – (15,918) – – – – 15,918 – – – – – – – 15,758 – – – (15,758) – – –
Total transactions with owners, recognised directly in equity	8 83 – (15,136) 15,758 – – – 160 873 – 873
Balance at 31 December 2019	488,023 3,597,179 60,588 520,424 453,413 (263,777) 9,899 (124,618) (475,551) 4,265,580 214,797 4,480,377

HONGHUA GROUP LIMITED 2020 ANNUAL REPORT

100

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

FOR THE YEAR ENDED 31 DECEMBER 2020 (All amounts in RMB unless otherwise stated)

Notes				Attributable to o	Attributable to o	wners of the	Company
	Share capital	Share premium	Other reserve	Capital reserve	Surplus reserve	Exchange reserve	Fair value reserve	Shares held for share award scheme	Accumulated losses	Total	Non- controlling interests	Total Equity
	RMB’000	RMB’000	RMB’000	RMB’000	RMB’000	RMB’000	RMB’000	RMB’000	RMB’000	RMB’000	RMB’000	RMB’000
	(Note 22)	(Note 24)	(Note 24)	(Note 24)	(Note 24)	(Note 24)	(Note 24)	(Note 23)
Balance at 1 January 2020
	488,023	3,597,179	60,588	520,424	453,413	(263,777)	9,899	(124,618)	(475,551)	4,265,580	214,797	4,480,377
Profit for the year Other comprehensive income
	–	–	–	–	–	–	–	–	49,660	49,660	10,480	60,140
	–	–	–	–	–	(44,589)	(901)	–	–	(45,490)	1,225	(44,265)
Total comprehensive income
	–	–	–	–	–	(44,589)	(901)	–	49,660	4,170	11,705	15,875
Transactions with owners Loss of shareholders’ indemnity Options lapsed under share option schemes Acquisition of non-controlling interests Appropriation to surplus reserve

	–	–	(516)	–	–	–	–	–	–	(516)	–	(516)
	–	–	–	(235)	–	–	–	–	235	–	–	–
	–	–	132	–	–	–	–	–	–	132	(1,241)	(1,109)
	–	–	–	–	16,283	–	–	–	(16,283)	–	–	–
Total transactions with owners, recognised directly in equity
	–	–	(384)	(235)	16,283	–	–	–	(16,048)	(384)	(1,241)	(1,625)
Balance at 31 December 2020
	488,023	3,597,179	60,204	520,189	469,696	(308,366)	8,998	(124,618)	(441,939)	4,269,366	225,261	4,494,627

The notes on pages 104 to 225 form an integral part of these consolidated financial statements.

HONGHUA GROUP LIMITED 2020 ANNUAL REPORT 101

THE CONSOLIDATED FINANCIAL STATEMENT OF CASH FLOWS

FOR THE YEAR ENDED 31 DECEMBER 2020

(All amounts in RMB unless otherwise stated)

		Year ended 31 December
		2020 2019
	Note	RMB’ 000 RMB’ 000
Cash flows (used in)/generated from operating activities
Cash generated from operations	31	(144,148) 183,588
Income taxpaid		(21,542) (80,580)
Net cash (used in)/generated from operating activities		(165,690) 103,008
Cash flows used in investing activities
Payment for additions of property, plant and equipment and
construction in progress		(200,171) (353,113)
Proceeds from financing lease as lessor		64,485 11,723
Proceeds from disposal of property, plant and equipment	31	35,998 77,058
Proceeds from government grants related to assets		9,197 3,519
Receipts of loans to related parties		99,891 79,842
Dividends received Receipt of debt investments		1,541 626 24,915 4,350
Payment for debt investments		– (128,632)
Proceeds from sales of investment accounted for using
the equity method		– 17,169
Interest received Expenditure on development project and other intangible assets		5,668 1,462 (69,988) (30,973)
Acquisition of non-controlling interests		(1,109) –
Payment for term deposit		(40,000) –
Payment for capital increasingof ajoint venture		(9,350) –
Net cash used in investing activities		(78,923) (316,969)

HONGHUA GROUP LIMITED 2020 ANNUAL REPORT

102

THE CONSOLIDATED FINANCIAL STATEMENT OF CASH FLOWS

FOR THE YEAR ENDED 31 DECEMBER 2020 (All amounts in RMB unless otherwise stated)

		Year ended 31 December
	Note	2020 2019 RMB’ 000 RMB’ 000
Cash flows generated from financing activities
Proceeds from bond issued Proceeds from borrowings		– 1,372,136 2,791,490 2,234,728
Repayments of borrowings		(2,395,813) (3,250,993)
Interest and charges paid		(226,757) (204,176)
Loans from related party		180,037 472,673
Payment for financing guarantee		– (200,000)
Payments of lease liabilities		(22,538) (11,509)
Net cashgenerated fromgenerated financing activities		326,419 412,859
Net increase in cash and cash equivalents		81,806 198,898
Cash and cash equivalents at the beginning of year		889,802 685,500
Exchange(losses)/gains on cash and cash equivalents		(19,224) 5,404
Cash and cash equivalents at end of the year		952,384 889,802

The notes on pages 104 to 225 form an integral part of these consolidated financial statements.

HONGHUA GROUP LIMITED 2020 ANNUAL REPORT 103

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEAR ENDED 31 DECEMBER 2020

(All amounts in RMB unless otherwise stated)

1 General information

Honghua Group Limited (“the Company”) and its subsidiaries (together “the Group”) are principally engaged in manufacturing of drilling rigs, oil and gas exploitation equipment,providing drilling services and fracturing.

The Company was incorporated in the Cayman Islands on 15 June 2007 as an exempted company with limited liability under the Companies Law, Cap 22 (Law 3 of 1961, as consolidated and revised) of the Cayman Islands. The address of its registered office is Clifton House, 75 Fort Street, PO Box 1350, Grand Cayman, KY1-1108, Cayman Islands.

The Company was listed on the Main Board of the Stock Exchange of Hong Kong Limited on 7 March 2008.

These financial statements are presented in Chinese Renminbi (“RMB”), unless otherwise stated, and were approved for issue by the Board of Directors of the Company on 29 March 2021.

2 Summary of significant accounting policies

The principal accounting policies applied in the preparation of these consolidated financial statements are set out below. These policies have been consistently applied to all the years presented, unless otherwise stated.

2.1 Basis of preparation

The consolidated financial statements of the Group have been prepared in accordance with all applicable International Financial Reporting Standards (“IFRS”) and requirements of the Hong Kong Companies Ordinance. The consolidated financial statements have been prepared under the historical cost convention, except that financial assets at fair value through other comprehensive income are carried at fair value, and certain financial assets and liabilities are recognized initially at fair value and subsequently measured at amortized cost using the effective interest method.

The preparation of financial statements in conformity with IFRS requires the use of certain critical accounting estimates. It also requires management to exercise its judgement in the process of applying the Group’s accounting policies. The areas involving a higher degree of judgement or complexity, or areas where assumptions and estimates are significant to the consolidated financial statements are disclosed in Note 4.

HONGHUA GROUP LIMITED 2020 ANNUAL REPORT

104

FOR THE YEAR ENDED 31 DECEMBER 2020 (All amounts in RMB unless otherwise stated)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

2 Summary of significant accounting policies (Continued)

2.1 Basis of preparation (Continued)

2.1.1 New and amended standards adopted by the Group

The Group has applied the following standards and amendments for the first time for their annual reporting period commencing 1 January 2020:

IAS 1 and IAS 8 (Amendment) – Definition of Material
IFRS 3 (Amendment) – Definition of a Business
Revised Conceptual Framework for Financial Reporting
Amendments to IFRS 7, IFRS 9 and IAS39 – Interest Rate Benchmark Reform
Amendments to IFRS 16- Covid 19-related Rent Concessions.

The adoption of these standards and new accounting policies disclosed did not have any significant impact on the Group’s accounting policies and did not require retrospective adjustments.

2.1.2 New standards and interpretations not yet adopted

Certain new accounting standards and interpretations have been published that are not mandatory for 31 December 2020 reporting periods and have not been early adopted by the Group. These standards are not expected to have a material impact on the entity in the current or future reporting periods and on foreseeable future transactions.

		Effective for
		annual accounting
Standards, Amendments		periods beginning
or Interpretations	Subject	on or after
IFRS 17	Insurance Contracts	1 January 2023
Amendments to IAS 1	Presentation of financial statements on	1 January 2023
	classification of liabilities
Amendments to IAS 16	Property, Plant and Equipment Proceeds	1 January 2022
	before intended use
Amendments to IFRS 3	Reference to the Conceptual Framework	1 January 2022
Amendments to IAS 37	Onerous Contracts – Cost of Fulfilling a	1 January 2022
	Contract
Annual Improvements	Annual Improvements to IFRS Standards	1 January 2022
	2018 – 2020

HONGHUA GROUP LIMITED 2020 ANNUAL REPORT 105

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEAR ENDED 31 DECEMBER 2020

(All amounts in RMB unless otherwise stated)

2 Summary of significant accounting policies (Continued)

2.2 Subsidiaries

2.2.1 Consolidation

A subsidiary is an entity (including a structured entity) over which the Group has control. The Group controls an entity when the Group is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity. Subsidiaries are consolidated from the date on which control is transferred to the Group. They are deconsolidated from the date that control ceases.

(a) Business combinations

The Group applies the acquisition method to account for business combinations. The consideration transferred for the acquisition of a subsidiary is the fair values of the assets transferred, the liabilities incurred to the former owners of the acquiree and the equity interests issued by the Group. The consideration transferred includes the fair value of any asset or liability resulting from a contingent consideration arrangement. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date.

The Group recognises any non-controlling interest in the acquiree on an acquisition-byacquisition basis. Non-controlling interests in the acquiree that are present ownership interests and entitle their holders to a proportionate share of the entity’s net assets in the event of liquidation are measured at either fair value or the present ownership interests’ proportionate share in the recognised amounts of the acquiree’s identifiable net assets. All other components of non-controlling interests are measured at their acquisition date fair value, unless another measurement basis is required by IFRS.

Acquisition-related costs are expensed as incurred.

If the business combination is achieved in stages, the acquisition date carrying value of the acquirer’s previously held equity interest in the acquiree is remeasured to fair value at the acquisition date. Any gains or losses arising from such remeasurement are recognised in profit or loss.

Any contingent consideration to be transferred by the Group is recognised at fair value at the acquisition date. Subsequent changes to the fair value of the contingent consideration that is deemed to be an asset or liability is recognised in profit or loss. Contingent consideration that is classified as equity is not remeasured, and its subsequent settlement is accounted for within equity.

HONGHUA GROUP LIMITED 2020 ANNUAL REPORT

106

FOR THE YEAR ENDED 31 DECEMBER 2020 (All amounts in RMB unless otherwise stated)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

2 Summary of significant accounting policies (Continued)

2.2 Subsidiaries (Continued)

2.2.1 Consolidation (Continued)

(a) Business combinations (Continued)

The excess of the consideration transferred, the amount of any non-controlling interest in the acquiree and the acquisition-date fair value of any previous equity interest in the acquiree over the fair value of the identifiable net assets acquired is recorded as goodwill. If the total of consideration transferred, non-controlling interest recognised and previously held interest measured is less than the fair value of the net assets of the subsidiary acquired in the case of a bargain purchase, the difference is recognised directly in profit or loss.

Intra-group transactions, balances and unrealised gains on transactions between group companies are eliminated. Unrealised losses are also eliminated unless the transaction provides evidence of an impairment of the transferred asset. When necessary, amounts reported by subsidiaries have been adjusted to conform with the Group’s accounting policies.

(b) Changes in ownership interests in subsidiaries without change of control

Transactions with non-controlling interests that do not result in a loss of control are accounted for as equity transactions – that is, as transactions with the owners of the subsidiary in their capacity as owners. The difference between fair value of any consideration paid and the relevant share acquired of the carrying amount of net assets of the subsidiary is recorded in equity. Gains or losses on disposals to non-controlling interests are also recorded in equity.

(c) Disposal of subsidiaries

When the Group ceases to have control, any retained interest in the entity is re-measured to its fair value at the date when control is lost, with the change in carrying amount recognised in profit or loss. The fair value is the initial carrying amount for the purposes of subsequently accounting for the retained interest as an associate, joint venture or financial asset. In addition, any amounts previously recognised in other comprehensive income in respect of that entity are accounted for as if the Group had directly disposed of the related assets or liabilities. It means the amounts previously recognised in other comprehensive income are reclassified to profit or loss or transferred to another category of equity as specified/permitted by applicable IFRSs.

HONGHUA GROUP LIMITED 2020 ANNUAL REPORT 107

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEAR ENDED 31 DECEMBER 2020

(All amounts in RMB unless otherwise stated)

2 Summary of significant accounting policies (Continued)

2.2 Subsidiaries (Continued)

2.2.2 Separate financial statements

Investments in subsidiaries are accounted for at cost less impairment. Cost includes direct attributable costs of investment. The results of subsidiaries are accounted for by the company on the basis of dividend received and receivable.

Impairment testing of the investments in subsidiaries is required upon receiving a dividend from these investments if the dividend exceeds the total comprehensive income of the subsidiary in the period the dividend is declared or if the carrying amount of the investment in the separate financial statements exceeds the carrying amount in the consolidated financial statements of the investee’s net assets including goodwill.

2.3 Associates

Associates are all entities over which the Group has significant influence but not control, generally accompanying a shareholding of between 20% and 50% of the voting rights. Investments in associates are accounted for using the equity method of accounting. Under the equity method, the investment is initially recognised at cost, and the carrying amount is increased or decreased to recognise the investor’s share of the profit or loss of the investee after the date of acquisition. The Group’s investments in associates include goodwill identified on acquisition. Upon the acquisition of the ownership interest in an associate, any difference between the cost of the associate and the Group’s share of the net fair value of the associate’s identifiable assets and liabilities is accounted for as goodwill.

If the ownership interest in an associate is reduced but significant influence is retained, only a proportionate share of the amounts previously recognised in other comprehensive income is reclassified to profit or loss where appropriate.

The Group’s share of post-acquisition profit or loss is recognised in profit or loss, and its share of post-acquisition movements in other comprehensive income is recognised in other comprehensive income with a corresponding adjustment to the carrying amount of the investment. When the Group’s share of losses in an associate equals or exceeds its interest in the associate, including any other unsecured receivables, the Group does not recognise further losses, unless it has incurred legal or constructive obligations or made payments on behalf of the associate.

The Group determines at each reporting date whether there is any objective evidence that the investment in the associate is impaired. If this is the case, the Group calculates the amount of impairment as the difference between the recoverable amount of the associate and its carrying value and recognises the amount adjacent to ‘share of profits of associates’ in profit or loss.

HONGHUA GROUP LIMITED 2020 ANNUAL REPORT

108

FOR THE YEAR ENDED 31 DECEMBER 2020 (All amounts in RMB unless otherwise stated)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

2 Summary of significant accounting policies (Continued)

2.3 Associates (Continued)

Profits and losses resulting from upstream and downstream transactions between the Group and its associate are recognised in the Group’s financial statements only to the extent of unrelated investor’s interests in the associates. Unrealised losses are eliminated unless the transaction provides evidence of an impairment of the asset transferred. Accounting policies of associates have been changed where necessary to ensure consistency with the policies adopted by the Group.

Gains or losses on dilution of equity interest in associates are recognised in profit or loss.

2.4 Joint arrangements

The Group has applied IFRS 11 to all joint arrangements. Under IFRS 11 investments in joint arrangements are classified as either joint operations or joint ventures depending on the contractual rights and obligations of each investor. The Group has assessed the nature of its joint arrangements and determined them to be joint ventures. Joint ventures are accounted for using the equity method.

Under the equity method of accounting, interests in joint ventures are initially recognised at cost and adjusted thereafter to recognise the Group’s share of the post-acquisition profits or losses and movements in other comprehensive income. The Group’s investments in joint ventures include goodwill identified on acquisition. Upon the acquisition of the ownership interest in a joint venture, any difference between the cost of the joint venture and the Group’s share of the net fair value of the joint ventures’ identifiable assets and liabilities is accounted for as goodwill. When the Group’s share of losses in a joint venture equals or exceeds its interests in the joint ventures, including any other unsecured receivables, the Group does not recognise further losses, unless it has incurred obligations or made payments on behalf of the joint ventures.

Unrealised gains on transactions between the Group and its joint ventures are eliminated to the extent of the Group’s interest in the joint ventures. Unrealised losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred. Accounting policies of the joint ventures have been changed where necessary to ensure consistency with the policies adopted by the Group.

2.5 Segment reporting

Operating segments are reported in a manner consistent with the internal reporting provided to the chief operating decision maker. The chief operating decision-maker, who is responsible for allocating resources and assessing performance of the operating segments, has been identified as the senior executive management that makes strategic decisions.

HONGHUA GROUP LIMITED 2020 ANNUAL REPORT 109

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEAR ENDED 31 DECEMBER 2020

(All amounts in RMB unless otherwise stated)

2 Summary of significant accounting policies (Continued)

2.6 Foreign currency translation

(a) Functional and presentation currency

Items included in the financial statements of each of the Group’s entities are measured using the currency of the primary economic environment in which the entity operates (‘the functional currency’). The consolidated financial statements are presented in Renminbi (“RMB”), which is the Group’s and Company’s presentation currency. The Company’s functional currency is Hong Kong Dollar (“HKD”).

(b) Transactions and balances

Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions or valuation where items are re-measured. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are generally recognised in profit or loss, except when deferred in other comprehensive income as qualifying cash flow hedges and qualifying net investment hedges.

Foreign exchange gains and losses that relate to borrowings and cash and cash equivalents are presented in the statement of profit or loss within ‘finance income or expenses’. All other foreign exchange gains and losses are presented in the statement of profit or loss within ‘other (losses)/ gains – net’.

Changes in the fair value of debt securities denominated in foreign currency classified as available for sale are analysed between translation differences resulting from changes in the amortised cost of the security and other changes in the carrying amount of the security. Translation differences related to changes in amortised cost are recognised in profit or loss, and other changes in carrying amount are recognised in other comprehensive income.

Translation differences on non-monetary financial assets and liabilities such as equities held at fair value through profit or loss are recognised in profit or loss as part of the fair value gain or loss. Translation differences on non-monetary financial assets, such as equities classified as available for sale, are included in other comprehensive income.

HONGHUA GROUP LIMITED 2020 ANNUAL REPORT

110

FOR THE YEAR ENDED 31 DECEMBER 2020 (All amounts in RMB unless otherwise stated)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

2 Summary of significant accounting policies (Continued)

2.6 Foreign currency translation (Continued)

(c) Group companies

The results and financial position of the group entities (none of which has the currency of a hyperinflationary economy) that have a functional currency different from the presentation currency are translated into the presentation currency as follows:

(i) assets and liabilities for each balance sheet presented are translated at the closing rate at the date of that balance sheet;
(ii) income and expenses for each statement of profit or loss are translated at average exchange rates (unless this is not a reasonable approximation of the cumulative effect of the rates prevailing on the transaction dates, in which case income and expenses are translated at the dates of the transactions), and
(iii) all resulting currency translation differences are recognised in other comprehensive income.

Goodwill and fair value adjustments arising on the acquisition of a foreign operation are treated as assets and liabilities of the foreign operation and translated at the closing rate. Currency translation differences arising are recognised in other comprehensive income.

(d) Disposal of foreign operation and partial disposal

On the disposal of a foreign operation (that is, a disposal of the Group’s entire interest in a foreign operation, or a disposal involving loss of control over a subsidiary that includes a foreign operation, a disposal involving loss of joint control over a joint venture that includes a foreign operation, or a disposal involving loss of significant influence over an associate that includes a foreign operation), all of the currency translation differences accumulated in equity in respect of that operation attributable to the owners of the company are reclassified to profit or loss.

In the case of a partial disposal that does not result in the Group losing control over a subsidiary that includes a foreign operation, the proportionate share of accumulated currency translation differences are re-attributed to non-controlling interests and are not recognised in profit or loss. For all other partial disposals (that is, reductions in the Group’s ownership interest in associates or joint ventures that do not result in the Group losing significant influence or joint control), the proportionate share of the accumulated exchange difference is reclassified to profit or loss.

HONGHUA GROUP LIMITED 111 2020 ANNUAL REPORT

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEAR ENDED 31 DECEMBER 2020

(All amounts in RMB unless otherwise stated)

2 Summary of significant accounting policies (Continued)

2.7 Property, plant and equipment

Property, plant and equipment is stated at historical cost less accumulated depreciation and impairment losses. Historical cost includes expenditure that is directly attributable to the acquisition of the items.

Subsequent costs are included in the asset’s carrying amount or recognised as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the Group and the cost of the item can be measured reliably. The carrying amount of the replaced part is derecognised. All other repairs and maintenance are charged to the statement of profit or loss during the financial period in which they are incurred.

For the drilling rigs used for drilling engineering services included in Plant and machinery, the depreciation is calculated using units-of-production method. For each day a rig is operating, it is depreciated over an approximate of 5,000~6,000-day period, after provision for residual values.

Depreciation on other assets is calculated using the straight-line method to allocate their cost to their residual values over their estimated useful lives, as follows:

•	Freehold land	No depreciation
•	Buildings held for own use	20-35 years
•	Plant and machinery	5-10 years
•	Fixtures, fittings and equipment	5-10 years
•	Motor vehicles	5-6 years

The assets’ residual values and useful lives are reviewed, and adjusted if appropriate, at the end of each reporting period.

An asset’s carrying amount is written down immediately to its recoverable amount if the asset’s carrying amount is greater than its estimated recoverable amount (Note 2.9).

Gains and losses on disposals are determined by comparing proceeds with carrying amount and are recognised within ‘Other (losses)/gains – net’ in profit or loss.

Construction-in-progress (“CIP”) represents buildings under construction and plant and equipment pending for installation, and are stated at cost. Costs include construction and acquisition costs. No provision for depreciation is made on CIP until such time as the relevant assets are completed and ready for intended use. When the assets concerned are brought into use, the costs are transferred to property, plant and equipment and depreciated in accordance with the policy as stated above.

HONGHUA GROUP LIMITED 2020 ANNUAL REPORT

112

FOR THE YEAR ENDED 31 DECEMBER 2020 (All amounts in RMB unless otherwise stated)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

2 Summary of significant accounting policies (Continued)

2.8 Intangible assets

(a) Goodwill

Goodwill arises on the acquisition of subsidiaries represents the excess of the consideration transferred, the amount of any non-controlling interest in the acquiree and the acquisition-date fair value of any previous equity interest in the acquiree over the fair value of the identified net assets acquired.

For the purpose of impairment testing, goodwill acquired in a business combination is allocated to each of the cash-generating units (“CGUs”), or groups of CGUs, that is expected to benefit from the synergies of the combination. Each unit or group of units to which the goodwill is allocated represents the lowest level within the entity at which the goodwill is monitored for internal management purposes. Goodwill is monitored at the operating segment level.

Goodwill impairment reviews are undertaken annually or more frequently if events or changes in circumstances indicate a potential impairment. The carrying value of the CGU containing the goodwill is compared to the recoverable amount, which is the higher of value in use and the fair value less costs of disposal. Any impairment is recognised immediately as an expense and is not subsequently reversed.

(b) Technical know-how

Separately acquired technical know-how is shown at historical cost. Technical knowhow acquired in a business combination is recognised at fair value at the acquisition date. Technical know-how has a finite useful life and is carried at cost less accumulated amortisation. Amortisation is calculated using the straight-line method to allocate the cost of technical knowhow over its estimated useful life of 10 years.

(c) Capitalised development costs

Capitalised development costs that are directly attributable to the design and testing of new or improved products when meet relevant criteria. Amortisation is calculated using the straight-line method over its estimated useful life of 10 years (Note 2.32).

HONGHUA GROUP LIMITED 2020 ANNUAL REPORT 113

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEAR ENDED 31 DECEMBER 2020

(All amounts in RMB unless otherwise stated)

2 Summary of significant accounting policies (Continued)

2.9 Impairment of non-financial assets

Intangible assets that have an indefinite useful life or intangible assets not ready to use are not subject to amortisation and are tested annually for impairment. Assets that are subject to amortisation are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised for the amount by which the asset’s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset’s fair value less costs to sell and value in use. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash inflows (cash-generating units). Non-financial assets other than goodwill that suffered an impairment are reviewed for possible reversal of the impairment at the end of each reporting date.

2.10 Non-current assets (or disposal groups) held for sale and discontinued operations

Non-current assets (or disposal groups) are classified as held for sale when their carrying amount will be recovered principally through a sale transaction and a sale is considered highly probable. The non-current assets (except for certain assets as explained below), (or disposal groups), are stated at the lower of carrying amount and fair value less costs to sell. Deferred tax assets, assets arising from employee benefits, financial assets (other than investments in subsidiaries and associates) and investment properties, which are classified as held for sale, would continue to be measured in accordance with the policies set out elsewhere in Note 2.

A discontinued operation is a component of the Group’s business, the operations and cash flows of which can be clearly distinguished from the rest of the Group and which represents a separate major line of business or geographic area of operations, or is part of a single co-ordinated plan to dispose of a separate major line of business or geographical area of operations, or is a subsidiary acquired exclusively with a view to resale. The results of discontinued operations are presented separately in the statement of profit or loss.

An impairment loss is recognised for any initial or subsequent write-down of the asset (or disposal group) to fair value less costs to sell. A gain is recognised for any subsequent increases in fair value less costs to sell of an asset (or disposal group), but not in excess of any cumulative impairment loss previously recognised. A gain or loss not previously recognised by the date of the sale of the noncurrent asset (or disposal group) is recognised at the date of derecognition.

Non-current assets (including those that are part of a disposal group) are not depreciated or amortised while they are classified as held for sale. Interest and other expenses attributable to the liabilities of a disposal group classified as held for sale continue to be recognised.

Non-current assets classified as held for sale and the assets of a disposal group classified as held for sale are presented separately from the other assets in the balance sheet. The liabilities of a disposal group classified as held for sale are presented separately from other liabilities in the balance sheet.

HONGHUA GROUP LIMITED 2020 ANNUAL REPORT

114

FOR THE YEAR ENDED 31 DECEMBER 2020 (All amounts in RMB unless otherwise stated)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

2 Summary of significant accounting policies (Continued)

2.11 Financial assets

2.11.1 Classification

The Group classifies its financial assets in the following measurement categories:

those to be measured subsequently at fair value (either through OCI or through profit or loss), and
those to be measured at amortised cost.

The classification depends on the entity’s business model for managing the financial assets and the contractual terms of the cash flows.

For assets measured at fair value, gains and losses will either be recorded in profit or loss or OCI. For investments in equity instruments that are not held for trading, this will depend on whether the Group has made an irrevocable election at the time of initial recognition to account for the equity investment at fair value through other comprehensive income (FVOCI).

The Group reclassifies debt investments when and only when its business model for managing those assets changes.

2.11.2 Recognition and derecognition

Regular way purchases and sales of financial assets are recognised on trade-date, the date on which the Group commits to purchase or sell the asset. Financial assets are derecognised when the rights to receive cash flows from the financial assets have expired or have been transferred and the Group has transferred substantially all the risks and rewards of ownership.

2.11.3 Measurement

At initial recognition, the Group measures a financial asset at its fair value plus, in the case of a financial asset not at fair value through profit or loss (FVPL), transaction costs that are directly attributable to the acquisition of the financial asset. Transaction costs of financial assets carried at FVPL are expensed in profit or loss.

Financial assets with embedded derivatives are considered in their entirety when determining whether their cash flows are solely payment of principal and interest.

HONGHUA GROUP LIMITED 2020 ANNUAL REPORT 115

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEAR ENDED 31 DECEMBER 2020 (All amounts in RMB unless otherwise stated)

2 Summary of significant accounting policies (Continued)

2.11 Financial assets (Continued)

2.11.3 Measurement (Continued)

Debt instruments

Subsequent measurement of debt instruments depends on the Group’s business model for managing the asset and the cash flow characteristics of the asset. There are three measurement categories into which the Group classifies its debt instruments:

Amortised cost: Assets that are held for collection of contractual cash flows where those cash flows represent solely payments of principal and interest are measured at amortised cost. Interest income from these financial assets is included in finance income using the effective interest rate method. Any gain or loss arising on derecognition is recognised directly in profit or loss and presented in other gains/(losses) together with foreign exchange gains and losses. Impairment losses are presented as separate line item in the statement of profit or loss.
FVOCI: Assets that are held for collection of contractual cash flows and for selling the financial assets, where the assets’ cash flows represent solely payments of principal and interest, are measured at FVOCI. Movements in the carrying amount are taken through OCI, except for the recognition of impairment gains or losses, interest income and foreign exchange gains and losses which are recognised in profit or loss. When the financial asset is derecognised, the cumulative gain or loss previously recognised in OCI is reclassified from equity to profit or loss and recognised in other gains/(losses). Interest income from these financial assets is included in finance income using the effective interest rate method. Foreign exchange gains and losses are presented in other (losses)/ gains and impairment expenses are presented as separate line item in the statement of profit or loss.
FVPL: Assets that do not meet the criteria for amortised cost or FVOCI are measured at FVPL. A gain or loss on a debt investment that is subsequently measured at FVPL is recognised in profit or loss and presented net within other (losses)/gains in the period in which it arises.

Equity instruments

The Group subsequently measures all equity investments at fair value. Where the Group’s management has elected to present fair value gains and losses on equity investments in OCI, there is no subsequent reclassification of fair value gains and losses to profit or loss following the derecognition of the investment. Dividends from such investments continue to be recognised in profit or loss as other income when the Group’s right to receive payments is established.

HONGHUA GROUP LIMITED 2020 ANNUAL REPORT

116

FOR THE YEAR ENDED 31 DECEMBER 2020 (All amounts in RMB unless otherwise stated)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

2 Summary of significant accounting policies (Continued)

2.11 Financial assets (Continued)

2.11.3 Measurement (Continued)

Equity instruments (Continued)

Changes in the fair value of financial assets at FVPL are recognised in other gains/(losses) in the statement of profit or loss as applicable. Impairment losses (and reversal of impairment losses) on equity investments measured at FVOCI are not reported separately from other changes in fair value.

2.11.4 Impairment

The Group assesses on a forward looking basis the expected credit losses associated with its debt instruments carried at amortised cost and FVOCI. The impairment methodology applied depends on whether there has been a significant increase in credit risk.

For trade receivables, the Group applies the simplified approach permitted by IFRS 9, which requires expected lifetime losses to be recognised from initial recognition of the receivables, see Note 3.1(b) for further details.

2.12 Offsetting financial instruments

Financial assets and liabilities are offset and the net amount reported in the balance sheet where there is a legally enforceable right to offset the recognised amounts, and there is an intention to settle on a net basis or realise the asset and settle the liability simultaneously. The legally enforceable right must not be contingent on future events and must be enforceable in the normal course of business and in the event of default, insolvency or bankruptcy of the company or the counterparty.

2.13 Derivative financial instruments and hedging activities

Derivatives are initially recognised at fair value on the date a derivative contract is entered into and are subsequently re-measured at their fair value. The method of recognising the resulting gain or loss depends on whether the derivative is designated as a hedging instrument, and if so, the nature of the item being hedged. The Group does not have any derivative instruments that qualifying for hedge accounting. Changes in the fair value of any derivative instruments that do not qualify for hedge accounting are recognised immediately in profit or loss.

HONGHUA GROUP LIMITED 117 2020 ANNUAL REPORT

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEAR ENDED 31 DECEMBER 2020

(All amounts in RMB unless otherwise stated)

2 Summary of significant accounting policies (Continued)

2.14 Inventories

Inventories are stated at the lower of cost and net realisable value. Cost is determined using the weighted average method. The cost of finished goods and work in progress comprises design costs, raw materials, direct labour, other direct costs and related production overheads (based on normal operating capacity). It excludes borrowing costs. Net realisable value is the estimated selling price in the ordinary course of business, less applicable variable selling expenses.

2.15 Trade and other receivables

Trade receivables are amounts due from customers for merchandise sold or services performed in the ordinary course of business. If collection of trade and other receivables is expected in one year or less (or in the normal operating cycle of the business if longer), they are classified as current assets. If not, they are presented as non-current assets.

Trade and other receivables are recognised initially at the amount of consideration that is unconditional unless they contain significant financing components, when they are recognised at fair value. The Group holds the trade receivables with the objective to collect the contractual cash flows and therefore measures them subsequently at amortised cost using the effective interest method. See Note 18 for further information about the Group’s accounting for trade receivables and Note 3.1(b) for a description of the Group’s impairment policies.

2.16 Cash and cash equivalents

In the consolidated statement of cash flows, cash and cash equivalents include cash in hand, deposits held at call with banks, other short-term highly liquid investments with original maturities of three months or less, and bank overdrafts.

2.17 Share capital

Ordinary shares are classified as equity.

Incremental costs directly attributable to the issue of new shares or options are shown in equity as a deduction, net of tax, from the proceeds.

2.18 Trade and other payables

Trade payables are obligations to pay for goods or services that have been acquired in the ordinary course of business from suppliers. Trade payables are classified as current liabilities if payment is due within one year or less (or in the normal operating cycle of the business if longer). If not, they are presented as non-current liabilities.

Trade payables are recognised initially at fair value and subsequently measured at amortised cost using the effective interest method.

HONGHUA GROUP LIMITED 2020 ANNUAL REPORT

118

FOR THE YEAR ENDED 31 DECEMBER 2020 (All amounts in RMB unless otherwise stated)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

2 Summary of significant accounting policies (Continued)

2.19 Borrowings

Borrowings are recognised initially at fair value, net of transaction costs incurred. Borrowings are subsequently carried at amortised cost; any difference between the proceeds (net of transaction costs) and the redemption amount is recognised in profit or loss over the period of the borrowings using the effective interest method.

Fees paid on the establishment of loan facilities are recognised as transaction costs of the loan to the extent that it is probable that some or all of the facility will be drawn down. In this case, the fee is deferred until the draw down occurs. To the extent there is no evidence that it is probable that some or all of the facility will be drawn down, the fee is capitalised as a prepayment for liquidity services and amortised over the period of the facility to which it relates.

Borrowings are classified as current liabilities unless the Group has an unconditional right to defer settlement of the liability for at least 12 months after the end of the reporting period.

An initial recognition the derivative component of senior notes under borrowings is measured at fair value and presented as part of derivative financial instruments. Any excess of proceeds over the amount initially recognised as the derivative component is recognised as the liability component. Transaction costs that relate to issue of the senior note are allocated to the liability and derivative components in proportion to the allocation of proceeds. The portion of the transaction costs relating to the liability component is recognised initially as part of the liability. The portion relating to derivative component is recognised immediately in profit or loss.

The derivative component is subsequently remeasured in accordance with Note 2.13. The liability component is subsequently carried at amortised cost. The interest expense recognised in profit or loss on the liability component is calculated using the effective interest method.

2.20 Borrowing costs

General and specific borrowing costs directly attributable to the acquisition, construction or production of qualifying assets, which are assets that necessarily take a substantial period of time to get ready for their intended use or sale, are added to the cost of those assets, until such time as 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 eligible for capitalisation.

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

HONGHUA GROUP LIMITED 2020 ANNUAL REPORT

119

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEAR ENDED 31 DECEMBER 2020

(All amounts in RMB unless otherwise stated)

2 Summary of significant accounting policies (Continued)

2.20 Borrowing costs (Continued)

Borrowing costs include interest expense, finance charges in respect of finance lease and exchange differences arising from foreign currency borrowings to the extent that they are regarded as an adjustment to interest costs. The exchange gains and losses that are an adjustment to interest costs include the interest rate differential between borrowing costs that would be incurred if the entity had borrowed funds in its functional currency, and the borrowing costs actually incurred on foreign currency borrowings. Such amounts are estimated based on interest rates on similar borrowings in the entity’s functional currency.

When the construction of the qualifying assets takes more than one accounting period, the amount of foreign exchange differences eligible for capitalisation is determined for each annual period and are limited to the difference between the hypothetical interest amount for the functional currency borrowings and the actual interest incurred for foreign currency borrowings. Foreign exchange differences that did not meet the criteria for capitalisation in previous years should not be capitalised in subsequent years.

2.21 Current and deferred income tax

The tax expense for the period comprises current and deferred tax. Tax is recognised in profit or loss, except to the extent that it relates to items recognised in other comprehensive income or directly in equity. In this case, the tax is also recognised in other comprehensive income or directly in equity, respectively.

(a) Current income tax

The current income tax charge is calculated on the basis of the tax laws enacted or substantively enacted at the balance sheet date in the countries where the Company and its subsidiaries and associates operate and generate taxable income. Management periodically evaluates positions taken in tax returns with respect to situations in which applicable tax regulation is subject to interpretation. It establishes provisions where appropriate on the basis of amounts expected to be paid to the tax authorities.

HONGHUA GROUP LIMITED 2020 ANNUAL REPORT

120

FOR THE YEAR ENDED 31 DECEMBER 2020 (All amounts in RMB unless otherwise stated)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

2 Summary of significant accounting policies (Continued)

2.21 Current and deferred income tax (Continued)

(b) Deferred income tax

Inside basis differences

Deferred income tax is recognised, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the consolidated financial statements. However, deferred tax liabilities are not recognised if they arise from the initial recognition of goodwill, the deferred income tax is not accounted for if it arises from initial recognition of an asset or liability in a transaction other than a business combination that at the time of the transaction affects neither accounting nor taxable profit or loss. Deferred income tax is determined using tax rates (and laws) that have been enacted or substantially enacted by the balance sheet date and are expected to apply when the related deferred income tax asset is realised or the deferred income tax liability is settled.

Deferred tax assets are recognised only to the extent that it is probable that future taxable profit will be available against which the temporary differences can be utilised.

Outside basis differences

Deferred income tax liabilities are provided on taxable temporary differences arising from investments in subsidiaries, associates and joint arrangements, except for deferred income tax liability where the timing of the reversal of the temporary difference is controlled by the Group and it is probable that the temporary difference will not reverse in the foreseeable future. Generally the Group is unable to control the reversal of the temporary difference for associates. Only when there is an agreement in place that gives the Group the ability to control the reversal of the temporary difference in the foreseeable future, deferred tax liability in relation to taxable temporary differences arising from the associate’s undistributed profits is not recognised.

Deferred income tax assets are recognised on deductible temporary differences arising from investments in subsidiaries, associates and joint arrangements only to the extent that it is probable the temporary difference will reverse in the future and there is sufficient taxable profit available against which the temporary difference can be utilised.

(c) Offsetting

Deferred income tax assets and liabilities are offset when there is a legally enforceable right to offset current tax assets against current tax liabilities and when the deferred income tax assets and liabilities relate to income taxes levied by the same taxation authority on either the taxable entity or different taxable entities where there is an intention to settle the balances on a net basis.

HONGHUA GROUP LIMITED 121 2020 ANNUAL REPORT

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEAR ENDED 31 DECEMBER 2020

(All amounts in RMB unless otherwise stated)

2 Summary of significant accounting policies (Continued)

2.22 Employee benefits

(a) Pension obligations

Pursuant to the relevant labour rules and regulations in the People’s Republic of China (the “PRC”), the PRC subsidiaries of the Group participates in defined contribution retirement benefit schemes (the “Schemes”) organised by the PRC municipal government authorities whereby the Group is required to make contributions to the Schemes at the rate of 20% to 22% (2019: 20% to 22%) of the standard wages determined by the relevant authorities in the PRC for the year ended 31 December 2020. The local government authority is responsible for the entire pension obligations payable to retired employees. The contributions to the schemes are charged to profit or loss as and when incurred.

(b) Housing fund and other benefits

All full-time employees of the Group’s subsidiaries in the PRC are entitled to participate in various government-sponsored housing and other benefits funds. The Group contributes on a monthly basis to these funds based on certain percentages of the salaries of the employees. The Group’s liability in respect of these funds is limited to the contributions payable in each period.

2.23 Share-based payments

(a) Equity-settled share-based payment transactions

The Group operates an equity-settled, share-based compensation plan, under which the entity receives services from employees as consideration for equity instruments (options) of the Group. The fair value of the employee services received in exchange for the grant of the options is recognised as an expense. The total amount to be expensed is determined by reference to the fair value of the options granted:

including any market performance conditions (for example, an entity’s share price);
excluding the impact of any service and non-market performance vesting conditions (for example, profitability, sales growth targets and remaining an employee of the entity over a specified time period); and
including the impact of any non-vesting conditions (for example, the requirement for employees to save or holding shares for a specified period of time).

At the end of each reporting period, the Group revises its estimates of the number of options that are expected to vest based on the non-marketing performance and service conditions. It recognises the impact of the revision to original estimates, if any, in profit or loss, with a corresponding adjustment to equity.

HONGHUA GROUP LIMITED 2020 ANNUAL REPORT

122

FOR THE YEAR ENDED 31 DECEMBER 2020 (All amounts in RMB unless otherwise stated)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

2 Summary of significant accounting policies (Continued)

2.23 Share-based payments (Continued)

(a) Equity-settled share-based payment transactions (Continued)

In addition, in some circumstances employees may provide services in advance of the grant date and therefore the grant date fair value is estimated for the purposes of recognising the expense during the period between service commencement period and grant date.

When the options are exercised, the Company issues new shares. The proceeds received net of any directly attributable transaction costs are credited to share capital (and share premium).

(b) Share-based payment transactions among group entities

The grant by the Company of options over its equity instruments to the employees of subsidiary undertakings in the Group is treated as a capital contribution. The fair value of employee services received, measured by reference to the grant date fair value, is recognised over the vesting period as an increase to investment in subsidiary undertakings, with a corresponding credit to equity in the parent entity accounts.

2.24 Provisions

Provisions for warranties costs and legal claims are recognised when: the Group has a present legal or constructive obligation as a result of past events, it is probable that an outflow of resources will be required to settle the obligation and the amount can be reliably estimated. Provisions are not recognised for future operating losses.

Where there are a number of similar obligations, the likelihood that an outflow will be required in settlement is determined by considering the class of obligations as a whole. A provision is recognised even if the likelihood of an outflow with respect to any one item included in the same class of obligations may be small.

Provisions are measured at the present value of the expenditures expected to be required to settle the obligation using a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the obligation. The increase in the provision due to the passage of time is recognised as interest expense.

HONGHUA GROUP LIMITED 2020 ANNUAL REPORT 123

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEAR ENDED 31 DECEMBER 2020

(All amounts in RMB unless otherwise stated)

2 Summary of significant accounting policies (Continued)

2.25 Revenue recognition

(a) Sale of goods

The Group manufactures and sells land drillings rigs, parts and components to the ultimate customers or dealers. Sales are recognised when control of the products has transferred, being when the customer has the ability to direct the use of and obtain substantially all of the remaining benefits from the products. The control of products is transferred when products have been shipped to the specified location, being when customer has accepted the products and collectability of the related parted receivables is reasonably assured.

The sales commission is the incremental cost of obtaining a contract and the Group expenses these costs as incurred where the expected amortisation period is one year or less.

For contracts that contain more than one performance obligations, typically sales of products, transportation as well as installation services in one contract, the Group allocates the transaction price to each performance obligation on a relative stand-alone selling price basis.

The Group’s obligation to repair or replace faulty products under the standard warranty terms is recognised as a provision, see Note 28.

Instalment sales, under which the consideration is receivable in instalments. The certain contracts where the period between the transfer of the promised goods or services to the customer and payment by the customer exceeds one year shall be considered any financing components. As a consequence, the Group adjusts the transaction prices for the time value of money.

As receivable is recognised when the goods are delivered as this is the point in time that the consideration is unconditional because only the passage of time is required before the payment is due.

(b) Sale of services

The Group provides drilling engineering service and fracturing engineering service. Revenue is recognised on the basis of outputs to the satisfaction of the performance obligation relative to the total expected outputs to the satisfaction of that performance obligation.

HONGHUA GROUP LIMITED 2020 ANNUAL REPORT

124

FOR THE YEAR ENDED 31 DECEMBER 2020 (All amounts in RMB unless otherwise stated)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

2 Summary of significant accounting policies (Continued)

2.26 Earnings per share

(a) Basic earnings per share

Basic earnings per share is calculated by dividing:

the profit attributable to owners of the company, excluding any costs of servicing equity other than ordinary shares

by the weighted average number of ordinary shares outstanding during the financial year, adjusted for bonus elements in ordinary shares issued during the year and excluding treasury shares.

(b) Diluted earnings per share

Diluted earnings per share adjusts the figures used in the determination of basic earnings per share to take into account:

the after income tax effect of interest and other financing costs associated with dilutive potential ordinary shares, and
the weighted average number of additional ordinary shares that would have been outstanding assuming the conversion of all dilutive potential ordinary shares.

2.27 Dividend income

Dividends are received from financial assets measured at fair value through profit or loss (FVPL) and at fair value through other comprehensive income (FVOCI). Dividends are recognised as other income in profit or loss when the right to receive payment is established. This applies even if they are paid out of pre-acquisition profits, unless the dividend clearly represents a recovery of part of the cost of an investment. In this case, the dividend is recognised in OCI if it relates to an investment measured at FVOCI. However, the investment may need to be tested for impairment as a consequence.

2.28 Leases

Leases are recognised as a right-of-use asset and a corresponding liability at the date at which the leased asset is available for use by the Group.

Contracts may contain both lease and non-lease components. The Group allocates the consideration in the contract to the lease and non-lease components based on their relative stand-alone prices. However, for leases of real estate for which the group is a lessee, it has elected not to separate lease and non-lease components and instead accounts for these as a single lease component.

HONGHUA GROUP LIMITED 2020 ANNUAL REPORT 125

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEAR ENDED 31 DECEMBER 2020 (All amounts in RMB unless otherwise stated)

2 Summary of significant accounting policies (Continued)

2.28 Leases (Continued)

Lease terms are negotiated on an individual basis and contain a wide range of different terms and conditions. The lease agreements do not impose any covenants other than the security interests in the leased assets that are held by the lessor. Leased assets may not be used as security for borrowing purposes.

Assets and liabilities arising from a lease are initially measured on a present value basis. Lease liabilities include the net present value of the following lease payments:

fixed payments (including in-substance fixed payments), less any lease incentives receivable
variable lease payment that are based on an index or a rate, initially measured using the index or rate as at the commencement date
amounts expected to be payable by the Group under residual value guarantees
the exercise price of a purchase option if the Group is reasonably certain to exercise that option, and
payments of penalties for terminating the lease, if the lease term reflects the Group exercising that option.

The variable lease payments which are not based on an index or a rate are not included in the measurement of the lease liability initially, and are recognised in profit or loss in the period in which the event or condition that triggers those payments occurs.

Lease payments to be made under reasonably certain extension options are also included in the measurement of the liability.

The lease payments are discounted using the interest rate implicit in the lease. If that rate cannot be readily determined, which is generally the case for leases in the Group, the lessee’s incremental borrowing rate is used, being the rate that the individual lessee would have to pay to borrow the funds necessary to obtain an asset of similar value to the right-of-use asset in a similar economic environment with similar terms, security and conditions.

HONGHUA GROUP LIMITED 2020 ANNUAL REPORT

126

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEAR ENDED 31 DECEMBER 2020 (All amounts in RMB unless otherwise stated)

2 Summary of significant accounting policies (Continued)

2.28 Leases (Continued)

To determine the incremental borrowing rate, the Group:

where possible, uses recent third-party financing received by the individual lessee as a starting point, adjusted to reflect changes in financing conditions since third party financing was received
uses a build-up approach that starts with a risk-free interest rate adjusted for credit risk for leases held by the entities within the Group, which does not have recent third party financing, and
makes adjustments specific to the lease, e.g. term, country, currency and security.

The future variable lease payments of the Group may increase depends on an index or a rate. The potential further increase payments are not recognised in the lease liabilities until the changes take effect. When the adjustment to the lease payments takes effect, the Group will remeasure and adjust the lease liabilities based on the right-of-use assets.

Lease payments are allocated between principal and finance cost. The finance cost is charged to profit or loss over the lease period so as to produce a constant periodic rate of interest on the remaining balance of the liability for each period.

Right-of-use assets are measured at cost comprising the following:

the amount of the initial measurement of lease liability
any lease payments made at or before the commencement date less any lease incentives received
any initial direct costs, and
restoration costs.

Right-of-use assets are generally depreciated over the shorter of the asset’s useful life and the lease term on a straight-line basis. If the Group is reasonably certain to exercise a purchase option, the right-of-use asset is depreciated over the underlying asset’s useful life.

Payments associated with short-term leases of equipment and vehicles and all leases of low-value assets are recognised on a straight-line basis as an expense in profit or loss. Short-term leases are leases with a lease term of 12 months or less.

Lease income from operating leases where the Group is a lessor is recognised in income on a straight-line basis over the lease term or on another systematic basis. Initial direct costs incurred in obtaining an operating lease are added to the carrying amount of the underlying asset and recognised as expense over the lease term on the same basis as lease income. The respective leased assets are included in the balance sheet based on their nature.

HONGHUA GROUP LIMITED 127 2020 ANNUAL REPORT

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEAR ENDED 31 DECEMBER 2020

(All amounts in RMB unless otherwise stated)

2 Summary of significant accounting policies (Continued)

2.28 Leases (Continued)

In classifying a sublease, the intermediate lessor shall classify the sublease as a finance lease or an operating lease as follows:

if the head lease is a short-term lease that the Group, as a lessee, has accounted this lease on a straight-line basis over the lease term as an expense in profit or loss, the sublease shall be classified as an operating lease.
otherwise, the sublease shall be classified by reference to the right-of-use assets arising from the head lease, rather than by reference to the underlying asset.

2.29 Dividend distribution

Provision is made for the amount of any dividend declared, being appropriately authorised and no longer at the discretion of the entity, on or before the end of the reporting period but not distributed at the end of the reporting period.

2.30 Government grants

Grants from the government are recognised at their fair value where there is a reasonable assurance that the grant will be received and the Group will comply with all attached conditions.

Government grants relating to costs are deferred and recognised in the profit or loss over the period necessary to match them with the costs that they are intended to compensate.

Government grants relating to the purchase of property, plant and equipment are included in noncurrent liabilities as deferred income and are credited to profit or loss on a straight-line basis over the expected lives of the related assets.

2.31 Interest income

Interest income from financial assets at FVPL is included in the net fair value gains/(losses) on these assets.

Interest income on financial assets at amortised cost and financial assets at FVOCI calculated using the effective interest method is recognised in the statement of profit or loss as part of other income.

Interest income is presented as finance income where it is earned from financial assets that are held for cash management purposes, see Note 10 below. Any other interest income is included in other income.

HONGHUA GROUP LIMITED 2020 ANNUAL REPORT

128

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEAR ENDED 31 DECEMBER 2020 (All amounts in RMB unless otherwise stated)

2 Summary of significant accounting policies (Continued)

2.31 Interest income (Continued)

Interest income is calculated by applying the effective interest rate to the gross carrying amount of a financial asset except for financial assets that subsequently become credit-impaired. For creditimpaired financial assets the effective interest rate is applied to the net carrying amount of the financial asset (after deduction of the loss allowance).

2.32 Research and development

Research expenditure is recognised as an expense as incurred. Costs incurred on development projects (relating to the design and testing of new or improved products) are recognised as intangible assets when the following criteria are fulfilled:

(a) it is technically feasible to complete the intangible asset so that it will be available for use or sale;
(b) management intends to complete the intangible asset and use or sell it;
(c) there is an ability to use or sell the intangible asset;
(d) it can be demonstrated how the intangible asset will generate probable future economic benefits;
(e) adequate technical, financial and other resources to complete the development and to use or sell the intangible asset are available; and
(f) the expenditure attributable to the intangible asset during its development can be reliably measured.

Other development expenditures that do not meet these criteria are recognised as an expense as incurred. Development costs previously recognised as an expense are not recognised as an asset in a subsequent period. Capitalised development costs are recorded as intangible assets and amortised from the point at which the asset is ready for use on a straight-line basis over its useful life.

HONGHUA GROUP LIMITED 2020 ANNUAL REPORT 129

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEAR ENDED 31 DECEMBER 2020

(All amounts in RMB unless otherwise stated)

3 Financial risk management

3.1 Financial risk factors

The Group’s activities expose to a variety of financial risks: market risk (including foreign exchange risk, cash flow and fair value interest rate risk), credit risk and liquidity risk. The Group’s overall risk management programme focuses on the unpredictability of financial markets and seeks to minimise potential adverse effects on the Group’s financial performance.

Risk management is carried out by the senior executive management of the Group. The senior executive management of the Group identifies, evaluates and hedges financial risks in close cooperation with the Group’s operating units. The board provides principles for overall risk management, as well as policies covering specific areas, such as foreign exchange risk, interest rate risk, credit risk, use of derivative financial instruments and non-derivative financial instruments, and investment of excess liquidity.

(a) Market risk

(i) Foreign exchange risk

The Group is exposed to foreign exchange risk arising from various currency exposures, primarily with respect to the US dollar (“USD”), Euros (“EUR”) and RMB. Foreign exchange risk arises when future commercial transactions or recognised assets or liabilities are denominated in a currency that is not the entity’s functional currency. Management has set up a policy to require the Group companies to manage their foreign exchange risk against their functional currency.

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

HONGHUA GROUP LIMITED 2020 ANNUAL REPORT

130

FOR THE YEAR ENDED 31 DECEMBER 2020 (All amounts in RMB unless otherwise stated)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

3 Financial risk management (Continued)

3.1 Financial risk factors (Continued)

(a) Market risk (Continued)

(i) Foreign exchange risk (Continued)

The following table details the Group’s exposure at 31 December 2020 to currency risk arising from recognised assets or liabilities denominated in a currency other than the functional currency of the entity to which they relate. For presentation purposes, the amounts of the exposure are shown in RMB, translated using the spot rate at 31 December 2020.

	Exposure to foreign currency USD items EUR items RMB items (RMB’ 000) (RMB’ 000) (RMB’ 000)	Exposure to foreign currency USD items EUR items RMB items (RMB’ 000) (RMB’ 000) (RMB’ 000)	Exposure to foreign currency USD items EUR items RMB items (RMB’ 000) (RMB’ 000) (RMB’ 000)
At 31 December 2020
Cash and cash equivalents	158,393	2,186	5,257
Trade and other receivables Borrowings	770,304 (637,313)	86 –	54 –
Trade and other payables	(249,313)	(44)	(3,421)
Lease liabilities	(85,837)	–	–
Overall net exposure	(43,766)	2,228	1,890

	Exposure to foreign currency
	USD items	EUR items	RMB items
	(RMB’ 000)	(RMB’ 000)	(RMB’ 000)
At 31 December 2019
Cash and cash equivalents	221,406	417	35,603
Trade and other receivables	1,673,820	–	398
Borrowings	(752,718)	–	–
Trade and other payables	(312,202)	(1,578)	(516)
Lease liabilities	(110,972)	–	–
Overall net exposure	719,334	(1,161)	35,485

As at 31 December 2020 and 2019, the Group did not have any forward exchange contracts to hedge its exposure to foreign exchange risk.

HONGHUA GROUP LIMITED 2020 ANNUAL REPORT 131

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEAR ENDED 31 DECEMBER 2020

(All amounts in RMB unless otherwise stated)

3 Financial risk management (Continued)

3.1 Financial risk factors (Continued)

(a) Market risk (Continued)

(i) Foreign exchange risk (Continued)

As at 31 December 2020, if RMB had weakened/strengthened by 5% (2019: 5%) against the USD with all other variables held constant, the Group’s post-tax profit for the year then ended would have been approximately RMB1,751,000 lower/higher (2019: RMB30,572,000 higher/lower), mainly as a result of foreign exchange gains/losses on translation of USD-denominated cash and cash equivalents, trade and other receivables, borrowings, trade and other payables and lease liabilities.

The sensitivity analysis above represents an aggregation of the instantaneous effects on each of the group entities’ profit or loss after tax measured in the respective functional currencies, translated into RMB at the exchange rate ruling at the end of the reporting period for presentation purposes.

(ii) Cash flow and fair value interest rate risk

The Group’s interest rate risk arises primarily from borrowings. Borrowings obtained at variable rates expose the Group to cash flow interest rate risk which is partially offset by cash held at variable rates. All borrowings including senior notes obtained at fixed rates expose the Group to fair value interest rate risk. The Group’s policy is to manage its interest rate risk to ensure there are no undue exposures to significant interest rate movements. The Group does not use derivative financial instruments to hedge its fixed and variable rate debt obligations.

As at 31 December 2020, it is estimated that a general increase/decrease of 50 basis points in interest rates, with all other variables held constant, would have decreased/ increased the Group’s profit after tax by approximately RMB5,272,000 (2019: RMB3,808,000).

The sensitivity analysis above indicates the instantaneous change in the Group’s profit after tax that would arise assuming that the change in interest rates had occurred as at 31 December 2020 and 2019, the impact on the Group’s profit after tax is estimated as annualised impact on interest expense of such a change in interest rates.

HONGHUA GROUP LIMITED 2020 ANNUAL REPORT

132

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEAR ENDED 31 DECEMBER 2020 (All amounts in RMB unless otherwise stated)

3 Financial risk management (Continued)

3.1 Financial risk factors (Continued)

(b) Credit risk

Credit risk arises from cash and cash equivalents, contractual cash flows of debt instruments carried at amortised cost and at fair value through comprehensive income and deposits with banks, as well as credit exposures to customers, including outstanding receivables.

(i) Risk management

Credit risk is managed on a group basis. Management has a credit policy in place and the exposures to these credit risks are monitored on an on-going basis.

Risk control assesses the credit quality of the customer, taking into account its financial position, past experience and other factors. Individual risk limits are set based on internal or external ratings in accordance with limits set by the management. The compliance with credit limits by customers is regularly monitored by line management.

The Group’s exposure to credit risk is influenced mainly by the individual characteristics of each customer and the industry in which the customers operate. Significant concentration of credit risk primarily arises when the Group has significant exposure to individual customers. As at 31 December 2020, 23% (2019: 21%) and 42% (2019: 25%) of the total trade receivables was due from the Group’s largest customer and the five largest customers respectively. The Group also has significant concentration of credit risk on customers in the oil drilling industry and the volatility in global oil prices may affect the financial results and ability of customers to make payments.

The Group provides guarantees which expose the Group to credit risk (Note 34).

The credit risk on cash at bank, pledged bank deposits and term deposit is limited as the counterparties are banks with sound credit standing. Majority of the Group’s cash and cash equivalents at bank and pledged bank deposits were deposited at the stateowned commercial banks in the PRC.

HONGHUA GROUP LIMITED 2020 ANNUAL REPORT 133

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEAR ENDED 31 DECEMBER 2020

(All amounts in RMB unless otherwise stated)

3 Financial risk management (Continued)

3.1 Financial risk factors (Continued)

(b) Credit risk (Continued)

(ii) Impairment of financial assets

The Group has the following types of financial assets and contract assets that are subject to the expected credit loss model:

trade receivables (including bills receivables) for sales of goods and from the provision of services
contract assets
loan to an associate and other related party carried at amortised cost
debt investments carried at amortised cost
bank acceptance bill receivables carried at FVOCI
finance lease receivables
other financial assets at amortised cost
pledged bank deposits
term deposit, and
cash and cash equivalents

While pledged bank deposits, term deposit and cash and cash equivalents are also subject to the impairment requirements of IFRS 9, the identified impairment loss was immaterial.

Trade receivables and contract assets

The Group applies the IFRS 9 simplified approach to measuring expected credit losses which uses a lifetime expected loss allowance for all trade receivables and contract assets.

HONGHUA GROUP LIMITED 2020 ANNUAL REPORT

134

FOR THE YEAR ENDED 31 DECEMBER 2020 (All amounts in RMB unless otherwise stated)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

3 Financial risk management (Continued)

3.1 Financial risk factors (Continued)

(b) Credit risk (Continued)

(ii) Impairment of financial assets (Continued)

Trade receivables and contract assets (Continued)

If the credit losses of a signal trade receivable can be assessed at a reasonable cost, the credit losses of those trade receivables are assessed separately. If not, to measure the expected credit losses, trade receivables and contract assets have been grouped based on shared credit risk characteristics and the days past due. The contract assets relate to unbilled work in progress and have substantially the same risk characteristics as the trade receivables for the same types of contracts. The Group has therefore concluded that the expected loss rates for trade receivables are a reasonable approximation of the loss rates for the contract assets.

The expected loss rates are based on the payment profiles of sales over a period of 24 months before 31 December 2020 or 1 January 2020 respectively and the corresponding historical credit losses experienced within this period. The historical loss rates are adjusted to reflect current and forward-looking information on macroeconomic factors affecting the ability of the customers to settle the receivables. The Group has identified the GDP and the unemployment rate of the countries in which it sells its goods and services to be the most relevant factors, and accordingly adjusts the historical loss rates based on expected changes in these factors.

On that basis, the loss allowance as at 31 December 2020 and 31 December 2019 was determined as follows for both trade receivables and contract assets:

i) As at 31 December 2020 and 31 December 2019, receivables with amounts subject to separate assessment for impairment are as below:

31 December 2020	More than 90 days past due Total
Expected loss rate	71.08% –
Gross carrying amount – trade receivables
(RMB’ 000)	520,596 520,596
Loss allowance (RMB’ 000)	(370,050) (370,050)

HONGHUA GROUP LIMITED 2020 ANNUAL REPORT 135

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEAR ENDED 31 DECEMBER 2020

(All amounts in RMB unless otherwise stated)

3 Financial risk management (Continued)

3.1 Financial risk factors (Continued)

(b) Credit risk (Continued)

(ii) Impairment of financial assets (Continued)

Trade receivables and contract assets (Continued)

i) As at 31 December 2020 and 31 December 2019, receivables with amounts subject to separate assessment for impairment are as below: (Continued)

	More than
	90 days
31 December 2019	past due	Total
Expected loss rate	35.14%	–
Gross carrying amount – trade receivables
(RMB’ 000)	592,786	592,786
Loss allowance (RMB’ 000)	(208,313)	(208,313)

As the above debtors suffered in several lawsuits or operation difficulty, the Group cannot be able to collect the amount under the original terms, provisions for impairment on those receivables were made.

ii) As at 31 December 2020 and 31 December 2019, trade receivables and contract assets have been grouped on the basis of shared credit risk characteristics and the days past due for the measurement of expected credit losses:

bank acceptance bill receivables group

As at 31 December 2019, the total amount of bank acceptance bills was RMB500,000, these bills will be accepted by large state-owned banks or national commercial banks. The Group believes that there is no significant credit losses due to the bank default.

HONGHUA GROUP LIMITED 2020 ANNUAL REPORT

136

FOR THE YEAR ENDED 31 DECEMBER 2020 (All amounts in RMB unless otherwise stated)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

3 Financial risk management (Continued)

3.1 Financial risk factors (Continued)

(b) Credit risk (Continued)

(ii) Impairment of financial assets (Continued)

Trade receivables and contract assets (Continued)

ii) As at 31 December 2020 and 31 December 2019, trade receivables and contract assets have been grouped on the basis of shared credit risk characteristics and the days past due for the measurement of expected credit losses: (Continued)
revenue of land drilling rigs group

31 December 2020	Current	1-30 days past due	More than 90 days past due	Total
Expected loss rate Gross carrying amount – trade receivables (RMB’000) Loss allowance (RMB’000)	1.15% 1,072,907 (12,382)	4.42% 40,989 (1,812)	7.85% 241,278 (18,940)	– 1,355,174 (33,134)
			More than
		1-30 days	90 days
31 December 2019	Current	past due	past due	Total
Expected loss rate	0.43%	1.15%	7.49%	–
Gross carrying amount
– trade receivables (RMB’000)	1,507,630	139,921	25,622	1,673,173
Loss allowance (RMB’000)	(6,546)	(1,612)	(1,918)	(10,076)

HONGHUA GROUP LIMITED 2020 ANNUAL REPORT 137

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEAR ENDED 31 DECEMBER 2020

(All amounts in RMB unless otherwise stated)

3 Financial risk management (Continued)

3.1 Financial risk factors (Continued)

(b) Credit risk (Continued)

(ii) Impairment of financial assets (Continued)

Trade receivables and contract assets (Continued)

• revenue of fracturing

The segment of fracturing was established from 1 January 2020 (Note 5) and trade receivables and contract assets related to fracturing have been grouped together as one group named “revenue of fracturing” (31 December 2019: revenue of fracture pumps group) based on shared credit risk characteristics and the days past due. As at 31 December 2019, the revenue of fracture pumps group only contained trade receivables from sales of fracture pumps.

31 December 2020	Current 1-30 days past due More than 90 days past due Total
Expected loss rate	1.39% 1.45% 8.09% –
Gross carrying amount
– trade receivables (RMB’000)	339,379 169,947 94,427 603,753
Gross carrying amount
– contract assets (RMB’000)	314,530 – – 314,530
Loss allowance (RMB’000)	(9,094) (2,469) (7,641) (19,204)
31 December 2019	Current Total
Expected loss rate	0.42% –
Gross carrying amount – trade receivables
(RMB’ 000)	173,564 173,564
Loss allowance (RMB’ 000)	(724) (724)

HONGHUA GROUP LIMITED 2020 ANNUAL REPORT

138

FOR THE YEAR ENDED 31 DECEMBER 2020 (All amounts in RMB unless otherwise stated)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

3 Financial risk management (Continued)

3.1 Financial risk factors (Continued)

(b) Credit risk (Continued)

(ii) Impairment of financial assets (Continued)

Trade receivables and contract assets (Continued)

ii) As at 31 December 2020 and 31 December 2019, trade receivables and contract assets have been grouped on the basis of shared credit risk characteristics and the days past due for the measurement of expected credit losses: (Continued)
revenue of parts and components and others group

31 December 2020	Current	1-30 days past due	More than 30 days past due	More than 60 days past due	More than 90 days past due	Total
Expected loss rate	4.15%	9.69%	10.53%	10.82%	11.66%	–
Gross carrying amount
– trade receivables
(RMB’000)	324,722	221,256	112,516	11,676	253,839	924,009
Gross carrying amount
– contract assets
(RMB’000)	222,542	–	–	–	–	222,542
Loss allowance
(RMB’000)	(22,696)	(21,437)	(11,849)	(1,263)	(29,590)	(86,835)
			More than	More than	More than
		1-30 days	30 days	60 days	90 days
31 December 2019	Current	past due	past due	past due	past due	Total
Expected loss rate	2.22%	6.56%	9.15%	10.81%	11.54%	–
Gross carrying amount
– trade receivables
(RMB’000)	615,560	107,632	19,016	45,746	322,299	1,110,253
Gross carrying amount
– contract assets
(RMB’000)	31,806	–	–	–	–	31,806
Loss allowance
(RMB’000)	(14,363)	(7,061)	(1,740)	(4,945)	(37,196)	(65,305)

HONGHUA GROUP LIMITED 2020 ANNUAL REPORT 139

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEAR ENDED 31 DECEMBER 2020

(All amounts in RMB unless otherwise stated)

3 Financial risk management (Continued)

3.1 Financial risk factors (Continued)

(b) Credit risk (Continued)

(ii) Impairment of financial assets (Continued)

Trade receivables and contract assets (Continued)

• revenue of drilling engineering services group

As a result of the establishment of the segment of fracturing, the segment of oil and gas engineering service changed to segment of drilling engineering services which only focuses on drilling engineering services without fracturing engineering services from 1 January 2020 (Note 5). Trade receivables and contract assets relate to drilling engineering services have been grouped together as one group named “revenue of drilling engineering services group” (31 December 2019：revenue of oil and gas engineering services group). As at 31 December 2019, the revenue of oil and gas engineering services group included trade receivables and contract assets from both drilling engineering services and fracturing engineering services.

31 December 2020	Current 1-30 days past due More than 30 days past due More than 60 days past due More than 90 days past due Total
Expected loss rate	1.36% 1.63% 1.93% 2.55% 11.06% –
Gross carrying amount
– trade receivables
(RMB’000)	231,849 31,522 – – 67,965 331,336
Gross carrying amount
– contract assets
(RMB’000)	169,230 – – – – 169,230
Loss allowance
(RMB’000)	(5,453) (515) – – (7,518) (13,486)

HONGHUA GROUP LIMITED 2020 ANNUAL REPORT

140

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEAR ENDED 31 DECEMBER 2020 (All amounts in RMB unless otherwise stated)

3 Financial risk management (Continued)

3.1 Financial risk factors (Continued)

(b) Credit risk (Continued)

(ii) Impairment of financial assets (Continued)

Trade receivables and contract assets (Continued)

ii) As at 31 December 2020 and 31 December 2019, trade receivables and contract assets have been grouped on the basis of shared credit risk characteristics and the days past due for the measurement of expected credit losses: (Continued)
revenue of drilling engineering services group (Continued)

			More than	More than	More than
		1-30 days	30 days	60 days	90 days
31 December 2019	Current	past due	past due	past due	past due	Total
Expected loss rate	0.42%	0.80%	0.93%	1.55%	6.53%	–
Gross carrying amount
– trade receivables
(RMB’000)	130,332	128,918	16,931	28,408	124,186	428,775
Gross carrying amount
– contract assets
(RMB’000)	189,153	–	–	–	–	189,153
Loss allowance
(RMB’000)	(1,345)	(1,032)	(158)	(440)	(8,115)	(11,090)

HONGHUA GROUP LIMITED 2020 ANNUAL REPORT

141

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEAR ENDED 31 DECEMBER 2020

(All amounts in RMB unless otherwise stated)

3 Financial risk management (Continued)

3.1 Financial risk factors (Continued)

(b) Credit risk (Continued)

(ii) Impairment of financial assets (Continued)

Trade receivables and contract assets (Continued)

ii) As at 31 December 2020 and 31 December 2019, trade receivables and contract assets have been grouped on the basis of shared credit risk characteristics and the days past due for the measurement of expected credit losses: (Continued)

The closing loss allowances for trade receivables and contract assets as at 31 December 2020 reconcile to the opening loss allowances as follows:

	Contract assets Trade receivables	Contract assets Trade receivables
	2020 2019 2020	2019
	RMB’000 RMB’000 RMB’000	RMB’000
Opening loss allowance as at
1 January 2020	(1,022) (129) (294,486)	(169,007)
Increase in loss allowance recognised
in profit or loss during the year	(17,489) (893) (215,720)	(124,139)
Receivables written off during the year
as uncollectible	– – 803	4
Exchange rate changes	– – 5,205	(1,344)
Closing loss allowances as at
31 December 2020	(18,511) (1,022) (504,198)	(294,486)

Trade receivables and contract assets are written off where there is no reasonable expectation of recovery. Indicators that there is no reasonable expectation of recovery include, amongst others, the failure of a debtor to engage in a repayment plan with the Group, and a failure to make contractual payments.

Impairment losses on trade receivables and contract assets are presented as net impairment losses within operating profit. Subsequent recoveries of amounts previously written off are credited against the same line item.

HONGHUA GROUP LIMITED 2020 ANNUAL REPORT

142

FOR THE YEAR ENDED 31 DECEMBER 2020 (All amounts in RMB unless otherwise stated)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

3 Financial risk management (Continued)

3.1 Financial risk factors (Continued)

(b) Credit risk (Continued)

(ii) Impairment of financial assets (Continued)

Loan to an associate and other related party and debt investments

Loan to an associate and other related party is considered credit-impairment on origination. For such assets, impairment is determined based on full lifetime expected credit loss on initial recognition. However, lifetime expected credit losses are included in the estimated cash flows when calculating the effective interest rate on initial recognition. The effective interest rate for interest recognition throughout the life of the asset is a credit-adjusted effective interest rate.

For measuring expected credit losses, the estimate of expected cash shortfalls reflects the cash flows expected from collateral and other credit enhancements that are part of the contractual terms and are not recognised separately by the entity.

As at 31 December 2020 and 31 December 2019, loan to an associate and other related party subject to separate assessment for impairment is as below:

31 December 2020	Current	Total
Expected loss rate Gross carrying amount-Loan to an associate and other related party (RMB’ 000) Loss allowance (RMB’ 000)	4.88% 1,488,055 (72,663)	– 1,488,055 (72,663)
31 December 2019	Current	Total
Expected loss rate	3.14%	–
Gross carrying amount-Loan to an associate and
other related party (RMB’ 000)	1,588,346	1,588,346
Loss allowance (RMB’ 000)	(49,887)	(49,887)

Debt investments at amortised cost are considered to have low credit risk, and the loss allowance recognised during the period was therefore limited to 12 months’ expected losses.

HONGHUA GROUP LIMITED 2020 ANNUAL REPORT 143

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEAR ENDED 31 DECEMBER 2020

(All amounts in RMB unless otherwise stated)

3 Financial risk management (Continued)

3.1 Financial risk factors (Continued)

(b) Credit risk (Continued)

(ii) Impairment of financial assets (Continued)

Financial assets at fair value through other comprehensive income

Bank acceptance bill receivables carried at FVOCI are considered to have low credit risk, and the loss allowance recognised during the period was therefore limited to 12 months expected losses. Management considers ‘low credit risk’ for the instruments as the issuers have strong capacity to meet its contractual cash flow obligations in the near term.

Finance lease receivables

The Group applies the IFRS 9 simplified approach to measuring expected credit losses which uses a lifetime expected loss allowance for finance lease receivables.

To measure the expected credit losses, finance lease receivables have been grouped based on shared credit risk characteristics and the days past due.

The expected loss rates are based on the payment profiles of revenue over a period of 24 months before 31 December 2020 or 1 January 2020 respectively and the corresponding historical credit losses experienced within this period. The historical loss rates are adjusted to reflect current and forward-looking information on macroeconomic factors affecting the ability of the customers to settle the receivables. The Group has identified the GDP and the unemployment rate of the countries in which it rents its inventory out through financing lease to be the most relevant factors, and accordingly adjusts the historical loss rates based on expected changes in these factors.

HONGHUA GROUP LIMITED 2020 ANNUAL REPORT

144

FOR THE YEAR ENDED 31 DECEMBER 2020 (All amounts in RMB unless otherwise stated)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

3 Financial risk management (Continued)

3.1 Financial risk factors (Continued)

(b) Credit risk (Continued)

(ii) Impairment of financial assets (Continued)

Finance lease receivables (Continued)

On that basis, the loss allowance as at 31 December 2020 and 31 December 2019 was determined as follows for finance lease receivables:

i) As at 31 December 2020 and 31 December 2019, finance lease receivables with amounts subject to separate assessment for impairment are as below:

31 December 2020	More than 90 days past due	Total
Expected loss rate Gross carrying amount – finance lease receivables (RMB’ 000) Loss allowance (RMB’ 000)	57.27% 129,257 (74,024)	– 129,257 (74,024)
	More than
	90 days
31 December 2019	past due	Total
Expected loss rate	55.87%	–
Gross carrying amount – finance lease
receivables (RMB’ 000)	137,289	137,289
Loss allowance (RMB’ 000)	(76,705)	(76,705)

HONGHUA GROUP LIMITED 2020 ANNUAL REPORT 145

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEAR ENDED 31 DECEMBER 2020

(All amounts in RMB unless otherwise stated)

3 Financial risk management (Continued)

3.1 Financial risk factors (Continued)

(b) Credit risk (Continued)

(ii) Impairment of financial assets (Continued)

Finance lease receivables (Continued)

ii) As at 31 December 2020 and 31 December 2019, finance lease receivables have been grouped on the basis of shared credit risk characteristics and the days past due for the measurement of expected credit losses:

Finance lease receivables within due date group

31 December 2020	Current	Total
Expected loss rate Gross carrying amount – finance lease receivables (RMB’ 000) Loss allowance (RMB’ 000)	1.00% 125,573 (1,255)	– 125,573 (1,255)
31 December 2019	Current	Total
Expected loss rate	0.30%	–
Gross carrying amount – finance lease
receivables (RMB’ 000)	178,082	178,082
Loss allowance (RMB’ 000)	(534)	(534)

Other financial assets at amortised cost

Other financial assets at amortised cost include other receivables. The closing loss allowances for other financial assets as at 31 December 2020 reconcile to the opening loss allowances as follows:

	Other receivables RMB’ 000
Opening loss allowance as at 1 January 2020 Increase in the allowance recognised in profit or loss during the year Exchange rate changes	(122,845) (7,697) 4,441
Closing loss allowance as at 31 December 2020	(126,101)

HONGHUA GROUP LIMITED 2020 ANNUAL REPORT

146

FOR THE YEAR ENDED 31 DECEMBER 2020 (All amounts in RMB unless otherwise stated)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

3 Financial risk management (Continued)

3.1 Financial risk factors (Continued)

(b) Credit risk (Continued)

(ii) Impairment of financial assets (Continued)

Net impairment losses on financial and contract assets recognised in profit or loss

During the year, the following losses were recognised in profit or loss in relation to impaired financial assets and contract assets:

	2020 2019 RMB’ 000 RMB’ 000
Impairment losses
Impairment losses on trade receivables and
contract assets Impairment losses on finance lease receivables	(233,209) (125,032) 1,913 (11,423)
Impairment losses on other financial assets at
amortised cost Impairment losses on loan to an associate and	(7,697) (4,672)
other related party	(26,470) (49,862)
Impairment losses on cash and cash equivalents	(2,289) –
Net impairment losses on financial assets and
contract assets	(267,752) (190,989)

HONGHUA GROUP LIMITED 147 2020 ANNUAL REPORT

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEAR ENDED 31 DECEMBER 2020 (All amounts in RMB unless otherwise stated)

3 Financial risk management (Continued)

3.1 Financial risk factors (Continued)

(c) Liquidity risk

Individual operating entities within the Group are responsible for their own cash management, including the short term investment of cash surpluses and the raising of loans to cover expected cash demands, subject to approval by the Company’s management when the borrowings exceed certain predetermined levels of authority.

The Group’s policy is to regularly monitor its liquidity requirements and its compliance with lending covenants, to ensure that it maintains sufficient reserves of cash and adequate committed lines of funding from major financial institutes to meet its liquidity requirements in the short and long term.

The Group has significant concentration of credit risk on customers in the oil and gas industry. The volatility in global oil prices may affect the ability of customers to make payments and demand of the Group’s goods and services and hence may affect the liquidity of the Group.

The table below analyses the Group’s non-derivative financial liabilities into relevant maturity groupings based on the remaining period the balance sheet date to the contractual maturity date. The amounts disclosed in the table are the contractual undiscounted cash flows. Balances due within 12 months equal their carrying balances, as the impact of discounting is not significant.

					Total
	Less than	Between	Between	Over	contractual
	1 year	1 and 2 years	2 and 5 years	5 years	cash flows
	RMB’000	RMB’000	RMB’000	RMB’000	RMB’000
At 31 December 2020 Trade and other payables (i) Senior notes Borrowings (excluding senior notes) Lease liabilities	2,655,243 83,192 2,317,614 22,304	– 1,388,172 550,806 21,942	– – 382,807 53,855	– – – –	2,655,243 1,471,364 3,251,227 98,101
Total financial liabilities	5,078,353	1,960,920	436,662	–	7,475,935

At 31 December 2019
Trade and other payables (i)	2,826,117	–	–	–	2,826,117
Senior notes	88,947	88,947	1,484,187	–	1,662,081
Borrowings (excluding senior notes)	2,005,442	449,297	238,313	50,600	2,743,652
Lease liabilities	24,275	24,275	70,313	–	118,863
Total financial liabilities	4,944,781	562,519	1,792,813	50,600	7,350,713

(i) Trade and other payables include trade payables, bills payable, amounts due to related companies and other payables.

HONGHUA GROUP LIMITED 2020 ANNUAL REPORT

148

FOR THE YEAR ENDED 31 DECEMBER 2020 (All amounts in RMB unless otherwise stated)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

3 Financial risk management (Continued)

3.2 Capital management

The Group’s primary objectives when managing capital are to safeguard the Group’s ability to continue as ageing concern, so that it can continue to provide returns for shareholders and to maintain an optimal capital structure to reduce the cost of capital.

The Group’s capital structure is regularly reviewed and managed in accordance with the capital management practices of the Group and in light of changes in economic conditions affecting the Group, to the extent that these do not conflict with the directors’ fiduciary duties towards the Group.

Consistent with others in the industry, the Group monitors capital risk on the basis of the gearing ratio. This ratio is calculated as net debt divided by total capital. Net debt is calculated as total borrowings (including “current and non-current borrowings” as shown in the consolidated balance sheet) less cash and cash equivalents. Total capital is calculated as “equity” as shown in the consolidated balance sheet plus net debt. The Group aims to maintain the gearing ratio at a reasonable level.

For the year ended 31 December 2020, the Group’s strategy, which was unchanged from 2019, was to maintain sufficient capital to cover any net debt position by adjusting the amount of dividends paid to shareholders or issue new shares. The gearing ratios as at 31 December 2020 and 2019 were as follows:

	As at 31 December
	2020 2019
	RMB’ 000 RMB’ 000
Total borrowings (Note 26)	4,484,861 4,009,369
Less: cash and cash equivalents(Note 21)	(952,384) (889,802)
Net debt	3,532,477 3,119,567
Total equity	4,494,627 4,480,377
Total capital	8,027,104 7,599,944
Gearing ratio	44% 41%

HONGHUA GROUP LIMITED 2020 ANNUAL REPORT 149

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEAR ENDED 31 DECEMBER 2020

(All amounts in RMB unless otherwise stated)

3 Financial risk management (Continued)

3.3 Fair value estimation

(a) Fair value hierarchy

This section explains the judgements and estimates made in determining the fair values of the financial instruments that are recognised and measured at fair value in the financial statements. To provide an indication about the reliability of the inputs used in determining fair value, the Group has classified its financial instruments into the three levels prescribed under the accounting standards. An explanation of each level follows underneath the table.

The Group has an established control framework with respect to the measurement of fair values. Management of the Group has overall responsibility for overseeing all significant fair value measurements, including level 3 fair values and reports directly to the management.

Management of the Group regularly reviews significant unobservable inputs and valuation adjustments. If third-party information is used to measure fair values, then management of the Group assesses the evidence obtained from the third parties to support the conclusion that such valuations meet the requirements of IFRS, including the level in the fair value hierarchy in which such valuations should be classified.

The following table presents the Group’s financial assets that are measured at fair value at 31 December 2020.

	Level 1 Level 2 Level 3 Total RMB’ 000 RMB’ 000 RMB’ 000 RMB’ 000
Assets
Financial asset at fair value through
other comprehensive income
– Investment in unlisted companies	– – 106,338 106,338
– Bank acceptance bill receivables	– – 54,937 54,937
Total assets	– – 161,275 161,275

HONGHUA GROUP LIMITED 2020 ANNUAL REPORT

150

FOR THE YEAR ENDED 31 DECEMBER 2020 (All amounts in RMB unless otherwise stated)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

3 Financial risk management (Continued)

3.3 Fair value estimation (Continued)

(a) Fair value hierarchy (Continued)

The following table presents the Group’s financial assets that are measured at fair value at 31 December 2019.

	Level 1	Level 2	Level 3	Total
	RMB’ 000	RMB’ 000	RMB’ 000	RMB’ 000
Assets
Financial asset at fair value through
other comprehensive income
– Investment in unlisted companies	–	–	104,263	104,263
– Bank acceptance bill receivables	–	–	78,273	78,273
Total assets	–	–	182,536	182,536

There were no transfers among levels 1, 2 and 3 during 2020 and 2019. There were no other changes in valuation techniques during 2020 and 2019.

The Group’s policy is to recognise transfers into and transfers out of fair value hierarchy levels as at the end of the reporting period.

Level 1: The fair value of financial instruments traded in active markets is based on quoted market prices at the balance sheet date. A market is regarded as active if quoted prices are readily and regularly available from an exchange, dealer, broker, industry group, pricing service, or regulatory agency, and those prices represent actual and regularly occurring market transactions on an arm’s length basis.

Level 2: The fair value of financial instruments that are not traded in an active market (for example, over-the-counter derivatives) is determined by using valuation techniques. These valuation techniques maximise the use of observable market data where it is available and rely as little as possible on entity specific estimates. If all significant inputs required to fair value an instrument are observable, the instrument is included in level 2.

Level 3: If one or more of the significant inputs is not based on observable market data, the instrument is included in level 3. This is the case for unlisted equity securities.

HONGHUA GROUP LIMITED 2020 ANNUAL REPORT 151

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEAR ENDED 31 DECEMBER 2020

(All amounts in RMB unless otherwise stated)

3 Financial risk management (Continued)

3.3 Fair value estimation (Continued)

(b) Valuation techniques used to determine fair values

Specific valuation techniques used to value financial instruments include:

Quoted market prices or dealer quotes for similar instruments.
The fair value of interest rate swaps is calculated as the present value of the estimated future cash flows based on observable yield curves.
The fair value of forward foreign exchange contracts is determined using forward exchange rates at the balance sheet date, with the resulting value discounted back to present value.
Other techniques, such as discounted cash flow analysis, are used to determine fair value for the remaining financial instruments.

(c) Fair value measurements using significant unobservable inputs (level 3)

	Investments	Bank
	in unlisted	acceptance bill
	companies	receivables	Total
	RMB’ 000	RMB’ 000	RMB’ 000
Opening balance 1 January 2019	89,475	78,462	167,937
Acquisitions	3,982	656,031	660,013
Disposals	–	(656,220)	(656,220)
Changes in fair value	10,806	–	10,806
Closing balance 31 December 2019	104,263	78,273	182,536
Acquisitions	–	282,882	282,882
Disposals	–	(306,218)	(306,218)
Changes in fair value	(1,052)	–	(1,052)
Others	3,127	–	3,127
Closing balance 31 December 2020	106,338	54,937	161,275

There is no unrealised gains or losses recognised in profit or loss attributable to balances held at the end of the reporting period.

HONGHUA GROUP LIMITED 2020 ANNUAL REPORT

152

FOR THE YEAR ENDED 31 DECEMBER 2020 (All amounts in RMB unless otherwise stated)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

3 Financial risk management (Continued)

3.3 Fair value estimation (Continued)

(c) Fair value measurements using significant unobservable inputs (level 3) (Continued)

The carrying amounts of the Group’s financial assets and liabilities including cash and cash equivalents, pledged bank deposits, trade and other receivables, trade and other payables and current borrowings, approximate their fair values due to their short maturities. The face values less any estimated credit adjustments for financial assets and liabilities with a maturity of less than one year are assumed to approximate their fair values. The fair value of term deposit and non-current financial liabilities for disclosure purposes is estimated by discounting the future contractual cash flows at the current market interest rate available to the Group for similar financial instruments. The fair value of term deposit and the non-current borrowings is disclosed in Note 21 and Note 26 respectively.

(d) Valuation inputs and relationships to fair value

The following table summarises the quantitative information about the significant unobservable inputs used in level 3 fair value measurements. See (b) above for the valuation techniques adopted.

Fair value at	Range of unobservable inputs	Range of unobservable inputs	Relationship of
			unobservable
31 December 31	December Unobservable		inputs to
Description 2020 RMB’000	2019 inputs 2020 RMB’000	2019	fair value
Unlisted companies – current 17,134	17,134 Discount rate 21%	21%	negative
Unlisted companies – non-current 89,204	87,129 Discount rate 33.18%	33.18%	negative
Bank acceptance bill receivables 54,937	78,273 Discount rate 2.42%-2.51% 3.42%-8.30%		negative

HONGHUA GROUP LIMITED 2020 ANNUAL REPORT

153

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEAR ENDED 31 DECEMBER 2020 (All amounts in RMB unless otherwise stated)

4 Critical accounting estimates and judgements

4.1 Critical accounting estimates and assumptions

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

The Group makes estimates and assumptions concerning the future. The resulting accounting estimates will, by definition, seldom equal the related actual results. The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are addressed below.

(a) Measurement of expected credit loss

The Group calculates expected credit losses according to the default risk exposure and expected credit loss rate, and determines the expected credit loss rate based on default probability and default loss rate. In determining the expected credit loss rate, the Group uses data such as internal historical credit loss experience, etc., and adjusts historical data based on current conditions and forward-looking information. When considering forward-looking information, the indicators used by the Group include the risk of economic downturn, the expected increase in unemployment rate, the external market environment, the technological environment and changes in customer conditions. The Group regularly monitors and reviews assumptions related to the calculation of expected credit losses. In 2020, there was no significant change in the above estimation techniques and key assumptions.

(b)

Impairment of non-financial assets

If circumstances indicate that the carrying value of non-financial assets may not be recoverable, these assets may be considered impaired, and an impairment loss may be recognised in accordance with IAS 36, Impairment of assets. These assets are tested for impairment whenever events or changes in circumstances indicate that their recorded carrying amounts may not be recoverable. When such a decline has occurred, the carrying amount is reduced to recoverable amount. The recoverable amount is the greater of the fair value less costs to sell and the value in use. In determining that value in use, expected cash flows generated by the assets are discounted to their present value, which requires significant judgement relating to revenue, gross margin and pre-tax discount rate. The Group uses all readily available information in determining an amount that is a reasonable approximation of recoverable amount, including estimates based on reasonable and supportable assumptions and projections of revenue and amount of operating costs.

HONGHUA GROUP LIMITED 2020 ANNUAL REPORT

154

FOR THE YEAR ENDED 31 DECEMBER 2020 (All amounts in RMB unless otherwise stated)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

4 Critical accounting estimates and judgements (Continued)

4.1 Critical accounting estimates and assumptions (Continued)

(c) Write down of inventories

The Group estimates the write down for obsolescence of inventories with reference to aged inventories analyses, projections of expected future saleability of goods and management experience and judgement. Based on this review, write down of inventories will be made when the carrying amounts of inventories decline below their estimated net realisable value. Due to changes in market conditions, actual saleability of goods may be different from estimation and profit or loss could be affected by differences in this estimation.

(d) Income taxes

The Group is subject to various taxes in the places which the Group has operations. Significant judgement is required in determining the provision for income taxes. There are many transactions and calculations for which the ultimate tax determination is uncertain during the ordinary course of business. The Group recognises liabilities for anticipated tax audit issues based on estimates of whether additional taxes will be due. Where the final tax outcome of these matters is different from the amounts that were initially recorded, such differences will impact the income tax and deferred tax provisions in the period in which such determination is made.

Deferred income tax assets relating to certain temporary differences and tax losses are recognised as management considers it is probable that future taxable profit will be available against which the temporary differences or tax losses can be utilised. Where the expectation is different from the original estimate, such differences will impact the recognition of deferred income tax assets and income tax expense in the period in which such estimate is changed.

Deferred tax liabilities are generally recognised for all taxable temporary differences, except that the temporary differences arise from the initial recognition of goodwill, or arise from initial recognition of an asset or liability in a transaction other than a business combination that at the time of the transaction affects neither accounting nor taxable profit or loss.

HONGHUA GROUP LIMITED 2020 ANNUAL REPORT 155

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEAR ENDED 31 DECEMBER 2020

(All amounts in RMB unless otherwise stated)

5 Segment information

The senior executive management is the Group’s chief operating decision-maker. Management has determined the operating segments based on the information reviewed by the senior executive management for the purposes of allocating resources and assessing performance.

The Group manages its businesses by divisions, which are organised by business lines (land drilling rigs, parts and components and others, drilling engineering services and fracturing) and geographically. In a manner consistent with the way in which information is reported internally to the Group’s chief operating decision maker (“CODM”) for the purposes of resource allocation and performance assessment, the Group has identified four reportable segments.

As the business of fracturing becomes large enough, the CODM requested changes to the internal management reporting to show separately the performance of fracturing. As a result of the changes, the segment of fracturing was established by the Group and the segment of oil and gas engineering service changed to drilling engineering services which only focuses on drilling engineering services without fracturing engineering services from 1 January 2020. The Group has also restated the comparative segment information.

The senior executive management assesses the performance of the operating segments based on a measure of segment profit or loss. This measurement basis excludes the share of loss of joint ventures and associates, other (losses)/gains, net and other income/(expense). Finance income and expenses are not allocated to segments, as this type of activity is driven by the central treasury function, which manages the cash position of the Group. Other information provided, except as noted below, to the senior executive management is measured in a manner consistent with that in the consolidated financial statements.

Sales between segments are carried out in the ordinary course of business and in accordance with the terms of the underlying agreements. The revenue from external parties reported to the senior executive management is measured in a manner consistent with that in profit or loss.

HONGHUA GROUP LIMITED 2020 ANNUAL REPORT

156

FOR THE YEAR ENDED 31 DECEMBER 2020 (All amounts in RMB unless otherwise stated)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

5 Segment information (Continued)

The following table presents revenue and profit information regarding the Group’s operating segments for the years ended 31 December 2020 and 2019 respectively. The Group derives revenue from the transfer of good and services over time and at a point in the following operating segments.

	Parts and components	Drilling engineering
Land drilling rigs	and others	services	Fracturing	Total
Year ended 31 December	Year ended 31 December	Year ended 31 December	Year ended 31 December	Year ended 31 December
2020 2019	2020 2019	2020 2019	2020 2019	2020	2019
RMB’000 RMB’000	RMB’000 RMB’000	RMB’000 RMB’000	RMB’000 RMB’000	RMB’000	RMB’000
Segment revenue 621,523 1,487,664	1,788,594 1,851,421	247,919 464,078	1,339,871 1,075,221	3,997,907	4,878,384
Inter-segment revenue – (218,308)	(66,415) (234,390)	– –	– –	(66,415)	(452,698)
Revenue from external customers 621,523 1,269,356	1,722,179 1,617,031	247,919 464,078	1,339,871 1,075,221	3,931,492	4,425,686
Timing of revenue recognition At a point in time 621,523 1,487,664	1,788,594 1,851,421	– –	610,143 934,488	3,020,260	4,273,573
Over time – –	– –	247,919 464,078	729,728 140,733	977,647	604,811
Reportable segment (loss)/profit (42,330) 115,875	179,801 108,669	5,969 12,734	109,233 233,330	252,673	470,608
Depreciation and amortisation for the year (i) 30,805 56,628	63,113 74,159	38,204 28,267	63,890 46,003	196,012	205,057
Impairment on trade and other receivables 104,411 35,545	106,955 88,570	11,060 4,865	18,480 724	240,906	129,704
Write-down of inventories 1,903 3,611	49,803 62,591	3,988 5,175	– –	55,694	71,377
Impairment provision of property, plant and equipment – –	– –	1,035 7,852	– –	1,035	7,852

(i) The amount includes depreciation and amortisation of property, plant and equipment, intangible assets, right-of-use assets and other non-current assets.

Given the manufacturing processes of the Group’s business are in a form of vertical integration, the Group’s chief operating decision maker considered segment assets and liabilities information was not relevant in assessing performance of and allocating resources to the operations segments. During the year ended 31 December 2020, such information was not reviewed by the Group’s chief operating decision maker. Accordingly, no segment assets and liabilities are presented.

HONGHUA GROUP LIMITED 2020 ANNUAL REPORT 157

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEAR ENDED 31 DECEMBER 2020

(All amounts in RMB unless otherwise stated)

5 Segment information (Continued)

A reconciliation of segment profit to profit before income tax is provided as follows:

	Year ended 31 December
	2020 2019 RMB’ 000 RMB’ 000
Segment profit
– for reportable segments	252,673 470,608
Elimination of inter-segmentprofit	(13,994) (87,622)
Segment profit derived from the Group’s external customers	238,679 382,986
Share of loss of joint ventures	(14,967) (3,223)
Other income and other gains, net	40,278 114,305
Finance income Finance expenses	96,154 23,035 (222,513) (231,938)
Unallocated head office and corporate expenses	(51,541) (118,900)
Profit before income tax	86,090 166,265

The following table sets out revenue from external customers by geographical location, based on the destination of the customer:

	Year ended 31 December
	2020 2019 RMB’ 000 RMB’ 000
PRC (country of domicile)	2,905,901 2,243,222
Americas Middle East Europe and Central Asia	42,137 313,249 417,736 900,364 305,887 884,494
South Asia and South East Africa	118,790 25,434 141,041 58,923
	3,931,492 4,425,686

HONGHUA GROUP LIMITED 2020 ANNUAL REPORT

158

FOR THE YEAR ENDED 31 DECEMBER 2020 (All amounts in RMB unless otherwise stated)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

5 Segment information (Continued)

The following table sets out non-current assets, other than financial instruments and deferred income tax assets, by geographical location:

	As at 31	December
	2020	2019
	RMB’ 000	RMB’ 000
PRC (country of domicile)	1,809,820	1,670,303
Americas	2,037	2,711
Middle East	351,146	342,140
Europe and Central Asia	43,140	62,137
Africa	28,785	31,259
	2,234,928	2,108,550

For the year ended 31 December 2020, there was no customer contributed over 10% of the total revenue of the Group.

For the year ended 31 December 2019, revenue of approximately RMB597,654,000 was derived from an external customer. The revenue was attributed to the sales of land drilling rigs in Europe and Central Asia.

Assets and liabilities related to contracts with customers

(a) The Group has recognised the following assets and liabilities related to contracts with customers:

	Year ended 31 December
	2020 2019 RMB’ 000 RMB’ 000
Contract assets Less: loss allowance	706,302 220,959 (18,511) (1,022)
Total contract assets	687,791 219,937
Current contract liabilities	139,608 163,799

(i) Contract assets and contract liabilities are recognised under fracturing, drilling engineering services and sales of parts and components and others segments.
(ii) Contract assets have increased as the Group has provided more services ahead of the agreed payment schedules for fixed-price contracts. The Group also recognised a loss allowance for contract assets in accordance with IFRS 9, see Note 3.1(b) for further information.

Contract liabilities for sales of goods have decreased by RMB24,191,000, which was due to the negotiation of less prepayments from customers.

HONGHUA GROUP LIMITED 2020 ANNUAL REPORT 159

FOR THE YEAR ENDED 31 DECEMBER 2020 (All amounts in RMB unless otherwise stated)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

5 Segment information (Continued)

Assets and liabilities related to contracts with customers (Continued)

(b) Revenue recognised in relation to contract liabilities

The following table shows how much of the revenue recognised in current reporting period relates to carried-forward contract liabilities:

	Year ended 31 December	Year ended 31 December
	2020	2019
	RMB’ 000	RMB’ 000
Revenue recognised that was included in the contract liabilities
balance at the beginning of the year
Sales of goods	121,406	239,848
Services	1,976	1,234

(c) Unsatisfied performance

As at 31 December 2020, the aggregate amount of the transaction price allocated to contracts that are partially or fully unsatisfied is RMB1,718,720,000 (as at 31 December 2019: RMB1,476,446,000).

The management expects that 74% (as at 31 December 2019: 77%) of the transaction price allocated to unsatisfied performance obligations as at 31 December 2020 will be recognised as revenue during the next reporting period (RMB1,268,400,000) (as at 31 December 2019: RMB1,137,970,000). The remaining will be recognised in the 2022 financial year and afterwards.

HONGHUA GROUP LIMITED 2020 ANNUAL REPORT

160

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEAR ENDED 31 DECEMBER 2020 (All amounts in RMB unless otherwise stated)

6 Other income/(expense)

	Year ended 31 December
	2020 2019
	RMB’ 000 RMB’ 000
Government grants	63,687 43,100
Sales of scrap materials	12,926 35,772
Service expense	– (51,822)
Rental expense	– (39,629)
Others	10,999 625
	87,612 (11,954)

7 Other (losses)/gains, net

	Year ended 31 December
	2020 2019 RMB’ 000 RMB’ 000
Insurance compensation	50,519 3,618
Net foreign exchange (losses)/gains	(74,784) 40,588
(Losses)/gains on disposals of property, plant and equipment	(1,674) 35,428
Net gains on disposals and dissolution of subsidiaries and a joint venture	– 17,169
Other penalty (losses)/gains	(33,816) 19,305
Others	12,421 10,151
	(47,334) 126,259

HONGHUA GROUP LIMITED 2020 ANNUAL REPORT 161

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEAR ENDED 31 DECEMBER 2020 (All amounts in RMB unless otherwise stated)

8 Expenses by nature

	Year ended 31 December
	2020 2019 RMB’ 000 RMB’ 000
Raw materials and consumables used Employee benefit expenses	1,508,618 1,952,218 530,591 572,679
Service fee Amortisation and depreciation	323,444 371,306
– Property, plant and equipment	171,274 163,874
– Intangible assets	15,908 13,568
– Right-of-use-assets	8,830 4,960
Transportation	43,124 105,519
Changes in inventories of finished goods and work in progress	(81,464) 328,444
Provision for inventory write-down	55,694 71,377
Research and development costs (i)	177,329 93,348
Less: amount capitalised into intangible assets	(56,007) (38,135)
Utilities Operating lease charges	25,999 45,989 522,764 10,833
Travelling expenses	39,155 57,843
Provision of prepayments	(796) 8,666
Repairs and maintenance expenditure on property, plant and equipment	16,985 18,122
Other taxes Provision for warranty	24,362 40,653 4,302 25,357
Commission Auditors’ remuneration	42,990 60,634
– Audit services – Other services	4,707 4,707 150 550
Impairment provision of property, plant and equipment	1,035 7,852
Other expenses	97,608 50,247
Total cost of sales, distribution costs and administrative expenses	3,476,602 3,970,611

(i) The amount does not include staff costs of the research and development department of approximately RMB84,292,000 (2019: RMB86,396,000) and relevant amortisation and depreciation of approximately RMB22,689,000 (2019: RMB21,334,000), which are included in the total staff costs as disclosed in Note 9 and total amortisation and depreciation in Note 15 and Note 17 respectively.

HONGHUA GROUP LIMITED 2020 ANNUAL REPORT

162

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEAR ENDED 31 DECEMBER 2020 (All amounts in RMB unless otherwise stated)

9 Employee benefit expenses

	Year ended 31 December
	2020 2019 RMB’ 000 RMB’ 000
Contributions to defined contribution retirement schemes Equity-settled share-based payment expenses (Note 23)	37,284 41,653 – 839
Salaries, wages and other benefits	493,307 530,187
	530,591 572,679

(a) Five highest paid individuals

The five individuals whose emoluments were highest in the Group for the year ended 31 December 2020 did not include any director (2019: one director). The emoluments of the directors are reflected in the analysis disclosed as Note 36. The emoluments payable to the five (2019: four) individuals for the years ended 31 December 2020 and 2019 are as follows:

	Year ended 31 December
	2020 2019 RMB’ 000 RMB’ 000
Basic salaries, allowances and other benefits in kind	3,273 9,581
Discretionary bonuses	5,162 2,656
Contributions to defined contribution retirement schemes	237 300
	8,672 12,537

The emoluments of the above individual fell within the following bands:

		Number of individuals
		Year ended 31 December
		2020 2019
HKD1,000,001	to HKD2,000,000	4	–
HKD2,000,001	to HKD3,000,000	1	2
HKD3,000,001	to HKD4,000,000	–	1
HKD4,000,001	to HKD5,000,000	–	1
		5	4

HONGHUA GROUP LIMITED 2020 ANNUAL REPORT 163

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEAR ENDED 31 DECEMBER 2020

(All amounts in RMB unless otherwise stated)

10 Finance expenses – net

	Year ended 31 December
	2020 2019 RMB’ 000 RMB’ 000
Finance expenses
Interest on borrowings wholly repayable within five years	217,019 225,707
Interest expense from lease liabilities	6,100 6,893
Less: interest expense capitalised into assets under
construction(Note 15)	(606) (662)
	222,513 231,938
Finance income
Interest income on bank deposits	(13,767) (9,169)
Interest income from non-current receivables Net foreign exchangegains	(21,692) (12,323) (60,695) (1,543)
	(96,154) (23,035)
	126,359 208,903

11 Subsidiaries

The following is a list of the principal subsidiaries as at 31 December 2020:

	Place of	Place of	Particulars of issued	Attributable	equity interest
Name of company	incorporation	operation	and paid-up capital	Direct	Indirect	Principal activities
Honghua Holdings Limited	Hong Kong	Hong Kong	1 ordinary share	100%	–	Investment holding
(“Honghua Holdings”)
Sichuan Honghua Petroleum	The PRC	The PRC	Registered capital	–	100%	Manufacturing of petroleum
Equipment Co., Ltd.			RMB2,200,000,000			equipment
(“Honghua Company”)
((a) and (c))
Sichuan Honghua Electric	The PRC	The PRC	Registered capital	–	84%	Manufacturing of panel of
Co., Ltd. (“Honghua Electric”)			RMB100,000,000			drilling rigs
((a) and (c))
Honghua International Co., Ltd.	The PRC	The PRC	Registered capital	–	2019:90%	Trading of drilling rigs and
(“Honghua International”)			RMB51,200,000		2020:91%	related parts
((a) and (c))

HONGHUA GROUP LIMITED

2020 ANNUAL REPORT

164

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEAR ENDED 31 DECEMBER 2020 (All amounts in RMB unless otherwise stated)

11 Subsidiaries (Continued)

	Place of	Place of	Particulars of issued	Attributable equity interest	Attributable equity interest
Name of company	incorporation	operation	and paid-up capital	Direct	Indirect	Principal activities
Honghua (China) Investment	The PRC	The PRC	Registered capital	–	100%	Investment holding
Co., Ltd. (“Honghua China”)			USD320,000,000
((a), (b) and (c))
Honghua Oil & Gas Engineering	The PRC	The PRC	Registered capital	–	100%	Drilling engineering service
Technology Services Limited			RMB732,600,000			and fracturing engineering
(“Sichuan Oil & Gas Services”)						service
((a) and (c))
Gansu Hongteng Oil & Gas	The PRC	The PRC	Registered capital	–	70%	Manufacturing of related
Equipment Co., Ltd.			RMB120,000,000			parts of drilling rigs
(“Gansu Hongteng”)
((a) and (c))
Honghua Oil & Gas Engineering	Hong Kong	Iraq	Registered capital	–	100%	Drilling engineering service
Services Limited (“Hongkong			USD41,080,000			and fracturing engineering
Oil & Gas Services “)						service
Newco (H.K.) Limited	Hong Kong	Hong Kong	1,000 ordinary shares	–	100%	Trading of drilling rigs and
						related parts
Honghua America, LLC	United States	United States	Registered capital	–	100%	Trading of drilling rigs and
	of America	of America	USD3,414,407			related parts
Russia Touhey Motor Drilling	Russia	Russia	Registered capital	–	51%	Drilling engineering service
Service Limited (“TNG”)	Federation	Federation	RUB489,297,344
Han Zheng Testing	The PRC	The PRC	Registered capital		100%	Testing service
Technology Co., Ltd.			RMB11,103,380
(“Han Zheng Testing“)
Honghua Energy Equipment	Russia	Russia	Registered capital	–	100%	Trading of drilling rigs and
Limited	Federation	Federation	RUB13,339,523			related parts

(a) These entities are domestic limited liability companies established in the PRC.
(b) The entity is a wholly-owned foreign invested enterprise established in the PRC.
(c) The official names of these companies are in Chinese. The English translation of the company name is for reference only.

HONGHUA GROUP LIMITED 2020 ANNUAL REPORT 165

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2020 (All amounts in RMB unless otherwise stated)

11 Subsidiaries (Continued)

Material non-controlling interests

The total non-controlling interests as at 31 December 2020 was approximately RMB225,261,000 (2019: RMB214,797,000), of which approximately RMB197,293,000 (2019: RMB161,437,000) is attributed to Honghua Electric, approximately RMB24,071,000 (2019: RMB31,798,000) is attributed to Honghua International, approximately RMB10,620,000 (2019: RMB10,626,000) is attributed to Gansu Hongteng, and approximately RMB(6,723,000) (2019: RMB(4,044,000)) is attributed to TNG. The amounts disclosed for each subsidiary are before inter-company eliminations.

Summarised financial information on subsidiaries with material non-controlling interests

Set out below are the summarised financial information for each subsidiary that has non-controlling interests that are material to the Group. The amounts disclosed for each subsidiary are before inter-company eliminations.

Summarised balance sheet

Honghua Electric Honghua International Gansu Hongteng TNG As at 31 December As at 31 December As at 31 December As at 31 December 2020 2019 2020 2019 2020 2019 2020 2019 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000	Honghua Electric Honghua International Gansu Hongteng TNG As at 31 December As at 31 December As at 31 December As at 31 December 2020 2019 2020 2019 2020 2019 2020 2019 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000	Honghua Electric Honghua International Gansu Hongteng TNG As at 31 December As at 31 December As at 31 December As at 31 December 2020 2019 2020 2019 2020 2019 2020 2019 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000	Honghua Electric Honghua International Gansu Hongteng TNG As at 31 December As at 31 December As at 31 December As at 31 December 2020 2019 2020 2019 2020 2019 2020 2019 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000	Honghua Electric Honghua International Gansu Hongteng TNG As at 31 December As at 31 December As at 31 December As at 31 December 2020 2019 2020 2019 2020 2019 2020 2019 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000
Current Assets 2,661,176 Liabilities (1,581,336)	2,062,954 839,889 (1,197,221) (671,329)	1,222,537 56,774 (877,096) (77,656)	44,890 57,648 (70,807) (113,230)	74,943 (144,433)
Total current net assets/ (liabilities) 1,079,840	865,733 168,560	345,441 (20,882)	(25,917) (55,582)	(69,490)
Non-current Assets 301,279 Liabilities (112,732)	273,967 84,893 (18,415) –	24,711 58,766 – –	63,684 42,067 – (206)	61,502 (264)
Total non-current net assets 188,547	255,552 84,893	24,711 58,766	63,684 41,861	61,238
Net assets 1,268,387	1,121,285 253,453	370,152 37,884	37,767 (13,721)	(8,252)

HONGHUA GROUP LIMITED 2020 ANNUAL REPORT

166

FOR THE YEAR ENDED 31 DECEMBER 2020 (All amounts in RMB unless otherwise stated)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

11 Subsidiaries (Continued)

Summarised financial information on subsidiaries with material non-controlling interests (Continued)

Summarised statement of profit or loss and other comprehensive income

	Honghua Electric	Honghua International	Gansu Hongteng	TNG
	Year ended 31 December	Year ended 31 December	Year ended 31 December	Year ended 31	December
	2020 2019	2020 2019	2020 2019	2020	2019
	RMB’000 RMB’000	RMB’000 RMB’000	RMB’000 RMB’000	RMB’000	RMB’000
Revenue Profit/(loss) before	1,407,388 1,623,503	432,163 529,964	56,870 103,391	–	–
income tax Income tax (expense)/	165,301 183,827	(155,505) 19,106	159 1,897	(7,970)	(9,818)
credit	(18,199) (24,749)	38,806 (4,910)	(42) 432	–	6,779
Profit/(loss) for the year	147,102 159,078	(116,699) 14,196	117 2,329	(7,970)	(3,039)
Other comprehensive
income/(loss) for the
year	– –	– –	– –	2,501	(793)
Total comprehensive
income/(loss)	147,102 159,078	(116,699) 14,196	117 2,329	(5,469)	(3,832)
Total comprehensive
income/(loss)
allocated to
non-controlling
interests	23,919 25,866	(10,713) 1,353	35 699	(2,680)	(1,878)

HONGHUA GROUP LIMITED 2020 ANNUAL REPORT 167

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEAR ENDED 31 DECEMBER 2020

(All amounts in RMB unless otherwise stated)

11 Subsidiaries (Continued)

Summarised financial information on subsidiaries with material non-controlling interests (Continued)

Summarised cash flows

	Honghua Electric	Honghua International	Gansu Hongteng	TNG
	Year ended 31 December	Year ended 31 December	Year ended 31 December	Year ended 31	December
	2020 2019	2020 2019	2020 2019	2020	2019
	RMB’000 RMB’000	RMB’000 RMB’000	RMB’000 RMB’000	RMB’000	RMB’000
Cash flows from
operating activities
Cash (used in)/
generated from
operations	(533,514) (360,799)	(236,844) (42,459)	12 72,585	(2,187)	2,382
Income tax paid	(17,009) (37,215)	(2,303) (9,022)	– –	(178)	(130)
Net cash (used in)/
generated from
operating activities	(550,523) (398,014)	(239,147) (51,481)	12 72,585	(2,365)	2252
Net cash (used in)/
generated from
investing activities	181,290 427,069	197,015 105,668	(134) (119)	128	–
Net cash generated
from/(used in)
financing activities	414,373 23,855	98,051 (79,588)	– (74,393)	–	–
Net increase/
(decrease) in cash
and cash
equivalents	45,140 52,910	55,919 (25,401)	(122) (1,927)	(2,237)	2,252
Cash and cash
equivalents at
beginning of year	83,001 30,091	71,904 97,305	1,019 2,946	2,252	–
Cash and cash
equivalents at end
of year	128,141 83,001	127,823 71,904	897 1,019	15	2,252

HONGHUA GROUP LIMITED 2020 ANNUAL REPORT

168

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEAR ENDED 31 DECEMBER 2020 (All amounts in RMB unless otherwise stated)

12 Investments accounted for using the equity method

The amounts recognised in the consolidated balance sheet are as follows:

As at 31 December 2020 2019 RMB’ 000 RMB’ 000	As at 31 December 2020 2019 RMB’ 000 RMB’ 000
Investment in associates and joint ventures 28,785	31,259

The amounts recognised in profit or loss are as follows:

Year ended 2020 RMB’ 000	31 December 2019 RMB’ 000
Investment in associates and joint ventures (14,967)	(3,223)
Year ended 2020 RMB’ 000	31 December 2019 RMB’ 000
At 1 January 31,259 Share of loss (14,967) Increase in ownership interest 9,350 Currencytranslation differences 3,143	35,135 (3,223) – (653)
At 31 December 28,785	31,259

HONGHUA GROUP LIMITED 2020 ANNUAL REPORT 169

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEAR ENDED 31 DECEMBER 2020

(All amounts in RMB unless otherwise stated)

12 Investments accounted for using the equity method (Continued)

Investment in associates

Set out below are the associates of the Group as at 31 December 2020, which are held directly by the Group.

Nature of investment in associates as at 31 December 2020 and 2019

	Place of	of ownership	Nature of the	Measurement
Name of company	establishment	interest	relationship	method
Honghua Offshore Oil and Gas	The PRC	49%	(i)	Equity
Equipment (Jiangsu) Co., Ltd.
(“Honghua (Jiangsu)”)
Shanghai Honghua Offshore Oil &	The PRC	49%	(i)	Equity
Gas Equipment Co., Ltd.
(“Honghua (Shanghai)”)

The associates are unlisted companies and there is no quoted market price available for its equity.

There are no contingent liabilities relating to the Group’s interest in the associates.

Honghua (Jiangsu) and Honghua (Shanghai) are associates of the Group as at 31 December 2020 and 2019, which, in the opinion of the directors, are material to the Group.

Set out below are the summarised financial information for Honghua (Jiangsu) and Honghua (Shanghai) which are accounted for using the equity method. The information disclosed reflects the amounts presented in the financial statements of the associates and not the Group’s share of those amounts. They have been amended to reflect adjustments made by the Group when using the equity method, including fair value adjustments and modifications for differences in accounting policy.

HONGHUA GROUP LIMITED 2020 ANNUAL REPORT

170

FOR THE YEAR ENDED 31 DECEMBER 2020 (All amounts in RMB unless otherwise stated)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

12 Investments accounted for using the equity method (Continued)

Investment in associates (Continued)

Honghua (Jiangsu)

Summarised balance sheet

As at 31 December 2020 2019 RMB’ 000 RMB’ 000	As at 31 December 2020 2019 RMB’ 000 RMB’ 000
Current assets Cash and cash equivalents 24,612 Other current assets 550,692	21,785 749,310
Total current assets 575,304	771,095
Non-current assets 1,054,602	1,300,169
Current liabilities Other current liabilities (1,496,013)	(727,831)
Total current liabilities (1,496,013)	(727,831)
Non-current liabilities Other non-current liabilities (1,150,421)	(1,877,991)
Total non-current liabilities (1,150,421)	(1,877,991)
Net liabilities (1,016,528)	(534,558)

HONGHUA GROUP LIMITED 171 2020 ANNUAL REPORT

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEAR ENDED 31 DECEMBER 2020

(All amounts in RMB unless otherwise stated)

12 Investments accounted for using the equity method (Continued)

Investment in associates (Continued)

Honghua (Jiangsu) (Continued)

Summarised statement of comprehensive income

	Year ended
	31 December
	2020 RMB’ 000
Revenue Interest income Depreciation and amortisation Interest expense Income tax expense Loss from continuing operations	226,157 47 (42,668) (86,216) – (481,640)
Loss for the period	(481,640)
Other comprehensive income	–
Total comprehensive loss	(481,640)

Reconciliation of the summarised financial information

Reconciliation of the summarised financial information presented to the carrying amount of its interest in the associate.

	Year ended
	31 December
	2020 RMB’ 000
Opening net liabilities 1 January	(534,558)
Loss for theyear	(481,640)
Closing net liabilities	(1,016,528)
Interest in associate Adjustment	(498,099) 498,099
Carrying value (i)	–

HONGHUA GROUP LIMITED 2020 ANNUAL REPORT

172

FOR THE YEAR ENDED 31 DECEMBER 2020 (All amounts in RMB unless otherwise stated)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

12 Investments accounted for using the equity method (Continued)

Investment in associates (Continued)

Honghua (Shanghai)

Summarised balance sheet

As at 31 December 2020 2019 RMB’ 000 RMB’ 000	As at 31 December 2020 2019 RMB’ 000 RMB’ 000
Current assets Cash and cash equivalents 6,520 Other current assets 17,621	5,024 17,501
Total current assets 24,141	22,525
Non-current assets 41,040	73,623
Current liabilities Other current liabilities (214,587)	(233,440)
Total current liabilities (214,587)	(233,440)
Net liabilities (149,406)	(137,292)

Summarised statement of comprehensive income

	Year ended
	31 December
	2020 RMB’ 000
Revenue Interest income Depreciation and amortisation Interest expense Income tax expense Loss from continuing operations	6,591 13 (88) (5,035) – (12,114)
Loss for the period	(12,114)
Other comprehensive income	–
Total comprehensive loss	(12,114)

HONGHUA GROUP LIMITED 2020 ANNUAL REPORT 173

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEAR ENDED 31 DECEMBER 2020

(All amounts in RMB unless otherwise stated)

12 Investments accounted for using the equity method (Continued)

Investment in associates (Continued)

Honghua (Shanghai) (Continued)

Reconciliation of the summarised financial information

Reconciliation of the summarised financial information presented to the carrying amount of its interest in the associate.

	Year ended
	31 December
	2020 RMB’ 000
Opening net liabilities 1 January	(137,292)
Loss for theyear	(12,114)
Closing net liabilities	(149,406)
Interest in joint associate	(73,209)
Adjustment	73,209
Carrying value (i)	–

(i) For the year ended 31 December 2020, both Honghua (Jiangsu) and Honghua (Shanghai) were still suffered from losses and the net assets as at 31 December 2020 were negative, thus the carrying amount of investments in Honghua (Jiangsu) and Honghua (Shanghai) were zero as at 31 December 2020.

HONGHUA GROUP LIMITED 2020 ANNUAL REPORT

174

FOR THE YEAR ENDED 31 DECEMBER 2020 (All amounts in RMB unless otherwise stated)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

12 Investments accounted for using the equity method (Continued)

Investment in joint ventures

Set out below are the joint ventures of the Group as at 31 December 2020, which are held directly by the Group.

Nature of investment in joint ventures as at 31 December 2020 and 2019

	Place of	% of ownership	Nature of the	Measurement
Name of company	establishment	interest	relationship	method
Egyptian Petroleum HH Rigs	Egypt	50%	(i)	Equity
Manufacturing Co. S.A.E.
(“HH Egyptian Company”)
Honghua Financial Leasing (Shenzhen)	The PRC	2020:41%	(ii)	Equity
Co., Ltd. (“Honghua (Shenzhen)”)		2019:36%

(i) HH Egyptian Company mainly engages in the manufacturing and sale of drilling rigs, parts and components.

(ii) Honghua (Shenzhen) was incorporated in 2014 and mainly engages in providing leasing services. On 29 June 2020, the Group increased the investment in Honghua (Shenzhen) by RMB9,350,000. As a result, the equity interests in Honghua (Shenzhen) increased to 41%. The Group’s voting rights in the board of directors of Honghua (Shenzhen) is 50%, and Honghua (Shenzhen) is accounted as a joint venture.

The joint ventures are unlisted companies and there is no quoted market price available for its equity.

There are no contingent liabilities relating to the Group’s interest in the joint ventures.

Honghua (Shenzhen) and HH Egyptian Company are joint ventures of the Group as at 31 December 2020, which, in the opinion of the directors, is material to the Group.

Set out below are the summarised financial information for Honghua (Shenzhen) and HH Egyptian Company which are accounted for using the equity method. The information disclosed reflects the amounts presented in the financial statements of the joint ventures and not the Group’s share of those amounts. They have been amended to reflect adjustments made by the Group when using the equity method, including fair value adjustments and modifications for differences in accounting policy.

HONGHUA GROUP LIMITED 2020 ANNUAL REPORT 175

(All amounts in RMB unless otherwise stated)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEAR ENDED 31 DECEMBER 2020

12 Investments accounted for using the equity method (Continued)

Investment in joint ventures (Continued)

Honghua (Shenzhen)

Summarised balance sheet

As at 31 December 2020 2019 RMB’ 000 RMB’ 000	As at 31 December 2020 2019 RMB’ 000 RMB’ 000
Current assets Cash and cash equivalents 23,163 Other current assets 129,810	50,688 121,162
Total current assets 152,973	171,850
Non-current assets 1,375,958	1,553,840
Current liabilities Other current liabilities (486,164)	(469,005)
Total current liabilities (486,164)	(469,005)
Non-current liabilities Other non-current liabilities (1,021,503)	(1,212,086)
Total non-current liabilities (1,021,503)	(1,212,086)
Net assets 21,264	44,599

HONGHUA GROUP LIMITED 2020 ANNUAL REPORT

176

FOR THE YEAR ENDED 31 DECEMBER 2020 (All amounts in RMB unless otherwise stated)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

12 Investments accounted for using the equity method (Continued)

Investment in joint ventures (Continued)

Honghua (Shenzhen) (Continued)

Summarised statement of comprehensive income

	Year ended 31 December
	2020 2019
	RMB’ 000 RMB’ 000
Revenue Interest income	491,949 327,580 804 63
Depreciation and amortisation	(371,163) (231,240)
Interest expense	(6,788) (2,566)
Income tax expense	10,542 892
Loss from continuing operations	(31,678) (3,674)
Loss for the period	(31,678) (3,674)
Other comprehensive income	– –
Total comprehensive loss	(31,678) (3,674)

HONGHUA GROUP LIMITED 177 2020 ANNUAL REPORT

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEAR ENDED 31 DECEMBER 2020 (All amounts in RMB unless otherwise stated)

12 Investments accounted for using the equity method (Continued)

Investment in joint ventures (Continued)

Honghua (Shenzhen) (Continued)

Reconciliation of summarised financial information

Reconciliation of the summarised financial information presented to the carrying amount of its interest in the joint venture.

	Year ended 31 December
	2020 2019
	RMB’ 000 RMB’ 000
Opening net assets 1 January	44,599 48,273
Loss for the year	(31,678) (3,674)
Increase of capital	16,840 –
Dividend distribution Others	(8,547) – 50 –
Closing net assets	21,264 44,599
Interest in joint venture	8,731 16,105
Adjustment(ii)	(8,731) (16,105)
Carrying value	– –

(ii) Due to the accumulated unrealised gains between the Group and Honghua (Shenzhen) exceeded the carrying amount of investment in Honghua (Shenzhen), thus the carrying value of the investment is reduced to zero as at 31 December 2020.

HONGHUA GROUP LIMITED 2020 ANNUAL REPORT

178

FOR THE YEAR ENDED 31 DECEMBER 2020 (All amounts in RMB unless otherwise stated)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

12 Investments accounted for using the equity method (Continued)

Investment in joint ventures (Continued)

HH Egyptian Company

Summarised balance sheet

As at 31 December 2020 2019 RMB’ 000 RMB’ 000	As at 31 December 2020 2019 RMB’ 000 RMB’ 000
Current assets Cash and cash equivalent 1,233 Other current assets 12,797	3,462 21,800
Total current assets 14,030	25,262
Non-current assets 91,056	90,120
Current liabilities – Other current liabilities (47,516)	– (52,864)
Total current liabilities (47,516)	(52,864)
Net assets 57,570	62,518

HONGHUA GROUP LIMITED 2020 ANNUAL REPORT 179

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEAR ENDED 31 DECEMBER 2020

(All amounts in RMB unless otherwise stated)

12 Investments accounted for using the equity method (Continued)

Investment in joint ventures (Continued)

HH Egyptian Company (Continued)

Summarised statement of comprehensive income

	Year ended 31 December
	2020 2019
	RMB’ 000 RMB’ 000
Revenue Interest income	14,747 16,937 – –
Depreciation and amortisation	– –
Interest expense	(86) (144)
Income tax expense	– –
Loss from continuing operations	(11,234) (6,446)
Loss for the period	(11,234) (6,446)
Other comprehensive income/(loss)	6,286 (1,305)
Total comprehensive loss	(4,948) (7,751)

Reconciliation of summarised financial information

Reconciliation of the summarised financial information presented to the carrying amount of its interest in the joint venture.

	Year ended 31 December
	2020 2019 RMB’ 000 RMB’ 000
Opening net assets 1 January	62,518 70,269
Post-tax loss for the year	(11,234) (6,446)
Currencytranslation differences	6,286 (1,305)
Closing net assets	57,570 62,518
Interest injoint venture	28,785 31,259
Carrying value	28,785 31,259

HONGHUA GROUP LIMITED 2020 ANNUAL REPORT

180

FOR THE YEAR ENDED 31 DECEMBER 2020 (All amounts in RMB unless otherwise stated)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

13 Income tax expense

Taxation in the consolidated statement of profit or loss represents:

Year ended 31 December 2020 2019 RMB’ 000 RMB’ 000	Year ended 31 December 2020 2019 RMB’ 000 RMB’ 000
Current income tax – Hong Kong Profits Tax (a) Provision for the year 495 Overprovision in respect ofprioryears (241)	23 (607)
254	(584)
Current income tax – PRC (b) Provision for the year 23,931 Underprovision in respect ofprioryears 6,086	43,776 373
30,017	44,149
Current income tax – Other jurisdictions (c) Provision for the year 10,161 Overprovision in respect ofprioryears –	11,409 (7,961)
10,161	3,448
Total current income tax 40,432 Deferred income tax(Note 27) (14,482)	47,013 (13,237)
Income tax expense 25,950	33,776

HONGHUA GROUP LIMITED 2020 ANNUAL REPORT 181

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEAR ENDED 31 DECEMBER 2020

(All amounts in RMB unless otherwise stated)

13 Income tax expense (Continued)

(a) Hong Kong

The provision for Hong Kong Profits Tax is calculated at 16.5% of the estimated assessable profits of the subsidiaries of the Group incorporated in Hong Kong for the years ended 31 December 2020 and 2019.

(b) PRC

Pursuant to the income tax rules and regulations of the PRC, the subsidiaries of the Group in the PRC are subject to PRC enterprise income tax at a rate of 25% for the years ended 31 December 2020 and 2019, except for the following companies:

(i) Honghua Company, Han Zheng Testing and Sichuan Oil & Gas Services

Corporate income tax (“CIT”) of Honghua Company, Han Zheng Testing and Sichuan Oil & Gas Services is accrued at a tax rate of 15% applicable for Hi-tech enterprises pursuant to the relevant PRC tax rules and regulations for the years ended 31 December 2020 and 2019.

(ii) Honghua Electric

On 6 April 2012, State Taxation Administration issued Notice 12(2012) (“the Notice”) in respect of favourable CIT policy applicable to qualified enterprises located in western China. Honghua Electric applied and obtained an approval from in-charge tax authority under the policy for the 15% preferential CIT rate and is qualified for the 15% preferential CIT rate from 2012 to 2020.

(c) Others

Taxation for other entities is charged at their respective applicable tax rates ruling in the relevant jurisdictions.

(d) Withholding tax

Under the PRC tax law and its implementation rules, dividends receivable by non-PRC resident enterprises from PRC enterprises are subject to withholding tax at a rate of 10%, unless reduced by tax treaties or arrangements, for profits earned since 1 January 2008. Pursuant to a tax arrangement between the PRC and Hong Kong, a qualified Hong Kong tax resident will be liable for withholding tax at a reduced rate of 5% for dividend income derived from the PRC.

The Company’s directors revisited the dividend policy of the Group in 2020 and 2019. In order to retain the fundings for operations and future development, it was resolved that the Group’s PRC subsidiaries will not distribute dividend to the offshore holding companies in the foreseeable future. Any dividends to be declared by the Company will be distributed from the share premium account.

HONGHUA GROUP LIMITED 2020 ANNUAL REPORT

182

FOR THE YEAR ENDED 31 DECEMBER 2020 (All amounts in RMB unless otherwise stated)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

13 Income tax expense (Continued)

(e) The tax on the Group’s profit before tax differs from the theoretical amount that would arise using the tax rate applicable to the group entities as follows:

	Year ended 31 December
	2020 2019
	RMB’ 000 RMB’ 000
Profit before income tax	86,090 166,265
Tax calculated at statutory tax rates applicable to each group entities	39,304 18,998
Tax effect of non-deductible expenses	379 504
Tax effect of non-taxable income	(230) (1,136)
Tax effect of changing tax rate	– 19,635
Tax losses for which no deferred income tax asset was recognised	10,179 31,698
Deductible temporary differences for which no deferred income tax asset
was recognised	2,890 15,446
Additional deduction of research and development expense	(11,757) –
Recognise tax losses for which no deferred income tax asset was
recognised in prior years	– (41,849)
Reversal of previously recognised deferred income tax assets of deductible
temporary differences	6,702 –
Write off of previously recognised deferred income tax assets of tax losses	1,548 –
Under/(over) provision in respect of prior years	5,845 (8,195)
Use of tax losses which unrecognised in prior years	(28,910) (1,325)
Income tax expense	25,950 33,776

(f) Amounts recognised directly in other comprehensive income

Aggregate deferred tax arising in the reporting period and not recognised in net profit or loss but charged to other comprehensive income:

	Year ended 31 December	Year ended 31 December
	2020	2019
	RMB’ 000	RMB’ 000
Deferred tax: Changes in the fair value of equity investments
at fair value other comprehensive income	(151)	1,792

HONGHUA GROUP LIMITED 2020 ANNUAL REPORT

183

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEAR ENDED 31 DECEMBER 2020 (All amounts in RMB unless otherwise stated)

14 Earnings per share

(a) Basic earnings per share

The calculation of basic earnings per share is based on the loss attributable to owners of the Company by the weighted average number of ordinary shares in issue during the year.

	Year ended 31 December
	2020 2019
Profit attributable to owners of the Company (RMB’ 000)	49,660 107,472
Weighted average number of ordinary shares in issue (thousands)	5,355,995 5,355,958
Effect of the share award scheme (thousands)	(61,089) (62,089)
Effect of share options exercised(thousands)	– 53
Adjusted weighted average number of ordinary shares
in issue (thousands)	5,294,906 5,293,922
Basic earnings per share (RMB cents per share)	0.94 2.03

(b) Diluted earnings per share

The calculation of diluted earnings per share is based on adjusting the weighted average number of ordinary shares outstanding to assume conversion of all dilutive potential ordinary shares. The Company has one category of dilutive potential ordinary shares: share options. For the share options, a calculation is done to determine the number of shares that could have been acquired at fair value (determined as the average annual market share price of the Company’s shares) based on the monetary value of the subscription rights attached to outstanding share options. The number of shares calculated as above is compared with the number of shares that would have been issued assuming the exercise of the share options.

	Year ended 31 December
	2020 2019
Profit attributable to owners of the Company (RMB’ 000)	49,660 107,472
Weighted average number of ordinary shares in issue (thousands)	5,294,906 5,293,922
Effect of deemed issue of shares under the share option scheme
(thousands)	– –
Adjusted weighted average number of ordinary shares (diluted)
in issue (thousands)	5,294,906 5,293,922
Diluted earnings per share (RMB cents per share)	0.94 2.03

HONGHUA GROUP LIMITED 2020 ANNUAL REPORT

184

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEAR ENDED 31 DECEMBER 2020 (All amounts in RMB unless otherwise stated)

15 Property, plant and equipment

		Buildings		Furniture,
	Freehold	held for	Plant and	fittings and	Motor	Construction
	land	own use	machinery	equipment	vehicles	in progress	Total
	RMB’000	RMB’000	RMB’000	RMB’000	RMB’000	RMB’000	RMB’000
At 1 January 2019
Cost	5,835	695,026	1,550,078	490,067	107,022	193,117	3,041,145
Disposal of subsidiaries	–	(12,899)	(10,966)	(1,386)	(608)	(101,804)	(127,663)
Accumulated depreciation
and impairment	–	(238,633)	(755,800)	(340,871)	(59,021)	(891)	(1,395,216)
Net book amount	5,835	443,494	783,312	147,810	47,393	90,422	1,518,266
Year ended 31 December 2019
Opening net book amount	5,835	443,494	783,312	147,810	47,393	90,422	1,518,266
Additions	–	3,337	77,549	51,881	8,930	96,764	238,461
Transfer from construction in progress	–	74,904	4,101	2,171	–	(81,176)	–
Transfer from inventories	–	–	99,061	–	–	–	99,061
Disposals	(5,359)	(29,763)	(3,082)	(2,967)	(459)	–	(41,630)
Transfer to inventories	–	–	(4,867)	–	–	–	(4,867)
Transfer to investment properties	–	(6,468)	–	–	–	–	(6,468)
Transfer to construction in progress	–	–	(37,442)	(3,592)	–	41,034	–
Depreciation charge	–	(32,220)	(82,639)	(46,263)	(4,991)	–	(166,113)
Currency translation difference	36	1,212	10,866	533	173	–	12,820
Impairment provision	–	–	(7,852)	–	–	–	(7,852)
Closing net amount	512	454,496	839,007	149,573	51,046	147,044	1,641,678
At 31 December 2019
Cost	512	689,954	1,598,197	490,708	113,077	147,935	3,040,383
Accumulated depreciation
and impairment	–	(235,458)	(759,190)	(341,135)	(62,031)	(891)	(1,398,705)
Net book amount	512	454,496	839,007	149,573	51,046	147,044	1,641,678
Year ended 31 December 2020 Opening net book amount Additions Transfer from construction in progress Disposals Transfer to inventories Transfer from investment properties Depreciation charge Currency translation difference Impairment provision	512 – – – – – – (33) –	454,496 822 13,658 (9,323) – 5,476 (32,897) (817) –	839,007 43,892 224,364 (28,126) (25,876) – (76,180) (15,375) (1,035)	149,573 114,951 5,896 (52) – – (59,466) – –	51,046 1,041 – (8,062) (151) – (4,898) (407) –	147,044 196,601 (243,918) – – – – (5,158) –	1,641,678 357,307 – (45,563) (26,027) 5,476 (173,441) (21,790) (1,035)
Closing net amount	479	431,415	960,671	210,902	38,569	94,569	1,736,605
At 31 December 2020 Cost Accumulated depreciation and impairment	479 –	703,616 (272,201)	1,478,349 (517,678)	611,319 (400,417)	94,072 (55,503)	95,460 (891)	2,983,295 (1,246,690)
Net book amount	479	431,415	960,671	210,902	38,569	94,569	1,736,605

HONGHUA GROUP LIMITED 2020 ANNUAL REPORT 185

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEAR ENDED 31 DECEMBER 2020

(All amounts in RMB unless otherwise stated)

15 Property, plant and equipment (Continued)

(a) Depreciation expense of approximately RMB132,719,000 (2019: RMB121,648,000) has been charged in cost of sales, RMB5,575,000 (2019: RMB7,640,000) in distribution expenses, RMB32,980,000 (2019: RMB34,586,000) in administrative expenses and RMB2,167,000 (2019: RMB2,239,000) in development cost.
(b) As at 31 December 2020, the Group was in the process of obtaining the legal title of buildings with carrying amount of approximately RMB142,795,000 (2019: RMB257,852,000).
(c) The Group has capitalised borrowing costs amounting to approximately RMB606,000 (2019: RMB662,000) on qualifying assets. Borrowing costs were capitalised at the weighted average rate of its general borrowings at 3.95% (2019: 3.62%).
(d) For the years ended 31 December 2020 and 2019, property, plant and equipment was transferred out to inventories for rebuild and future sale.
(e) Net rental income amounting to approximately RMB87,277,000 (2019: RMB59,141,000) relating to the lease of plant and machinery is included in profit or loss.

The category of plant and machinery leased by the Group to third parties under operating leases with the following carrying amount:

	Year ended 31 December
	2020 2019 RMB’ 000 RMB’ 000
Cost Accumulated depreciation at 1 January	360,816 280,646 (83,192) (53,328)
Additions Deduction Depreciation charge for theyear	149,209 93,616 (42,002) (13,446) (20,482) (29,864)
Net book amount	364,349 277,624

HONGHUA GROUP LIMITED 2020 ANNUAL REPORT

186

FOR THE YEAR ENDED 31 DECEMBER 2020 (All amounts in RMB unless otherwise stated)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

16 Leases

This note provides information for leases where the Group is a lessee.

(a) Amounts recognised in the balance sheet

The balance sheet shows the following amounts relating to leases:

	31 December 31 December	31 December 31 December
	2020	2019
	RMB’ 000	RMB’ 000
Right-of-use assets
Lease prepayments for land use rights	181,447	184,652
Buildings and equipment	3,561	3,117
	185,008	187,769
Lease liabilities
Current	18,199	16,673
Non-current	70,118	94,299
	88,317	110,972

Additions to the right-of-use assets during the 2020 financial year were RMB3,335,000 (2019: RMB123,156,000).

(b) Amounts recognised in the statement of profit or loss

The statement of profit or loss shows the following amounts relating to leases:

		2020 2019
	Note	RMB’ 000 RMB’ 000
Depreciation charge of right-of-use assets
Lease prepayments for land use rights		6,158 4,570
Buildings and equipment		2,672 390
Interest expense (included in finance cost)	10	6,100 6,893
Expense relating to short-term and low-value
assets leases (included in cost of goods sold
and distribution expenses)		42,157 10,782

The total cash outflow for leases in 2020 was RMB51,236,000 (2019: RMB38,684,000) and it excluded the payments for variable leasing expenses to Honghua (Shenzhen) (Note 33).

(c) The Group’s leasing activities and how these are accounted for

The Group leases various offices, warehouses and equipment. Rental contracts are typically made for fixed periods fixed period without extension or termination options. Lease terms are negotiated on an individual basis. The lease agreements do not impose any covenants in relation to security interests in the leased assets that are held by the lessor. Leased assets are not used as security for borrowing purposes.

HONGHUA GROUP LIMITED 2020 ANNUAL REPORT 187

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEAR ENDED 31 DECEMBER 2020

(All amounts in RMB unless otherwise stated)

17 Intangible assets

		Development
	Technical	cost and
	know-how	others	Total
	RMB’ 000	RMB’ 000	RMB’ 000
At 1 January 2019
Cost	348,839	203,876	552,715
Disposal of subsidiaries	–	(6,210)	(6,210)
Accumulated amortisation and impairment	(348,839)	(36,480)	(385,319)
Net book amount	–	161,186	161,186
Year ended 31 December 2019
Opening net book amount	–	161,186	161,186
Additions	–	35,454	35,454
Amortisation charge	–	(13,734)	(13,734)
Disposals	–	(2,579)	(2,579)
Currencytranslation difference	–	15	15
Closing net amount	–	180,342	180,342
At 31 December 2019
Cost	348,839	228,654	577,493
Accumulated amortisation and impairment	(348,839)	(48,312)	(397,151)
Net book amount	–	180,342	180,342
Year ended 31 December 2020
Opening net book amount	–	180,342	180,342
Additions Amortisation charge	– –	69,988 (16,019)	69,988 (16,019)
Disposals	–	(3,604)	(3,604)
Others	–	116	116
Closing net amount	–	230,823	230,823
At 31 December 2020
Cost Accumulated amortisation and impairment	348,839 (348,839)	295,154 (64,331)	643,993 (413,170)
Net book amount	–	230,823	230,823

Most of the amortisation of the Group’s intangible assets was charged to administrative expenses.

HONGHUA GROUP LIMITED 2020 ANNUAL REPORT

188

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEAR ENDED 31 DECEMBER 2020 (All amounts in RMB unless otherwise stated)

18 Trade and other receivables

	As at 31 December
	2020 2019
	RMB’ 000 RMB’ 000
Trade receivables (a)	2,981,797 3,501,437
Bills receivable	549,190 266,165
Less:provision for impairment of trade receivables and bills receivable	(435,724) (266,775)
Amount due from related parties (Note 33(b)) – Trade	3,095,263 3,500,827 400,473 211,449
– Non-trade Less: provision for impairment of trade receivables for amount	359,785 311,738
due from relatedparties	(68,474) (27,711)
	691,784 495,476
Finance lease receivables	254,830 315,371
Less: provision for impairment of finance lease receivable	(75,279) (77,239)
Value-added tax recoverable	64,517 74,929
Prepayments	311,285 425,549
Less: provision for prepayments	(32,662) (36,970)
Other receivables (b)	319,198 299,408
Less:provision for impairment of other receivables	(126,101) (122,845)
	4,502,835 4,874,506
Representing:
Current portion (c)	3,699,407 3,593,152
Non-currentportion(d)	803,428 1,281,354
Total	4,502,835 4,874,506

HONGHUA GROUP LIMITED 2020 ANNUAL REPORT 189

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEAR ENDED 31 DECEMBER 2020

(All amounts in RMB unless otherwise stated)

18 Trade and other receivables (Continued)

(a) As at 31 December 2020 and 31 December 2019, the ageing analysis of the net amount of trade receivables and bills receivable (including amounts due from related parties of trading in nature), based on the invoice date is as follows:

	As at 31	December
	2020	2019
	RMB’ 000	RMB’ 000
Within 3 months	2,283,515	2,517,145
3 to 12 months	584,314	564,943
Over 1year	559,433	602,477
	3,427,262	3,684,565

The Group maintains different billing policies for different customers based on the negotiated terms with each of the customers. The Group issues progress billing at different stages such as upon the signing of contracts and upon the delivery of products. The exact percentage of each part of payment varies from contract to contract. Trade receivables are generally due for payment within 90 days from the date of billing.

(b) Included in other receivables of the Group as at 31 December 2019 is an amount of approximately RMB21,032,000 to be indemnified by some beneficiary owners of the Company in relation to a legal claim.
(c) Except for the non-current trade and other receivables, all of the other trade and other receivables are expected to be recovered within one year.
(d) Non-current trade and other receivables as at 31 December 2020 included (1) finance lease receivables of approximately RMB76,283,000 (2019: RMB129,193,000); (2) receivables of approximately RMB727,145,000 (2019: RMB1,151,961,000) arising from instalment sales which are due for payment one year after the end of the reporting period and are discounted at the rate which discounts the nominal amount of the promised consideration to the price that customer would pay in cash for the goods or services when or as the Group transfers to the customer; and (3) prepayment for acquisition of property, plant and equipment of approximately RMB0 (2019: RMB200,000).
(e) As at 31 December 2020 and 2019, the Group’s maximum exposure to credit risk was the carrying value of each class of receivables mentioned above.
(f) The carrying amounts of the current portion of trade and other receivables approximate their fair value.

HONGHUA GROUP LIMITED 2020 ANNUAL REPORT

190

FOR THE YEAR ENDED 31 DECEMBER 2020 (All amounts in RMB unless otherwise stated)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

18 Trade and other receivables (Continued)

(g) The creation and release of provision for prepayments has been included in “Administrative expenses” and provision for impaired receivables has been included in “Net impairment losses on financial assets and contract assets” in profit or loss respectively.
(h) As at 31 December 2020, bills receivables of approximately RMB222,658,000 and accounts receivable of RMB71,702,000 were secured for borrowings (Note 26).
(i) As at 31 December 2020, lease liabilities of RMB85,837,000 (as at 31 December 2019: RMB108,721,000) were secured by finance lease receivables of RMB81,899,000 (as at 31 December 2019: RMB103,425,000).
(j) As at 31 December 2020 and 2019, the Group had receivables under finance lease as follows:

As at 31 December 2020 2019 RMB’ 000 RMB’ 000	As at 31 December 2020 2019 RMB’ 000 RMB’ 000
Non-current receivables Finance leases – gross receivables 84,830 Unearned finance income (8,547)	146,911 (17,718)
76,283	129,193
Current receivables Finance leases – gross receivables 187,288 Unearned finance income (8,741)	198,045 (11,867)
178,547	186,178
Gross receivables from finance leases: – No later than 1 year 187,288 – Later than 1year and no later than 5years 84,830	198,045 146,911
272,118 Unearned future finance income on finance leases (17,288)	344,956 (29,585)
Net investment in finance leases 254,830	315,371

HONGHUA GROUP LIMITED 2020 ANNUAL REPORT 191

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEAR ENDED 31 DECEMBER 2020 (All amounts in RMB unless otherwise stated)

18 Trade and other receivables (Continued)

(j) (Continued)

The net investment in finance leases is analysed as follows:

	As at 31	December
	2020	2019
	RMB’ 000	RMB’ 000
No later than 1 year	178,547	186,178
Later than 1year and no later than 5years	76,283	129,193
Total	254,830	315,371

(k) Impairment and risk exposure

The Group applies the IFRS 9 simplified approach to measuring expected credit losses which uses a lifetime expected loss allowance for all trade receivables and contract assets. Note 3.1(b) provides for details about the calculation of the allowance.

19 Debt investments at amortised cost

As at 31 December 2020 2019 RMB’ 000 RMB’ 000	As at 31 December 2020 2019 RMB’ 000 RMB’ 000
Loan to a joint venture 80,736 Loan to a thirdparty 17,170	105,651 17,170
97,906	122,821
Current portion 43,956 Non-currentportion 53,950	24,915 97,906
Total 97,906	122,821

The loan to a joint venture, Honghua (Shenzhen), is for a period of 4 years, repayable in quarterly instalments at effective annual interest rate of 7.51% per annum. The loan will be repayable in full on 19 July 2023.

The loan to a third party was for a period of 16 months with effective annual interest rate of 6% and will be repayable in full on 31 March 2021.

HONGHUA GROUP LIMITED 2020 ANNUAL REPORT

192

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEAR ENDED 31 DECEMBER 2020

(All amounts in RMB unless otherwise stated)

20 Inventories

	As at 31	December
	2020	2019
	RMB’ 000	RMB’ 000
Raw materials	409,733	539,199
Work in progress	470,638	357,737
Finished goods	349,162	369,742
Costs to fulfil contracts Revolvingmaterials and others	83,891 33,394	– 678
	1,346,818	1,267,356

For the year ended 31 December 2020, the cost of inventories recognised as the Group’s expense and included in ‘cost of sales’ amounted to approximately RMB1,427,154,000 (2019: RMB2,280,662,000).

(a) Movement on the provision for inventory is as follows:

	Years ended	31 December
	2020	2019
	RMB’ 000	RMB’ 000
At 1 January	167,595	172,690
Provision Write off	74,124 (72,152)	71,698 (76,472)
Reversal	(18,430)	(321)
Currencytranslation difference	(2,794)	–
At 31 December	148,343	167,595

HONGHUA GROUP LIMITED 2020 ANNUAL REPORT 193

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEAR ENDED 31 DECEMBER 2020

(All amounts in RMB unless otherwise stated)

21 Cash and cash equivalents

(a) Cash and cash equivalents

	As at 31	December
	2020	2019
	RMB’ 000	RMB’ 000
Cash on hand	2,500	2,601
Cash at bank	949,884	887,201
Cash and cash equivalents	952,384	889,802

(b) Pledged bank deposits

As at 31 December 2020 and 2019, the deposits are pledged to banks as security against letters of guarantee (Note 26) and for bills payable (Note 25).

(c) Term deposit

As at 31 December 2020, the Group had a term deposit with amount of RMB40,000,000. The interest rate of this term deposit is 3.6% per annum and will be due in 2023.

The fair value of the term deposit is RMB38,664,000 as at 31 December 2020.

22 Share capital

Ordinary shares, issued and fully paid:

Number of shares (thousands)	Amount RMB’ 000 488,015 8 488,023
At 1 January 2019 5,355,905 Shares issued under share option scheme(Note 23(b)(ii)) 90
At 31 December 2019 5,355,995
At 1 January 2020 5,355,995 Shares issued under share option scheme(Note 23(b)(ii)) –
	488,023
	–
At 31 December 2020 5,355,995
	488,023

(a) The total authorised number of ordinary shares is 10,000,000,000 shares (2019: 10,000,000,000 shares) with a par value of HKD0.1 per share (2019: HKD0.1 per share).

HONGHUA GROUP LIMITED 2020 ANNUAL REPORT

194

FOR THE YEAR ENDED 31 DECEMBER 2020 (All amounts in RMB unless otherwise stated)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

23 Share-based payments

(a) Share Option Scheme

(i) The Company also adopted a share option scheme (the “Share Option Scheme”) on 21 January 2008 for any eligible employees of the entities within the Group. The terms and conditions of the grants that existed during the year are as follows, whereby all options are settled by physical delivery of shares:

	Number of			Contractual
	share options			life of
	(thousands)		Vesting conditions	options
Options granted:
– on 15 April 2009	60,000	(i)	30% on 1 December 2009	10 years
		(ii)	30% on 14 April 2010
		(iii)	40% on 15 April 2011
– on 11 October 2010	2,200	(i)	40% on 25 October 2010	10 years
		(ii)	30% on 11 October 2011
		(iii)	30% on 11 October 2012
– on 20 June 2011	7,600 (a)	(i)	30% on 19 July 2011	10 years
		(ii)	30% on 19 June 2012
		(iii)	40% on 20 June 2013
– on 5 April 2012	15,400	(i)	30% on 5 April 2013	10 years
		(ii)	30% on 5 April 2014
		(iii)	40% on 5 April 2015
– on 24 March 2014	3,200 (b)	(i)	30% on 24 April 2014	10 years
		(ii)	30% on 24 April 2015
		(iii)	40% on 24 April 2016
– on 2 July 2014	40,575 (c)		Vesting of the share options is conditional upon the achievement of corporate	10 years
			goals of the company and the individual performance of the respective grantees.
			The share options of any portion thereof shall lapse if the relevant corporate goals
			cannot be achieved. Up to 30% of the share options granted to each grantee after
			April 2015; up to 60% of the share options granted to each grantee after April 2016;
			all the remaining share options granted to each grantee after April 2017
– on 21 September 2016	41,350 (d)	(i)	30% on 21 September 2017	10 years
		(ii)	30% on 21 September 2018
		(iii)	40% on 21 September 2019
Total share options	170,325

HONGHUA GROUP LIMITED 2020 ANNUAL REPORT

195

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEAR ENDED 31 DECEMBER 2020

(All amounts in RMB unless otherwise stated)

23 Share-based payments (Continued)

(a) Share Option Scheme (Continued)

(i) (Continued)
(a) 5,200,000 shares are granted to the directors of the Group.
(b) 3,200,000 shares are granted to the directors of the Group.
(c) 4,577,000 shares are granted to the directors of the Group.
(d) 8,450,000 shares are granted to the directors of the Group.

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

	Year ended 31 December 2020 2019 Weighted average exercise price Number of share options (thousands) Weighted average exercise price Number of share options (thousands) HKD1.12 93,707 HKD1.16 132,751 – – HKD0.44 (90) – – HKD0.44 (460) HKD0.96 (1,371) HKD1.27 (38,494) HKD1.18 92,336 HKD1.12 93,707	Year ended 31 December 2020 2019 Weighted average exercise price Number of share options (thousands) Weighted average exercise price Number of share options (thousands) HKD1.12 93,707 HKD1.16 132,751 – – HKD0.44 (90) – – HKD0.44 (460) HKD0.96 (1,371) HKD1.27 (38,494) HKD1.18 92,336 HKD1.12 93,707
	2020
	Weighted average exercise price	Number of share options (thousands)
At 1 January Exercised Forfeited Lapsed
	HKD1.12	93,707
	–	–
	–	–
	HKD0.96	(1,371)
At 31 December
	HKD1.18	92,336

The options outstanding at 31 December 2020 had an exercise price in the range of HKD0.44 to HKD2.02 (2019: HKD0.44 to HKD2.02) and a weighted average remaining contractual life of 5.81 years (2019: 6.83 years).

For the year ended 31 December 2020, there was no share options exercised (2019: 90,000 share options exercised).

For the year ended 31 December 2020, options granted in year 2014 and 2016 which were not exercised in prior years were lapsed due to the resignation of employees.

HONGHUA GROUP LIMITED 2020 ANNUAL REPORT

196

FOR THE YEAR ENDED 31 DECEMBER 2020 (All amounts in RMB unless otherwise stated)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

23 Share-based payments (Continued)

(a) Share Option Scheme (Continued)

(ii) (Continued)

The fair value of options granted to the directors and selected employees is determined by using the binomial valuation model. The fair value of options granted on 21 September 2016 was HKD0.22 and HKD0.18 per option for the directors and selected employees respectively. The significant inputs into the model were spot share price of HKD0.44 at the grant date, exercise price shown above, volatilities of 55.65%, dividend yield of 1.75%, exercise multiples of 2.47 and 1.6 for directors and selected employees respectively, forfeiture rate of 0.00% for directors and selected employees, and an annual risk-free interest rates of 1.06%. The volatilities were based on the daily historical volatility of the Company. See Note 9 for the total expense recognised in profit or loss for share options granted to directors and employees.

(b) Share Award Scheme

On 30 December 2011, the board of directors approved to adopt a Restricted Share Award Scheme (the “Scheme”). Under the Scheme, the Company may grant shares of the Company to certain selected participants at specified consideration. Pursuant to the Scheme rules, existing issued shares will be purchased by the trustee of the Scheme (the “Trustee”) from the market out of funds provided by the Company in accordance with the Scheme rules.

During the year ended 31 December 2012, 47,817,000 shares were acquired by the Trustee through purchases from the open market, at a total cost of approximately RMB49,973,000 (equivalent to HKD61,518,000).

During the year ended 31 December 2013, the Trustee acquired 50,000,000 shares of the Company through purchase from the open market according to the instructions of the board of directors, at a total cost of approximately RMB146,233,000.

HONGHUA GROUP LIMITED 2020 ANNUAL REPORT 197

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEAR ENDED 31 DECEMBER 2020 (All amounts in RMB unless otherwise stated)

23 Share-based payments (Continued)

(b) Share Award Scheme (Continued)

During the year ended 31 December 2013, the Company granted restricted shares in respect of a total of 35,917,700 ordinary shares of the Company to selected participants at a price of HKD1.27 each, of which 190,000 restricted shares granted were subsequently cancelled. 17,428,850 of the restricted shares were vested on 20 May 2013 and 18,298,850 of the restricted shares were vested on 20 December 2013.

During the year ended 31 December 2014, the Company granted restricted shares in respect of a total of 1,000,000 ordinary shares of the Company to a selected participant at a price of HKD0.99 each and the selected participant exercised all the granted shares on 19 December 2017.

No shares were acquired by the Trustee under the Scheme for the years ended 31 December 2020 and 2019. As at 31 December 2020, 61,089,300 shares were held by the Trustee under the Scheme (2019: 62,089,300 shares).

The fair value of restricted shares granted to employees is measured with reference to the closing price of the ordinary share of the Company at the grant date and recognised as staff costs with a corresponding increase in the capital reserve within equity.

24 Other reserves

(a) Share premium

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

(b) Other reserve

The other reserve represents the difference between the nominal value of share of the subsidiaries acquired over the nominal value of the shares issued by the Company in exchange; the difference between acquisitions of non-controlling interests and entities under common control over the consideration given; and the contribution of technology licenses by a shareholder.

HONGHUA GROUP LIMITED 2020 ANNUAL REPORT

198

FOR THE YEAR ENDED 31 DECEMBER 2020 (All amounts in RMB unless otherwise stated)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

24 Other reserves (Continued)

(c) Capital reserve

Capital reserve represents the value of employee services in respect of the equity-settled sharebased payment as set out in Note 23, waiver of debts by the immediate holding company and capital contribution arising on shareholders’ indemnity.

(d) Surplus reserve

Pursuant to the applicable PRC regulations, PRC entity is required to appropriate 10% of its profitafter-tax (after offsetting prior year losses) to the reserve until such reserve reaches 50% of the registered capital. The transfer to the reserve must be made before distribution of dividends to shareholders. The surplus reserve can be utilised, upon approval by the relevant authorities, to offset accumulated losses or to increase registered capital of the PRC subsidiaries, provided that the balance after such issue is not less than 50% of its registered capital.

(e) Exchange reserve

The exchange reserve comprises all foreign exchange differences arising from the translation of the financial statements of operations outside the PRC which are dealt with in accordance with the accounting policies as set out in Note 2.6.

(f) Fair value reserve

The fair value reserve comprises the cumulative net change in the fair value of equity investments at fair value through other comprehensive income held at the end of the reporting period and is dealt with in accordance with the accounting policies in Note 2.11.

HONGHUA GROUP LIMITED 2020 ANNUAL REPORT 199

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEAR ENDED 31 DECEMBER 2020

(All amounts in RMB unless otherwise stated)

25 Trade and other payables

	As at 31	December
	2020	2019
	RMB’ 000	RMB’ 000
Trade payables	1,421,207	1,538,066
Amounts due to related companies (Note 33(c))
– Trade	19,423	8,681
– Non-trade	44,376	43,216
Bills payable	755,316	689,010
Receipts in advance	501	401
Otherpayables	414,921	547,144
	2,655,744	2,826,518

At 31 December 2020 and 2019, the ageing analysis of the trade payables and bills payable (including amounts due to related parties of trading in nature) based on invoice date is as follows:

	As at 31	December
	2020	2019
	RMB’ 000	RMB’ 000
Within 3 months	567,463	446,514
3 to 6 months	532,146	492,896
6 to 12 months	766,736	747,348
Over 1year	329,601	548,999
	2,195,946	2,235,757

As at 31 December 2020 and 2019, all the trade payables, bills payable and other payables of the Group were non-interest bearing and their fair value approximated their carrying amounts due to their short maturities.

As at 31 December 2020 and 2019, bills payable were secured by certain pledged bank deposits as disclosed in Note 21. All the current trade and other payables are expected to be settled within one year or are repayable on demand.

HONGHUA GROUP LIMITED 2020 ANNUAL REPORT

200

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEAR ENDED 31 DECEMBER 2020

(All amounts in RMB unless otherwise stated)

26 Borrowings

As at 31 December 2020 2019 RMB’ 000 RMB’ 000	As at 31 December 2020 2019 RMB’ 000 RMB’ 000
(a) Bank loans Secured (i) – Current portion 611,732 – Non-currentportion 173,000	125,231 490,000
784,732	615,231
Unsecured – Current portion 1,533,373 – Non-currentportion 723,862	839,686 218,000
2,257,235	1,057,686
(b) Unsecured loan from related party (Note 33) – Currentportion 110,037	952,673
(c) Other loans Senior notes (ii) – Non-currentportion 1,332,857	1,383,779
Current borrowings 2,255,142 Non-current borrowings 2,229,719	1,917,590 2,091,779
Total borrowings 4,484,861	4,009,369

HONGHUA GROUP LIMITED 2020 ANNUAL REPORT 201

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEAR ENDED 31 DECEMBER 2020

(All amounts in RMB unless otherwise stated)

26 Borrowings (Continued)

(i) As at 31 December 2020, the bank loans were secured by letters of guarantee as collateral of RMB200,000,000, bills receivable of RMB222,658,000, accounts receivable of RMB71,702,000 and 20% equity interest of Honghua Company, a subsidiary of the Group.

As at 31 December 2019, the bank loans were secured by letters of guarantee as collateral of RMB200,000,000, bills receivable of RMB31,700,000 and 20% equity interest of Honghua Company, a subsidiary of the Group.

(ii) On 1 August 2019, the Company issued listed senior notes in the aggregate principal amount of USD200,000,000 (“Senior Notes”). The Senior Notes bear interest at 6.375% per annum, payable semi-annually in arrears and will be due in 2022.

The Senior Notes are guaranteed by the Group’s existing subsidiaries, Honghua Holdings Limited， Newco (H.K.) Limited，Honghua Oil & Gas Engineering Services Limited, Honghua Golden Coast Equipment FZE as stated in the Company’s offering memorandum on 25 July 2019.

The borrowings at 31 December 2020 bear annual interest ranging from 1.00%-5.70% annually (2019: 1.20%-8.30% annually).

The maturities of the Group’s borrowings at respective end of the year are set out as follows:

	As at 31	December
	2020	2019
	RMB’ 000	RMB’ 000
Within 1 year	2,255,142	1,917,590
Between 1 and 2 years	1,855,705	522,000
Between 2 and 5years	374,014	1,569,779
	4,484,861	4,009,369

HONGHUA GROUP LIMITED 2020 ANNUAL REPORT

202

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEAR ENDED 31 DECEMBER 2020 (All amounts in RMB unless otherwise stated)

26 Borrowings (Continued)

The carrying amount and fair value of the borrowings are as follows:

As at 31 December 2020 2019 RMB’ 000 RMB’ 000	As at 31 December 2020 2019 RMB’ 000 RMB’ 000
Carrying amount Bank borrowings 3,041,967 Unsecured loan from related party 110,037 Senior notes 1,332,857	1,672,917 952,673 1,383,779
Fair value Bank borrowings 3,011,531 Unsecured loan from related party 110,059 Senior notes 1,278,880	1,675,718 954,911 1,398,728

Except the Senior Notes, the fair values of non-current borrowings are estimated based on discounted cash flow approach using the prevailing market rates of interest available to the Group for financial instruments with substantially the same terms and characteristics, which were 4.35%-4.90% as at 31 December 2020 (2019: 4.35%-6.84%). The fair value of Senior Notes is estimated based on the market price of Senior Notes traded at over-the-counter as at 31 December 2020. All the fair values of the non-current borrowings are classified as level 2 of the fair value hierarchy.

The carrying amount of current borrowings approximated their fair value, as the impact of discounting was not significant.

The carrying amounts of the Group’s borrowings are denominated in the following currencies:

	As at 31	December
	2020	2019
	RMB’ 000	RMB’ 000
RMB	2,486,268	1,916,404
USD	1,998,593	2,092,965
	4,484,861	4,009,369

HONGHUA GROUP LIMITED 2020 ANNUAL REPORT 203

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEAR ENDED 31 DECEMBER 2020

(All amounts in RMB unless otherwise stated)

26 Borrowings (Continued)

At each balance sheet date, the Group had the following undrawn borrowing facilities:

As at 31 December 2020 2019 RMB’ 000 RMB’ 000	As at 31 December 2020 2019 RMB’ 000 RMB’ 000
Fixed rate Expiring within 1 year (bank loans and bill facilities) 2,693,866	6,318,289

These facilities have been arranged for financing daily operations.

27 Deferred income tax

(a) The analysis of deferred tax assets/(liabilities) is as follows:

	As at 31 December
	2020 2019
	RMB’ 000 RMB’ 000
Deferred tax assets
Deferred tax assets to be recovered within 12 months	153,585 172,785
Deferred tax assets to be recovered more than 12 months	160,344 139,588
	313,929 312,373
Deferred tax liabilities
Deferred tax liabilities to be settled within 12 months	(11,583) (3,176)
Deferred tax liabilities to be settled more than 12 months	(14,446) (35,850)
	(26,029) (39,026)
Deferred tax assets (net)	287,900 273,347

HONGHUA GROUP LIMITED 2020 ANNUAL REPORT

204

FOR THE YEAR ENDED 31 DECEMBER 2020 (All amounts in RMB unless otherwise stated)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

27 Deferred income tax (Continued)

(b) The movement in deferred tax assets and liabilities during the year, without taking into consideration the offsetting of balances within the same tax jurisdiction, is as follows:

									Impairment
									provision
	Write	Provision	Unrealised	Provision for					of property,	Unrealised	Provision for
Deferred tax	down of	for product	profit on	impairment of		Government	Tax	Depreciation	plant and	financing	investment in
assets	inventories	warranties	inventories	receivables	Accruals	grants	losses	difference	equipment	income	associates	Total
	RMB’000	RMB’000	RMB’000	RMB’000	RMB’000	RMB’000	RMB’000	RMB’000	RMB’000	RMB’000	RMB’000	RMB’000
At 1 January 2019	24,688	15,695	2,097	62,520	16,492	14,114	57,254	1,605	6,938	5,770	54,754	261,927
Recognised in profit
or loss	(116)	(7,899)	1,926	31,565	(1,163)	(4,424)	36,057	–	–	(5,770)	–	50,176
Currency translation
differences	–	–	–	270	–	–	–	–	–	–	–	270
At 31 December
2019 Recognised in profit	24,572	7,796	4,023	94,355	15,329	9,690	93,311	1,605	6,938	–	54,754	312,373
or loss Currency translation	(62)	(5,589)	(1,577)	20,026	(3,472)	(1,915)	(5,775)	–	–	–	–	1,636
differences	–	–	–	(80)	–	–	–	–	–	–	–	(80)
At 31 December
2020	24,510	2,207	2,446	114,301	11,857	7,775	87,536	1,605	6,938	–	54,754	313,929

HONGHUA GROUP LIMITED 2020 ANNUAL REPORT

205

FOR THE YEAR ENDED 31 DECEMBER 2020 (All amounts in RMB unless otherwise stated)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

27 Deferred income tax (Continued)

(b) (Continued)

		Changes in
	Installment	fair value
Deferred tax liabilities	sales	of FVOCI	Total
	RMB’ 000	RMB’ 000	RMB’ 000
At 1 January 2019	–	(295)	(295)
Credited to profit or loss	(36,939)	–	(36,939)
Recognised in other comprehensive income	–	(1,792)	(1,792)
At 31 December 2019 Credited to profit or loss Recognised in other comprehensive income	(36,939) 12,846 –	(2,087) – 151	(39,026) 12,846 151
At 31 December 2020	(24,093)	(1,936)	(26,029)

The Group has not recognised deferred income tax assets in respect of tax losses of approximately RMB189,695,000 as at 31 December 2020 (2019: RMB159,404,000) as it is not probable that future taxable profits against which the losses can be utilised in the relevant tax jurisdictions of those entities. These tax losses will be expired in 5 to 10 years.

As at 31 December 2020, deferred income tax liabilities of approximately RMB87,844,000 (2019: RMB75,121,000) had not been recognised for the withholding tax that would be payable on the unremitted earnings of certain subsidiaries. Unremitted earnings totalled approximately RMB1,756,874,000 as at 31 December 2020 (2019: RMB1,502,414,000). The Group does not intend to remit these unremitted earnings from the relevant subsidiaries in the foreseeable future.

HONGHUA GROUP LIMITED 2020 ANNUAL REPORT

206

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEAR ENDED 31 DECEMBER 2020 (All amounts in RMB unless otherwise stated)

28 Provisions for other liabilities and charges

	Legal	Legal
	claims of	claims of	Compensation
	former	sales	to	Legal	Product	Onerous
	shareholders	agency	shareholder (i)	claims	warranties	contract	Total
	RMB’000	RMB’000	RMB’000	RMB’000	RMB’000	RMB’000	RMB’000
At 1 January 2019	42,380	47,353	–	–	55,458	–	145,191
Provisions during the year	–	–	–	–	25,357	6,570	31,927
Utilised during the year	(42,380)	(47,353)	–	–	(35,350)	–	(125,083)
At 31 December 2019	–	–	–	–	45,465	6,570	52,035
At 1 January 2020	–	–	–	–	45,465	6,570	52,035
Provisions during the year	–	–	15,919	2,610	4,302	–	22,831
Utilised during the year	–	–	–	–	(35,054)	(6,570)	(41,624)
At 31 December 2020	–	–	15,919	2,610	14,713	–	33,242

(i) Pursuant to the agreement signed in 2020 between the Company and Kehua Technology Co., Limited (“Kehua Technology”), a subsidiary of China Aerospace Science and Industry Corporation (中國航天科工集團有限公司) (“CASIC”), the Company will compensate CASIC for certain litigations and issues which cause losses. As 31 December 2020, as some issues haven’t been settled, the Group estimated that about RMB15,919,000 may need to be compensated to CASIC upon those issues are finalised. The Group recorded such estimated compensation amount as “Provision for other liabilities and charges” and recognised in profit or loss as other losses.

HONGHUA GROUP LIMITED 2020 ANNUAL REPORT

207

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEAR ENDED 31 DECEMBER 2020 (All amounts in RMB unless otherwise stated)

29 Deferred income

Movement on the deferred income is as follows:

	As at 31 December
	2020 2019
	RMB’ 000 RMB’ 000
At 1 January	64,961 94,536
Government grants related to assets received during the year	9,197 14,779
Government grants related to costs received during the year	64,359 94,880
Credited toprofit or loss	(86,404) (139,234)
At 31 December	52,113 64,961
Less: non-currentportion	(47,621) (54,464)
Current portion	4,492 10,497

30 Dividends

No dividend was approved or paid in respect of the previous financial years for the years ended 31 December 2020 and 2019.

No dividend was proposed for the year ended 31 December 2020.

HONGHUA GROUP LIMITED 2020 ANNUAL REPORT

208

FOR THE YEAR ENDED 31 DECEMBER 2020 (All amounts in RMB unless otherwise stated)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

31 Cash generated from operations

(a) Reconciliation of profit before income tax to cash generated from operations

	Year ended 31 December
	2020 2019 RMB’ 000 RMB’ 000
Profit before income tax Adjustments for:	86,090 166,265
– Depreciation of property, plant and equipment	171,274 163,874
– Depreciation of right use of assets	8,830 4,960
– Amortisation of intangible assets	15,908 13,568
– Interest income – Interest expense	(5,668) (21,492) 223,119 232,600
– Share of loss from joint ventures and associates	14,967 3,223
– Loss/(gain) on disposal of property, plant and equipment	1,674 (35,428)
– Gain on disposal and dissolution of subsidiaries and a joint venture	– (17,169)
– Foreign exchange gain	(60,695) (34,790)
– Equity-settled share-based payment expenses arising from
share option schemes and share award scheme	– 839
– Provision for impairment ofproperty,plant and equipment	1,035 7,852
	456,534 484,302
Changes in working capital:
– (Increase)/decrease in inventories	(181,650) 302,536
– Decrease/(increase) in trade and other receivables	274,070 (809,893)
– (Increase)/decrease in pledged bank deposits	(11,490) 68,629
– (Decrease)/increase in trade and other payables	(170,774) 485,632
– Increase in contract assets – Decrease in contract liabilities – Decrease inprovisions for other liabilities and charges	(467,854) (177,179) (24,191) (77,283) (18,793) (93,156)
Cash generated from operations	(144,148) 183,588

HONGHUA GROUP LIMITED 2020 ANNUAL REPORT 209

(All amounts in RMB unless otherwise stated)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEAR ENDED 31 DECEMBER 2020

31 Cash generated from operations (Continued)

(b) Proceeds from disposal of property, plant and equipment

In the consolidated statements of cash flows, proceeds from disposal of property, plant and equipment comprise:

	Year ended 31 December
	2020 2019
	RMB’ 000 RMB’ 000
Net book amount (Note 15)	45,563 41,630
(Loss)/Gain on disposal of property, plant and equipment	(1,674) 35,428
Non-cash investingactivities	(7,891) –
Proceeds from disposal of property, plant and equipment	35,998 77,058

(c) Net debt reconciliation

This section sets out an analysis of net debt and the movements in net debt for each of the periods presented.

Net debt 2020 RMB’ 000	2019 RMB’ 000
Cash and cash equivalents (Note 21) 952,384 Borrowings – repayable within one year (Note 26) (2,255,142) Borrowings – repayable after oneyear(Note 26) (2,229,719)	889,802 (1,917,590) (2,091,779)
Net debt (3,532,477)	(3,119,567)
Cash and cash equivalents (Note 21) 952,384 Gross debt – fixed interest rates (3,240,791) Gross debt – variable interest rates (1,244,070)	889,802 (3,103,017) (906,352)
Net debt (3,532,477)	(3,119,567)

HONGHUA GROUP LIMITED 2020 ANNUAL REPORT

210

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEAR ENDED 31 DECEMBER 2020 (All amounts in RMB unless otherwise stated)

31 Cash generated from operations (Continued)

(c) Net debt reconciliation (Continued)

		Liabilities from financing	Liabilities from financing
	Assets	activities
	Cash	Borrowings	Borrowings
	and cash	due within	due after
	equivalents	1 year	1 year	Total
	RMB’ 000	RMB’ 000	RMB’ 000	RMB’ 000
Net debt as at 1 January 2019	685,500	(2,545,450)	(575,000)	(2,434,950)
Cash flows	198,898	676,593	(1,505,136)	(629,645)
Foreign exchange adjustments	5,404	(48,733)	(11,643)	(54,972)
Net debt as at 31 December 2019 Cash flows Foreign exchange adjustments	889,802 81,806 (19,224)	(1,917,590) (379,940) 42,388	(2,091,779) (195,774) 98,023	(3,119,567) (493,908) 121,187
Other non-cash movements	–	–	(40,189)	(40,189)
Net debt as at 31 December 2020	952,384	(2,255,142)	(2,229,719)	(3,532,477)

32 Commitments

(a) Capital commitments

Capital expenditure contracted for or authorised but not contracted for at the balance sheet date but not yet incurred is as follows:

	As at 31	December
	2020	2019
	RMB’ 000	RMB’ 000
Contracted for	3,479	10,891

(b) Operating lease commitments

The future aggregate minimum lease payments under non-cancellable operating leases are as follows:

			As at 31	December
			2020	2019
			RMB’ 000	RMB’ 000
Within	1	year	5,897	–

The Group was the lessee in respect of a number of buildings held under operating leases. None of the leases include contingent rentals.

HONGHUA GROUP LIMITED 211 2020 ANNUAL REPORT

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEAR ENDED 31 DECEMBER 2020 (All amounts in RMB unless otherwise stated)

33 Related-party transactions

Related parties are those parties that have the ability to control the other party or exercise significant influence in making financial and operating decisions. Parties are also considered to be related if they are subject to common control.

The following is a summary of the significant transactions carried out between the Group and its related parties in the ordinary course of business during the years ended 31 December 2020 and 2019, and balances arising from related party transactions as at 31 December 2020 and 2019.

Name ofparty	Relationship
Guanghan Hongtai Business Trading Co., Ltd.	Hongtai is a party of which spouses of certain
(廣漢市宏泰商貿有限公司) (“Hongtai”)	directors and management have equity interests
Sichuan Deep & Fast Oil Drilling Tools Co., Ltd.	Sichuan Shenyuan is a party of which the spouse
(四川深遠石油鑽井工具有限公司) (“Sichuan Shenyuan”)	of a director has equity interests
Guanghan Huite Hydraulic Accessories Co., Ltd.	Huite is a party of which the brother of a director
(廣漢市惠特液壓附件有限公司) (“Huite”)	of a group’s subsidiary has equity interests
Aerospace Science & Industry Financial Leasing Co,. Ltd.	ASIFL is a joint venture of CASIC
(航天科工金融租賃有限公司) (“ASIFL”)
Aerospace Science & Industry Finance CORP	ASIFC is a subsidiary of CASIC
(航天科工財務有限責任公司) (“ASIFC”)
HH Egyptian Company	Joint venture
Honghua (Shenzhen)	Joint venture
Honghua (Jiangsu)	Associate
Honghua (Shanghai)	Associate
Jiangsu Hongjieding Energy Technology Co., Ltd.	Controlled by a director of the Group
(“Jiangsu Hongjieding”)
Hong Kong Tank Tek Limited (“HK Tank”)	HK Tank is a subsidiary of Jiangsu Hongjieding
Aerospace Information System Engineering (Beijing)	AISE is a subsidiary of CASIC
Co., Ltd. (航天信息系統工程（北京）有限公司) (“AISE”)
Aerospace Jiangnan Group Co., Ltd.	AJG is a subsidiary of CASIC
(航天江南集團有限公司) (“AJG”)

HONGHUA GROUP LIMITED 2020 ANNUAL REPORT

212

FOR THE YEAR ENDED 31 DECEMBER 2020 (All amounts in RMB unless otherwise stated)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

33 Related-party transactions (Continued)

Name of party	Relationship
Aerospace Sanjiang Group Co., Ltd.	ASG is a subsidiary of CASIC
(中國航天三江集團有限公司) (“ASG”)
Aerospace Cloud Technology Development Co., Ltd.	ACTD is a subsidiary of CASIC
(航天雲網科技發展有限責任公司) (“ACTD”)
Aerospace Construction Group Co., Ltd.	ACG is a subsidiary of CASIC
(中國航天建設集團有限公司) (“ACG”)
(a) Significant related party transactions

Year ended 31 December 2020 2019 RMB’ 000 RMB’ 000	Year ended 31 December 2020 2019 RMB’ 000 RMB’ 000
Purchases of parts and components and others – AISE – – Honghua (Jiangsu) 188,231 – Other related companies 4,628	64,431 9,381 8,495
192,859	82,307
Sales of drilling rigs, parts and components and others – Honghua (Jiangsu) 13,044 – HH Egyptian Company 10,438 – Honghua (Shenzhen) 4,250 – Other related companies 18,394	– 2,695 – 1,980
46,126	4,675
Consulting service provided – Honghua (Shenzhen) 10,186	15,263
Operating lease expenses – Honghua (Shenzhen) 480,607	311,520

HONGHUA GROUP LIMITED 2020 ANNUAL REPORT 213

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEAR ENDED 31 DECEMBER 2020 (All amounts in RMB unless otherwise stated)

33 Related-party transactions (Continued)

(a) Significant related party transactions (Continued)

According to the tripartite agreements signed by the Group, Honghua (Shenzhen) and third party leasing companies, for the year ended 31 December 2019, the Group sold products amounted to approximately RMB960,177,000 to those third party leasing companies, meanwhile, those third party leasing companies have provided finance lease to Honghua (Shenzhen), and the risk and rewards of those products have been transferred to Honghua (Shenzhen).

After the completion of the above transactions, Honghua (Shenzhen) and the subsidiaries of the Group have entered into operating lease agreements which leased the products, including the above mentioned products as well as those products leased by Honghua (Shenzhen) from ASIFL and third party leasing companies before 2019, to the subsidiaries of the Group, and then the subsidiaries of the Group have leased those products to third party companies.

For the year ended 31 December 2020, the total operating lease expense incurred and charged to the profit or loss from the above lease agreements was approximately RMB480,607,000 (2019： RMB311,520,000).

	Year ended 31 December	Year ended 31 December
	2020	2019
	RMB’ 000	RMB’ 000
Payments of loans to
– Honghua (Shenzhen) (Note 19)	–	110,000
Receipts of loan to
– Honghua (Jiangsu)	93,040	71,713
– HK Tank	6,851	8,128
– Honghua(Shenzhen) (Note 19)	24,915	4,350
	124,806	84,191

HONGHUA GROUP LIMITED 2020 ANNUAL REPORT

214

FOR THE YEAR ENDED 31 DECEMBER 2020 (All amounts in RMB unless otherwise stated)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

33 Related-party transactions (Continued)

(a) Significant related party transactions (Continued)

For the year ended 31 December 2020, the Group received repayments of loan to an associate and other related parties from HK Tank and Honghua (Jiangsu) based on debt payment arrangements described in Note 33(b).

	Year ended 31 December
	2020 2019
	RMB’ 000 RMB’ 000
Investments to
– Honghua (Shenzhen) (Note 12)	9,350 –
Receipts of loans from
– ASIFC	180,037 472,673
Repayments of loans from
– Honghua (Shenzhen)	– 2,878
– ASIFC	1,022,673 120,000
	1,022,673 122,878
Financial income
– Honghua (Shenzhen)	6,403 2,421
Financial expenses
– ASIFC	36,673 36,742

Compensation to shareholder

Pursuant to the agreement signed in 2020 between the Company and Kehua Technology, the Company paid compensation of RMB16,112,000 to shareholder for certain litigations and issues which cause losses and recognised the amount in profit or loss as other losses.

HONGHUA GROUP LIMITED 2020 ANNUAL REPORT 215

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEAR ENDED 31 DECEMBER 2020

(All amounts in RMB unless otherwise stated)

33 Related-party transactions (Continued)

(b) Amounts due from related companies

	As at 31	December
	2020	2019
	RMB’ 000	RMB’ 000
Trade (Note 18)
– Joint ventures	222,405	123,129
– Associates	104,483	55,625
– Other related companies	5,111	4,984
	331,999	183,738
Non-trade (i)
– Associates	1,359,941	1,445,674
– Joint ventures	392,157	400,321
– Other related companies	103,815	109,852
	1,855,913	1,955,847

(i) In 2018, the Group signed agreements with Jiangsu Hongjieding an Honghua (Shanghai) with the following key transaction terms and disposed offshore drilling rigs segment accordingly:
i) The Group agreed to sell its 51% equity interests in both Honghua (Jiangsu) and Honghua (Shanghai) for a cash consideration of RMB1 respectively;
ii) The Group agreed to sell its 25% equity interests in FSP LNG B.V. and 70% equity interests in HK Tank for a cash consideration of USD1 respectively;
iii) The Group agreed to sell its 30% equity interests in Prime FSP, LLC for a cash consideration of USD1.

The Group also entered debt repayment agreements with Honghua (Jiangsu) and HK Tank respectively, pursuant to which Honghua (Jiangsu) and HK Tank shall repay the existing debt, together with relevant interest to the Group after the completion of the above equities transfer. These debts are secured by the interest of above entities held by Jiangsu Hongjieding as well as the total assets of Honghua (Jiangsu) and Honghua (Shanghai). The interest of the loans to Honghua (Jiangsu) and HK Tank are 4.75% and 6% respectively. The Group recorded these debts as “loan to an associate and other related party”.

HONGHUA GROUP LIMITED 2020 ANNUAL REPORT

216

FOR THE YEAR ENDED 31 DECEMBER 2020 (All amounts in RMB unless otherwise stated)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

33 Related-party transactions (Continued)

(b) Amounts due from related companies (Continued)

As at 31 December 2020, the current loan to an associate and other related party is RMB683,827,000 (as at 31 December 2019: RMB88,278,000) and non-current loan to an associate and other related party is RMB731,565,000 (as at 31 December 2019: RMB1,450,181,000), which will be received after 1 year but within 3 years. The Group recorded these debts as “loan to an associate and other related party” and the Group made a provision for the credit risk of RMB26,470,000 (2019: RMB49,887,000) (Note 3.1(b)) for the year ended 31 December 2020, and the balance of the provision for the loan to an associate and other related party was RMB72,663,000 as at 31 December 2020 (as at 31 December 2019: RMB49,887,000).

As at 31 December 2020, the current portion and non-current portion of debt investments to joint venture is RMB26,786,000 (2019:RMB24,915,000) and RMB53,950,000 (2019:RMB80,736,000) respectively (Note 19).

The other amounts due from other related companies are unsecured, interest-free and repayable on demand (Note 18). The Group made provisions against the other amount due from related companies for the credit risk of RMB3,345,000 (31 December 2019: nil).

(c) Amounts due to related companies

	As at 31	December
	2020	2019
	RMB’ 000	RMB’ 000
Trade (Note 25)
– Joint ventures	6,531	6,979
– Associates – Other related companies	7,177 5,715	– 1,702
	19,423	8,681
Non-trade (Note 25)
– Joint ventures	4,239	2,079
– Associates	123	800
– Other related companies	40,014	40,337
	44,376	43,216

The amounts due to related companies are unsecured, interest-free and have no fixed repayment terms.

HONGHUA GROUP LIMITED 217 2020 ANNUAL REPORT

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEAR ENDED 31 DECEMBER 2020

(All amounts in RMB unless otherwise stated)

33 Related-party transactions (Continued)

(d) Cash and cash equivalents

	As at 31	December
	2020	2019
	RMB’ 000	RMB’ 000
– ASIFC	9,868	220,611

(e) Borrowings (Note 26)

	As at 31	December
	2020	2019
	RMB’ 000	RMB’ 000
– ASIFC (i)	110,037	952,673

(i) As at 31 December 2020, the loans from ASIFC bear fixed interest rate of 4.35%-4.45%, and will be due for repayment in 2021.
(ii) As at 31 December 2019, the loans from ASIFC bear fixed interest rate of 4.35%, and had been repaid in 2020.

(f) Amounts due from certain shareholders

As at 31 December 2019, the amount due from certain shareholders amounted to RMB21,032,000, being the amount indemnified by certain shareholders in relation to a legal claim. The amount was settled in 2020 and with no remaining balance as at 31 December 2020.

(g) Key management compensation

Year ended 2020 RMB’ 000	31 December 2019 RMB’ 000
Basic salaries, allowances and other benefits in kind 7,205 Contributions to defined contribution retirement schemes 436 Discretionarybonus 6,836	6,664 772 7,833
14,477	15,269

HONGHUA GROUP LIMITED 2020 ANNUAL REPORT

218

FOR THE YEAR ENDED 31 DECEMBER 2020 (All amounts in RMB unless otherwise stated)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

34 Contingencies

On June 2018, the Group received a Notification of Proceeding served by the Court pursuant to which Shanghai Shangshi International Trade (Group) Co., Ltd. (上海上實國際貿易（集團）有限公司) (the “Plaintiff”) commenced a legal proceedings against Honghua (Jiangsu) as the first defendant and Honghua China as the second defendant.

Pursuant to the civil complaint, the plaintiff signed the purchase agency contract with Honghua (Jiangsu) in 2015 pursuant to which, the Plaintiff was engaged by Honghua (Jiangsu) to purchase equipment and materials. The purchase was guaranteed by Honghua China. The Plaintiff alleged that, up to now, Honghua (Jiangsu) and Honghua China should pay the Plaintiff RMB320,693,000 for the materials and equipment procurement costs, agency fee and respective interests thereon.

On 5 August 2015, Honghua (Jiangsu) and LNG Power Shipping Co., Ltd. (“LNG Power Shipping”) entered into a shipbuilding contract pursuant to which Honghua (Jiangsu) shall build and sell to LNG Power Shipping 200 sets of LNG power ships. Due to the fact that the payment by LNG Power Shipping for the ships was not paid in the progress as expected and due to the project management of LNG Power Shipping, the progress of the shipbuilding was delayed, resulting in Honghua (Jiangsu)’s failure to pay the Plaintiff relevant fees on time.

On 17 October 2018, Plaintiff requested that Honghua (Jiangsu) and Honghua China should pay compensation of RMB190,289,000 for payment overdue.

On 7 November 2019, the first judgement was issued by Shanghai Maritime Court of Appeals that Honghua (Jiangsu) should pay an aggregate amount of RMB336,621,000 and the late payment penalty thereon from 15 February 2018 which is calculated at 1.3 times of the Renminbi benchmark loan interest rate for financial institutions of the same terms published by the People’s Bank of China up to the date of actual payment.

On 11 November 2019, Honghua (Jiangsu) and the Group filed an appeal to the Shanghai Higher People’s Court. The judgement was made on 24 December 2020 and it upheld the result of the first judgement.

As at 31 December 2020, Honghua (Jiangsu) has already made the liabilities for the above materials and equipment procurement costs and agency fee of RMB320,693,436.84. Based on the assessment, management of the Company believed that the possibility of paying the liabilities arising from the guarantee provided by Honghua China was relatively low.

HONGHUA GROUP LIMITED 2020 ANNUAL REPORT 219

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEAR ENDED 31 DECEMBER 2020

(All amounts in RMB unless otherwise stated)

35 Balance sheet and reserve movement of the Company

Balance sheet of the Company

		As at 31 December	As at 31 December
		2020	2019
	Note	RMB’ 000	RMB’ 000
ASSETS
Non-current assets
Investments in subsidiaries		4,032,590	3,357,027
Total non-current assets		4,032,590	3,357,027
Current assets
Other receivables		71	216
Amounts due from subsidiaries		1,014,328	1,718,731
Cash and cash equivalents		353	1,220
Total current assets		1,014,752	1,720,167
Total assets		5,047,342	5,077,194
EQUITY
Equity attributable to owners of the Company
Share capital		488,023	488,023
Other reserves	(a)	3,620,101	3,835,393
Accumulated losses	(a)	(773,679)	(674,725)
Total equity		3,334,445	3,648,691
LIABILITIES
Non-current liabilities
Borrowings		1,332,857	1,383,779
Current liabilities
Otherpayables		380,040	44,724
Total liabilities		1,712,897	1,428,503
Total equity and liabilities		5,047,342	5,077,194

The balance sheet of the Company was approved by the Board of Directors on 29 March 2021 and was signed on its behalf:

Jin Liliang Director

Zhang Mi Director

HONGHUA GROUP LIMITED 2020 ANNUAL REPORT

220

FOR THE YEAR ENDED 31 DECEMBER 2020

(All amounts in RMB unless otherwise stated)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

35 Balance sheet and reserve movement of the Company (Continued)

Balance sheet of the Company (Continued)

(a) Reserve movement of the Company

Share capital RMB’000	Share premium RMB’000	Other reserve RMB’000	Capital reserve RMB’000	Exchange reserve RMB’000	Shares held for share award scheme RMB’000	Accumulated losses RMB’000	Total RMB’000 3,640,280 (71,886) 80,180 8,294 83 34 117 3,648,691
Balance at 1 January 2019 488,015	3,597,096	389,691	99,967	(207,032)	(124,618)	(602,839)
Loss for the year – Other comprehensive income –	– –	– –	– –	– 80,180	– –	(71,886) –
Total comprehensive income –	–	–	–	80,180	–	(71,886)
Equity-settled share-based transactions – Shares issued under share option scheme 8	– 83	– –	83 (57)	– –	– –	– –
Total transactions with owners, Recognised directly in equity 8	83	–	26	–	–	–
Balance at 31 December 2019 488,023	3,597,179	389,691	99,993	(126,852)	(124,618)	(674,725)
Balance at 1 January 2020 488,023
	3,597,179	389,691	99,993	(126,852)	(124,618)	(674,725)	3,648,691
Loss for the year – Other comprehensive income –
	–	–	–	–	–	(98,954)	(98,954)
	–	–	–	(215,294)	–	–	(215,294)
Total comprehensive income –
	–	–	–	(215,294)	–	(98,954)	(314,248)
Equity-settled share-based transactions –
	–	–	2	–	–	–	2
Total transactions with owners, Recognised directly in equity –
	–	–	2	–	–	–	2
Balance at 31 December 2020 488,023
	3,597,179	389,691	99,995	(342,146)	(124,618)	(773,679)	3,334,445

HONGHUA GROUP LIMITED 2020 ANNUAL REPORT

221

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEAR ENDED 31 DECEMBER 2020 (All amounts in RMB unless otherwise stated)

36 Benefits and interests of directors

(a) Directors’, supervisors’ and senior management’s emoluments

The remuneration of every director and the chief executive is set out below:

For the year ended 31 December 2020:

Emoluments paid or receivable in respect of a person’s services as a director, whether of the Company or its subsidiaries undertakings.

Name	Fees Basic salaries, allowances and other benefits in kind Contributions to defined contribution retirement scheme Discretionary bonuses Equity-settled share-based payment expenses Total RMB’000 RMB’000 RMB’000 RMB’000 RMB’000 RMB’000
Chairman and Executive Director
Jin Liliang	– 698 521 41 – 1,260
Executive Directors
Zhang Mi	– 690 770 – – 1,460
Ren Jie Non-executive Directors	– 617 643 41 – 1,301
Chen Wenle	– – – – – –
Han Guangrong	– – – – – –
Independent Non-executive Directors
Chen Guoming	107 – – – – 107
Su Mei	107 – – – – 107
Liu Xiaofeng	213 – – – – 213
Pan Zhaoguo	160 – – – – 160
Chang Qing	107 – – – – 107
Wei Bin	213 – – – – 213
Total	907 2,005 1,934 82 – 4,928

HONGHUA GROUP LIMITED 2020 ANNUAL REPORT

222

FOR THE YEAR ENDED 31 DECEMBER 2020 (All amounts in RMB unless otherwise stated)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

36 Benefits and interests of directors (Continued)

(a) Directors’, supervisors’ and senior management’s emoluments (Continued)

The remuneration of every director and the chief executive is set out below:

For the year ended 31 December 2019:

Emoluments paid or receivable in respect of a person’s services as a director, whether of the Company or its subsidiaries undertakings.

		Basic
		salaries,	Contributions
		allowances	to defined		Equity-settled
		and other	contribution		share-based
		benefits	retirement	Discretionary	payment
Name	Fees	in kind	scheme	bonuses	expenses	Total
	RMB’000	RMB’000	RMB’000	RMB’000	RMB’000	RMB’000
Chairman and Executive Director
Jin Liliang	–	690	70	567	–	1,327
Executive Directors
Zhang Mi	–	673	–	1,317	–	1,990
Ren Jie	–	485	69	640	–	1,194
Non-executive Directors
Chen Wenle	–	–	–	–	–	–
Han Guangrong	–	–	–	–	–	–
Independent Non-executive Directors
Chen Guoming	106	–	–	–	–	106
Su Mei	106	–	–	–	–	106
Liu Xiaofeng	212	–	–	–	–	212
Pan Zhaoguo	159	–	–	–	–	159
Chang Qing	106	–	–	–	–	106
Wu Yuwu (passed away on 29 May 2019)	94	–	–	–	–	94
Wei Bin (appointed with effect from
29 August 2019)	72	–	–	–	–	72
Total	855	1,848	139	2,524	–	5,366

HONGHUA GROUP LIMITED 2020 ANNUAL REPORT 223

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEAR ENDED 31 DECEMBER 2020

(All amounts in RMB unless otherwise stated)

36 Benefits and interests of directors (Continued)

(b) Directors’ retirement benefits and termination benefits

For the years ended 31 December 2020 and 2019, no special retirement and termination benefits plans to the directors for the year except for the plans to all the Group’s employees mentioned in Note 9. No other retirement and termination benefits were paid to or receivable by those directors in respect of their other services in connection with the management of the affairs of the Company or its subsidiary undertaking.

During the year ended 31 December 2020, the Company did not provide any consideration to any third party for making available director’s services (2019: nil).

(d) Information about loans, quasi-loans and other dealings in favour of directors, controlled bodies corporate by and connected entities with such directors

During the year ended 31 December 2020, no loans, quasi-loans or other dealings in favour of directors of the Company, controlled bodies corporate by and connected entities with such directors (2019: nil).

(e) Directors’ material interests in transactions, arrangements or contracts

Save for contracts amongst group companies and the interests in transactions, arrangements or contracts mentioned in Note 33, no other significant transactions, arrangements and contracts in relation to the Group’s business to which the Company was a party and in which a director of the Company had a material interest, whether directly or indirectly, subsisted at the end of the year or at any time during the year.

HONGHUA GROUP LIMITED 2020 ANNUAL REPORT

224

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEAR ENDED 31 DECEMBER 2020 (All amounts in RMB unless otherwise stated)

37 Financial instruments by category

The Group holds the following financial instruments:

		As at 31	December
Financial Assets		2020	2019
	Notes	RMB’ 000	RMB’ 000
Financial assets at amortized cost
– Trade and bills receivables	18	3,230,670	3,684,565
– Finance lease receivables – Other receivables (include non-trade amounts due from	18	179,551	238,132
related parties)	18	540,743	477,398
– Debt investment	19	97,906	122,821
– Loan to an associate and other related party	3.1(b)	1,415,392	1,538,459
– Pledged bank deposits	21	280,163	268,673
– Term Deposit	21	40,000	–
– Cash and cash equivalents	21	952,384	889,802
Financial assets at fair value through other comprehensive income
– Bank acceptance bill receivables	3.3(c)	54,937	78,272
– Investment in unlisted companies at FVOCI	3.3(c)	106,338	104,264
		6,898,084	7,402,386

		As at 31	December
Financial liabilities		2020	2019
	Notes	RMB’ 000	RMB’ 000
Liabilities at amortized cost
Trade and other payables (exclude payroll and welfare payables,
other tax payables and receipts in advance)	25	2,572,704	2,686,094
Borrowings	26	4,484,861	4,009,369
Lease liabilities	16	88,317	110,972
		7,145,882	6,806,435

The Group’s exposure to various risks associated with the financial instruments is discussed in Note 3. The maximum exposure to credit risk at the end of the reporting period is the carrying amount of each class of financial assets mentioned above.

HONGHUA GROUP LIMITED 2020 ANNUAL REPORT 225

FIVE-YEAR FINANCIAL HIGHLIGHTS

2020 2019	2018	2017	2016
RMB’000 RMB’000	RMB’000	RMB’000	RMB’000
Consolidated Statement of profit or loss Revenue 3,931,492 4,425,686	4,205,162	2,175,856	2,147,592
Cost of sales (2,751,127) 3,109,852	(3,122,890)	(1,540,763)	(1,789,716)
Gross profit 1,180,365 1,315,834	1,082,272	635,093	357,876
Distribution costs (177,878) (357,273)	(313,211)	(232,616)	(369,608)
Administrative expenses (547,597) (503,486)	(469,484)	(422,090)	(589,195)
Impairment losses on financial and contract assets (267,752) (190,989)	(93,829)	(133,094)	–
Other income 87,612 (11,954)	90,678	92,652	126,732
Other gains/(losses), net (47,334) 126,259	43,005	(43,319)	9,210
Operating loss 227,416 378,391	339,431	(103,374)	(464,985)
Finance expenses – net (126,359) (208,903)	(163,405)	(214,203)	(77,496)
Share of net losses of associates and joint ventures accounted for using the equity method (14,967) (3,223)	(32,444)	(28,968)	(418)
Profit/(loss) before income tax 86,090 166,265	143,582	(346,545)	(542,899)
Income tax expenses (25,950) (33,776)	(33,897)	(48,651)	25,428
Profit/(loss) from continuing operations 60,140 132,489	109,685	(395,196)	(517,471)
Discontinued operations Loss from discontinued operations – –	(13,063)	(834,386)	(109,778)
Profit/(loss) for the year 60,140 132,489	96,622	(1,229,582)	(627,249)
Profit/(loss) attributable to: – Owners of the company 49,660 107,472	82,287	(1,239,368)	(609,689)
– Non-controlling interests 10,480 25,017	14,335	9,786	(17,560)
Profit/(loss) per share from continuing and discontinued operations attributable to owners of the Company (expressed in RMB cents per share) Basic profit/(loss) per share 0.94 2.03	1.55	(26.50)	(19.18)
Diluted profit/(loss) per share 0.94 2.03	1.55	(26.50)	(19.18)
Dividend Dividends declared and paid – – Dividends declared and paid per share – – Dividend proposed after balance sheet date – – Dividend proposed after balance sheet date per share – –	– – – –	– – – –	– – – –

HONGHUA GROUP LIMITED 2020 ANNUAL REPORT

226

FIVE-YEAR FINANCIAL HIGHLIGHTS

2020 RMB’000	2019 2018 2017 2016 RMB’000 RMB’000 RMB’000 RMB’000
Consolidated Balance Sheet Total non-current assets 4,240,975 Total current assets 7,771,402	5,298,467 4,772,175 2,334,095 4,415,887 6,455,861 5,544,922 7,732,449 6,851,879
Total assets 12,012,377	11,754,328 10,317,097 10,066,544 11,267,766
Total current liabilities 5,170,292 Total non-current liabilities 2,347,458	5,033,409 5,374,100 3,938,579 5,022,637 2,240,542 624,086 1,950,315 2,161,677
Total liabilities 7,517,750	7,273,951 5,998,186 5,888,894 7,184,314
Total equity 4,494,627	4,480,377 4,318,911 4,177,650 4,083,452
Key financial ratios Profitability Gross margin from continuing operations 30.0% EBITDA margin/(loss margin) 10.4% Net margin/(loss margin) 1.3%	29.7% 25.7% 29.2% 16.7% 12.6% 11.7% (24.0%) (13.4%) 2.4% 2.0% (57.0%) (28.4%)
Return Return on average equity 1.2% Return on average assets 0.4%	2.6% 2.0% (31.3%) (14.4%) 1.0% 0.8% (11.6%) (5.0%)
Liquidity Current ratio 1.50 Quick ratio 1.24	1.28 1.03 1.96 1.36 1.03 0.74 1.50 0.94
Turnover Turnover of average trade and bills receivable 297 Turnover of average trade and bills payable 292 Turnover of average inventory 174	247 191 172 453 239 174 128 348 166 198 160 378
Gearing Total debts/Total assets 37.3% Gearing ratio 62.6% EBIT/Interest expenses 0.98	34.1% 30.2% 32.9% 38.2% 61.9% 58.1% 58.5% 63.8% 1.66 2.07 (3.56) (2.38)

HONGHUA GROUP LIMITED 227 2020 ANNUAL REPORT

FIVE-YEAR FINANCIAL HIGHLIGHTS

Note:

Profitability

Gross margin EBITDA

EBITDA (loss margin)/margin Net (loss margin)/margin

= Gross profit/Revenue
= (Loss)/profit from operations + Share of net losses of associates and joint ventures accounted for using the equity method + Depreciation + Amortisation
= EBITDA/Revenue
= (Loss)/profit attributable to equity shareholders of the Company/Revenue

Return

Return on average assets Return on average equity

= (Loss)/profit attributable to equity shareholders of the Company/Average assets
= (Loss)/profit attributable to equity shareholders of the Company/Average equity attributable to equity shareholders of the Company

Liquidity

Current ratio Quick ratio

= Current assets/Current liabilities
= (Current assets – Inventory)/Current liabilities

Turnover

Turnover of average trade and bills receivable Turnover of average trade and bills payable Turnover of average inventory

= 365.25*Average trade and bills receivable/Revenue
= 365.25*Average trade and bills payable/Cost of sales
= 365.25*Average inventory/Cost of sales

Gearing

Total debts/Total assets

= (Long term interest-bearing borrowings + Short term interest-bearing borrowings)/Total assets
Gearing ratio = Total liabilities/Total assets EBIT/Interest expenses =
= (Loss)/profit from operations + Share of net losses of associates and joint ventures accounted for using the equity method)/Interest expenses (including capitalised interest)

HONGHUA GROUP LIMITED 2020 ANNUAL REPORT

228

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Honghua Group Limited — Annual Report 2020

49025_rns_2021-04-19_fba50112-06b9-4da5-86e5-28f071e926da.pdf

CONTENTS

CORPORATE INFORMATION

BOARD OF DIRECTORS

EXECUTIVE DIRECTORS

NON-EXECUTIVE DIRECTORS

STRATEGIC INVESTMENT AND RISK CONTROL COMMITTEE

JOINT COMPANY SECRETARIES

INDEPENDENT NON-EXECUTIVE DIRECTORS

LEGAL ADVISOR

PRINCIPAL BANKERS

SECRETARY OF BOARD OF DIRECTORS

BOARD COMMITTEES

AUDIT COMMITTEE

REMUNERATION COMMITTEE

AUDITOR

REGISTERED OFFICE

HEAD OFFICE

PLACE OF BUSINESS IN HONG KONG

PRINCIPAL SHARE REGISTRAR AND TRANSFER OFFICE

HONG KONG BRANCH SHARE REGISTRAR AND TRANSFER OFFICE

STOCK CODE

WEBSITE

FINANCIAL HIGHLIGHTS

FINANCIAL HIGHLIGHTS

CHAIRMAN’S STATEMENT

DEAR SHAREHOLDERS AND FRIENDS,

CHAIRMAN’S STATEMENT

Chairman

Jin Liliang

MANAGEMENT DISCUSSION AND ANALYSIS

MANAGEMENT DISCUSSION AND ANALYSIS

MARKET REVIEW

MANAGEMENT DISCUSSION AND ANALYSIS

BUSINESS REVIEW

1. Drilling Rigs and Related Product Business Segment

MANAGEMENT DISCUSSION AND ANALYSIS

2. Fracturing Business

MANAGEMENT DISCUSSION AND ANALYSIS

3. Drilling Engineering Service Business

MANAGEMENT DISCUSSION AND ANALYSIS

ENVIRONMENTAL POLICIES AND PERFORMANCE

MANAGEMENT DISCUSSION AND ANALYSIS

QUALITY MANAGEMENT AND RESEARCH & DEVELOPMENT

MANAGEMENT DISCUSSION AND ANALYSIS

HUMAN RESOURCES MANAGEMENT

MANAGEMENT DISCUSSION AND ANALYSIS

OUTLOOK

MANAGEMENT DISCUSSION AND ANALYSIS

FINANCIAL REVIEW

Turnover

(1) Revenue by geographical locations

MANAGEMENT DISCUSSION AND ANALYSIS

Revenue by geographical locations

(2) Revenue by operating segments

MANAGEMENT DISCUSSION AND ANALYSIS

Revenue by operating segments

Cost of Sales

Gross Profit and Gross Margin

MANAGEMENT DISCUSSION AND ANALYSIS

Expenses in the Year

Profit before Income Tax

Income Tax Expense

Profit for the year

Earnings before Interest, Taxes, Depreciation and Amortization (“EBITDA”) and EBITDA Margin

MANAGEMENT DISCUSSION AND ANALYSIS

Dividends

Source of Capital and Borrowings

Deposits and Cash Flow

Assets Structure and Changes

MANAGEMENT DISCUSSION AND ANALYSIS

Liabilities

Equity

Capital Expenditure, Major Investment and Capital Commitments

Principal Risks and Uncertainties

EXECUTIVE DIRECTORS

BIOGRAPHICAL DETAILS OF DIRECTORS AND SENIOR MANAGEMENT

NON-EXECUTIVE DIRECTORS

Honghua Group Limited Annual Report 2020