Taizhou Water Group Co., Ltd. - M&A Activity 2021

THIS CIRCULAR IS IMPORTANT AND REQUIRES YOUR IMMEDIATE ATTENTION

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

If you have sold or transferred all your shares in Taizhou Water Group Co., Ltd. , you should at once hand this circular, together with the accompanying form of proxy to the purchaser or the transferee, or to the bank, stockbroker or other agent through whom the sale or transfer was effected for transmission to the purchaser or transferee.

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

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**Taizhou Water Group Co., Ltd.* 台州市水務集團股份有限公司**

(a joint stock company incorporated in the People’s Republic of China with limited liability)

(Stock Code: 1542)

(I) MAJOR TRANSACTIONS IN RELATION TO ACQUISITION OF 45% EQUITY INTEREST IN TAIZHOU WATER SUPPLY, JIAOBEI WATER SUPPLY AND LUQIAO WATER SUPPLY; AND

(II) NOTICE OF THE 2021 FIRST EXTRAORDINARY GENERAL MEETING

A notice convening the EGM of the Company to be held at Conference Room, Taizhou Water Group Co., Ltd., No. 308 Yin Quan Road, Xicheng Street, Huangyan District, Taizhou, Zhejiang Province, the PRC at 9:30 a.m. on Thursday, 15 July 2021 is set out on pages EGM-1 to EGM-3 of this circular. A form of proxy for use at the EGM is also enclosed with this circular. Whether or not you intend to attend and vote at the EGM, you are requested to complete and return the enclosed form of proxy in accordance with the instructions printed thereon to the H Share registrar and transfer office of the Company in Hong Kong, Computershare Hong Kong Investor Services Limited, at 17M Floor, Hopewell Centre, 183 Queen’s Road East, Wan Chai, Hong Kong (in respect of holders of H Shares), or to the Company’s registered office in the PRC at No. 308 Yin Quan Road, Xicheng Street, Huangyan District, Taizhou, Zhejiang Province, PRC (in respect of holders of Domestic Shares) as soon as possible but in any event by not later than 24 hours before the time appointed for holding of the EGM (i.e. before 9:30 a.m. on Wednesday, 14 July 2021) or any adjournment thereof. Completion and return of the form of proxy shall not preclude you from attending and voting in person at the EGM or any adjourned meeting should you so wish.

24 June 2021

* For identification purposes only

CONTENTS

					Page
DEFINITIONS	. . . .	. . . . . . . . . . . . . . . . . . . . . . . . . .	.	. . . . . . . . . . . . . . . . . . . .	1
LETTER FROM THE		BOARD . . . . . . . . . . . . . . . . . .	.	. . . . . . . . . . . . . . . . . . . .	5
APPENDIX I	—	FINANCIAL INFORMATION	OF THE GROUP . . . . . .		I-1
APPENDIX IIA	—	ACCOUNTANTS’ REPORT OF
		TAIZHOU WATER SUPPLY		. . . . . . . . . . . . . . . . . . . .	IIA-1
APPENDIX IIB	—	ACCOUNTANTS’ REPORT OF
		JIAOBEI WATER SUPPLY .	.	. . . . . . . . . . . . . . . . . . . .	IIB-1
APPENDIX IIC	—	ACCOUNTANTS’ REPORT OF
		LUQIAO WATER SUPPLY .	.	. . . . . . . . . . . . . . . . . . . .	IIC-1
APPENDIX IIIA	—	MANAGEMENT DISCUSSION AND ANALYSIS OF
		TAIZHOU WATER SUPPLY		. . . . . . . . . . . . . . . . . . . .	IIIA-1
APPENDIX IIIB	—	MANAGEMENT DISCUSSION AND ANALYSIS OF
		JIAOBEI WATER SUPPLY .	.	. . . . . . . . . . . . . . . . . . . .	IIIB-1
APPENDIX IIIC	—	MANAGEMENT DISCUSSION AND ANALYSIS OF
		LUQIAO WATER SUPPLY	.	. . . . . . . . . . . . . . . . . . . .	IIIC-1
APPENDIX IV	—	UNAUDITED PRO FORMA FINANCIAL
		INFORMATION OF THE ENLARGED GROUP . . . .			IV-1
APPENDIX VA	—	SUMMARY OF THE TAIZHOU		WATER SUPPLY
		VALUATION REPORT . . .	.	. . . . . . . . . . . . . . . . . . . .	VA-1
APPENDIX VB	—	SUMMARY OF THE JIAOBEI	WATER SUPPLY
		VALUATION REPORT . . .	.	. . . . . . . . . . . . . . . . . . . .	VB-1
APPENDIX VC	—	SUMMARY OF THE LUQIAO	WATER SUPPLY
		VALUATION REPORT . . .	.	. . . . . . . . . . . . . . . . . . . .	VC-1
APPENDIX VI	—	GENERAL INFORMATION .	.	. . . . . . . . . . . . . . . . . . . .	VI-1
NOTICE OF EGM . .		. . . . . . . . . . . . . . . . . . . . . . . . . .	.	. . . . . . . . . . . . . . . . . . . .	EGM-1

– i –

DEFINITIONS

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

“Acquisitions”
all or any of the Taizhou Water Supply Acquisition, Jiaobei Water Supply Acquisition and Luqiao Water Supply Acquisition (as the case may be) in accordance with the terms and conditions of the Equity Transfer Agreements
“Articles of Association” the articles of association of the Company, as amended from time to time
“Board”
the board of directors of the Company
“Business Day(s)”
a day (excluding Saturday, Sunday and public holiday in the PRC) on which commercial banks are open for business in the PRC
“China” or “PRC”
the People’s Republic of China, which for the purpose of this circular only, excludes Hong Kong, the Macau Special Administrative Region of the PRC and Taiwan
“Company”
Taizhou Water Group Co., Ltd.* (台州市水務集團股份有限公司), a joint stock company established in the PRC with limited liability, the H Shares of which are listed on the Main Board of the Stock Exchange (stock code: 1542)
“connected person(s)”
has the meaning ascribed to it under the Listing Rules
“Director(s)”
the director(s) of the Company
“Domestic Share(s)”
issued ordinary share(s) in the share capital of the Company with a nominal value of RMB1.00 each, which are subscribed for and paid up in RMB
“EGM”
the 2021 first extraordinary general meeting of the Company to be held at Conference Room, Taizhou Water Group Co., Ltd., No. 308 Yin Quan Road, Xicheng Street, Huangyan District, Taizhou, Zhejiang Province, the PRC at 9:30 a.m. on Thursday, 15 July 2021
“Enlarged Group”

the Group as enlarged by the Acquisitions

“Equity Transfer Agreements”
the Jiaojiang Equity Transfer Agreement and the Luqiao Equity Transfer Agreement

– 1 –

DEFINITIONS

“Group”, “we” or “our”
the Company and its subsidiaries
“H Share(s)”
overseas listed foreign share(s) in the share capital of the Company with a nominal value of RMB1.00 each, which are listed on the Main Board of the Stock Exchange and traded in HKD
“HKD” or “HK$” Hong Kong dollars, the lawful currency of Hong Kong
“Hong Kong” the Hong Kong Special Administrative Region of the PRC
“Independent Valuer”
Canwin Appraisal Co., Ltd. (坤元資產評估有限公司), an independent PRC valuer
“Jiaobei Water Supply”
Taizhou Jiaobei Water Supply Co., Ltd.* (台州市椒北供水有限公司), a limited liability company established in the PRC, and an 88.46%-owned subsidiary of Jiaojiang Urban Development as at the Latest Practicable Date
“Jiaobei Water Supply Acquisition”
the acquisition of 45% equity interest in Jiaobei Water Supply in accordance with the terms and conditions of the Jiaojiang Equity Transfer Agreement
“Jiaobei Water Supply Valuation Report”
the valuation report dated 14 April 2021 issued by the Independent Valuer in respect of the appraisal of the equity attributable to the owners of Jiaobei Water Supply as at the Valuation Reference Date
“Jiaojiang Equity Transfer Agreement”
the equity transfer agreement dated 20 May 2021 entered into between the Company, Jiaojiang Urban Development, Taizhou Water Supply and Jiaobei Water Supply in relation to the Taizhou Water Supply Acquisition and Jiaobei Water Supply Acquisition
“Jiaojiang Urban Development”
Taizhou Jiaojiang Urban Development Investment Group Co., Ltd.* (台州市椒江城市發展投資集團有限公司), a limited liability company established in the PRC
“Latest Practicable Date”
17 June 2021, being the latest practicable date before printing of this circular for the purpose of ascertaining certain information for inclusion in this circular

– 2 –

DEFINITIONS

“Listing Rules”
“Luqiao Equity Transfer Agreement”
“Luqiao Urban Construction”
“Luqiao Water Supply”
“Luqiao Water Supply Acquisition”
“Luqiao Water Supply Valuation Report”
“Model Code”
“Notice of EGM”
“Prospectus”
“RMB”
“SFO”
“Share(s)”
“Shareholder(s)”

the Rules Governing the Listing of Securities on the Stock Exchange, as amended, supplemented or otherwise modified from time to time

the equity transfer agreement dated 20 May 2021 entered into between the Company, Luqiao Urban Construction and Luqiao Water Supply in relation to Luqiao Water Supply Acquisition
Taizhou Luqiao District Urban Construction Group Co., Ltd.* (台州市路橋區城市建設集團有限公司), a limited liability company established in the PRC
Taizhou Luqiao Water Supply Co., Ltd.* (台州市路橋自來水有限公司), a limited liability company established in the PRC, and a wholly-owned subsidiary of Luqiao Urban Construction as at the Latest Practicable Date
the acquisition of 45% equity interest in Luqiao Water Supply in accordance with the terms and conditions of the Luqiao Equity Transfer Agreement
the valuation report dated 8 May 2021 issued by the Independent Valuer in respect of the appraisal of the equity attributable to the owners of Luqiao Water Supply as at the Valuation Reference Date
the Model Code for Securities Transactions by Directors of Listed Issuers, as set out in Appendix 10 to the Listing Rules
the notice convening the EGM set out on pages EGM-1 to EGM-3 of this circular
the prospectus of the Company dated 17 December 2019
Renminbi, the lawful currency of the PRC
the Securities and Futures Ordinance (Chapter 571 of the Laws of Hong Kong)
the Domestic Share(s) and/or the H Share(s)
holder(s) of Share(s)

– 3 –

DEFINITIONS

“Stock Exchange”
The Stock Exchange of Hong Kong Limited
“subsidiary/(ies)”
has the meaning ascribed to it under the Listing Rules
“Supervisor(s)” the supervisor(s) of the Company
“Taizhou Luqiao Public Assets”
Taizhou Luqiao Public Assets Investment Management Co.,Ltd.* (台州市路橋公共資產投資管理有限公司), a limited liability company established in the PRC which holds approximately 8.81% shareholding interest in the Company as at the Latest Practicable Date
“Taizhou SASAC”
The State-owned Assets Supervision and Administration Commission of Taizhou* (台州市人民政府國有資產監督管理委員會)
“Taizhou Water Supply”
Taizhou Water Supply Co., Ltd.* (台州自來水有限公司), a limited liability company established in the PRC, and a wholly-owned subsidiary of Jiaojiang Urban Development as at the Latest Practicable Date
“Taizhou Water Supply Acquisition”
the acquisition of 45% equity interest in Taizhou Water Supply in accordance with the terms and conditions of the Jiaojiang Equity Transfer Agreement
“Taizhou Water Supply Valuation Report”
the valuation report dated 14 April 2021 issued by the Independent Valuer in respect of the appraisal of the equity attributable to the owners of Taizhou Water Supply as at the Valuation Reference Date
“Transition Period”
the period from the Valuation Reference Date to the completion date of the Taizhou Water Supply Acquisition, Jiaobei Water Supply Acquisition and Luqiao Water Supply Acquisition (as the case may be)
“Valuation Reference Date”
31 October 2020, being the reference date of the Valuation Reports on the appraisal of the equity attributable to owners of Taizhou Water Supply, Jiaobei Water Supply and Luqiao Water Supply (as the case may be)
“Valuation Reports”
the Taizhou Water Supply Valuation Report, the Jiaobei Water Supply Valuation Report and the Luqiao Water Supply Valuation Report
“%”
per cent

– 4 –

LETTER FROM THE BOARD

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**Taizhou Water Group Co., Ltd.* 台州市水務集團股份有限公司**

(a joint stock company incorporated in the People’s Republic of China with limited liability)

(Stock Code: 1542)

Executive Directors: Mr. Yang Jun (Chairman) Mr. Zhang Junzhou Non-executive Directors: Mr. Wang Haibo Mr. Wang Haiping Ms. Fang Ya Mr. Yu Yangbin Ms. Huang Yuyan Mr. Yang Yide Mr. Guo Dingwen Mr. Sun Hua

Registered office and Principal Place of Business in the PRC: No. 308 Yin Quan Road Xicheng Street Huangyan District Taizhou, Zhejiang Province PRC Principal Place of Business in Hong Kong: 14/F., Golden Centre 188 Des Voeux Road Central Hong Kong

Independent non-executive Directors: Mr. Zheng Jianzhuang Ms. Lin Suyan Ms. Hou Meiwen Mr. Li Wai Chung Mr. Wang Yongyue

24 June 2021

To the Shareholders

Dear Sir or Madam,

(I) MAJOR TRANSACTIONS IN RELATION TO ACQUISITION OF 45% EQUITY INTEREST IN TAIZHOU WATER SUPPLY, JIAOBEI WATER SUPPLY AND LUQIAO WATER SUPPLY; AND

(II) NOTICE OF THE 2021 FIRST EXTRAORDINARY GENERAL MEETING

1. INTRODUCTION

Reference is made to the announcement of the Company dated 20 May 2021 in relation to the Acquisitions.

* For identification purposes only

– 5 –

LETTER FROM THE BOARD

The purpose of this circular is to provide you with, among other things, (i) further details of the Acquisitions; (ii) financial information and other information of Taizhou Water Supply, Jiaobei Water Supply and Luqiao Water Supply; (iii) pro forma financial information of the Enlarged Group as a result of the Acquisitions; and (iv) a notice of the EGM.

2. MAJOR TRANSACTIONS IN RELATION TO ACQUISITION OF 45% EQUITY INTEREST IN TAIZHOU WATER SUPPLY, JIAOBEI WATER SUPPLY AND LUQIAO WATER SUPPLY

On 20 May 2021 (after trading hours), (i) the Company, Jiaojiang Urban Development, Taizhou Water Supply and Jiaobei Water Supply entered into the Jiaojiang Equity Transfer Agreement in respect of the Taizhou Water Supply Acquisition and Jiaobei Water Supply Acquisition; and (ii) the Company, Luqiao Urban Construction and Luqiao Water Supply entered into the Luqiao Equity Transfer Agreement in respect of the Luqiao Water Supply Acquisition.

The Jiaojiang Equity Transfer Agreement

Date:	20	May 2021
Parties:	1.	Jiaojiang Urban Development (as vendor);
	2.	the Company (as purchaser);
	3.	Taizhou Water Supply (as target company); and
	4.	Jiaobei Water Supply (as target company).

To the best of the Directors’ knowledge, information and belief having made all reasonable enquiries, as at the Latest Practicable Date, Jiaojiang Urban Development and its ultimate beneficial owner(s) are third parties independent of the Company and its connected persons.

Subject matter

Pursuant to the Jiaojiang Equity Transfer Agreement, Jiaojiang Urban Development has conditionally agreed to sell, and the Company has conditionally agreed to purchase, 45% equity interest in each of Taizhou Water Supply and Jiaobei Water Supply, subject to the terms and conditions thereof.

– 6 –

LETTER FROM THE BOARD

Jiaojiang consideration and adjustment thereto

The consideration for the transfer of 45% equity interest in Taizhou Water Supply and Jiaobei Water Supply is RMB23.22 million and RMB23.38 million, respectively. The aggregate consideration of the Taizhou Water Supply Acquisition and Jiaobei Water Supply Acquisition amounts to RMB46.60 million (subject to adjustment) and shall be paid by the Company to Jiaojiang Urban Development in cash in the following manner:

RMB13.98 million (being 30% of the consideration) (the “ First Instalment of Jiaojiang Consideration ”) is payable within 15 Business Days after satisfaction (or waiver by the Company) of the following conditions precedent:
(a) the Jiaojiang Equity Transfer Agreement having been executed and become effective;
(b) the notification to or consents or confirmation of no objection of relevant creditors of Taizhou Water Supply and Jiaobei Water Supply having been obtained;
(c) certain bank loans of Taizhou Water Supply and Jiaobei Water Supply in an aggregate amount of RMB50 million having been settled or discharged;
(d) certain guarantees granted by Taizhou Water Supply in relation to the loan of Taizhou Jiaojiang Municipal Engineering Co., Ltd.* (台州市椒江市政工程有限公司), a subsidiary of Jiaojiang Urban Development, having been discharged; and
(e) all approvals or confirmation of no objection of the relevant regulatory authorities, including the competent state-owned asset management departments and the Stock Exchange (if applicable) having been obtained;
RMB13.98 million (being 30% of the consideration) is payable within 15 Business Days after completion of the Taizhou Water Supply Acquisition and Jiaobei Water Supply Acquisition;
the remaining balance of the consideration is payable within 12 months after completion of the Taizhou Water Supply Acquisition and Jiaobei Water Supply Acquisition and agreement between all parties on the audit results, consideration adjustment and loss and profit arrangements regarding the Transition Period having been reached, and shall be adjusted with reference to:
(a) the loss and/or profit (as the case may be) of each of Taizhou Water Supply and Jiaobei Water Supply generated during the

– 7 –

LETTER FROM THE BOARD

Transition Period. Special audit regarding the loss and profit of each of Taizhou Water Supply and Jiaobei Water Supply will be conducted. The parties shall determine and adjust the consideration payable within 10 Business Days of the issuance of the special audit reports; and

(b) in respect of properties involved within the scope of the Taizhou Water Supply Valuation Report and Jiaobei Water Supply Valuation Report which (i) ownership registration formalities cannot be completed within 12 months after completion of the Taizhou Water Supply Acquisition and/or Jiaobei Water Supply Acquisition (as the case may be); and (ii) will be continued to be used by Taizhou Water Supply and Jiaobei Water Supply (as the case may be), the appraised value of such properties as at the Valuation Reference Date shall be deducted from the consideration.

The Company and Jiaojiang Urban Development have agreed that the aggregate consideration of the Taizhou Water Supply Acquisition and Jiaobei Water Supply Acquisition payable by the Company to Jiaojian Urban Development subsequent to the adjustment to the consideration as set out above shall not exceed RMB61.60 million.

The consideration of the Taizhou Water Supply Acquisition and Jiaobei Water Supply Acquisition will be satisfied by internal resources of the Group.

As at the Latest Practicable Date, none of the aforementioned conditions precedent has been fulfilled.

Basis of consideration

The consideration was determined after arm’s length negotiations between the parties to the Jiaojiang Equity Transfer Agreement, taking into account, among others, the appraised value of the total equity interest of Taizhou Water Supply and Jiaobei Water Supply as at the Valuation Reference Date of approximately RMB51.59 million and RMB51.94 million, respectively, as assessed by the Independent Valuer using the asset based approach.

Taking into account the aforesaid adjustment, the Board is of the view that the consideration of the Taizhou Water Supply Acquisition and Jiaobei Water Supply Acquisition based on the results of the Taizhou Water Supply Valuation Report and Jiaobei Water Supply Valuation Report is fair and reasonable.

– 8 –

LETTER FROM THE BOARD

Completion

Pursuant to the Jiaojiang Equity Transfer Agreement, upon fulfillment of the conditions precedent of payment of the First Instalment of Jiaojiang Consideration as set out in the paragraph headed “Jiaojiang consideration and adjustment thereto” in this circular, each of Taizhou Water Supply and Jiaobei Water Supply shall complete the business registration for the equity transfers (including the respective changes of directors, supervisors and senior management) with the relevant industrial and commercial administration. Completion of the Taizhou Water Supply Acquisition and Jiaobei Water Supply Acquisition shall take place upon completion of the respective business registration particulars of Taizhou Water Supply and Jiaobei Water Supply.

The Company and Jiaojiang Urban Development shall use their best endeavours to procure that the aforementioned business registration for the equity transfers (including the respective changes of directors, supervisors and senior management) with the relevant industrial and commercial administration to be completed on or before 30 September 2021. There is no long stop date in the Jiaojiang Equity Transfer Agreement.

Upon completion, as the Group will hold not more than 50% interest in Taizhou Water Supply and Jiaobei Water Supply and the Group will have no control over the board of directors of Taizhou Water Supply and Jiaobei Water Supply, each of Taizhou Water Supply and Jiaobei Water Supply will not become a subsidiary of the Company and their financial results will not be consolidated into the consolidated financial statements of the Company.

Effective date

The Jiaojiang Equity Transfer Agreement shall be established from the date when it is signed and sealed by the legal representatives or authorised representatives of both parties, and shall take effect from the date when the following conditions are fulfilled:

(a) all decision-making and approval required in relation to the transactions contemplated under the Jiaojiang Equity Transfer Agreement having been obtained by Jiaojiang Urban Development;
(b) the Taizhou Water Supply Valuation Report and Jiaobei Water Supply Valuation Report having been approved or registered with the competent state-owned asset management departments; and
(c) approvals of the Board and shareholder’s resolutions of the Company to approve the transactions contemplated under the Jiaojiang Equity Transfer Agreement having been obtained.

– 9 –

LETTER FROM THE BOARD

Termination

The Jiaojiang Equity Transfer Agreement may be terminated prior to the completion:

(a) with the consent of all the parties;
(b) by the Company in the event there has been material adverse change to Taizhou Water Supply and Jiaobei Water Supply; or
(c) if any of the parties committed a material breach of any representations, guarantees, undertakings or obligations under the Jiaojiang Equity Transfer Agreement and such breach is not remedied by the defaulting party within 30 days upon the issue of written notice by the non-defaulting party, the non-defaulting party is entitled to terminate the Jiaojiang Equity Transfer Agreement.

Post-completion rights

Pursuant to the Jiaojiang Equity Transfer Agreement, after completion of the Taizhou Water Supply Acquisition and Jiaobei Water Supply Acquisition:

(a) if any of the registered land involved within the scope of the Taizhou Water Supply Valuation Report and Jiaobei Water Supply Valuation Report is expropriated by the government, the land appreciation income incurred in relation thereto shall belong to Jiaojiang Urban Construction and shall be calculated based on the formula below:

Land appreciation income = Land resumption fee – Appraised value of the expropriated land – Capital cost

The aforementioned capital cost shall belong to the Company and shall be calculated based on the formula below:

Capital cost = Appraised value of the expropriated land x the consideration paid by the Company in respect of the Taizhou Water Supply Acquisition and Jiaobei Water Supply Acquisition (as the case may be) x Annual capital cost (being the prevailing bank loan benchmark interest rate) x Year; and

(b) if any of the registered properties involved within the scope of the Taizhou Water Supply Valuation Report and Jiaobei Water Supply Valuation Report is demolished by the government, the property appreciation income incurred in relation thereto shall belong to Jiaojiang Urban Construction and shall be calculated based on the formula below:

Property appreciation income = Demolition compensation – Net book value of the demolished property – Disposal costs (if any)

– 10 –

LETTER FROM THE BOARD

Where resettlement properties are offered, the property appreciation income shall be calculated based on the formula below:

Property appreciation income = Appraised value of the property (or resettlement compensation) – Net book value of the demolished property – Disposal costs (if any)

Board representation

Upon completion of the Taizhou Water Supply Acquisition and Jiaobei Water Supply Acquisition, the board of directors of each of Taizhou Water Supply and Jiaobei Water Supply shall be comprised of five directors, of which the Company shall be entitled to nominate two directors and the chairman. The supervisory committee of each of Taizhou Water Supply and Jiaobei Water Supply shall be comprised of three supervisors, of which the Company shall be entitled to nominate one supervisor.

The Luqiao Equity Transfer Agreement

Date: 20 May 2021 Parties: 1. Luqiao Urban Construction (as vendor); 2. the Company (as purchaser); and 3. Luqiao Water Supply (as target company).

To the best of the Directors’ knowledge, information and belief having made all reasonable enquiry, as at the Latest Practicable Date, each of Luqiao Urban Construction and Luqiao Water Supply is an indirect wholly-owned subsidiary of Taizhou Luqiao Public Assets, which holds approximately 8.81% shareholding interest in the Company.

Subject matter

Pursuant to the Luqiao Equity Transfer Agreement, Luqiao Urban Construction has conditionally agreed to sell, and the Company has conditionally agreed to purchase, 45% equity interest in Luqiao Water Supply, subject to the terms and conditions thereof.

– 11 –

LETTER FROM THE BOARD

Luqiao consideration and adjustment thereto

The consideration for the transfer of 45% equity interest in Luqiao Water Supply is RMB124.42 million (subject to adjustment) and shall be paid by the Company to Luqiao Urban Construction in cash in the following manner:

RMB37.326 million (being 30% of the consideration) (the “ First Instalment of Luqiao Consideration ”) is payable within 15 Business Days after satisfaction (or waiver by the Company) of the following conditions precedent:
(a) the Luqiao Equity Transfer Agreement having been executed and become effective;
(b) the notification to or consents or confirmation of no objection of relevant creditors of Luqiao Water Supply having been obtained; and
(c) all approvals or confirmation of no objection of the relevant regulatory authorities, including the competent state-owned asset management departments and the Stock Exchange (if applicable) having been obtained;
RMB37.326 million (being 30% of the consideration) is payable within 15 Business Days after completion of Luqiao Water Supply Acquisition; and
the remaining balance of the consideration is payable within 12 months after completion of Luqiao Water Supply Acquisition and agreement between all parties on the audit results, consideration adjustment and loss and profit arrangements regarding the Transition Period having been reached, and shall be adjusted with reference to:
(a) the loss and/or profit (as the case may be) of Luqiao Water Supply generated during the Transition Period. Special audit regarding the loss and profit of Luqiao Water Supply will be conducted. The parties shall determine and adjust the consideration payable within 10 Business Days of the issuance of the special audit report; and
(b) in respect of properties involved within the scope of the Luqiao Water Supply Valuation Report which (i) ownership registration formalities is yet to be completed; and (ii) will be continued to be used by Luqiao Water Supply, the appraised value of such properties as at the Valuation Reference Date shall be deducted from the consideration.

– 12 –

LETTER FROM THE BOARD

The Company and Luqiao Urban Construction have agreed that the aggregate consideration of the Luqiao Water Supply Acquisition payable by the Company to Luqiao Urban Construction subsequent to the adjustment to the consideration as set out above shall not exceed RMB154.57 million.

The consideration of the Luqiao Water Supply Acquisition will be satisfied by internal resources of the Group.

As at the Latest Practicable Date, none of the aforementioned conditions precedent has been fulfilled.

Basis of consideration

The consideration was determined after arm’s length negotiations between the parties to the Luqiao Equity Transfer Agreement, taking into account, among others, the appraised value of the total equity interest of Luqiao Water Supply as at the Valuation Reference Date of approximately RMB276.48 million as assessed by the Independent Valuer using the asset based approach.

Taking into account the aforesaid adjustment, the Board is of the view that the consideration of the Luqiao Water Supply Acquisition based on the results of Luqiao Water Supply Valuation Report is fair and reasonable.

Completion

Pursuant to the Luqiao Equity Transfer Agreement, upon fulfillment of the conditions precedent of the payment of the First Instalment of Luqiao Consideration as set out in the paragraph headed “Luqiao consideration and adjustment thereto” in this circular, Luqiao Water Supply shall complete the business registration for the equity transfers (including the respective changes of directors, supervisors and senior management) with the relevant industrial and commercial administration. Completion of Luqiao Water Supply Acquisition shall take place upon completion of the aforementioned business registration particulars of Luqiao Water Supply.

The Company and Luqiao Urban Construction shall use their best endeavors to procure that the aforementioned business registration for the equity transfer (including the changes of directors, supervisors and senior management) with the relevant industrial and commercial administration to be completed on or before 30 September 2021. There is no long stop date in the Luqiao Equity Transfer Agreement.

Upon completion, as the Group will hold not more than 50% interest in Luqiao Water Supply and the Group will have no control over the board of Luqiao Water Supply, Luqiao Water Supply will not become a subsidiary of the Company and its financial results will not be consolidated into the consolidated financial statements of the Company.

– 13 –

LETTER FROM THE BOARD

Effective date

The Luqiao Equity Transfer Agreement shall be established from the date when it is signed and sealed by the legal representatives or authorised representatives of the parties, and shall take effect from the date when the following conditions are fulfilled:

(a) all decision-making and approval required in relation to the transactions contemplated under the Luqiao Equity Transfer Agreement having been obtained by Luqiao Urban Construction;
(b) Luqiao Water Supply Valuation Report having been approved or registered with the competent state-owned asset management departments; and
(c) approvals of the Board and shareholder’s resolutions of the Company to approve the transactions contemplated under the Luqiao Equity Transfer Agreement having been obtained.

Termination

The Luqiao Equity Transfer Agreement may be terminated prior to the completion:

(a) with the consent of all the parties;
(b) by the Company in the event there has been material adverse change to Luqiao Water Supply; or
(c) if any of the parties committed a material breach of any representations, guarantees, undertakings or obligations under the Luqiao Equity Transfer Agreement and such breach is not remedied by the defaulting party within 30 days upon the issue of written notice by the non-defaulting party, the non-defaulting party is entitled to terminate the Luqiao Equity Transfer Agreement.

Post-completion rights

Pursuant to the Luqiao Equity Transfer Agreement, after completion of Luqiao Water Supply Acquisition:

(a) if any of the registered land involved within the scope of Luqiao Water Supply Valuation Report is expropriated by the government, the land appreciation income incurred in relation thereto shall belong to Luqiao Urban Construction and shall be calculated based on the formula below:

Land appreciation income = Land resumption fee – Appraised value of the expropriated land – Capital cost

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LETTER FROM THE BOARD

The aforementioned capital cost shall belong to the Company and shall be calculated based on the formula below:

Capital cost = Appraised value of the expropriated land x the consideration paid by the Company in respect of Luqiao Water Supply Acquisition x Annual capital cost (being the prevailing bank loan benchmark interest rate) x Year; and

(b) if any of the registered properties involved within the scope of Luqiao Water Supply Valuation Report is demolished by the government, the property appreciation income incurred in relation thereto shall belong to Luqiao Urban Construction and shall be calculated based on the formula below:

Property appreciation income = Demolition compensation – Net book value of the demolished property – Disposal costs (if any)

Where resettlement properties are offered, the property appreciation income shall be calculated based on the formula below:

Property appreciation income = Appraised value of the property (or resettlement compensation) – Net book value of the demolished property – Disposal costs (if any)

Board representation

Upon completion of the Luqiao Water Supply Acquisition, the board of directors of Luqiao Water Supply shall be comprised of five directors, of which the Company shall be entitled to nominate two directors and the chairman. The supervisory committee of Luqiao Water Supply shall be comprised of three supervisors, of which the Company shall be entitled to nominate one supervisor.

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LETTER FROM THE BOARD

Information of the Targets

Taizhou Water Supply

Taizhou Water Supply principally engages in the business of centralised supply of drinking water and non-residential drinking water in Jiaonan District of Taizhou. As at the Latest Practicable Date, Taizhou Water Supply is a direct wholly-owned subsidiary of Jiaojiang Urban Development, and holds the following wholly-owned subsidiaries:

Name of subsidiary

Principal business of the subsidiary

Taizhou Water Supply Qingquan Municipal Engineering Co., Ltd.* (台州水司清泉市政工程有限公司)

Municipal public construction projects and pipeline engineering works
Taizhou Jiaojiang Jiaonan Qingquan Water Supply Service Co., Ltd.* (台州市椒江椒南清泉供水服務有限公司)
Marketing and management services for water supply companies
Taizhou Jiaojiang Dachen Qingquan Water Supply Service Co., Ltd.* (台州市椒江大陳清泉供水服務有限公司)
Tap water supply and municipal utilities construction projects

Set out below is the key audited financial information of Taizhou Water Supply for the two financial years ended 31 December 2019 and 2020:

	For the year	ended
	31 December	31 December
	2019	2020
	RMB'000	RMB'000
Revenue	299,916	276,563
Profit before tax	1,488	7,359
Profit/(loss) after tax	(765)	3,658

Taizhou Water Supply incurred loss after tax of RMB765,000 for the year ended 31 December 2019 while recorded profit after tax of approximately RMB3.7 million for the year ended 31 December 2020, mainly contributed by (i) gross profit of approximately RMB49.0 million in 2019, as compared to that of approximately RMB49.6 million in 2020, primarily due to (a) the higher gross profit of approximately RMB8.1 million from tap water supply in 2019, mainly attributable to the lower average unit selling price of tap water resulting from the 10% reduction in the price of tap water sold to enterprise end-users as a result of the COVID-19 pandemic in 2020; and (b) the lower gross profit of approximately RMB8.7 million

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LETTER FROM THE BOARD

from installation services in 2019, mainly attributable to the lower gross profit margin of installation services in 2019; and (ii) administrative expenses of approximately RMB41.3 million in 2019, as compared to that of approximately RMB37.7 million in 2020, mainly due to the higher impairment of contract assets arising from installation services and trade receivables of approximately RMB2.7 million caused by the higher original cost of contract assets as at 31 December 2019.

The audited net assets and equity attributable to owners of Taizhou Water Supply as at 31 December 2020 amounted to approximately RMB55.15 million and RMB55.15 million, respectively. The entire equity interest of Taizhou Water Supply as at 31 October 2020 as appraised by the Independent Valuer amounted to approximately RMB51.59 million, and the 45% equity interest in Taizhou Water Supply to be acquired by the Company amounted to approximately RMB23.21 million accordingly.

Jiaobei Water Supply

Jiaobei Water Supply principally engages in the business of centralised water supply and pipeline installation in Jiaobei District of Taizhou. As at the Latest Practicable Date, Jiaobei Water Supply is owned as to 88.46% by Jiaojiang Urban Development and 11.54% by Taizhou Jiaobei Infrastructure Investment Co., Ltd.* (台州市椒北基礎設施投資有限公司), which is ultimately wholly-owned by Zhangan Sub-district Office of the People’s Government of Jiaojiang District, Taizhou (台州市椒江區人民政府章安街道辦事處).

As at the Latest Practicable Date, Jiaobei Water Supply is the holding company of Taizhou Jiaojiang Jiaobei Qingquan Water Supply Service Co., Ltd.* (台州市椒江椒北清泉供水服務有限公司), which principally engages in the business of marketing services for water supply companies and installation of municipal water supply and drainage pipes.

Set out below is the key audited financial information of Jiaobei Water Supply for the two financial years ended 31 December 2019 and 2020:

		For the year	ended
		31 December	31 December
		2019	2020
		RMB'000	RMB'000
Revenue		22,755	23,157
Profit/(loss)	before tax	(2,557)	951
Profit/(loss)	after tax	(2,557)	951

Jiaobei Water Supply incurred loss after tax of approximately RMB2.6 million for the year ended 31 December 2019, while recorded profit after tax of approximately RMB1.0 million for the year ended 31 December 2020, mainly contributed by (i) gross profit of approximately RMB6.5 million in 2019, as compared to that of approximately RMB8.8 million in 2020, primarily due to the

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LETTER FROM THE BOARD

lower gross profit of approximately RMB2.3 million from tap water supply in 2019, mainly attributable to the higher employee benefit expense, depreciation expenses and raw water procurement fee in 2019; and (ii) administrative expenses of approximately RMB9.8 million in 2019, as compared to that of approximately RMB8.6 million in 2020, mainly due to the higher impairment of trade receivables in 2019 resulting from the higher original cost of trade receivables as at 31 December 2019. Please refer to the paragraph headed “Management Discussion and Analysis of Jiaobei Water Supply – Cost of Sales” in Appendix IIIB to this circular for further details.

The audited net assets and equity attributable to owners of Jiaobei Water Supply as at 31 December 2020 amounted to approximately RMB10.33 million and RMB10.33 million, respectively. The entire equity interest of Jiaobei Water Supply as at 31 October 2020 as appraised by the Independent Valuer amounted to approximately RMB51.94 million, and the 45% equity interest in Jiaobei Water Supply to be acquired by the Company amounted to approximately RMB23.37 million accordingly.

Luqiao Water Supply

Luqiao Water Supply principally engages in the business of centralised water supply services in Luqiao District of Taizhou. As at the Latest Practicable Date, Luqiao Water Supply is a direct wholly-owned subsidiary of Luqiao Urban Construction, and holds the following wholly-owned subsidiaries:

Name of subsidiary Taizhou Luqiao Lixin Municipal Engineering Co., Ltd. (台州市路橋立信市政工程有限公司) Taizhou Luqiao Urban and Rural Water Supply Service Co., Ltd. (台州市路橋城鄉供水服務有限公司)	Principal business of the subsidiary
	Contracting and undertaking of municipal public works construction projects Collection of water fees and maintenance services of water supply pipelines and water meters

Set out below is the key audited financial information of Luqiao Water Supply for the two financial years ended 31 December 2019 and 2020:

	For the year	ended
	31 December	31 December
	2019	2020
	RMB'000	RMB'000
Revenue	185,753	181,544
Profit before tax	15,379	3,204
Profit after tax	10,558	1,734

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LETTER FROM THE BOARD

The profit before tax and the profit after tax for Luqiao Water Supply decreased substantially from approximately RMB15.4 million in 2019 to approximately RMB3.2 million in 2020, and from approximately RMB10.6 million in 2019 to approximately RMB1.7 million, respectively, mainly due to the decrease in gross profit of approximately RMB15.3 million primarily arising from the water supply business, which was mainly due to (i) the increase in employee benefit expenses primarily attributable to the increase in the number of employees; and (ii) the increase in raw water procurement fee primarily attributable to the increase in leakage rate of water supply pipelines mainly contributed by the expansion of water supply areas in 2020.

The audited net assets and equity attributable to owners of Luqiao Water Supply as at 31 December 2020 amounted to approximately RMB121.51 million and RMB121.51 million, respectively. The entire equity interest of Luqiao Water Supply as at 31 October 2020 as appraised by the Independent Valuer amounted to approximately RMB276.48 million, and the 45% equity interest in Luqiao Water Supply to be acquired by the Company amounted to approximately RMB124.42 million accordingly.

Please refer to Appendices IIA, IIB and IIC of this circular for further financial information of Taizhou Water Supply, Jiaobei Water Supply and Luqiao Water Supply, respectively.

Information of the Parties Involved

The Company

The Company is a leading water supply service provider in Taizhou principally engaged in the supply of raw water and municipal water. The Company also supplies tap water directly to end-users and engages in the installation of the water pipelines for distributing tap water to its end-users in Taizhou.

Jiaojiang Urban Development

Jiaojiang Urban Development principally engages in the investment, construction and operation of urban infrastructure, public facility and landscaping municipal engineering projects. As at the Latest Practicable Date, Jiaojiang Urban Development is ultimately wholly-owned by the State-owned Assets Supervision and Administration Commission of Jiaojiang District, Taizhou City* (台州市椒江區國有資產監督管理委員會).

Luqiao Urban Construction

Luqiao Urban Construction principally engages in urban infrastructure construction and investment in social welfare undertakings. As at the Latest Practicable Date, Luqiao Urban Construction is ultimately owned as to 96.8% and 3.2% by the State-owned Assets Administration Commission of Luqiao District* (路橋區國有資產管理委員會) and Zhejiang Provincial Department of Finance (浙江省財政廳), respectively.

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LETTER FROM THE BOARD

Reasons for and Benefits of the Acquisitions

Pursuant to the “Notice on the issue of Implementation Opinions on the Reform of Integration of Water Supply in Taizhou” (關於印發《台州市區水務一體化改革實施意見》的通知) issued by the Municipal Committee Office of Taizhou (中共台州市委辦公室) and the Taizhou Municipal People’s Government Office (台州市人民政府辦公室) on 17 September 2018, it was stressed that the integration of water supply in Taizhou is essential for improving people’s livelihood, promoting integrated development of urban areas, efficient use of water and the transformation and upgrade of water supply business in Taizhou.

Adhering to the concept of “focusing on environmental protection and energy saving, ensuring high-quality water supply and servicing everyone” of the Group, the Acquisitions allow the Group to commence the integration of urban and rural water supply in Jiaojiang and Luqiao Districts of Taizhou so as to benefit more users through upgrading the water supply infrastructure, renovating the pipelines network at towns and villages as well as reinforcing the implementation of “one account, one water meter”.

With the expanded water supply network and water supply facilities after the Acquisitions, the Group would enjoy the benefits of an expanded ecological chain and economy scale, and ensure a stable and sustainable growth of the Group’s income. Further, the Acquisitions are expected to expand the Group’s geographical coverage of its water supply network across various districts in Taizhou, and thus enhance the overall revenue and profit of the Group and strengthen the Group’s position as the leading water supply service provider in Taizhou.

Taking into account the aforementioned factors, the Directors consider that the terms and conditions of the Equity Transfer Agreements are fair and reasonable and are on normal commercial terms and are in the interests of the Company and the Shareholders as a whole.

Financial Effects of the Acquisitions

Upon completion, Taizhou Water Supply, Jiaobei Water Supply and Luqiao Water Supply will become associated companies of the Company, and their financial results will not be consolidated into the accounts of the Company.

Based on the unaudited pro forma consolidated statement of financial position of the Enlarged Group as set out in Appendix IV to this circular, it is expected that upon completion of the Acquisitions, (a) the total assets and total liabilities will remain unchanged as the investment in an associate in the amount of approximately RMB171.02 million is offset by the cash and cash equivalents in the amount of approximately RMB171.02 million payable as consideration of the Acquisitions; and (b) an increase in net current liabilities of approximately RMB171.02 million. The Company considers that the revenue or the profits of the Group will remain unchanged.

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LETTER FROM THE BOARD

The earnings of the Group upon completion of the Acquisitions will include share of the profit and loss of each of Taizhou Water Supply, Jiaobei Water Supply and Luqiao Water Supply, which will depend on their respective actual financial performance. In view of the immaterial transaction costs to be incurred for the Acquisitions and save for the aforesaid effects from the Acquisitions, the Company considers that there will not be any material effect on the earnings of the Group immediately upon the Acquisitions.

In view of the financial performance of Taizhou Water Supply, Jiaobei Water Supply and Luqiao Water Supply in the previous years, it is anticipated that the Acquisitions will improve the Group’s financial and trading prospects in the future. Details of the financial effect of the Acquisitions on the financial position of the Group together with the bases and assumptions taken into account in preparing the unaudited pro forma financial information of the Enlarged Group are set out, for illustration purpose only, in Appendix IV to this circular.

Implications under the Listing Rules

As the Taizhou Water Supply Acquisition and Jiaobei Water Supply Acquisition were transactions entered into by the Company with the same party, i.e. Jiaojiang Urban Development, the Taizhou Water Supply Acquisition and Jiaobei Water Supply Acquisition are required to be aggregated pursuant to Rule 14.22 of the Listing Rules.

As one of the applicable percentage ratios in respect of the Taizhou Water Supply Acquisition and Jiaobei Water Supply Acquisition exceeds 25% but is less than 100%, the Taizhou Water Supply Acquisition and Jiaobei Water Supply Acquisition collectively constitute a major transaction of the Company, which is subject to the reporting, announcement and shareholders’ approval requirements under Chapter 14 of the Listing Rules.

As one of the applicable percentage ratios in respect of Luqiao Water Supply Acquisition exceeds 25% but is less than 100%, Luqiao Water Supply Acquisition constitutes a major transaction of the Company, which is subject to the reporting, announcement and shareholders’ approval requirements under Chapter 14 of the Listing Rules.

As Ms. Huang Yuyan, a non-executive Director, is the deputy general manager of and a Director nominated by Taizhou Luqiao Public Assets, which holds 100% equity interest of Luqiao Urban Construction and Luqiao Water Supply, she has abstained from voting on the board resolutions in respect of Luqiao Water Supply Acquisition. Save as disclosed above, none of the Directors has material interest in the Acquisitions and therefore no other Director has abstained from voting on such board resolutions.

The Company will seek approval for, among other things, the Equity Transfer Agreements and the transactions contemplated thereunder from the Shareholders at the EGM.

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LETTER FROM THE BOARD

3. EGM

The form of proxy and the reply slip of the EGM are enclosed herewith.

The EGM will be convened and held to approve the Acquisitions. As at the Latest Practicable Date, Luqiao Urban Construction is a subsidiary of Taizhou Luqiao Public Assets, and together with its associates hold approximately 8.81% shareholding interest in the Company. Taizhou Luqiao Public Assets and its close associates will abstain from voting at the EGM in respect of the resolutions to approve the Luqiao Equity Transfer Agreement and the transactions contemplated thereunder as a result of having a material interest therein.

To the best of knowledge, information and belief of the Directors, having made all reasonable enquiries, save as disclosed above, there are no other Shareholders who have an interest in the Acquisitions which is materially different from the other Shareholders. Therefore, no other Shareholder will be required to abstain from voting at the EGM to approve the Equity Transfer Agreements and the transactions contemplated thereunder.

Whether or not you intend to attend and vote at the EGM, you are requested to complete and return the enclosed form of proxy in accordance with the instructions printed thereon to the H Share registrar and transfer office of the Company in Hong Kong, Computershare Hong Kong Investor Services Limited, at 17M Floor, Hopewell Centre, 183 Queen’s Road East, Wan Chai, Hong Kong (in respect of holders of H Shares), or to the Company’s registered office in the PRC at No. 308 Yin Quan Road, Xicheng Street, Huangyan District, Taizhou, Zhejiang Province, PRC (in respect of holders of Domestic Shares) as soon as possible but in any event by not later than 24 hours before the time appointed for holding of the EGM (i.e. before 9:30 a.m. on Wednesday, 14 July 2021) or any adjournment thereof. Completion and return of the form of proxy shall not preclude you from attending and voting in person at the EGM or any adjourned meeting should you so wish.

If you intend to attend the EGM in person or by proxy, you are required to complete the enclosed reply slip and return the same to Computershare Hong Kong Investor Services Limited (in respect of holders of H Shares) and the Company’s registered office in the PRC (in respect of holders of Domestic Shares) on or before Tuesday, 29 June 2021.

4. VOTING BY POLL

Pursuant to Rule 13.39(4) of the Listing Rules, voting by any Shareholders at a general meeting shall be by way of poll, except where the chairman of the general meeting, in good faith, decides to allow a resolution which relates purely to a procedural or administrative matter to be voted on by a show of hands. The chairman of the general meeting shall require each of the resolutions proposed at the EGM to be voted by way of poll according to the Articles of Association.

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LETTER FROM THE BOARD

During voting by way of poll, each Shareholder who attends in person or by proxy (or if the Shareholder is a company, then its officially authorised representative) may have one vote for each Share recorded under his/her/its name as set out in the register of members of the Company. The Company will announce the poll results after the EGM in the manner as stipulated under Rule 13.39(5) of the Listing Rules.

5. RECOMMENDATION

The Board is of the view that the Acquisitions are fair and reasonable, on normal commercial terms, in the ordinary and usual course of business of the Group and are in the interests of the Company and the Shareholders as a whole. Accordingly, the Board recommends the Shareholders to vote in favour of the ordinary resolutions to be proposed at the EGM to approve the Equity Transfer Agreements and the transactions contemplated thereunder.

6. ADDITIONAL INFORMATION

Your attention is drawn to the financial information of the Group and other general information set out in the appendices to this circular.

By order of the Board Taizhou Water Group Co., Ltd.* YANG Jun Chairman

– 23 –

APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

1. FINANCIAL SUMMARY

The financial information of the Group for the three years ended 31 December 2020 has been published in the Prospectus and annual reports per below:

(a) the financial information of the Group for the year ended 31 December 2020 is disclosed in the annual report of the Company for the year ended 31 December 2020 published on 21 April 2021, from pages 61 to 135 (http://www.hkexnews.hk/listedco/listconews/sehk/2021/0421/2021042100804.pdf);
(b) the financial information of the Group for the year ended 31 December 2019 is disclosed in the annual report of the Company for the year ended 31 December 2019 published on 23 April 2020, from pages 59 to 127 (http://www.hkexnews.hk/listedco/listconews/sehk/2020/0423/2020042300101.pdf); and
(c) the financial information of the Group for the year ended 31 December 2018 is disclosed in the Prospectus, from pages I-4 to I-107 (http://www.hkexnews.hk/listedco/listconews/sehk/2019/1217/2019121700021.pdf).

2. INDEBTEDNESS

Borrowings

As at the close of business on 30 April 2021, the Group had borrowings as follows:

Bank and other borrowings Non-current Bank loans – secured Other borrowings – secured Lease liabilities Total	As at 30 April 2021 RMB’000 1,774,000 510,000
	2,284,000 18,829
	2,302,829

– I-1 –

APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

Notes:

(a) The Group’s bank and other borrowings are secured by:
(i) the pledge of the Group’s trade receivables and the right of charge on the future revenue generated by Taizhou water supply system (Phase I and Phase II);
(ii) the pledge of Binhai Water’s right of charge on the future revenue generated by Taizhou water supply system (Phase III); and
(iii) the pledge of Taizhou South Bay Water Supply’s right of charge on the future revenue.
(b) A subsidiary of the Company, Taizhou City Water Co., Ltd. (台州城市水務有限公司) (“ Taizhou City Water* ”), has guaranteed certain of the Group’s bank loans of up to RMB3,495.9 million.
(c) A shareholder of the Company, Taizhou Urban Construction Investment Development Group Co., Ltd. (“ Taizhou Urban Construction ”), has guaranteed certain of the Group’s other borrowings of up to RMB510.0 million.
(d) The Company has guaranteed certain of the Group’s bank loans of up to RMB6,274.1 million.

As at 30 April 2021, the Group had RMB15,051.0 million of credit facilities made available, of which RMB1,774.0 million were utilised and RMB13,277.0 million were unutilised.

Contingent liabilities

As at the close of business on 30 April 2021, the Group did not have any material contingent liability.

Capital commitment

As at the close of business on 30 April 2021, the Group had capital commitment as follows:

	As at
	30 April 2021
	RMB’000
Contracted, but not provided for:
Pipelines and buildings	794,131

Save as aforesaid and apart from intra-group liabilities and normal trade payables in the ordinary course of business, the Group did not have any loan capital issued or agreed to be issued, bank overdrafts, loans, debt securities issued and outstanding, and authorised or otherwise created but unissued and term loans or other borrowings, indebtedness in the nature of borrowings, liabilities under acceptance (other than normal trade bills) or acceptance credits, debentures, mortgages, charges, finance lease or hire purchase commitments, which are either guaranteed, unguaranteed, secured or unsecured, guarantees or other material contingent liabilities outstanding as at the close of business on 30 April 2021.

– I-2 –

APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

3. MATERIAL ADVERSE CHANGE

As at the Latest Practicable Date, the Directors confirm that there was no material adverse change in the financial or trading position of the Group since 31 December 2020, being the date to which the latest published audited consolidated financial statements of the Group were made up.

4. WORKING CAPITAL

The Directors, after due and careful enquiry, are of the opinion that, taking into account the expected completion of the Acquisitions, the internal financial resources available and the existing available facilities of the Enlarged Group, the Enlarged Group will have sufficient working capital for its present requirements for at least twelve months from the date of publication of this circular in the absence of unforeseen circumstances.

5. FINANCIAL AND TRADING PROSPECTS OF THE GROUP

As a leading water supply service provider in Taizhou, the Group’s principal businesses are supply of raw water, municipal water and tap water, ranking the first in Taizhou in terms of raw water and municipal water supply. The Group owns, operates and manages the Taizhou Water Supply System (Phase I) and the Taizhou Water Supply System (Phase II). The construction of the Taizhou Water Supply System (Phase III) commenced in February 2018 and is expected to complete in February 2022, aiming to supply water to the Taizhou Bay Economic Zone and to resolve the increasing water demand in the areas the Group have already supplied water to. The construction of Taizhou Water Supply System (Phase IV) commenced in November 2018 and is expected to complete in April 2022, aiming to supply water to South Bay Zone of Taizhou and to provide raw water and municipal water at the same time.

Adhering to the concept of “focusing on environmental protection and energy saving, ensuring high-quality water supply and servicing everyone” of the Group, the Acquisitions allow the Group to commence the integration of urban and rural water supply in Jiaojiang and Luqiao Districts of Taizhou so as to benefit more users through upgrading water supply infrastructure, renovating the pipelines network at towns and villages as well as reinforcing the implementation of “one account, one water meter”.

With the expanded water supply network and water supply facilities after the Acquisitions, the Group would enjoy the benefits of an expanded ecological chain and economy scale, and ensure a stable and sustainable growth of the Group’s income. Further, the Acquisitions are expected to expand the Group’s geographical coverage of its water supply network across various districts in Taizhou and enhance the overall revenue and profit of the Group and strengthen the Group’s position as the leading water supply service provider in Taizhou.

– I-3 –

APPENDIX IIA ACCOUNTANTS’ REPORT OF TAIZHOU WATER SUPPLY

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

27/F, One Taikoo Place, 979 King's Road, Quarry Bay, Hong Kong

ACCOUNTANTS’ REPORT ON HISTORICAL FINANCIAL INFORMATION TO THE DIRECTORS OF TAIZHOU WATER GROUP CO., LTD.

Introduction

We report on the historical financial information of Taizhou Water Supply Co., Ltd. (the “ Target Company ”) and its subsidiaries (together, the “ Target Group ”) set out on pages IIA-3 to IIA-66, which comprises the consolidated statements of profit or loss and other comprehensive income, statements of changes in equity and statements of cash flows of the Target Group for each of the years ended 31 December 2018, 2019 and 2020 (the “ Relevant Periods ”), and the consolidated statements of financial position of the Target Group as at 31 December 2018, 2019 and 2020 and a summary of significant accounting policies and other explanatory information (together, the “ Historical Financial Information ”). The Historical Financial Information set out on pages IIA-3 to IIA-66 forms an integral part of this report, which has been prepared for inclusion in the circular of Taizhou Water Group Co., Ltd. (the “ Company ”) dated 24 June 2021 (the “ Circular ”) in connection with the proposed acquisition of 45% equity interest in the Target Company by the Company.

Directors’ responsibility for the Historical Financial Information

The directors of the Target Company are responsible for the preparation of the Historical Financial Information that gives a true and fair view in accordance with the basis of preparation set out in note 2.1 to the Historical Financial Information, and for such internal control as the directors determine is necessary to enable the preparation of the Historical Financial Information that is free from material misstatement, whether due to fraud or error.

Reporting accountants’ responsibility

Our responsibility is to express an opinion on the Historical Financial Information and to report our opinion to you. We conducted our work in accordance with Hong Kong Standard on Investment Circular Reporting Engagements 200 Accountants’ Reports on Historical Financial Information in Investment Circulars issued by the Hong Kong Institute of Certified Public Accountants (“ HKICPA ”). This standard requires that we comply with ethical standards and plan and perform our work to obtain reasonable assurance about whether the Historical Financial Information is free from material misstatement.

– IIA-1 –

APPENDIX IIA

ACCOUNTANTS’ REPORT OF TAIZHOU WATER SUPPLY

Our work involved performing procedures to obtain evidence about the amounts and disclosures in the Historical Financial Information. The procedures selected depend on the reporting accountants’ judgement, including the assessment of risks of material misstatement of the Historical Financial Information, whether due to fraud or error. In making those risk assessments, the reporting accountants consider internal control relevant to the entity’s preparation of the Historical Financial Information that gives a true and fair view in accordance with the basis of preparation set out in note 2.1 to the Historical Financial Information, in order to design procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. Our work also included evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by the directors, as well as evaluating the overall presentation of the Historical Financial Information.

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

Opinion

In our opinion, the Historical Financial Information gives, for the purposes of the accountants’ report, a true and fair view of the financial position of the Target Group as at 31 December 2018, 2019 and 2020 and of the financial performance and cash flows of the Target Group for each of the Relevant Periods in accordance with the basis of preparation set out in note 2.1 to the Historical Financial Information.

Report on matters under the Rules Governing the Listing of Securities on the Stock Exchange and the Companies (Winding Up and Miscellaneous Provisions) Ordinance

Adjustments

In preparing the Historical Financial Information, no adjustments to the Underlying Financial Statements as defined on page IIA-3 have been made.

Dividends

We refer to note 11 to the Historical Financial Information which states that no dividends have been paid by the Target Company in respect of the Relevant Periods.

Yours faithfully,

Ernst & Young Certified Public Accountants Hong Kong 24 June 2021

– IIA-2 –

APPENDIX IIA ACCOUNTANTS’ REPORT OF TAIZHOU WATER SUPPLY

I HISTORICAL FINANCIAL INFORMATION

Preparation of Historical Financial Information

Set out below is the Historical Financial Information which forms an integral part of this accountants’ report.

The financial statements of the Target Group for the Relevant Periods, on which the Historical Financial Information is based, were audited by Ernst & Young in accordance with Hong Kong Standards on Auditing issued by the Hong Kong Institute of Certified Public Accountants (the “ HKICPA ”) (the “ Underlying Financial Statements ”).

The Historical Financial Information is presented in Renminbi (“ RMB ”) and all values are rounded to the nearest thousand (RMB’000) except when otherwise indicated.

– IIA-3 –

APPENDIX IIA ACCOUNTANTS’ REPORT OF TAIZHOU WATER SUPPLY

CONSOLIDATED STATEMENTS OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME

Notes REVENUE 5 Cost of sales Gross profit Other income and gains 5 Administrative expenses Other expenses Finance costs 7 PROFIT BEFORE TAX 6 Income tax expense 10 PROFIT/(LOSS) FOR THE YEAR OTHER COMPREHENSIVE INCOME Other comprehensive income that will not be reclassified to profit or loss in subsequent periods: Remeasurement gain/(loss) on defined benefit plan 26 OTHER COMPREHENSIVE INCOME FOR THE YEAR, NET OF TAX TOTAL COMPREHENSIVE INCOME FOR THE YEAR Attributable to: Owner of the parent	Year ended 31 December 2018 RMB’000 253,015 (218,418) 34,597 8,169 (32,595) (161) (8,650) 1,360 (2,241) (881) (7,261) (7,261) (8,142) (8,142)	Year ended 31 December 2019 RMB’000 299,916 (250,957) 48,959 3,627 (41,305) (468) (9,325) 1,488 (2,253) (765) (398) (398) (1,163) (1,163)	Year ended 31 December 2020 RMB’000 276,563 (226,925) 49,638 7,008 (37,699) (142) (11,446) 7,359 (3,701) 3,658 2,492 2,492 6,150 6,150

– IIA-4 –

APPENDIX IIA ACCOUNTANTS’ REPORT OF TAIZHOU WATER SUPPLY

CONSOLIDATED STATEMENTS OF FINANCIAL POSITION

Notes NON-CURRENT ASSETS Property, plant and equipment 12 Investment in an associate 14 Other intangible assets 13 Prepayments for land use rights Prepayments for property, plant and equipment Deferred tax assets 25 Right-of-use assets 15(a) Total non-current assets CURRENT ASSETS Inventories 16 Trade receivables 17 Contract assets 19 Prepayments, other receivables and other assets 18 Cash and cash equivalents 20 Total current assets CURRENT LIABILITIES Trade payables 21 Other payables and accruals 22 Interest-bearing bank and other borrowings 23 Deferred government grants 24 Lease liabilities 15(b) Tax payable Total current liabilities NET CURRENT LIABILITIES TOTAL ASSETS LESS CURRENT LIABILITIES	As at 31 December 2018 RMB’000 181,430 – 185 7,861 3,701 9,202 10,516 212,895 8,180 56,944 32,137 49,498 33,340 180,099 54,179 97,014 55,000 1,446 43 7,276 214,958 (34,859) 178,036	As at 31 December 2019 RMB’000 178,545 – 283 14,338 3,815 12,183 13,312 222,476 8,131 55,199 44,360 55,466 40,343 203,499 63,467 97,908 120,000 1,509 48 12,510 295,442 (91,943) 130,533	As at 31 December 2020 RMB’000 171,745 – 223 14,338 864 15,028 12,916 215,114 7,468 55,248 52,136 53,106 62,722 230,680 60,585 110,691 80,000 1,509 25 18,417 271,227 (40,547) 174,567

– IIA-5 –

APPENDIX IIA ACCOUNTANTS’ REPORT OF TAIZHOU WATER SUPPLY

Notes TOTAL ASSETS LESS CURRENT LIABILITIES NON-CURRENT LIABILITIES Interest-bearing bank and other borrowings 23 Deferred government grants 24 Lease liabilities 15(b) Net employee defined benefit liabilities 26 Total non-current liabilities Net assets EQUITY Equity attributable to owner of the parent Paid-up capital 27 Reserves 28 Total equity	As at 31 December 2018 RMB’000 178,036 60,000 19,848 209 47,821 127,878 50,158 63,617 (13,459) 50,158	As at 31 December 2019 RMB’000 130,533 10,000 21,444 162 49,932 81,538 48,995 63,617 (14,622) 48,995	As at 31 December 2020 RMB’000 174,567 50,000 19,935 112 49,375 119,422 55,145 63,617 (8,472) 55,145

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APPENDIX IIA

ACCOUNTANTS’ REPORT OF TAIZHOU WATER SUPPLY

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

At 1 January 2018 Loss for the year Other comprehensive income for the year: Transfer to statutory surplus reserve Remeasurement on defined benefit plan Total comprehensive loss for the year At 31 December 2018 and 1 January 2019 Loss for the year Other comprehensive income for the year: Transfer to statutory surplus reserve Remeasurement on defined benefit plan Total comprehensive loss for the year At 31 December 2019 and 1 January 2020 Profit for the year Other comprehensive income for the year: Remeasurement on defined benefit plan Total comprehensive income for the year At 31 December 2020	Paid-up capital RMB’000 (note 27) 63,617 – – – – 63,617 – – – – 63,617 – – – 63,617	Statutory surplus reserve* RMB’000 (note 28) 4,226 – 544 – – 4,770 – 97 – – 4,867 – – – 4,867	Accumulated losses* RMB’000 (9,543) (881) (544) (7,261) (8,142) (18,229) (765) (97) (398) (1,163) (19,489) 3,658 2,492 6,150 (13,339)	Total equity RMB’000 58,300 (881) – (7,261)
				(8,142)
				50,158 (765) – (398)
				(1,163)
				48,995 3,658 2,492
				6,150
				55,145

These reserve accounts comprise the consolidated reserves of RMB13,459,000, RMB14,622,000 and RMB8,472,000 in the consolidated statements of financial position as at 31 December 2018, 2019 and 2020, respectively.

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APPENDIX IIA

ACCOUNTANTS’ REPORT OF TAIZHOU WATER SUPPLY

CONSOLIDATED STATEMENTS OF CASH FLOWS

Notes CASH FLOWS FROM OPERATING ACTIVITIES Profit before tax Adjustments for: Interest income from loans to related parties 5 Loss on disposal of items of property, plant and equipment 6 Gain on early termination of a lease Finance costs 7 Depreciation of property, plant and equipment 12 Depreciation of other intangible assets 13 Depreciation of right-of-use assets 15 Amortisation of government grants 24 Impairment of inventories, net 6 Impairment of trade receivables, net 17 Impairment of contract assets, net 19 Impairment of other receivables, net 18 Decrease in inventories Decrease/(increase) in trade receivables Decrease/(increase) in prepayments, other receivables and other assets Increase in contract assets Increase/(decrease) in trade payables Increase/(decrease) in other payables and accruals Increase/(decrease) in net employee defined benefit liabilities Cash generated from/(used in) operations Income tax paid Net cash flows from/(used in) operating activities	Year ended 31 December 2018 RMB’000 1,360 (3,064) 87 – 8,650 13,666 161 312 (1,446) 13 (2,710) 3,125 21 1,637 (606) (3,055) (10,768) (29,862) 18,760 (141) (3,860) – (3,860)	Year ended 31 December 2019 RMB’000 1,488 (680) 18 – 9,325 14,249 218 374 (1,510) (10) 437 10,679 24 59 1,308 (4,401) (22,902) 9,288 (3,772) (40) 14,152 – 14,152	Year ended 31 December 2020 RMB’000 7,359 (3,232) 26 (7) 11,446 14,518 214 354 (1,509) 22 (988) 9,364 19 641 939 260 (17,140) (2,882) 14,227 120 33,751 (639) 33,112

– IIA-8 –

APPENDIX IIA ACCOUNTANTS’ REPORT OF TAIZHOU WATER SUPPLY

Note CASH FLOWS FROM INVESTING ACTIVITIES Purchases of items of property, plant and equipment Proceeds from disposal of items of property, plant and equipment Advances of loans to related parties Repayment of loans to related parties Interests received from loans to related parties Net cash flows used in investing activities CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from new bank and other borrowings 29 Repayment of bank and other borrowings 29 Loans from a related party 29 Repayment of loans from related parties 29 Interest paid for lease liabilities 29 Principal portion of lease payments 29 Interest paid to related parties 29 Interest paid of bank and other borrowings 29 Net cash flows from/(used in) financing activities NET INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS Cash and cash equivalents at beginning of year	Year ended 31 December 2018 RMB’000 (74,999) 1,126 (321) 66,474 2,288 (5,432) 110,000 (72,000) 10,000 (52,000) (11) (42) (1,065) (6,079) (11,197) (20,489) 53,829	Year ended 31 December 2019 RMB’000 (20,145) – (912) – – (21,057) 70,000 (55,000) 6,500 – (11) (42) (327) (7,212) 13,908 7,003 33,340	Year ended 31 December 2020 RMB’000 (6,354) – (80,192) 83,100 2,397 (1,049) 220,000 (220,000) – – (6) (24) (402) (9,252) (9,684) 22,379 40,343

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APPENDIX IIA

ACCOUNTANTS’ REPORT OF TAIZHOU WATER SUPPLY

CASH AND CASH EQUIVALENTS AT END OF YEAR
ANALYSIS OF BALANCES OF CASH AND CASH EQUIVALENTS
Cash and cash equivalents as stated in the consolidated statements of financial position and consolidated statements of cash flows

Year ended 31 December 2018 RMB’000 33,340 33,340	Year ended 31 December 2019 RMB’000 40,343 40,343	Year ended 31 December 2020 RMB’000 62,722

		62,722

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APPENDIX IIA ACCOUNTANTS’ REPORT OF TAIZHOU WATER SUPPLY

II NOTES TO THE HISTORICAL FINANCIAL INFORMATION

1. CORPORATE INFORMATION

The Target Company is a limited liability company established in the People’s Republic of China (“ PRC ”). The registered office of the Target Company is located at No.92, Yun Xi Road, Jiao Jiang District, Taizhou, Zhejiang Province, PRC.

During the Relevant Periods, the Target Group was principally engaged in supplying tap water directly to end-users and the installation of the water pipelines for distributing tap water to end-users.

The Target Company is 100% owned by Taizhou Jiaojiang Urban Development Investment Group Co., Ltd. (台州市椒江城市發展投資集團有限公司) (“ Jiaojiang Urban Development ”), which is registered in the PRC. In the opinion of the directors of the Target Company, the State-owned Assets Supervision and Administration Commission of Jiaojiang District, Taizhou City (台州市椒江區國有資產監督管理委員會) is the ultimate holding company of the Target Company at the end of 31 December 2018, 2019 and 2020.

As at the date of this report, the Target Company had direct interests in its subsidiaries, all of which are private limited liability companies, the particulars of which are set out below:

	Place and date of		Percentage of
	incorporation/		equity interest
	registration and	Nominal value	attributable to
	place of	of registered	the Target
Name	operations	share capital	Company	Principal activities
Taizhou Water Supply Qingquan	PRC/Mainland	RMB12,800,000	100%	Pipeline installation
Municipal Engineering Co., Ltd.	China			service
(“Qingquan Engineering”)	25 November
(台州水司清泉市政工程有限公司)(a),(b)	2015
Taizhou Jiaojiang Jiaonan Qingquan Water	PRC/Mainland	RMB100,000	100%	Centralised water
Supply Service Co., Ltd. (“Jiaonan	China			supply
Qingquan Water Supply”)	19 October
(台州市椒江椒南清泉供水服務有限公司)	2010
(a),(b)
Taizhou Jiaojiang Dachen Qingquan Water	PRC/Mainland	RMB100,000	100%	Centralised water
Supply Service Co., Ltd. (“Dachen	China			supply and
Qingquan Water Supply”)	23 January			pipeline
(台州市椒江大陳清泉供水服務有限公司)	2017			installation service
(a),(b)

Notes:

(a) The statutory financial statements of these entities for the year ended 31 December 2018 prepared under PRC Generally Accepted Accounting Principles (“ PRC GAAP ”) were audited by Taizhou Anxin Certified Public Accountants Co,. Ltd. (台州安信會計師事務所有限公司), certified public accountants registered in the PRC. The statutory financial statements of these entities for the years ended 31 December 2019 and 2020 prepared under PRC GAAP were audited by Zhejiang Zhongyong Zhongtian Certified Public Accountants Co., Ltd. (浙江中永中天會計師事務所有限公司), certified public accountants registered in the PRC.
(b) The English names of these entities registered in the PRC represent the best efforts made by management of the Target Company to directly translate their Chinese names as they do not register any official English names.

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APPENDIX IIA ACCOUNTANTS’ REPORT OF TAIZHOU WATER SUPPLY

2.1 BASIS OF PREPARATION

The Historical Financial Information has been prepared in accordance with Hong Kong Financial Reporting Standards (“ HKFRS ”) (which include all Hong Kong Financial Reporting Standards, Hong Kong Accounting Standards (“ HKASs ”) and Interpretations) issued by the HKICPA and accounting principles generally accepted in Hong Kong. All HKFRSs effective for the accounting period commencing from 1 January 2020 and Amendment to HKFRS 16 Covid-19-Related Rent Concessions , together with the relevant transitional provisions, have been adopted on a consistent basis by the Target Group in the preparation of the Historical Financial Information throughout the Relevant Periods.

The Historical Financial Information has been prepared under the historical cost convention.

Going concern

As at 31 December 2020, the Target Group recorded net current liabilities of approximately RMB40,547,000. Included therein, the Target Group recorded the other payables and accruals, the current portion of interest-bearing bank and other borrowings and trade payables of RMB110,691,000, RMB80,000,000 and RMB60,585,000 at 31 December 2020, respectively.

In view of the net current liabilities position, the directors have given careful consideration to the future liquidity and performance of the Target Group and its available sources of finance in assessing whether the Target Group will have sufficient financial resources to continue as a going concern. Having considered the cash flows from operations and the positive operating results, the directors are of the opinion the Target Group is able to meet in full its financial obligations as they fall due for the foreseeable future and it is appropriate to prepare the consolidated financial statements on a going concern basis.

Basis of consolidation

The Historical Financial Information includes the financial information of the Target Company and its subsidiaries for the Relevant Periods. A subsidiary is an entity (including a structured entity), directly or indirectly, controlled by the Target Company. Control is achieved when the Target Group is exposed, or has rights, to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee (i.e., existing rights that give the Target Group the current ability to direct the relevant activities of the investee).

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

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

The results of subsidiaries are included in the Target Company’s profit or loss to the extent of dividends received and receivable. The Target Company’s investments in subsidiaries are stated at cost less any impairment losses.

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

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

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APPENDIX IIA ACCOUNTANTS’ REPORT OF TAIZHOU WATER SUPPLY

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

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

2.2 ISSUED BUT NOT YET EFFECTIVE HONG KONG FINANCIAL REPORTING STANDARDS

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

Amendments to HKFRS 3	_Reference to the Conceptual Framework_2
Amendments to HKFRS 9, HKAS 39,	_Interest Rate Benchmark Reform – Phase 2_1
HKFRS 7, HKFRS 4 and HKFRS 16
Amendments to HKFRS 10 and HKAS	Sale or Contribution of Assets between an Investor and its
28 (2011)	_Associate or Joint Venture_4
HKFRS 17	_Insurance Contracts_3
Amendments to HKFRS 17	_Insurance Contracts_3,6
Amendments to HKAS 1	_Classification of Liabilities as Current or Non-current_3,5
Amendments to HKAS 16	_Property, Plant and Equipment: Proceeds before Intended Use_2
Amendments to HKAS 37	Onerous Contracts — _Cost of Fulfilling a Contract_2
Annual Improvements to HKFRSs	Amendments to HKFRS 1, HKFRS 9, Illustrative Examples
2018-2020	accompanying HKFRS 16, and HKAS 412

1 Effective for annual periods beginning on or after 1 January 2021
2 Effective for annual periods beginning on or after 1 January 2022
3 Effective for annual periods beginning on or after 1 January 2023
4 No mandatory effective date yet determined but available for adoption
5 As a consequence of the amendments to HKAS 1, Hong Kong Interpretation 5 Presentation of Financial Statements — Classification by the Borrower of a Term Loan that Contains a Repayment on Demand Clause was revised in October 2020 to align the corresponding wording with no change in conclusion
6 As a consequence of the amendments to HKFRS 17 issued in October 2020, HKFRS 4 was amended to extend the temporary exemption that permits insurers to apply HKAS 39 rather than HKFRS 9 for annual periods beginning before 1 January 2023

Further information about those HKFRSs that are expected to be applicable to the Target Group is described below.

Amendments to HKFRS 3 are intended to replace a reference to the previous Framework for the Preparation and Presentation of Financial Statements with a reference to the Conceptual Framework for Financial Reporting issued in June 2018 without significantly changing its requirements. The amendments also add to HKFRS 3 an exception to its recognition principle for an entity to refer to the Conceptual Framework to determine what constitutes an asset or a liability. The exception specifies that, for liabilities and contingent liabilities that would be within the scope of HKAS 37 or HK(IFRIC)-Int 21 if they were incurred separately rather than assumed in a business combination, an entity applying HKFRS 3 should refer to HKAS 37 or HK(IFRIC)-Int 21 respectively instead of the Conceptual Framework. Furthermore, the amendments clarify that contingent assets do not qualify for recognition at the acquisition date. The Target Group expects to adopt the amendments prospectively from 1 January 2022. Since the

– IIA-13 –

APPENDIX IIA

ACCOUNTANTS’ REPORT OF TAIZHOU WATER SUPPLY

amendments apply prospectively to business combinations for which the acquisition date is on or after the date of first application, the Target Group will not be affected by these amendments on the date of transition.

Amendments to HKFRS 9, HKAS 39, HKFRS 7, HKFRS 4 and HKFRS 16 address issues not dealt with in the previous amendments which affect financial reporting when an existing interest rate benchmark is replaced with an alternative risk-free rate (“ RFR ”). The amendments provide a practical expedient to allow the effective interest rate to be updated without adjusting the carrying amount when accounting for changes in the basis for determining the contractual cash flows of financial assets and liabilities, if the change is a direct consequence of the interest rate benchmark reform and the new basis for determining the contractual cash flows is economically equivalent to the previous basis immediately preceding the change. In addition, the amendments permit changes required by the interest rate benchmark reform to be made to hedge designations and hedge documentation without the hedging relationship being discontinued. Any gains or losses that could arise on transition are dealt with through the normal requirements of HKFRS 9 to measure and recognise hedge ineffectiveness. The amendments also provide a temporary relief to entities from having to meet the separately identifiable requirement when an RFR is designated as a risk component. The relief allows an entity, upon designation of the hedge, to assume that the separately identifiable requirement is met, provided the entity reasonably expects the RFR risk component to become separately identifiable within the next 24 months. Furthermore, the amendments require an entity to disclose additional information to enable users of financial statements to understand the effect of interest rate benchmark reform on an entity’s financial instruments and risk management strategy. The amendments are effective for annual periods beginning on or after 1 January 2021 and shall be applied retrospectively, but entities are not required to restate the comparative information. As the Target Group does not have any financial assets or financial liabilities based on any benchmark rates subject to interest rate benchmark reform, the amendments are not expected to have any significant impact on the Target Group’s financial statements.

Amendments to HKFRS 10 and HKAS 28 (2011) address an inconsistency between the requirements in HKFRS 10 and in HKAS 28 (2011) in dealing with the sale or contribution of assets between an investor and its associate or joint venture. The amendments require a full recognition of a gain or loss when the sale or contribution of assets between an investor and its associate or joint venture constitutes a business. For a transaction involving assets that do not constitute a business, a gain or loss resulting from the transaction is recognised in the investor’s profit or loss only to the extent of the unrelated investor’s interest in that associate or joint venture. The amendments are to be applied prospectively. The previous mandatory effective date of amendments to HKFRS 10 and HKAS 28 (2011) was removed by the HKICPA in January 2016 and a new mandatory effective date will be determined after the completion of a broader review of accounting for associates and joint ventures. However, the amendments are available for adoption now.

Amendments to HKAS 1 clarify the requirements for classifying liabilities as current or non-current. The amendments specify that if an entity’s right to defer settlement of a liability is subject to the entity complying with specified conditions, the entity has a right to defer settlement of the liability at the end of the reporting period if it complies with those conditions at that date. Classification of a liability is unaffected by the likelihood that the entity will exercise its right to defer settlement of the liability. The amendments also clarify the situations that are considered a settlement of a liability. The amendments are effective for annual periods beginning on or after 1 January 2023 and shall be applied retrospectively. Earlier application is permitted. The amendments are not expected to have any significant impact on the Target Group’s financial statements.

Amendments to HKAS 16 prohibit an entity from deducting from the cost of an item of property, plant and equipment any proceeds from selling items produced while bringing that asset to the location and condition necessary for it to be capable of operating in the manner intended by management. Instead, an entity recognises the proceeds from selling any such items, and the cost of those items, in profit or loss. The amendments are effective for annual periods beginning on or after 1 January 2022 and shall be applied retrospectively only to items of property, plant and equipment made available for use on or after the beginning of the earliest period presented in the financial statements in which the entity first applies the amendments. Earlier application is permitted. The amendments are not expected to have any significant impact on the Target Group’s financial statements.

– IIA-14 –

ACCOUNTANTS’ REPORT OF TAIZHOU WATER SUPPLY

APPENDIX IIA

that relate directly to a contract include both the incremental costs of fulfilling that contract (e.g., direct labour and materials) and an allocation of other costs that relate directly to fulfilling that contract (e.g., an allocation of the depreciation charge for an item of property, plant and equipment used in fulfilling the contract as well as contract management and supervision costs). General and administrative costs do not relate directly to a contract and are excluded unless they are explicitly chargeable to the counterparty under the contract. The amendments are effective for annual periods beginning on or after 1 January 2022 and shall be applied to contracts for which an entity has not yet fulfilled all its obligations at the beginning of the annual reporting period in which it first applies the amendments. Earlier application is permitted. Any cumulative effect of initially applying the amendments shall be recognised as an adjustment to the opening equity at the date of initial application without restating the comparative information. The amendments are not expected to have any significant impact on the Target Group’s financial statements.

Annual Improvements to HKFRSs 2018-2020 sets out amendments to HKFRS 1, HKFRS 9, Illustrative Examples accompanying HKFRS 16, and HKAS 41. Details of the amendments that are expected to be applicable to the Target Group are as follows:

HKFRS 9 Financial Instruments : clarifies the fees that an entity includes when assessing whether the terms of a new or modified financial liability are substantially different from the terms of the original financial liability. These fees include only those paid or received between the borrower and the lender, including fees paid or received by either the borrower or lender on the other’s behalf. An entity applies the amendment to financial liabilities that are modified or exchanged on or after the beginning of the annual reporting period in which the entity first applies the amendment. The amendment is effective for annual periods beginning on or after 1 January 2022. Earlier application is permitted. The amendment is not expected to have a significant impact on the Target Group’s financial statements.
HKFRS 16 Leases : removes the illustration of payments from the lessor relating to leasehold improvements in Illustrative Example 13 accompanying HKFRS 16. This removes potential confusion regarding the treatment of lease incentives when applying HKFRS 16.

2.3 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Investments in associates

An associate is an entity in which the Target Group has a long term interest of generally not less than 20% of the equity voting rights and over which it is in a position to exercise significant influence. Significant influence is the power to participate in the financial and operating policy decisions of the investee, but is not control or joint control over those policies.

The Target Group’s investment in an associate is stated in the consolidated statement of financial position at the Target Group’s share of net assets under the equity method of accounting, less any impairment losses.

Adjustments are made to bring into line any dissimilar accounting policies that may exist. The Target Group’s share of the post-acquisition results and other comprehensive income of an associate is included in the consolidated statement of profit or loss and other comprehensive income, respectively. In addition, when there has been a change recognised directly in the equity of associate, the Target Group recognises its share of any changes, when applicable, in the consolidated statement of changes in equity. Unrealised gains and losses resulting from transactions between the Target Group and its associate are eliminated to the extent of the Target Group’s investment in the associate, except where unrealised losses provide evidence of an impairment of the assets transferred. Goodwill arising from the acquisition of an associate is included as part of the Target Group’s investment in an associate.

If an investment in an associate becomes an investment in a joint venture or vice versa, the retained interest is not remeasured. Instead, the investment continues to be accounted for under the equity method. In all other cases, upon loss of significant influence over the associate or joint control over the joint venture, the Target Group measures and recognises any retained investment at its fair value. Any difference between the carrying amount of the associate or joint venture upon loss of significant influence or joint control and the fair value of the retained investment and proceeds from disposal is recognised in profit or loss.

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APPENDIX IIA

ACCOUNTANTS’ REPORT OF TAIZHOU WATER SUPPLY

The results of an associate are included in the Target Company’s statement of profit or loss and other comprehensive income to the extent of dividends received and receivable. The Target Company’s investment in an associate is classified as a non-current asset and is stated at cost less any impairment losses.

When an investment in an associate is classified as held for sale, it is accounted for in accordance with HKFRS 5 Non-current Assets Held for Sale and Discontinued Operations .

Impairment of non-financial assets

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

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

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

Related parties

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

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

(b) the party is an entity where any of the following conditions applies: (i) the entity and the Target Group are members of the same group; (ii) one entity is an associate or joint venture of the other entity (or of a parent, subsidiary or fellow subsidiary of the other entity);
(iii) the entity and the Target Group are joint ventures of the same third party; (iv) one entity is a joint venture of a third entity and the other entity is an associate of the third entity;
(v) the entity is a post-employment benefit plan for the benefit of employees of either the Target Group or an entity related to the Target Group;

– IIA-16 –

APPENDIX IIA

ACCOUNTANTS’ REPORT OF TAIZHOU WATER SUPPLY

(vi) the entity is controlled or jointly controlled by a person identified in (a);
(vii) a person identified in (a)(i) has significant influence over the entity or is a member of the key management personnel of the entity (or of a parent of the entity); and
(viii) the entity, or any member of a group of which it is a part, provides key management personnel services to the Target Group or to the parent of the Target Group.

Property, plant and equipment and depreciation

Property, plant and equipment, other than construction in progress, are stated at cost less accumulated depreciation and any impairment losses. When an item of property, plant and equipment is classified as held for sale or when it is part of a disposal group classified as held for sale, it is not depreciated and is accounted for in accordance with HKFRS 5. The cost of an item of property, plant and equipment comprises its purchase price and any directly attributable costs of bringing the asset to its working condition and location for its intended use.

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

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

Buildings	10–45 years
Pipelines	15–40 years
Machinery and equipment	3–30 years
Computer and office equipment	3–18 years
Motor vehicles	4–8 years

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

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

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

Intangible assets (other than goodwill)

Intangible assets acquired separately are measured on initial recognition at cost. The cost of intangible assets acquired in a business combination is the fair value at the date of acquisition. The useful lives of intangible assets are assessed to be either finite or indefinite. Intangible assets with finite lives are subsequently amortised over the useful economic life and assessed for impairment whenever there is an indication that the intangible asset may be impaired. The amortisation period and the amortisation method for an intangible asset with a finite useful life are reviewed at least at each financial year end.

– IIA-17 –

APPENDIX IIA

ACCOUNTANTS’ REPORT OF TAIZHOU WATER SUPPLY

Software

Software is stated at cost less any impairment losses and is amortised on the straight-line basis over its estimated useful life of 2 years.

Leases

The Target Group assesses at contract inception whether a contract is, or contains, a lease. A contract is, or contains, a lease if the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration.

Target Group as a lessee

The Target Group applies a single recognition and measurement approach for all leases. except for short-term leases and leases of low-value assets. The Target Group recognises lease liabilities to make lease payments and right-of-use assets representing the right to use the underlying assets.

(a) Right-of-use assets

Right-of-use assets are recognised at the commencement date of the lease (that is the date the underlying asset is available for use). Right-of-use assets are measured at cost, less any accumulated depreciation and any impairment losses, and adjusted for any remeasurement of lease liabilities. The cost of right-of-use assets includes the amount of lease liabilities recognised, initial direct costs incurred, and lease payments made at or before the commencement date less any lease incentives received. Right-of-use assets are depreciated on a straight-line basis over the shorter of the lease terms and the estimated useful lives of the assets as follows:

Leasehold land 50 years Employees dormitories and office premises 5–10 years

If ownership of the leased asset transfers to the Target Group by the end of the lease term or the cost reflects the exercise of a purchase option, depreciation is calculated using the estimated useful life of the asset.

(b) Lease liabilities

Lease liabilities are recognised at the commencement date of the lease at the present value of lease payments to be made over the lease term. The lease payments include fixed payments (including in-substance fixed payments) less any lease incentives receivable, variable lease payments that depend on an index or a rate, and amounts expected to be paid under residual value guarantees. The lease payments also include the exercise price of a purchase option reasonably certain to be exercised by the Target Group and payments of penalties for termination of a lease, if the lease term reflects the Target Group exercising the option to terminate the lease. The variable lease payments that do not depend on an index or a rate are recognised as an expense in the period in which the event or condition that triggers the payment occurs.

In calculating the present value of lease payments, the Target Group uses the incremental borrowing rate at the lease commencement date because the interest rate implicit in the lease is not readily determinable. After the commencement date, the amount of lease liabilities is increased to reflect the accretion of interest and reduced for the lease payments made. In addition, the carrying amount of lease liabilities is remeasured if there is a modification, a change in future lease payments arising from change in an index or rate, a change in the lease term, a change in the in-substance fixed lease payments or a change in assessment to purchase the underlying asset.

Investments and other financial assets

Initial recognition and measurement

Financial assets are classified, at initial recognition, as subsequently measured at amortised cost, fair value through other comprehensive income and fair value through profit or loss.

– IIA-18 –

APPENDIX IIA

ACCOUNTANTS’ REPORT OF TAIZHOU WATER SUPPLY

The classification of financial assets at initial recognition depends on the financial asset’s contractual cash flow characteristics and the Target Group’s business model for managing them. With the exception of trade receivables that do not contain a significant financing component or for which the Target Group has applied the practical expedient of not adjusting the effect of a significant financing component, the Target Group initially measures a financial asset at its fair value, plus in the case of a financial asset not at fair value through profit or loss, transaction costs. Trade receivables that do not contain a significant financing component or for which the Target Group has applied the practical expedient are measured at the transaction price determined under HKFRS 15 in accordance with the policies set out for “Revenue recognition” below.

In order for a financial asset to be classified and measured at amortised cost or fair value through other comprehensive income, it needs to give rise to cash flows that are solely payments of principal and interest (“ SPPI ”) on the principal amount outstanding. Financial assets with cash flows that are not SPPI are classified and measured at fair value through profit or loss, irrespective of the business model.

The Target Group’s business model for managing financial assets refers to how it manages its financial assets in order to generate cash flows. The business model determines whether cash flows will result from collecting contractual cash flows, selling the financial assets, or both. Financial assets classified and measured at amortised cost are held within a business model with the objective to hold financial assets in order to collect contractual cash flows, while financial assets classified and measured at fair value through other comprehensive income are held within a business model with the objective of both holding to collect contractual cash flows and selling. Financial assets which are not held within the aforementioned business models are classified and measured at fair value through profit or loss.

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

Subsequent measurement

The subsequent measurement of financial assets depends on their classification as follows:

Financial assets at amortised cost (debt investments)

Financial assets at amortised cost are subsequently measured using the effective interest method and are subject to impairment. Gains and losses are recognised in profit or loss when the asset is derecognised, modified or impaired.

Derecognition of financial assets

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

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

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

– IIA-19 –

APPENDIX IIA ACCOUNTANTS’ REPORT OF TAIZHOU WATER SUPPLY

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

Impairment of financial assets

The Target Group recognises an allowance for expected credit losses (“ ECLs ”) for all debt instruments not held at fair value through profit or loss. ECLs are based on the difference between the contractual cash flows due in accordance with the contract and all the cash flows that the Target Group expects to receive, discounted at an approximation of the original effective interest rate. The expected cash flows will include cash flows from the sale of collateral held or other credit enhancements that are integral to the contractual terms.

General approach

ECLs are recognised in two stages. For credit exposures for which there has not been a significant increase in credit risk since initial recognition, ECLs are provided for credit losses that result from default events that are possible within the next 12 months (a 12-month ECL). For those credit exposures for which there has been a significant increase in credit risk since initial recognition, a loss allowance is required for credit losses expected over the remaining life of the exposure, irrespective of the timing of the default (a lifetime ECL).

At each reporting date, the Target Group assesses whether the credit risk on a financial instrument has increased significantly since initial recognition. When making the assessment, the Target Group compares the risk of a default occurring on the financial instrument as at the reporting date with the risk of a default occurring on the financial instrument as at the date of initial recognition and considers reasonable and supportable information that is available without undue cost or effort, including historical and forward-looking information.

The Target Group considers a financial asset in default when contractual payments are 90 days past due. However, in certain cases, the Target Group may also consider a financial asset to be in default when internal or external information indicates that the Target Group is unlikely to receive the outstanding contractual amounts in full before taking into account any credit enhancements held by the Target Group. A financial asset is written off when there is no reasonable expectation of recovering the contractual cash flows.

Debt investments at fair value through other comprehensive income and financial assets at amortised cost are subject to impairment under the general approach and they are classified within the following stages for measurement of ECLs except for trade receivables and contract assets which apply the simplified approach as detailed below.

Stage	1	–	Financial instruments for which credit risk has not increased significantly since
			initial recognition and for which the loss allowance is measured at an amount
			equal to 12-month ECLs
Stage	2	–	Financial instruments for which credit risk has increased significantly since
			initial recognition but that are not credit-impaired financial assets and for which
			the loss allowance is measured at an amount equal to lifetime ECLs
Stage	3	–	Financial assets that are credit-impaired at the reporting date (but that are not
			purchased or originated credit-impaired) and for which the loss allowance is
			measured at an amount equal to lifetime ECLs

– IIA-20 –

APPENDIX IIA ACCOUNTANTS’ REPORT OF TAIZHOU WATER SUPPLY

Simplified approach

For trade receivables and contract assets that do not contain a significant financing component or when the Target Group applies the practical expedient of not adjusting the effect of a significant financing component, the Target Group applies the simplified approach in calculating ECLs. Under the simplified approach, the Target Group does not track changes in credit risk, but instead recognises a loss allowance based on lifetime ECLs at each reporting date. The Target Group has established a provision matrix that is based on its historical credit loss experience, adjusted for forward-looking factors specific to the debtors and the economic environment.

Financial liabilities

Initial recognition and measurement

Financial liabilities are classified, at initial recognition, as financial liabilities at fair value through profit or loss, loans and borrowings, payables, or as derivatives designated as hedging instruments in an effective hedge, as appropriate.

All financial liabilities are recognised initially at fair value and, in the case of loans and borrowings and payables, net of directly attributable transaction costs.

The Target Group’s financial liabilities include trade and other payables and interest-bearing bank and other borrowings.

Subsequent measurement

The subsequent measurement of financial liabilities depends on their classification as follows:

Financial liabilities at amortised cost (loans and borrowings)

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

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

Derecognition of financial liabilities

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

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

Offsetting of financial instruments

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

Inventories

Inventories are stated at the lower of cost and net realisable value. Cost is calculated using the weighted average method. Net realisable value represents the estimated selling price for inventories less any estimated costs to be incurred to completion and disposal.

– IIA-21 –

APPENDIX IIA

ACCOUNTANTS’ REPORT OF TAIZHOU WATER SUPPLY

Cash and cash equivalents

For the purpose of the consolidated statement of cash flows, cash and cash equivalents comprise cash on hand and demand deposits, and short-term highly liquid investments that are readily convertible into known amounts of cash, are subject to an insignificant risk of changes in value, and have a short maturity of generally within three months when acquired, less bank overdrafts which are repayable on demand and form an integral part of the Target Group’s cash management.

For the purpose of the consolidated statements of financial position, cash and cash equivalents comprise cash on hand and at banks, including term deposits, and assets similar in nature to cash, which are not restricted as to use.

Provisions

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

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

Income tax

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

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

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

Deferred tax liabilities are recognised for all taxable temporary differences, except:

(a) where the deferred tax liability arises from the initial recognition of goodwill or an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss; and
(b) in respect of taxable temporary differences associated with investments in subsidiaries, when the timing of the reversal of the temporary differences can be controlled and it is probable that the temporary differences will not reverse in the foreseeable future.

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

(a) when the deferred tax asset relating to the deductible temporary difference arises from the initial recognition of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss; and
(b) in respect of deductible temporary differences associated with investments in subsidiaries, deferred tax assets are only recognised to the extent that it is probable that the temporary differences will reverse in the foreseeable future and taxable profit will be available against which the temporary differences can be utilised.

– IIA-22 –

APPENDIX IIA

ACCOUNTANTS’ REPORT OF TAIZHOU WATER SUPPLY

The carrying amount of deferred tax assets is reviewed at the end of each of the Relevant Periods and reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the deferred tax asset to be utilised. Unrecognised deferred tax assets are reassessed at the end of each of the Relevant Periods and are recognised to the extent that it has become probable that sufficient taxable profit will be available to allow all or part of the deferred tax asset to be recovered.

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

Deferred tax assets and deferred tax liabilities are offset if and only if the Target Group has a legally enforceable right to set off current tax assets and current tax liabilities and the deferred tax assets and deferred tax liabilities relate to income taxes levied by the same taxation authority on either the same taxable entity or different taxable entities which intend either to settle current tax liabilities and assets on a net basis, or to realise the assets and settle the liabilities simultaneously, in each future period in which significant amounts of deferred tax liabilities or assets are expected to be settled or recovered.

Government grants

Government grants are recognised at their fair value where there is reasonable assurance that the grant will be received and all attaching conditions will be complied with. When the grant relates to an expense item, it is recognised as income on a systematic basis over the periods that the costs, for which it is intended to compensate, are expensed.

Where the grant relates to an asset, the fair value is credited to a deferred income account and is released to profit or loss over the expected useful life of the relevant asset by equal annual instalments or deducted from the carrying amount of the asset and released to profit or loss by way of a reduced depreciation charge.

Revenue recognition

Revenue from contracts with customers

Revenue from contracts with customers is recognised when control of goods or services is transferred to the customers at an amount that reflects the consideration to which the Target Group expects to be entitled in exchange for those goods or services.

When the consideration in a contract includes a variable amount, the amount of consideration is estimated to which the Target Group will be entitled in exchange for transferring the goods or services to the customer. The variable consideration is estimated at contract inception and constrained until it is highly probable that a significant revenue reversal in the amount of cumulative revenue recognised will not occur when the associated uncertainty with the variable consideration is subsequently resolved.

When the contract contains a financing component which provides the customer a significant benefit of financing the transfer of goods or services to the customer for more than one year, revenue is measured at the present value of the amount receivable, discounted using the discount rate that would be reflected in a separate financing transaction between the Target Group and the customer at contract inception. When the contract contains a financing component which provides the Target Group with a significant financial benefit for more than one year, revenue recognised under the contract includes the interest expense accreted on the contract liability under the effective interest method. For a contract where the period between the payment by the customer and the transfer of the promised goods or services is one year or less, the transaction price is not adjusted for the effects of a significant financing component, using the practical expedient in HKFRS 15.

(a) Sale of water

Revenue from the sale of water is recognised at the point in time when control of the water is transferred to the customer, generally on delivery of the water.

– IIA-23 –

APPENDIX IIA

ACCOUNTANTS’ REPORT OF TAIZHOU WATER SUPPLY

(b) Installation services

The Target Group provides installation services separately to customers.

Revenue from installation services is recognised over time, using an input method to measure progress towards complete satisfaction of the service, because the customer simultaneously receives and consumes the benefits provided by the Target Group. The input method recognises revenue on the basis of the actual cost expended relative to the total expected cost to complete the service.

Other income

Interest income is recognised on an accrual basis using the effective interest method by applying the rate that exactly discounts the estimated future cash receipts over the expected life of the financial instrument or a shorter period, when appropriate, to the net carrying amount of the financial asset.

Contract assets

A contract asset is the right to consideration in exchange for goods or services transferred to the customer. If the Target Group performs by transferring goods or services to a customer before the customer pays consideration or before payment is due, a contract asset is recognised for the earned consideration that is conditional. Contract assets are subject to impairment assessment, details of which are included in the accounting policies for impairment of financial assets.

Contract liabilities

A contract liability is recognised when a payment is received or a payment is due (whichever is earlier) from a customer before the Target Group transfers the related goods or services. Contract liabilities are recognised as revenue when the Target Group performs under the contract (i.e., transfers control of the related goods or services to the customer).

Other employee benefits

Pension scheme

The Target Group participates in the central pension schemes as defined by the laws of the countries in which it has operations. The subsidiaries established and operating in Mainland China are required to provide certain staff pension benefits to their employees under existing regulations of the PRC. Pension scheme contributions are provided at rates stipulated by PRC regulations and are made to a pension fund managed by government agencies, which are responsible for administering the contributions for the subsidiaries’ employees.

Contributions made to the government retirement benefit fund under defined contribution retirement plans are charged to profit or loss as they become payable in accordance with the rules of the central pension schemes.

Defined benefit plan

The Target Group operates a defined benefit pension plan which requires contributions to be made to a separately administered fund. The benefits are unfunded. The cost of providing benefits under the defined benefit plan is determined using the projected unit credit actuarial valuation method.

Remeasurements arising from defined benefit pension plans, comprising actuarial gains and losses, the effect of the asset ceiling (excluding amounts included in net interest on the net defined benefit liability) and the return on plan assets (excluding amounts included in net interest on the net defined benefit liability), are recognised immediately in the consolidated statement of financial position with a corresponding debit or credit to retained profits through other comprehensive income in the period in which they occur. Remeasurements are not reclassified to profit or loss in subsequent periods.

– IIA-24 –

APPENDIX IIA ACCOUNTANTS’ REPORT OF TAIZHOU WATER SUPPLY

Past service costs are recognised in profit or loss at the earlier of:

the date of the plan amendment or curtailment; and
the date that the Target Group recognises restructuring-related costs

Net interest is calculated by applying the discount rate to the net defined benefit liability or asset. The Target Group recognises the following changes in the net defined benefit obligation under “cost of sales”, “administrative expenses” and “finance costs” in the consolidated statement of profit or loss by function:

service costs comprising current service costs, past-service costs, gains and losses on curtailments and non-routine settlements
net interest expense or income

Dividends

Final dividends are recognised as a liability when they are approved by the shareholders in a general meeting.

3. SIGNIFICANT ACCOUNTING JUDGEMENTS AND ESTIMATES

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

Estimation uncertainty

The key assumptions concerning the future and other key sources of estimation uncertainty at the end of each of the Relevant Periods, that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year, are described below.

Impairment of non-financial assets (other than goodwill)

The Target Group assesses whether there are any indicators of impairment for all non-financial assets (including the right-of-use assets) at the end of each of the Relevant Periods. Non-financial assets are tested for impairment when there are indicators that the carrying amounts may not be recoverable. An impairment exists when the carrying value of an asset or a cash-generating unit exceeds its recoverable amount, which is the higher of its fair value less costs of disposal and its value in use. The calculation of the fair value less costs of disposal is based on the price that would be required currently to replace the service capacity of an asset less incremental costs for disposing of the asset. When value in use calculations are undertaken, the Target Group estimates the expected future cash flows from the assets or cash-generating unit and chooses a suitable discount rate in order to calculate the present value of those cash flows.

The key assumptions used in the fair value less costs of disposal calculations mainly include current replacement cost. The key assumptions used in the expected future cash flows calculations include appropriate discount rates, expected future selling prices and future cost of sales. Where the expectation is different from the original estimates, the carrying value and provision for such non-financial assets in the period in which such estimates are changed will be adjusted accordingly.

Based on the test results, no impairment of non-financial assets were provided as at 31 December 2018, 2019 and 2020.

Provision for expected credit losses of trade receivables

The Target Group uses a provision matrix to calculate ECLs for trade receivables and contract assets. The provision rates are based on days past due that have similar loss patterns.

– IIA-25 –

APPENDIX IIA

ACCOUNTANTS’ REPORT OF TAIZHOU WATER SUPPLY

The provision matrix is initially based on the Target Group’s historical observed default rates. The Target Group will calibrate the matrix to adjust the historical credit loss experience with forward-looking information. For instance, if forecast economic conditions are expected to deteriorate over the next year which can lead to an increased number of defaults, the historical default rates are adjusted. At each reporting date, the historical observed default rates are updated and changes in the forward-looking estimates are analysed.

The assessment of the correlation among historical observed default rates, forecast economic conditions and ECLs is a significant estimate. The amount of ECLs is sensitive to changes in circumstances and of forecast economic conditions. The Target Group’s historical credit loss experience and forecast of economic conditions may also not be representative of customer’s actual default in the future. The information about the ECLs on the Target Group’s trade receivables and contract assets as at 31 December 2018, 2019 and 2020 are disclosed in note 17 and note 19 to the Historical Financial Information respectively.

Deferred tax assets

Deferred tax assets are recognised for deductible temporary differences to the extent that it is probable that taxable profit will be available against which the losses and deductible temporary differences can be utilised. Significant management judgement is required to determine the amount of deferred tax assets that can be recognised, based upon the likely timing and level of future taxable profits together with future tax planning strategies. Further details are contained in note 25 to the Historical Financial statements.

Defined benefit plans (pension benefits)

The cost of the defined benefit pension plan and the present value of the pension obligation are determined using actuarial valuations. An actuarial valuation involves making various assumptions that may differ from actual developments in the future. These include the determination of the discount rate, future salary increases, mortality rates and future pension increases. Due to the complexities involved in the valuation and its long-term nature, a defined benefit obligation is highly sensitive to changes in these assumptions.

The parameter most subject to change is the discount rate. In determining the appropriate discount rate, management considers the interest rates of corporate bonds in currencies and extrapolated as needed along the yield curve to correspond with the expected term of the defined benefit obligation.

The mortality rate is based on publicly available mortality tables for the specific countries. Those mortality tables tend to change only at intervals in response to demographic changes. Future salary increases and pension increases are based on expected future inflation rates for the respective countries. Further details about pension obligations are provided in note 26.

4. Operating segment information

For management purposes, the Target Group only has one reportable operating segment which is water supply and installation of water pipelines. Management monitors the operating results of the Target Group’s operating segment as a whole for the purpose of making decisions about resources allocation and performance assessment.

Geographic information

(a) Revenue from external customers

During the Relevant Periods, the Target Group operated within one geographical area as all of the Target Group’s revenue was generated from customers located in Mainland China.

(b) Non-current assets

All non-current assets of the Target Group are located in Mainland China.

– IIA-26 –

APPENDIX IIA

ACCOUNTANTS’ REPORT OF TAIZHOU WATER SUPPLY

Information about major customers

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

		Year ended	Year ended	Year ended
		31 December	31 December	31 December
		2018	2019	2020
		RMB’000	RMB’000	RMB’000
Customer	1	27,632	N/A*	N/A*

The corresponding revenue from the customer is not disclosed as the revenue did not individually account for 10% or more of the Target Group’s revenue for the respective year.

5. Revenue, other income and gains

An analysis of revenue is as follows:

Revenue from contracts with customers Revenue from contracts with customers *(a)* *Disaggregated revenue information* Types of goods or services Sale of water Installation services Total revenue from contracts with customers Timing of revenue recognition Goods transferred at a point in time Services transferred over time Total revenue from contracts with customers	Year ended 31 December 2018 RMB’000 253,015 Year ended 31 December 2018 RMB’000 216,319 36,696 253,015 216,319 36,696 253,015	Year ended 31 December 2019 RMB’000 299,916 Year ended 31 December 2019 RMB’000 218,635 81,281 299,916 218,635 81,281 299,916	Year ended 31 December 2020 RMB’000 276,563

			Year ended 31 December 2020 RMB’000 207,958 68,605
			276,563

			207,958 68,605
			276,563

– IIA-27 –

APPENDIX IIA

ACCOUNTANTS’ REPORT OF TAIZHOU WATER SUPPLY

(b) Contract liabilities

The Target Group recognised the following revenue-related contract liabilities:

				As at	As at	As at
			31	December	31 December	31 December
				2018	2019	2020
				RMB’000	RMB’000	RMB’000
Current	_(note _	22(b))		34,283	30,561	39,622

Contract liabilities represented the obligations to transfer goods to a customer for which the Target Group has received consideration. The amount was included in “Other payables and accruals” in the consolidated statements of financial position.

(i) Significant changes in contract liabilities

The changes in the contract liabilities are mainly attributable to the short-term advances received to transfer goods to customers and satisfaction of performance obligations.

(ii) Revenue recognised in relation to contract liabilities

The following table shows the revenue recognised during the Relevant Periods that was included in the contract liabilities at the beginning of the Relevant Periods and recognised from performance obligations satisfied in previous periods:

Revenue recognised that was included in the contract liabilities balance at the beginning of the Relevant Periods: Sale of water Installation services	Year ended 31 December 2018 RMB’000 4,435 14,177 18,612	Year ended 31 December 2019 RMB’000 4,208 30,075 34,283	Year ended 31 December 2020 RMB’000 3,990 26,571
			30,561

(c) Performance obligations

Information about the Target Group’s performance obligations is summarised below:

Sale of water

The performance obligation is satisfied upon delivery of the water and payment is generally due within three months.

Installation services

The performance obligation is satisfied over time as services are rendered and payment is generally due upon completion of installation and customer acceptance.

– IIA-28 –

APPENDIX IIA

ACCOUNTANTS’ REPORT OF TAIZHOU WATER SUPPLY

The amounts of transaction prices allocated to the remaining performance obligations (unsatisfied or partially unsatisfied) in the Relevant Periods are as follows:

	As at	As at	As at
	31 December	31 December	31 December
	2018	2019	2020
	RMB’000	RMB’000	RMB’000
Amounts expected to be recognised as
revenue:
Within one year	52,039	25,629	42,015

All the amounts of transaction prices allocated to the remaining performance obligations are expected to be recognised as revenue within one year. The amounts disclosed above do not include variable consideration which is constrained.

Other income Bank interest income Interest income from loans to related parties Government grants Value added tax refund Income from sales of scrap Others Gain Gain on stocktaking	Year ended 31 December 2018 RMB’000 95 3,064 2,505 1,003 – 1,081 7,748 421 8,169	Year ended 31 December 2019 RMB’000 155 680 383 1,032 – 1,308 3,558 69 3,627	Year ended 31 December 2020 RMB’000 146 3,232 149 1,043 1,056 1,079
			6,705
			303
			7,008

– IIA-29 –

APPENDIX IIA ACCOUNTANTS’ REPORT OF TAIZHOU WATER SUPPLY

6. PROFIT BEFORE TAX

The Target Group’s profit before tax is arrived at after charging/(crediting):

Notes Cost of inventories sold Cost of services provided Depreciation of property, plant and equipment 12 Depreciation of right-of-use assets 15 Amortisation of other intangible assets 13 Impairment of trade receivables, net 17 Impairment of contract assets, net 19 Impairment of financial assets included in prepayments, other receivables, and other assets, net 18 Government grants Deferred government grants 24 Impairment of inventories** Auditor’s remuneration Employee benefit expense (excluding directors’, chief executive’s and supervisors’ remuneration (note 8)): Wages and salaries Pension scheme contributions Staff welfare expenses Defined benefit plan Loss on disposal of items of property, plant and equipment	Year ended 31 December 2018 RMB’000 193,527 24,891 13,666 312 161 (2,710) 3,125 21 (2,505) (1,446) 13 81 37,532 3,558 5,753 833 47,676 87	Year ended 31 December 2019 RMB’000 195,150 55,807 14,249 374 218 437 10,679 24 (383) (1,510) (10) 64 33,295 3,529 5,933 1,016 43,773 18	Year ended 31 December 2020 RMB’000 192,581 34,344 14,518 354 214 (988) 9,364 19 (149) (1,509) 22 89 33,312 1,816 6,635 1,090
			42,853
			26

The cost of inventories sold and services provided includes RMB35,667,000, RMB34,149,000 and RMB33,934,000, relating to staff costs and depreciation of property, plant and equipment for the years ended 31 December 2018, 2019 and 2020, respectively, which are also included in the respective total amounts disclosed above for each type of expenses.
** The amortisation of other intangible assets for the years ended 31 December 2018, 2019 and 2020 is included in “Administrative expenses” in the consolidated statements of profit or loss and other comprehensive income.
*** The government grants mainly represent compensation by the local governments to support the Target Group’s operation in Taizhou City, the PRC. There were no unfulfilled conditions or contingencies attached to these government grants. Deferred government grants represent the amount released from deferred government grants.
**** The impairment of inventories is included in “Cost of sales” in the consolidated statements of profit or loss and other comprehensive income.

– IIA-30 –

APPENDIX IIA

ACCOUNTANTS’ REPORT OF TAIZHOU WATER SUPPLY

7. FINANCE COSTS

An analysis of finance costs is as follows:

Interest on bank borrowings Interest on other borrowings Interest on lease liabilities (note 15) Interest on loans from related parties (note 32(a)) Interest expense arising from a defined benefit plan (note 26)	Year ended 31 December 2018 RMB’000 3,454 2,706 11 766 1,713 8,650	Year ended 31 December 2019 RMB’000 3,664 3,570 11 327 1,753 9,325	Year ended 31 December 2020 RMB’000 8,679 544 6 402 1,815
			11,446

8. DIRECTORS’, CHIEF EXECUTIVE’S AND SUPERVISORS’ REMUNERATION

Directors’, chief executive’s and supervisors’ remuneration for the year, disclosed pursuant to the Listing Rules, section 383(1)(a), (b), (c) and (f) of the Hong Kong Companies Ordinance and Part 2 of the Companies (Disclosure of Information about Benefits of Directors) Regulation, is as follows:

Fee Other emoluments: Salaries, allowances and benefits in kind Pension scheme contributions Defined benefit plan	Year ended 31 December 2018 RMB’000 – 2,001 98 46 2,145	Year ended 31 December 2019 RMB’000 – 1,900 112 63 2,075	Year ended 31 December 2020 RMB’000 –
			1,946 21 70
			2,037

(a) Independent non-executive directors

The Target Company did not have any independent non-executive directors during the Relevant Periods.

– IIA-31 –

APPENDIX IIA

ACCOUNTANTS’ REPORT OF TAIZHOU WATER SUPPLY

(b) Executive directors, non-executive director and supervisors

Year ended 31 December 2018 Executive directors: Hou Bin Li Chunqin Shen Xiaohui Ruan Huajian Non-executive director: Lin Yunfei Supervisors: Qiu Lin Wang Min(i) Wang Pan He Qiang(ii) Year ended 31 December 2019 Executive directors: Hou Bin Li Chunqin Shen Xiaohui Ruan Huajian Non-executive director: Lin Yunfei Supervisors: Qiu Lin Wang Pan He Qiang(ii)	Salaries, allowances and benefits in kind RMB’000 336 335 291 295 1,257 – 305 – 288 151 744 2,001 Salaries, allowances and benefits in kind RMB’000 299 298 260 268 1,125 – 275 228 272 775 1,900	Pension scheme contributions RMB’000 15 15 15 15 60 – 15 – 15 8 38 98 Pension scheme contributions RMB’000 16 16 16 16 64 – 16 16 16 48 112	Defined benefit plan RMB’000 7 7 7 7 28 – 7 – 7 4 18 46 Defined benefit plan RMB’000 9 9 9 9 36 – 9 9 9 27 63	Total RMB’000 358 357 313 317
				1,345 –
				327 – 310 163
				800
				2,145

				Total RMB’000 324 323 285 293
				1,225 –
				300 253 297
				850
				2,075

– IIA-32 –

APPENDIX IIA

ACCOUNTANTS’ REPORT OF TAIZHOU WATER SUPPLY

Year ended 31 December 2020 Executive directors: Hou Bin* Li Chunqin Shen Xiaohui Ruan Huajian Non-executive director: Lin Yunfei Supervisors: Qiu Lin Wang Pan He Qiang(ii)	Salaries, allowances and benefits in kind RMB’000 312 311 270 275 1,168 – 283 217 278 778 1,946	Pension scheme contributions RMB’000 3 3 3 3 12 – 3 3 3 9 21	Defined benefit plan RMB’000 10 10 10 10 40 – 10 10 10 30 70	Total RMB’000 325 324 283 288
				1,220 –
				296 230 291
				817
				2,037

Hou Bin was the chief executive of the Target Company during the Relevant Periods.

Notes:

(i) Wang Min retired as a supervisor in June 2018.

(ii) He Qiang was appointed as a supervisor in June 2018.

There was no arrangement under which a director waived or agreed to waive any remuneration during the Relevant Periods.

9. FIVE HIGHEST PAID EMPLOYEES

The five highest paid employees included four, four and three directors and supervisors for the years ended 31 December 2018, 2019 and 2020, respectively, details of whose remuneration are set out in note 8 above. Details of the remuneration of the remaining highest paid employees who were neither a director nor a supervisor of the Target Company during the Relevant Periods are as follows:

Salaries, allowances and benefits in kind Pension scheme contributions Defined benefit plan	Year ended 31 December 2018 RMB’000 340 15 7 362	Year ended 31 December 2019 RMB’000 307 16 9 332	Year ended 31 December 2020 RMB’000 601 6 21
			628

– IIA-33 –

APPENDIX IIA

ACCOUNTANTS’ REPORT OF TAIZHOU WATER SUPPLY

The number of non-director and non-supervisor highest paid employees whose remuneration fell within the following band is as follows:

			Number of employees	Number of employees	Number of employees
			Year ended	Year ended	Year ended
			31 December	31 December	31 December
			2018	2019	2020
Nil	to	HK$1,000,000	1	1	2

10. INCOME TAX EXPENSE

The Target Group is subject to income tax on an entity basis on profit arising in or derived from the jurisdictions in which members of the Target Group are domiciled and operate.

During the Relevant Periods, the provision for current income tax in Mainland China was based on the statutory rate of 25% of the assessable profits of certain PRC subsidiaries of the Target Group as determined in accordance with the PRC Corporate Income Tax Law, which was approved and became effective on 1 January 2008.

The income tax expense of the Target Group during the Relevant Periods is analysed as follows:

Current tax – Mainland China Charge for the year Deferred tax (note 25) Total tax charge for the year	Year ended 31 December 2018 RMB’000 2,491 (250) 2,241	Year ended 31 December 2019 RMB’000 5,234 (2,981) 2,253	Year ended 31 December 2020 RMB’000 6,546 (2,845)
			3,701

A reconciliation of the tax expense applicable to profit before tax at the statutory rate in Mainland China to the tax expense at the effective tax rate is as follows:

Profit before tax Tax at the statutory tax rate of 25% in Mainland China Effect of non-deductible expenses Tax losses not recognised Tax losses utilised from previous periods Temporary differences not recognised Temporary differences utilised from previous periods Tax charge at the Target Group’s effective rate	Year ended 31 December 2018 RMB’000 1,360 340 361 1,237 (145) 448 – 2,241	% 25.0 26.5 91.1 (10.7) 32.9 – 164.8	Year ended 31 December 2019 RMB’000 1,488 372 255 1,164 – 497 (35) 2,253	% 25.0 17.1 78.3 – 33.4 (2.4) 151.4	Year ended 31 December 2020 RMB’000 7,359 1,840 123 1,164 – 574 – 3,701	% 25.0 1.7 15.8 – 7.8 –
						50.3

11. DIVIDENDS

No dividend was declared and paid by the Target Company in respect of the Relevant Periods.

– IIA-34 –

APPENDIX IIA ACCOUNTANTS’ REPORT OF TAIZHOU WATER SUPPLY

12. PROPERTY, PLANT AND EQUIPMENT

31 December 2018 At 1 January 2018: Cost Accumulated depreciation Net carrying amount At 1 January 2018, net of accumulated depreciation Additions Disposals Depreciation provided during the year Transfers At 31 December 2018, net of accumulated depreciation At 31 December 2018: Cost Accumulated depreciation Net carrying amount 31 December 2019 At 1 January 2019: Cost Accumulated depreciation Net carrying amount At 1 January 2019, net of accumulated depreciation Additions Disposals Depreciation provided during the year Transfers At 31 December 2019, net of accumulated depreciation At 31 December 2019: Cost Accumulated depreciation Net carrying amount	Buildings RMB’000 34,507 (12,854) 21,653 21,653 – (6) (935) – 20,712 34,390 (13,678) 20,712 34,390 (13,678) 20,712 20,712 – – (1,805) 761 19,668 35,151 (15,483) 19,668	Pipelines RMB’000 217,573 (73,589) 143,984 143,984 2,367 (226) (8,069) – 138,056 219,545 (81,489) 138,056 219,545 (81,489) 138,056 138,056 6,585 – (7,461) – 137,180 226,130 (88,950) 137,180	Machinery and equipment RMB’000 44,798 (27,437) 17,361 17,361 1,544 (874) (3,667) 2,695 17,059 45,026 (27,967) 17,059 45,026 (27,967) 17,059 17,059 1,702 – (3,984) 1,416 16,193 48,140 (31,947) 16,193	Computer and office equipment RMB’000 12,967 (8,184) 4,783 4,783 396 (21) (797) – 4,361 12,970 (8,609) 4,361 12,970 (8,609) 4,361 4,361 391 (3) (777) – 3,972 13,303 (9,331) 3,972	Motor vehicles Construction in progress RMB’000 RMB’000 4,371 1,099 (3,526) – 845 1,099 845 1,099 194 2,083 (86) – (198) – – (2,695) 755 487 2,830 487 (2,075) – 755 487 2,830 487 (2,075) – 755 487 755 487 527 2,177 (15) – (222) – – (2,177) 1,045 487 3,052 487 (2,007) – 1,045 487	Total RMB’000 315,315 (125,590)
						189,725

						189,725 6,584 (1,213) (13,666) –
						181,430

						315,248 (133,818)
						181,430

						315,248 (133,818)
						181,430

						181,430 11,382 (18) (14,249) –
						178,545

						326,263 (147,718)
						178,545

– IIA-35 –

APPENDIX IIA ACCOUNTANTS’ REPORT OF TAIZHOU WATER SUPPLY

31 December 2020 At 1 January 2020: Cost Accumulated depreciation Net carrying amount At 1 January 2020, net of accumulated depreciation Additions Disposals Depreciation provided during the year At 31 December 2020, net of accumulated depreciation At 31 December 2020: Cost Accumulated depreciation Net carrying amount	Buildings RMB’000 35,151 (15,483) 19,668 19,668 – – (1,065) 18,603 35,151 (16,548) 18,603	Pipelines RMB’000 226,130 (88,950) 137,180 137,180 5,114 – (8,375) 133,919 231,244 (97,325) 133,919	Machinery and equipment RMB’000 48,140 (31,947) 16,193 16,193 1,466 (7) (4,072) 13,580 49,297 (35,717) 13,580	Computer and office equipment RMB’000 13,303 (9,331) 3,972 3,972 610 (7) (737) 3,838 13,791 (9,953) 3,838	Motor vehicles Construction in progress RMB’000 RMB’000 3,052 487 (2,007) – 1,045 487 1,045 487 303 243 (4) – (269) – 1,075 730 3,281 730 (2,206) – 1,075 730	Total RMB’000 326,263 (147,718)
						178,545

						178,545 7,736 (18) (14,518)
						171,745

						333,494 (161,749)
						171,745

– IIA-36 –

APPENDIX IIA

ACCOUNTANTS’ REPORT OF TAIZHOU WATER SUPPLY

13. OTHER INTANGIBLE ASSETS

At 1 January 2018: Cost Accumulated amortisation Net carrying amount Cost at 1 January 2018, net of accumulated amortisation Additions Amortisation provided during the year (note 6) At 31 December 2018 At 31 December 2018: Cost Accumulated amortisation Net carrying amount Cost at 1 January 2019, net of accumulated amortisation Additions Amortisation provided during the year (note 6) At 31 December 2019 At 31 December 2019: Cost Accumulated amortisation Net carrying amount Cost at 1 January 2020, net of accumulated amortisation Additions Amortisation provided during the year (note 6) At 31 December 2020 At 31 December 2020: Cost Accumulated amortisation Net carrying amount	Software RMB’000 828 (627)
	201

	201 145 (161)
	185

	973 (788)
	185

	185 316 (218)
	283

	1,289 (1,006)
	283

	283 154 (214)
	223

	1,443 (1,220)
	223

– IIA-37 –

APPENDIX IIA ACCOUNTANTS’ REPORT OF TAIZHOU WATER SUPPLY

14. INVESTMENT IN AN ASSOCIATE

			As at	As at	As at
		31 December		31 December	31 December
			2018	2019	2020
		RMB’000		RMB’000	RMB’000
Share of net assets			800	800	800

Accumulated impairment in
an investment in an associate			(800)	(800)	(800)
Net carrying amount			–	–	–

Particulars of the associate are as follows:
			Percentage of
		Nominal	ownership
	Place of	value of		interest
	incorporation/	issued/	attributable to
	registration	registered	the Target		Principal
Name	and business	share capital		Group	activities
Taizhou Bada Municipal	PRC/	RMB7,200,000		11.11	Municipal
Engineering Co., Ltd.	Mainland				Engineering
(“Taizhou Bada”)	China			construction and
					pipeline
					installation
					service

In the opinion of the directors, the associate is not material to the Target Group.

The Target Group’s shareholding in the associate is held by the Target Company.

– IIA-38 –

APPENDIX IIA ACCOUNTANTS’ REPORT OF TAIZHOU WATER SUPPLY

15. Leases

The Target Group as a lessee

The Target Group has lease contracts for land, employees dormitories and office premises used in its operations. Lump sum payments were made upfront to acquire the leased land from the government with lease periods of 50 years, and no ongoing payments will be made under the terms of this land lease. Leases of employees dormitories and office premises have lease terms from 5 to 10 years. Generally, the Target Group is restricted from assigning and subleasing the leased assets outside the Target Group. There are no lease contracts that include extension and termination options and variable lease payments.

(a) Right-of-use assets

The carrying amounts of the Target Group’s right-of-use assets and the movements during the Relevant Periods are as follows:

As at 1 January 2018 Depreciation charge (note 6) As at 31 December 2018 and 1 January 2019 Addition Depreciation charge (note 6) As at 31 December 2019 and 1 January 2020 Gain on early termination of a lease Depreciation charge (note 6) As at 31 December 2020	Employees dormitories and office premises RMB’000 277 (46) 231 – (45) 186 (42) (24) 120	Leasehold land RMB’000 10,551 (266) 10,285 3,170 (329) 13,126 – (330) 12,796	Total RMB’000 10,828 (312)
			10,516 3,170 (374)
			13,312 (42) (354)
			12,916

– IIA-39 –

APPENDIX IIA

ACCOUNTANTS’ REPORT OF TAIZHOU WATER SUPPLY

(b) Lease liabilities

The carrying amount of lease liabilities and the movements during the Relevant Periods are as follows:

Carrying amount at 1 January Early termination of a lease Accretion of interest recognised during the year (note 7) Payments Net carrying amount at 31 December Analysed into: Current portion Non-current portion	As at 31 December 2018 RMB’000 294 – 11 (53) 252 43 209	As at 31 December 2019 RMB’000 252 – 11 (53) 210 48 162	As at 31 December 2020 RMB’000 210 (49) 6 (30)
			137

			25 112

The maturity analysis of lease liabilities is disclosed in note 35 to the Historical Financial Information.

(c) The amounts recognised in profit or loss in relation to leases are as follows:

Interest on lease liabilities Early termination of a lease Depreciation charge of right-of-use assets Total amount recognised in profit or loss	Year ended 31 December 2018 RMB’000 11 – 312 323	Year ended 31 December 2019 RMB’000 11 – 374 385	Year ended 31 December 2020 RMB’000 6 (7) 354
			353

(d) The total cash outflow for leases is disclosed in note 29(b) to the Historical Financial Information.

16. INVENTORIES

			As at	As at	As at
		31	December	31 December	31 December
			2018	2019	2020
			RMB’000	RMB’000	RMB’000
Raw	materials		8,180	8,131	7,468

– IIA-40 –

APPENDIX IIA

ACCOUNTANTS’ REPORT OF TAIZHOU WATER SUPPLY

17. TRADE RECEIVABLES

Trade receivables Due from related parties (note 32(b)) Impairment	As at 31 December 2018 RMB’000 62,255 15,301 77,556 (20,612) 56,944	As at 31 December 2019 RMB’000 61,575 14,356 75,931 (20,732) 55,199	As at 31 December 2020 RMB’000 61,066 13,926
			74,992 (19,744)
			55,248

The Target Group’s trading terms with its customers are mainly on credit. The credit period generally ranges from three to six months. The Target Group seeks to maintain strict control over its outstanding receivables and overdue balances are reviewed regularly by senior management. The Target Group does not hold any collateral or other credit enhancements over its trade receivable balances. Trade receivables are non-interest-bearing.

An ageing analysis of the trade receivables as at the end of each of the Relevant Periods, based on the invoice date and net of loss allowance, is as follows:

Within 3 months 3 to 6 months 6 to 12 months 1 to 2 years Over 2 years	As at 31 December 2018 RMB’000 39,561 1,573 2,813 7,715 5,282 56,944	As at 31 December 2019 RMB’000 36,517 1,223 4,089 7,696 5,674 55,199	As at 31 December 2020 RMB’000 36,484 5,344 2,141 4,391 6,888
			55,248

The movements in the loss allowance for impairment of trade receivables are as follows:

At beginning of year Amount written off as uncollectible Impairment losses, net (note 6) At end of year	As at 31 December 2018 RMB’000 23,322 – (2,710) 20,612	As at 31 December 2019 RMB’000 20,612 (317) 437 20,732	As at 31 December 2020 RMB’000 20,732 – (988)
			19,744

The Target Group has applied the simplified approach to provide for expected credit losses under HKFRS 9, which permits the use of the lifetime expected loss provision for all trade receivables. The Target Group overall considers the credit risk characteristics and the days past due of each group of trade receivables to measure the expected credit losses. The Target Group considers the historical loss rate and adjusts for forward-looking macroeconomic data in calculating the expected credit loss rate. As at 31 December 2018, 2019 and 2020, the expected credit losses were determined according to the provision matrix as follows:

– IIA-41 –

APPENDIX IIA ACCOUNTANTS’ REPORT OF TAIZHOU WATER SUPPLY

Amount RMB’000 31 December 2018 Less than 1 year 48,227 Between 1 and 2 years 10,497 Over 2 years 18,832 77,556 Amount RMB’000 31 December 2019 Less than 1 year 43,509 Between 1 and 2 years 12,400 Over 2 years 20,022 75,931 Amount RMB’000 31 December 2020 Less than 1 year 44,994 Between 1 and 2 years 5,369 Over 2 years 23,569 Default receivables 1,060 74,992 18. PREPAYMENTS, OTHER RECEIVABLES AND OTHER ASSETS As at 31 December 2018 RMB’000 Prepayments 295 Other receivables 5,488 Prepayments for other taxes 227 Due from related parties (note 32(b)) 49,631 55,641 Impairment allowance for other receivables (2,754) Impairment allowance for amounts due from related parties (note 32(b)) (3,389) 49,498	Expected credit loss rate 8.87% 26.50% 71.95% 26.58% Expected credit loss rate 3.86% 37.94% 71.66% 27.30% Expected credit loss rate 2.28% 18.22% 70.78% 100% 26.33% As at 31 December 2019 RMB’000 1,652 5,808 213 53,960 61,633 (2,754) (3,413) 55,466	Expected credit losses RMB’000 4,280 2,782 13,550
		20,612

		Expected credit losses RMB’000 1,680 4,704 14,348
		20,732

		Expected credit losses RMB’000 1,025 978 16,681 1,060
		19,744

		As at 31 December 2020 RMB’000 480 4,420 121 54,271
		59,292 (2,749) (3,437)
		53,106

– IIA-42 –

APPENDIX IIA

ACCOUNTANTS’ REPORT OF TAIZHOU WATER SUPPLY

The movements in the loss allowance for impairment of other receivables and amounts due from related parties are as follows:

At beginning of year Impairment losses, net (note 6) At end of year	As at 31 December 2018 RMB’000 6,122 21 6,143	As at 31 December 2019 RMB’000 6,143 24 6,167	As at 31 December 2020 RMB’000 6,167 19
			6,186

Management makes periodic collective assessments as well as individual assessment on the recoverability of other receivables and amounts due from related parties based on historical settlement records and past experiences. As at 31 December 2018, 2019 and 2020, the credit ratings of other receivables and amounts due from related parties were assessed. Except for the default receivables amounting to RMB6,056,000, RMB6,080,000, RMB6,104,000, the Target Group assessed that the expected credit losses for these receivables and amounts due from related parties are not material under the 12-month ECL method. In view of the history of cooperation with debtors and the sound collection history of other receivables and amounts due from related parties, management believes that the credit risk inherent in the Target Group’s outstanding other receivable and amounts due from related parties balances are not significant.

19. CONTRACT ASSETS

Contract assets arising from: Installation services Impairment	As at 31 December 2018 RMB’000 36,069 (3,932) 32,137	As at 31 December 2019 RMB’000 58,971 (14,611) 44,360	As at 31 December 2020 RMB’000 76,111 (23,975)
			52,136

Contract assets relating to installation services are not due from customers until installation services are completed. As a result, contract assets are recognised over the period in which the installation services are performed to represent the entity’s right to consideration for the services transferred to date. Upon completion of installation and acceptance by the customer, the amounts recognised as contract assets are reclassified to trade receivables. The increase in contract assets during the Relevant Periods was the result of the increase in the ongoing provision of installation services at the end of each of the Relevant Periods.

The Target Group’s trading terms and credit policy with customers are disclosed in note 17 to the Historical Financial Information.

– IIA-43 –

APPENDIX IIA

ACCOUNTANTS’ REPORT OF TAIZHOU WATER SUPPLY

The expected timing of recovery or settlement for contract assets are as follows:

Within one year After one year Total contract assets	As at 31 December 2018 RMB’000 19,462 12,675 32,137	As at 31 December 2019 RMB’000 20,864 23,496 44,360	As at 31 December 2020 RMB’000 32,510 19,626
			52,136

The movements in the loss allowance for impairment of contract assets are as follows:

At beginning of year Impairment losses, net (note 6) At end of year	As at 31 December 2018 RMB’000 807 3,125 3,932	As at 31 December 2019 RMB’000 3,932 10,679 14,611	As at 31 December 2020 RMB’000 14,611 9,364
			23,975

An impairment analysis is performed at the end of each of the Relevant Periods using a provision matrix to measure expected credit losses. The provision rates for the measurement of the expected credit losses of the contract assets are based on those of the trade receivables as the contract assets and the trade receivables are from the same customer bases. The Target Group overall considers the credit risk characteristics and the days past due of each group of contract assets to measure the expected credit losses. The Target Group considers the historical loss rate and adjusts for forward-looking macroeconomic data in calculating the expected credit loss rate.

Set out below is the information about the credit risk exposure on the Target Group’s contract assets using a provision matrix:

		31 December	31 December	31 December
		2018	2019	2020
	Expected credit loss rate	10.90%	24.78%	31.50%
	Gross carrying amount (RMB’000)	36,069	58,971	76,111
	Expected credit losses (RMB’000)	3,932	14,611	23,975
20.	CASH AND CASH EQUIVALENTS

					As at	As at	As at
				31	December	31 December	31 December
					2018	2019	2020
					RMB’000	RMB’000	RMB’000
Cash	and	bank	balances		33,340	40,343	62,722

The RMB is not freely convertible into other currencies. However, under Mainland China’s Foreign Exchange Control Regulations and Administration of Settlement, Sale and Payment of Foreign Exchange Regulations, the Target Group is permitted to exchange RMB for other currencies through banks authorised to conduct foreign exchange business. The remittance of funds out of Mainland China is subject to exchange restrictions imposed by the PRC government.

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

– IIA-44 –

APPENDIX IIA

ACCOUNTANTS’ REPORT OF TAIZHOU WATER SUPPLY

21. TRADE PAYABLES

			As at	As at	As at
		31	December	31 December	31 December
			2018	2019	2020
			RMB’000	RMB’000	RMB’000
Trade	payables		54,179	63,467	60,585

An ageing analysis of the trade payables as at the end of each of the Relevant Periods, based on the invoice date, is as follows:

Within 3 months 3 to 6 months 6 to 12 months Over 12 months	As at 31 December 2018 RMB’000 48,465 3,396 443 1,875 54,179	As at 31 December 2019 RMB’000 55,675 4,217 1,159 2,416 63,467	As at 31 December 2020 RMB’000 49,474 8,268 745 2,098
			60,585

Trade payables are non-interest-bearing and are normally settled on terms of one to two months.

22. OTHER PAYABLES AND ACCRUALS

Notes Other payables (a) Due to related parties (note 32(b)) Accrued salaries Interest payable Contract liabilities (b) Other taxes payables	As at 31 December 2018 RMB’000 43,561 1,846 9,502 200 34,283 7,622 97,014	As at 31 December 2019 RMB’000 43,194 8,505 8,100 222 30,561 7,326 97,908	As at 31 December 2020 RMB’000 43,027 8,472 7,692 193 39,622 11,685
			110,691

– IIA-45 –

APPENDIX IIA

ACCOUNTANTS’ REPORT OF TAIZHOU WATER SUPPLY

Notes:

(a) Other payables are non-interest-bearing and repayable on demand.
(b) Details of contract liabilities as at 31 December 2018, 2019 and 2020 are as follows:

Short-term advances received from customers Sale of water Installation services Total contract liabilities	As at 31 December 2018 RMB’000 4,208 30,075 34,283	As at 31 December 2019 RMB’000 3,990 26,571 30,561	As at 31 December 2020 RMB’000 3,262 36,360
			39,622

Contract liabilities include short-term advances received to deliver water and provide installation services. The decrease in contract liabilities in 2019 was the result of the decrease in short-term advances received from customers in relation to services rendered during the year. The increase in contract liabilities in 2020 was the result of the increase in short-term advances received from customers in relation to services rendered during the year.

23. INTEREST-BEARING BANK AND OTHER BORROWINGS

Effective interest rate Maturity (%) Current Current portion of long term bank loans – secured 5.94 2019 Bank loans – secured 6.62 2019 Bank loans – secured 5.00 2019 Bank loans – secured 5.22 2020 Bank loans – secured 6.62 2020 Bank loans – secured 5.00 2020 Bank loans – secured 5.22 2021 Bank loans – secured 4.80 2021 Current portion of other borrowings – secured 5.80 2020	As at 31 December 2018 RMB’000 5,000 20,000 30,000 – – – – – – 55,000	As at 31 December 2019 RMB’000 – – – 20,000 10,000 30,000 – – 60,000 120,000	As at 31 December 2020 RMB’000 – – – – – – 20,000 60,000 –
			80,000

– IIA-46 –

APPENDIX IIA

ACCOUNTANTS’ REPORT OF TAIZHOU WATER SUPPLY

Effective interest rate Maturity (%) Non-current Bank loans – secured 5.83 2021 Bank loans – secured 4.79 2022 Bank loans – secured 4.75 2022 Other borrowings – secured 5.80 2020 Analysed into: Bank loans repayable: Within one year In the second year Other borrowings repayable: Within one year In the second year	As at 31 December 2018 RMB’000 – – – 60,000 60,000 115,000 55,000 – 55,000 – 60,000 60,000 115,000	As at 31 December 2019 RMB’000 10,000 – – – 10,000 130,000 60,000 10,000 70,000 60,000 – 60,000 130,000	As at 31 December 2020 RMB’000 – 20,000 30,000 –
			50,000
			130,000

			80,000 50,000
			130,000
			– –
			–
			130,000

Notes:

(a) The immediate holding company of the Target Company, Jiaojiang Urban Development, has guaranteed certain of the Target Group’s bank loans of up to RMB30,000,000, RMB130,000,000 and RMB190,000,000 as at 31 December 2018, 2019 and 2020, respectively.
(b) The immediate holding company of the Target Company, Jiaojiang Urban Development, has guaranteed certain of the Target Group’s other borrowings of up to RMB60,000,000 and RMB60,000,000 as at 31 December 2018 and 2019, respectively.
(c) An entity controlled by the immediate holding company of the Target Company, Taizhou Jiaojiang Municipal Engineering Co., Ltd., has guaranteed certain of the Target Group’s bank loans of up to RMB20,000,000, RMB20,000,000 and RMB20,000,000 as at 31 December 2018, 2019 and 2020, respectively.
(d) An entity controlled by the immediate holding company of the Target Company, Taizhou Water Treatment Development Co., Ltd. and Taizhou Jiaojiang City Construction Development Co., Ltd. (“ Jiaojiang City Construction Development ”), have jointly guaranteed certain of the Target Group’s bank loans of up to RMB48,000,000 as at 31 December 2018.

– IIA-47 –

APPENDIX IIA ACCOUNTANTS’ REPORT OF TAIZHOU WATER SUPPLY

24. DEFERRED GOVERNMENT GRANTS

At 1 January Grants received during the year Amount released At 31 December Current portion Non-current portion	As at 31 December 2018 RMB’000 22,740 – (1,446) 21,294 (1,446) 19,848	As at 31 December 2019 RMB’000 21,294 3,169 (1,510) 22,953 (1,509) 21,444	As at 31 December 2020 RMB’000 22,953 – (1,509)
			21,444 (1,509)
			19,935

The government grants are related to the subsidies for the compensation for the construction, relocation and reconstruction of the original water supply pipelines of certain projects of the Target Group. Upon completion of the related projects and successful final assessment of the relevant government authorities, the grants related to assets would be released to profit or loss over the expected useful lives of the relevant assets.

25. DEFERRED TAX

The movements in deferred tax assets during the Relevant Periods are as follows:

Deferred tax assets

Deferred tax assets as at 1 January 2018 Deferred tax credited to profit or loss during the year_(note 10) Deferred tax assets as at 31 December 2018 and 1 January 2019 Deferred tax credited/(charged) to profit or loss during the year (note 10) Deferred tax assets as at 31 December 2019 and 1 January 2020 Deferred tax credited/(charged) to profit or loss during the year (note 10)_ Deferred tax assets as at 31 December 2020	Impairment of financial and contract assets RMB’000 7,518 96 7,614 2,740 10,354 2,099 12,453	Accrued salaries RMB’000 375 10 385 58 443 (41) 402	Loss available for offsetting against future taxable profits RMB’000 – – – – – 501 501	Inventory provision RMB’000 62 3 65 (2) 63 5 68	Depreciation and amortisation RMB’000 997 141 1,138 185 1,323 281 1,604	Total RMB’000 8,952 250
						9,202 2,981
						12,183 2,845
						15,028

– IIA-48 –

APPENDIX IIA

ACCOUNTANTS’ REPORT OF TAIZHOU WATER SUPPLY

Deferred tax assets have not been recognised in respect of the following items:

Tax losses Deductible temporary differences	2018 RMB’000 18,323 2,920 21,243	2019 RMB’000 21,885 4,768 26,653	2020 RMB’000 24,467 7,064
			31,531

The above tax losses will expire in one to five years for offsetting against taxable profits of the companies in which the losses arose. Deferred tax assets have not been recognised in respect of the above items as they have arisen in subsidiaries that have been loss-making for some time and it is not considered probable that taxable profits will be available against which the above items can be utilised.

26. NET EMPLOYEE DEFINED BENEFIT LIABILITIES

The Target Group has a defined benefit pension plan in Mainland China. The Target Group provides certain pension plan benefits to employees (unfunded).

				As at	As at	As at
			31	December	31 December	31 December
				2018	2019	2020
				RMB’000	RMB’000	RMB’000
Defined	benefit	plan		47,821	49,932	49,375

The carrying amount of defined benefit obligations and the movements during the Relevant Periods are as follows:

Defined benefit obligation Net employee defined benefit liabilities	1 January 2018 RMB’000 38,988 38,988	Pension cost charged to profit or loss Service cost Net interest expense Sub-total included in profit or loss RMB’000 RMB’000 RMB’000 880 1,713 2,593 880 1,713 2,593	Pension cost charged to profit or loss Service cost Net interest expense Sub-total included in profit or loss RMB’000 RMB’000 RMB’000 880 1,713 2,593 880 1,713 2,593	Remeasurementgains/(losses) in other comprehensive income	Remeasurementgains/(losses) in other comprehensive income	Remeasurementgains/(losses) in other comprehensive income
		Service cost RMB’000 880 880	Net interest expense RMB’000 1,713 1,713	Benefit paid RMB’000 (1,021) (1,021)	Actuarial changes arising from changes in financial assumptions Sub-total included in other comprehensive income RMB’000 RMB’000 7,261 7,261 7,261 7,261	As at 31 December 2018 RMB’000 47,821
						47,821

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APPENDIX IIA

ACCOUNTANTS’ REPORT OF TAIZHOU WATER SUPPLY

Pension cost charged to profit or loss Service cost Net interest expense Sub-total included in profit or loss RMB’000 RMB’000 RMB’000 1,083 1,753 2,836 1,083 1,753 2,836 Pension cost charged to profit or loss Service cost Net interest expense Sub-total included in profit or loss RMB’000 RMB’000 RMB’000 1,132 1,815 2,947 1,132 1,815 2,947	Pension cost charged to profit or loss Service cost Net interest expense Sub-total included in profit or loss RMB’000 RMB’000 RMB’000 1,083 1,753 2,836 1,083 1,753 2,836 Pension cost charged to profit or loss Service cost Net interest expense Sub-total included in profit or loss RMB’000 RMB’000 RMB’000 1,132 1,815 2,947 1,132 1,815 2,947	Remeasurementgains/(losses) in other comprehensive income	Remeasurementgains/(losses) in other comprehensive income	Remeasurementgains/(losses) in other comprehensive income
		Benefit paid Actuarial changes arising from changes in financial assumptions Sub-total included in other comprehensive income As at 31 December 2019 RMB’000 RMB’000 RMB’000 RMB’000 (1,123) 398 398 49,932 (1,123) 398 398 49,932 Remeasurementgains/(losses) in other comprehensive income		As at 31 December 2019 RMB’000 49,932
				49,932

Service cost RMB’000 1,132 1,132	Net interest expense RMB’000 1,815 1,815	Benefit paid RMB’000 (1,012) (1,012)	Actuarial changes arising from changes in financial assumptions Sub-total included in other comprehensive income RMB’000 RMB’000 (2,492) (2,492) (2,492) (2,492)	As at 31 December 2020 RMB’000 49,375
				49,375

The principal assumptions used in determining pension and post-employment medical benefit obligations for the Target Group’s plans are shown below:

	As at	As at	As at
	31 December	31 December	31 December
	2018	2019	2020
Discount rate	3.67%	3.63%	3.86%
Future medical benefit increase rate	6.00%	6.00%	6.00%

As at 31 December 2018, 2019 and 2020

Life expectation for pensioners

China Life Insurance Mortality Table (2010-2013)

– IIA-50 –

APPENDIX IIA

ACCOUNTANTS’ REPORT OF TAIZHOU WATER SUPPLY

A quantitative sensitivity analysis for significant assumptions as at 31 December is shown below:

	Impact on	defined benefit	obligation
	31 December	31 December	31 December
	2018	2019	2020
Discount rate
0.5% decrease	4,871	5,086	5,029
0.5% increase	(4,249)	(4,437)	(4,387)
Future medical benefit increase rate
1% decrease	(5,968)	(6,232)	(6,162)
1% increase	7,787	8,130	8,040
Life expectation
China Life Insurance
Mortality Table
1 year back	1,855	1,937	1,915
1 year forward	(1,829)	(1,910)	(1,889)
3 years forward	(5,401)	(5,640)	(5,577)

The above sensitivity analysis is based on a change in an assumption while holding all other assumptions constant. In practice, this is unlikely to occur, and changes in some of the assumptions may be correlated. When calculating the sensitivity of the defined benefit obligations to significant actuarial assumptions, the same method (present value of the defined benefit obligation calculated with the projected unit credit method at the end of the reporting period) has been used for calculating the defined benefit obligations recognised in the consolidated statements of financial position.

The following payments are expected contributions to the defined benefit plan in future years:

Less than 1 year Between 1 and 5 years Over 5 years PAID-UP CAPITAL Registered and paid-up capital	As at 31 December 2018 1,123 5,835 147,929 154,887 As at 31 December 2018 RMB’000 63,617	As at 31 December 2019 1,012 6,553 146,199 153,764 As at 31 December 2019 RMB’000 63,617	As at 31 December 2020 977 7,440 144,335
			152,752

			As at 31 December 2020 RMB’000 63,617

27. PAID-UP CAPITAL

28. RESERVES

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

– IIA-51 –

APPENDIX IIA ACCOUNTANTS’ REPORT OF TAIZHOU WATER SUPPLY

Statutory surplus reserve

Pursuant to the PRC Company Law and the respective entities’ articles of association, the Target Company and its subsidiaries established in the PRC shall appropriate 10% of their annual statutory net profit (determined in accordance with the PRC accounting principles and regulations and after offsetting any prior years’ losses) to the statutory surplus reserve until such reserve fund reaches 50% of the share capital of these entities. The statutory surplus reserve can be utilised to offset prior years’ losses or to increase capital. However, except for offsetting prior years’ losses, such reserve must be maintained at a minimum of 25% of the share capital after usage.

29. NOTES TO THE CONSOLIDATED STATEMENTS OF CASH FLOWS

(a) Changes in liabilities arising from financing activities

At 1 January 2018 Changes from financing cash flows Interest expense At 31 December 2018 and 1 January 2019 Changes from financing cash flows Interest expense At 31 December 2019 and 1 January 2020 Changes from financing cash flows Interest expense Early termination of a lease At 31 December 2020	Interest payable Interest- bearing bank and other borrowings RMB’000 RMB’000 119 77,000 (6,079) 38,000 6,160 – 200 115,000 (7,212) 15,000 7,234 – 222 130,000 (9,252) – 9,223 – – – 193 130,000	Lease liabilities RMB’000 294 (53) 11 252 (53) 11 210 (30) 6 (49) 137	Amounts due to related parties included in other payables and accruals RMB’000 42,442 (43,065) 766
			143 6,173 327
			6,643 (402) 402 –
			6,643

(b) Total cash outflow for leases

The total cash outflow for leases included in the statements of cash flows is as follows:

			Year ended	Year ended	Year ended
			31 December	31 December	31 December
			2018	2019	2020
			RMB’000	RMB’000	RMB’000
Within	financing	activities	53	53	30

– IIA-52 –

APPENDIX IIA

ACCOUNTANTS’ REPORT OF TAIZHOU WATER SUPPLY

30. CONTINGENT LIABILITIES

As at 31 December 2018, 2019 and 2020, contingent liabilities not provided for in the Historical Financial Information were as follows:

	As at	As at	As at
	31 December	31 December	31 December
	2018	2019	2020
	RMB’000	RMB’000	RMB’000
Credit guarantees provided to entities controlled by
the immediate holding company	300,000	300,000	–

The Target Group provided guarantees in respect of credit facilities granted by banks and utilised by the entities controlled by the immediate holding company. The Target Group did not incur any material losses during the Relevant Periods in respect of the guarantees provided to the entities controlled by immediate holding company. The directors considered that those entities are state-owned enterprises and have sufficient cash flow to repay the outstanding loans together with any accrued interest and penalty, and therefore no provision has been made in connection with the guarantees.

31. COMMITMENTS

The Group had the following capital commitments at the end of each of the Relevant Periods:

Capital commitments

	As at	As at	As at
	31 December	31 December	31 December
	2018	2019	2020
	RMB’000	RMB’000	RMB’000
Contracted, but not provided for:
Plant and machinery	7,378	58	116

32. RELATED PARTY TRANSACTIONS

The Target Group’s related parties are as follows:

Name

Relationship with the Target Company

Jiaojiang Urban Development

The immediate holding company

Taizhou Jiaojiang Dongshan Water Supply Co., Ltd (“ Dongshan Water Supply ”)

An entity that a director of the Target Company has significant influence

Taizhou Bada Municipal Engineering Co., Ltd. (“ Taizhou Bada ”)

An associate of the Target Group

Taizhou Jiaojiang District Investment Development Co., Ltd. (“ Jiaojiang Investment Development ”)

An entity controlled by the immediate holding company

Taizhou Jiaojiang City Construction Co., Ltd. (“ Jiaojiang City Construction ”)

An entity controlled by the immediate holding company

– IIA-53 –

APPENDIX IIA ACCOUNTANTS’ REPORT OF TAIZHOU WATER SUPPLY

Name

Relationship with the Target Company

Jiaojiang City Construction Development

Taizhou Jiaobei Water Supply Co., Ltd. (“ Jiaobei Water Supply ”)

An entity controlled by the immediate holding company An entity controlled by the immediate holding company

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

Notes Interest income from: Dongshan Water Supply (i) Taizhou Bada (ii) Jiaojiang Urban Development (iii) Interest expense to: Jiaojiang City Construction Development (iv) Jiaojiang Urban Development (v) Advances of loans to: Taizhou Bada (ii) Jiaojiang Urban Development (iii) Repayment of loans to: Taizhou Bada (ii) Dongshan Water Supply (i) Jiaojiang Urban Development (iii) Loans from: Jiaojiang Urban Development (v)	Year ended 31 December 2018 RMB’000 5 732 2,327 3,064 37 729 766 321 – 321 7,800 1,000 57,674 66,474 10,000	Year ended 31 December 2019 RMB’000 – 680 – 680 – 327 327 912 – 912 – – – – 6,500	Year ended 31 December 2020 RMB’000 – 690 2,542
			3,232

			– 402
			402

			192 80,000
			80,192

			3,100 – 80,000
			83,100

			–

– IIA-54 –

APPENDIX IIA ACCOUNTANTS’ REPORT OF TAIZHOU WATER SUPPLY

Notes Repayment of loans from: Jiaojiang City Construction Development (iv) Jiaojiang Urban Development (v) Sales of water: Dongshan Water Supply (vi) Construction services to: Jiaojiang Urban Development (vi) Other services to: Taizhou Bada (vi) Jiaobei Water Supply (vi) Jiaojiang Urban Development (vi)	Year ended 31 December 2018 RMB’000 3,000 49,000 52,000 3,943 1,554 424 1,181 659 2,264	Year ended 31 December 2019 RMB’000 – – – 3,683 408 369 1,151 685 2,205	Year ended 31 December 2020 RMB’000 – –
			–

			3,323

			324

			156 1,086 655
			1,897

Notes:

(i) The Target Group made a loan to Dongshan Water Supply amounting to RMB1,000,000 as working capital in 1999. The loan was unsecured and bore interest at 5% per annum and had been repaid in 2018.
(ii) The Target Group made loans to Taizhou Bada amounting to RMB21,627,000 as working capital before 2018 and amounting to RMB321,000, RMB912,000 and RMB192,000 as working capital in 2018, 2019 and 2020, respectively. The loans are unsecured, bear interest at 5% per annum and have no fixed terms of repayment. Out of the Loan balances, RMB7,800,000 and RMB3,100,000 had been paid in 2018 and 2020, respectively.
(iii) The Target Group made loans to Jiaojiang Urban Development amounting to RMB60,000,000 and RMB80,000,000 as working capital in 2017 and 2020, respectively. The loan of RMB60,000,000 was unsecured and bore interest at 4.7% per annum and had no fixed terms of repayment. The loan had fully repaid in 2018. The loan of RMB80,000,000 was unsecured, and bore interest at 4.65% per annum and had no fixed terms of repayment. The Loan had been fully repaid in December 2020.

– IIA-55 –

APPENDIX IIA

ACCOUNTANTS’ REPORT OF TAIZHOU WATER SUPPLY

(iv) The Target Group obtained a loan of RMB3,000,000 from Jiaojiang City Construction Development as working capital in 2014. The loan was unsecured, and bore interest at 4.9% per annum and had no fixed terms of repayment. The loan had fully repaid in 2018.
(v) The Target Group obtained loans of RMB39,000,000 and RMB10,000,000 as working capital and RMB6,500,000 for land payment from Jiaojiang Urban Development in 2017, 2018 and 2019, respectively. The loans were unsecured, and bore interest ranging from 4.74% to 6.08% per annum and had no fixed terms of repayment. RMB49,000,000 had been fully paid in 2018.
(vi) Provision of construction services to the related party, provision of other services to the related parties and sale of water were conducted according to the published prices and conditions offered by the Target Group and the related parties to their major customers.
(vii) The immediate holding company of the Target Company and entities controlled by the immediate holding company of the Target Company have guaranteed certain of the Target Group’s bank loans as at the end of the Relevant Periods, as further detailed disclosed in note 23 to Historical Financial Information.
(viii) The Target Company has guaranteed bank facilities granted to the entities controlled by the immediate holding company amounting to RMB300,000,000, RMB300,000,000 and nil as at 31 December 2018, 2019 and 2020, respectively.

– IIA-56 –

APPENDIX IIA

ACCOUNTANTS’ REPORT OF TAIZHOU WATER SUPPLY

(b) Outstanding balances with related parties:

Loan to a director: Maximum amount outstanding during the year Dongshan Water Supply (A director has significant influence) Due from related parties: Trade in nature Dongshan Water Supply Jiaojiang Urban Development Balance included in trade receivables Non-trade in nature Taizhou Bada Jiaojiang Investment Development Jiaojiang City Construction Jiaobei Water Supply Jiaojiang Urban Development Impairment allowance for: Taizhou Bada Jiaojiang Investment Development Jiaobei Water Supply Balance included in prepayments, deposits and other receivables Due to related parties: Non-trade in nature Jiaojiang Urban Development Taizhou Bada Dongshan Water Supply Balance included in other payables and accruals	As at 31 December 2018 RMB’000 1,000,000 14,065 1,236 15,301 27,959 9,365 8,005 3,121 1,181 49,631 (396) (2,365) (628) (3,389) 46,242 143 1,648 55 1,846	As at 31 December 2019 RMB’000 – 14,356 – 14,356 30,452 9,365 8,005 4,272 1,866 53,960 (420) (2,365) (628) (3,413) 50,547 6,643 1,781 81 8,505	As at 31 December 2020 RMB’000 –

			13,926 –
			13,926

			28,919 9,365 8,005 5,358 2,624
			54,271
			(444) (2,365) (628)
			(3,437)
			50,834

			6,643 1,753 76
			8,472

The balances with related parties are unsecured, interest-free and repayable on demand except the loan balances due from Taizhou Bada which bear interest at 5% per annum and are repayable on demand, and the loan balances due to Jiaojiang Urban Development which bear interest ranging from 4.74% to 6.08% per annum and are repayable on demand.

– IIA-57 –

APPENDIX IIA

ACCOUNTANTS’ REPORT OF TAIZHOU WATER SUPPLY

(c) Compensation of key management personnel of the Target Group:

Salaries, allowances and benefits in kind Pension scheme contributions Defined benefit plan Total compensation paid to key management personnel	Year ended 31 December 2018 RMB’000 2,195 104 51 2,350	Year ended 31 December 2019 RMB’000 1,975 112 66 2,153	Year ended 31 December 2020 RMB’000 2,052 20 72
			2,144

Further details of directors’, chief executive’s and supervisors’ emoluments are included in note 8 to the Historical Financial Information.

33. FINANCIAL INSTRUMENTS BY CATEGORY

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

Financial assets at amortised cost

Trade receivables Contract assets Financial assets included in prepayments, other receivables and other assets Cash and cash equivalents Financial liabilities at amortised cost Trade payables Financial liabilities included in other payables and accruals Interest-bearing bank and other borrowings Lease liabilities	As at 31 December 2018 RMB’000 56,944 32,137 48,976 33,340 171,397 As at 31 December 2018 RMB’000 54,179 45,607 115,000 252 215,038	As at 31 December 2019 RMB’000 55,199 44,360 53,601 40,343 193,503 As at 31 December 2019 RMB’000 63,467 51,921 130,000 210 245,598	As at 31 December 2020 RMB’000 55,248 52,136 52,505 62,722
			222,611

			As at 31 December 2020 RMB’000 60,585 51,692 130,000 137
			242,414

– IIA-58 –

APPENDIX IIA ACCOUNTANTS’ REPORT OF TAIZHOU WATER SUPPLY

34. FAIR VALUE AND FAIR VALUE OF HIERARCHY OF FINANCIAL INSTRUMENTS

The carrying amounts and fair values of the Target Group’s financial instruments, other than those with carrying amounts that reasonably approximate to fair values, are as follows:

	Carrying amounts	Carrying amounts	Carrying amounts		Fair value
	2018	2019	2020	2018	2019	2020
	RMB’000	RMB’000	RMB’000	RMB’000	RMB’000	RMB’000
Financial liabilities
Interest-bearing bank and other borrowings	60,000	10,000	50,000	57,242	9,993	50,070

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

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

Management has assessed that the fair values of the non-current portion of interest-bearing bank and other borrowings based on prevailing market interest rates approximate to their carrying amounts. The fair values of the non-current portion of interest-bearing bank and other borrowings have been calculated by discounting the expected future cash flows using rates currently available for instruments with similar terms, credit risk and remaining maturities. The changes in fair value as a result of the Target Group’s own non-performance risk for interest-bearing bank and other borrowings as at 31 December 2018, 2019 and 2020 were assessed to be insignificant.

The Target Group did not have any financial assets and liabilities measured at fair value as at 31 December 2018, 2019 and 2020.

Fair value hierarchy

The following tables illustrate the fair value measurement hierarchy of the Target Group’s financial instruments:

Liabilities for which fair values are disclosed:

2018

					Fair value measurement using	Fair value measurement using	Fair value measurement using
					Quoted
					prices in	Significant	Significant
					active	observable	unobservable
					markets	inputs	inputs
					(Level 1)	(Level 2)	(Level 3)	Total
					RMB’000	RMB’000	RMB’000	RMB’000
Interest-bearing	bank	and	other	borrowings	–	57,242	–	57,242

– IIA-59 –

APPENDIX IIA

ACCOUNTANTS’ REPORT OF TAIZHOU WATER SUPPLY

2019

Interest-bearing bank and other borrowings 2020 Interest-bearing bank and other borrowings	Fair value measurement using Quoted prices in active markets (Level 1) Significant observable inputs (Level 2) Significant unobservable inputs (Level 3) RMB’000 RMB’000 RMB’000 – 9,993 – Fair value measurement using Quoted prices in active markets (Level 1) Significant observable inputs (Level 2) Significant unobservable inputs (Level 3) RMB’000 RMB’000 RMB’000 – 50,070 –	Total RMB’000 9,993

		Total RMB’000 50,070

35. FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES

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

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

Credit risk

The Target Group trades mainly with recognised and creditworthy third parties. It is the Target Group’s policy that all customers who wish to trade on credit terms are subject to credit verification procedures. In addition, receivable balances are monitored on an on-going basis.

Maximum exposure and year-end staging

The table below shows the credit quality and the maximum exposure to credit risk based on the Target Group’s credit policy, which is mainly based on past due information unless other information is available without undue cost or effort, and year-end staging classification as at the year-end of each of the Relevant Periods.

The amounts presented are gross carrying amounts for financial assets.

– IIA-60 –

APPENDIX IIA

ACCOUNTANTS’ REPORT OF TAIZHOU WATER SUPPLY

31 December 2018

Trade receivables Financial assets included in prepayments, other receivables and other assets – Normal – Doubtful* Contract assets Cash and cash equivalents – Not yet past due	12-month ECLs Stage 1 RMB’000 – 49,063 – 36,069 33,340 118,472		Lifetime ECLs	Simplified approach RMB’000 77,556 – – – – 77,556	Total RMB’000 77,556 49,063 6,056 36,069 33,340
		Stage 2 RMB’000 – – – – – –	Stage 3 RMB’000 – – 6,056 – – 6,056
					202,084

31 December 2019

Trade receivables Financial assets included in prepayments, other receivables and other assets – Normal – Doubtful* Contract assets Cash and cash equivalents – Not yet past due	12-month ECLs Stage 1 RMB’000 – 53,688 – 58,971 40,343 153,002		Lifetime ECLs	Simplified approach RMB’000 75,931 – – – – 75,931	Total RMB’000 75,931 53,688 6,080 58,971 40,343
		Stage 2 RMB’000 – – – – – –	Stage 3 RMB’000 – – 6,080 – – 6,080
					235,013

– IIA-61 –

APPENDIX IIA

ACCOUNTANTS’ REPORT OF TAIZHOU WATER SUPPLY

31 December 2020

Trade receivables Financial assets included in prepayments, other receivables and other assets – Normal – Doubtful* Contract assets Cash and cash equivalents – Not yet past due	12-month ECLs Stage 1 RMB’000 – 52,587 – 75,448 62,722 190,757		Lifetime ECLs	Simplified approach RMB’000 74,992 – – – – 74,992	Total RMB’000 74,992 52,587 6,104 76,111 62,722
		Stage 2 RMB’000 – – – – – –	Stage 3 RMB’000 – – 6,104 663 – 6,767
					272,516

For trade receivables to which the Target Group applies the simplified approach for impairment, information based on the provision matrix is disclosed in note 17 to the Historical Financial Information.
** The credit quality of the financial assets included in prepayments, other receivables and other assets is considered to be “normal” when they are not past due and there is no information indicating that the financial assets had a significant increase in credit risk since initial recognition. Otherwise, the credit quality of the financial assets is considered to be “doubtful”.

Further quantitative data in respect of the Target Group’s exposure to credit risk arising from trade receivables are disclosed in note 17 to the Historical Financial Information.

– IIA-62 –

APPENDIX IIA ACCOUNTANTS’ REPORT OF TAIZHOU WATER SUPPLY

Liquidity risk

The Target Group monitors its risk to a shortage of funds using a recurring liquidity planning tool. This tool considers the maturity of both its financial investments and financial assets (e.g., trade receivables and other financial assets) and projected cash flows from operations.

The Target Group’s objective is to maintain a balance between continuity of funding and flexibility through the use of interest-bearing bank borrowings.

The maturity profile of the Target Group’s financial liabilities as at the end of each of the Relevant Periods, based on the contractual undiscounted payments, is as follows:

Interest-bearing bank and other borrowings Trade payables Financial liabilities included in other payables and accruals Lease liabilities	On demand RMB’000 – 5,714 30,602 – 36,316	Less than 3 months RMB’000 – 48,465 2,993 43 51,501	31 December 2018 3 to 12 months 1 to 5 years RMB’000 RMB’000 58,123 63,480 – – 12,012 – – 209 70,135 63,689	Over 5 years RMB’000 – – – – –	Total RMB’000 121,603 54,179 45,607 252
					221,641

Interest-bearing bank and other borrowings Trade payables Financial liabilities included in other payables and accruals Lease liabilities	On demand RMB’000 – 7,792 35,965 – 43,757	Less than 3 months RMB’000 – 55,675 3,247 48 58,970	31 December 2019 3 to 12 months 1 to 5 years RMB’000 RMB’000 126,689 10,583 – – 12,709 – – 162 139,398 10,745	Over 5 years RMB’000 – – – – –	Total RMB’000 137,272 63,467 51,921 210
					252,870

Interest-bearing bank and other borrowings Trade payables Financial liabilities included in other payables and accruals Lease liabilities	On demand RMB’000 – 11,111 28,758 – 39,869	Less than 3 months RMB’000 83,924 49,474 7,810 25 141,233	31 December 2020 3 to 12 months 1 to 5 years RMB’000 RMB’000 – 52,381 – – 15,124 – – 112 15,124 52,493	Over 5 years RMB’000 – – – – –	Total RMB’000 136,305 60,585 51,692 137
					248,719

– IIA-63 –

APPENDIX IIA

ACCOUNTANTS’ REPORT OF TAIZHOU WATER SUPPLY

Capital management

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

The Target Group manages its capital structure and makes adjustments to it in light of changes in economic conditions and the risk characteristics of the underlying assets. To maintain or adjust the capital structure, the Target Group may adjust the dividend payment to shareholders, return capital to shareholders or issue new shares. The Target Group is not subject to any externally imposed capital requirements. No changes were made in the objectives, policies or processes for managing capital during the Relevant Periods.

The Target Group monitors capital using a gearing ratio, which is net debt divided by total capital plus net debt. Net debt includes interest-bearing bank and other borrowings, trade payables, other payables and accruals, lease liabilities, less cash and cash equivalents. Total capital represents equity attributable to owner of the parent. The gearing ratios as at the end of each of the Relevant Periods were as follows:

Interest-bearing bank and other borrowings Trade payables Other payables and accruals Lease liabilities Less: Cash and cash equivalents Net debt Equity attributable to owners of the parent Total capital and net debt Gearing ratio	As at 31 December 2018 RMB’000 115,000 54,179 97,014 252 (33,340) 233,105 50,158 283,263 82%	As at 31 December 2019 RMB’000 130,000 63,467 97,908 210 (40,343) 251,242 48,995 300,237 84%	As at 31 December 2020 RMB’000 130,000 60,585 110,691 137 (62,722)
			238,691
			55,145
			293,836

			81%

– IIA-64 –

APPENDIX IIA ACCOUNTANTS’ REPORT OF TAIZHOU WATER SUPPLY

36. STATEMENTS OF FINANCIAL POSITION OF THE TARGET COMPANY

NON-CURRENT ASSETS Property, plant and equipment Other intangible assets Prepayments for land use rights Prepayments for property, plant and equipment Investments in subsidiaries Investment in an associate Deferred tax assets Right-of-use assets Total non-current assets CURRENT ASSETS Inventories Trade receivables Contract assets Prepayments, other receivables and other assets Cash and cash equivalents Total current assets CURRENT LIABILITIES Trade payables Other payables and accruals Interest-bearing bank and other borrowings Deferred government grants Tax payable Total current liabilities NET CURRENT LIABILITIES TOTAL ASSETS LESS CURRENT LIABILITIES	As at 31 December 2018 RMB’000 159,716 185 7,861 3,701 12,900 – 6,921 10,285 201,569 2,885 64,537 20,975 55,741 25,851 169,989 49,136 82,550 55,000 305 6,312 193,303 (23,314) 178,255	As at 31 December 2019 RMB’000 156,098 283 14,338 3,815 12,900 – 8,457 13,124 209,015 4,125 71,165 29,865 67,435 19,320 191,910 54,362 83,440 120,000 369 9,079 267,250 (75,340) 133,675	As at 31 December 2020 RMB’000 150,458 223 14,338 864 12,900 – 9,606 12,795
			201,184
			4,071 75,429 31,187 64,759 18,506
			193,952
			51,756 84,453 80,000 369 9,079
			225,657
			(31,705)
			169,479

– IIA-65 –

APPENDIX IIA ACCOUNTANTS’ REPORT OF TAIZHOU WATER SUPPLY

TOTAL ASSETS LESS CURRENT LIABILITIES NON-CURRENT LIABILITIES Interest-bearing bank and other borrowings Deferred government grants Net employee defined benefit liabilities Total non-current liabilities Net assets EQUITY Paid-up capital Reserve (note) Total equity Note: At 1 January 2018 Profit for the year Remeasurement on defined benefit plan Transfer to statutory surplus reserve At 31 December 2018 and 1 January 2019 Profit for the year Remeasurement on defined benefit plan Transfer to statutory surplus reserve At 31 December 2019 and 1 January 2020 Loss for the year Remeasurement on defined benefit plan Transfer to statutory surplus reserve At 31 December 2020	As at 31 December 2018 RMB’000 178,255 60,000 3,830 47,821 111,651 66,604 63,617 2,987 66,604 Statutory reserve RMB’000 4,226 – – 544 4,770 – – 97 4,867 – – – 4,867	As at 31 December 2019 RMB’000 133,675 10,000 6,567 49,932 66,499 67,176 63,617 3,559 67,176 Accumulated losses RMB’000 577 5,445 (7,261) (544) (1,783) 970 (398) (97) (1,308) (5,763) 2,492 – (4,579)	As at 31 December 2020 RMB’000 169,479
			50,000 6,199 49,375
			105,574
			63,905

			63,617 288
			63,905

			Total RMB’000 4,803 5,445 (7,261) –
			2,987 970 (398) –
			3,559 (5,763) 2,492 –
			288

37. SUBSEQUENT FINANCIAL STATEMENTS

No audited financial statements have been prepared by the Target Company, the Target Group or any of the companies now comprising the Target Group in respect of any period subsequent to 31 December 2020.

– IIA-66 –

APPENDIX IIB

ACCOUNTANTS’ REPORT OF JIAOBEI WATER SUPPLY

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

27/F, One Taikoo Place, 979 King's Road, Quarry Bay, Hong Kong

ACCOUNTANTS’ REPORT ON HISTORICAL FINANCIAL INFORMATION TO THE DIRECTORS OF TAIZHOU WATER GROUP CO., LTD.

Introduction

We report on the historical financial information of Taizhou Jiaobei Water Supply Co., Ltd. (the “ Target Company ”) and its subsidiary (together, the “ Target Group ”) set out on pages IIB-3 to IIB-49, which comprises the consolidated statements of profit or loss and other comprehensive income, statements of changes in equity and statements of cash flows of the Target Group for each of the years ended 31 December 2018, 2019 and 2020 (the “ Relevant Periods ”), and the consolidated statements of financial position of the Target Group as at 31 December 2018, 2019 and 2020 and a summary of significant accounting policies and other explanatory information (together, the “ Historical Financial Information ”). The Historical Financial Information set out on pages IIB-3 to IIB-49 forms an integral part of this report, which has been prepared for inclusion in the circular of Taizhou Water Group Co., Ltd. (the “ Company ”) dated 24 June 2021 (the “ Circular ”) in connection with the proposed acquisition of 45% equity interest in the Target Company by the Company.

Directors’ responsibility for the Historical Financial Information

Reporting accountants’ responsibility

– IIB-1 –

APPENDIX IIB

ACCOUNTANTS’ REPORT OF JIAOBEI WATER SUPPLY

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

Opinion

Report on matters under the Rules Governing the Listing of Securities on the Stock Exchange and the Companies (Winding Up and Miscellaneous Provisions) Ordinance

Adjustments

In preparing the Historical Financial Information, no adjustments to the Underlying Financial Statements as defined on page IIB-3 have been made.

Dividends

We refer to note 11 to the Historical Financial Information which states that no dividends have been paid by the Target Company in respect of the Relevant Periods.

Yours faithfully,

Ernst & Young Certified Public Accountants Hong Kong 24 June 2021

– IIB-2 –

APPENDIX IIB

ACCOUNTANTS’ REPORT OF JIAOBEI WATER SUPPLY

I HISTORICAL FINANCIAL INFORMATION

Preparation of Historical Financial Information

Set out below is the Historical Financial Information which forms an integral part of this accountants’ report.

The Historical Financial Information is presented in Renminbi (“ RMB ”) and all values are rounded to the nearest thousand (RMB’000) except when otherwise indicated.

CONSOLIDATED STATEMENTS OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME

Notes REVENUE 5 Cost of sales Gross profit Other income and gains 5 Administrative expenses Other expenses Finance costs 7 PROFIT/(LOSS) BEFORE TAX 6 Income tax expense 10 PROFIT/(LOSS) FOR THE YEAR AND OTHER COMPREHENSIVE INCOME FOR THE YEAR Attributable to: Owners of the parent	Year ended 31 December 2018 RMB’000 21,804 (16,699) 5,105 13,273 (9,704) (9) (12,481) (3,816) – (3,816) (3,816)	Year ended 31 December 2019 RMB’000 22,755 (16,274) 6,481 11,570 (9,788) (54) (10,766) (2,557) – (2,557) (2,557)	Year ended 31 December 2020 RMB’000 23,157 (14,405) 8,752 943 (8,619) (57) (68) 951 – 951 951

– IIB-3 –

APPENDIX IIB

ACCOUNTANTS’ REPORT OF JIAOBEI WATER SUPPLY

CONSOLIDATED STATEMENTS OF FINANCIAL POSITION

Notes NON-CURRENT ASSETS Property, plant and equipment 12 Other intangible assets 14 Investment in an associate 13 Other receivables 17 Total non-current assets CURRENT ASSETS Inventories 15 Trade receivables 16 Prepayments, other receivables and other assets 17 Cash and cash equivalents 18 Total current assets CURRENT LIABILITIES Trade payables 19 Other payables and accruals 20 Interest-bearing bank borrowings 21 Deferred government grants 22 Total current liabilities NET CURRENT LIABILITIES TOTAL ASSETS LESS CURRENT LIABILITIES	As at 31 December 2018 RMB’000 29,307 93 1,400 224,000 254,800 553 3,557 2,341 8,990 15,441 1,552 27,864 25,000 510 54,926 (39,485) 215,315	As at 31 December 2019 RMB’000 26,949 125 1,400 – 28,474 25 4,658 2,707 10,561 17,951 1,235 31,432 – 510 33,177 (15,226) 13,248	As at 31 December 2020 RMB’000 38,729 99 1,400 – 40,228 377 3,948 3,283 13,791 21,399 1,157 46,271 – 510 47,938 (26,539) 13,689

– IIB-4 –

APPENDIX IIB

ACCOUNTANTS’ REPORT OF JIAOBEI WATER SUPPLY

Notes TOTAL ASSETS LESS CURRENT LIABILITIES NON-CURRENT LIABILITIES Interest-bearing bank borrowings 21 Deferred government grants 22 Total non-current liabilities Net assets EQUITY Equity attributable to owners of the parent Paid-up capital 23 Accumulated losses Total equity	As at 31 December 2018 RMB’000 215,315 199,000 4,376 203,376 11,939 15,500 (3,561) 11,939	As at 31 December 2019 RMB’000 13,248 – 3,866 3,866 9,382 15,500 (6,118) 9,382	As at 31 December 2020 RMB’000 13,689 – 3,356 3,356 10,333 15,500 (5,167) 10,333

– IIB-5 –

APPENDIX IIB

ACCOUNTANTS’ REPORT OF JIAOBEI WATER SUPPLY

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

At 1 January 2018 Loss for the year and total comprehensive income for the year At 31 December 2018 and 1 January 2019 Loss for the year and total comprehensive income for the year At 31 December 2019 and 1 January 2020 Profit for the year and total comprehensive income for the year At 31 December 2020	Paid-in capital RMB’000 (note 23) 15,500 – 15,500 – 15,500 – 15,500	Accumulated losses RMB’000 255 (3,816) (3,561) (2,557) (6,118) 951 (5,167)	Total equity RMB’000 15,755 (3,816) 11,939 (2,557) 9,382 951 10,333

– IIB-6 –

APPENDIX IIB

ACCOUNTANTS’ REPORT OF JIAOBEI WATER SUPPLY

CONSOLIDATED STATEMENTS OF CASH FLOWS

Notes CASH FLOWS FROM OPERATING ACTIVITIES Profit/(loss) for the year Adjustments for: Interest income from a loan to the immediate holding company 5 Loss/(gain) on disposal of items of property, plant and equipment 6 Finance costs 7 Depreciation of property, plant and equipment 12 Amortisation of other intangible assets 14 Amortisation of government grants 22 Impairment of inventories, net 6 Impairment of trade receivables, net 16 Impairment of other receivables 17 Decrease/(increase) in inventories Decrease/(increase) in trade receivables Increase in prepayments, other receivables and other assets Increase/(decrease) in trade payables Increase in other payables and accruals Net cash flows from operating activities	Year ended 31 December 2018 RMB’000 (3,816) (12,481) (60) 12,481 4,778 2 (510) 21 (92) 806 (114) (101) (1,139) 700 1,051 1,526	Year ended 31 December 2019 RMB’000 (2,557) (10,766) 10 10,766 3,595 18 (510) 238 379 542 290 (1,480) (1,271) (317) 4,331 3,268	Year ended 31 December 2020 RMB’000 951 – 40 68 3,261 29 (510) (36) (475) 420 (316) 1,185 (996) (78) 6,299 9,842

– IIB-7 –

APPENDIX IIB

ACCOUNTANTS’ REPORT OF JIAOBEI WATER SUPPLY

Note CASH FLOWS FROM INVESTING ACTIVITIES Purchases of items of property, plant and equipment Proceeds from disposal of items of property, plant and equipment Repayment of a loan to a related party Repayment of a loan to immediate holding company Interests received from a loan to the immediate holding company Net cash flows from/(used in) investing activities CASH FLOWS FROM FINANCING ACTIVITIES Repayment of bank borrowings 25 Proceeds of a new loan from the immediate holding company Interest paid 25 Net cash flows from/(used in) financing activities NET INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS Cash and cash equivalents at beginning of year CASH AND CASH EQUIVALENTS AT END OF YEAR ANALYSIS OF BALANCES OF CASH AND CASH EQUIVALENTS Cash and cash equivalents as stated in the consolidated statements of financial position and consolidated statements of cash flows	Year ended 31 December 2018 RMB’000 (4,212) 94 24,000 – 13,468 33,350 (25,000) – (12,521) (37,521) (2,645) 11,635 8,990 8,990	Year ended 31 December 2019 RMB’000 (1,698) 1 – 224,000 11,129 233,432 (224,000) – (11,129) (235,129) 1,571 8,990 10,561 10,561	Year ended 31 December 2020 RMB’000 (9,892) 7 – – – (9,885) – 3,273 – 3,273 3,230 10,561 13,791 13,791

– IIB-8 –

APPENDIX IIB

ACCOUNTANTS’ REPORT OF JIAOBEI WATER SUPPLY

II NOTES TO THE HISTORICAL FINANCIAL INFORMATION

1. CORPORATE INFORMATION

The Target Company is a joint stock company with limited liability established in the People’s Republic of China (“ PRC ”). The registered office of the Target Company is located at Shan Qian Village, Zhang An Street, Jiao Jiang District, Taizhou, Zhejiang Province, PRC.

During the Relevant Periods, the Target Group was principally engaged in supplying tap water directly to end-users.

The Target Company is 88.46% owned by Taizhou Jiaojiang Urban Development Investment Group Co., Ltd. (“ Jiaojiang Urban Development ”) (台州市椒江城市發展投資集團有限公司) and 11.54% owned by Taizhou Jiaobei Infrastructure Investment Co., Ltd. (台州市椒北基礎設施投資有限公司), both of which are registered in the PRC. In the opinion of the directors of the Target Company, the State-owned Assets Supervision and Administration Commission of Jiaojiang District, Taizhou City (台州市椒江區國有資產監督管理委員會) is the ultimate holding company of the Target Company at the end of 31 December 2018, 2019 and 2020.

As at the date of this report, the Target Company had direct interests in its subsidiary, which is private limited liability company, the particulars of which are set out below:

	Place and		Percentage
	date of		of equity
	incorporation/	Nominal	interest
	registration	value of	attributable to
	and place of	registered	the Target	Principal
Name	operations	share capital	Company	activities
Taizhou Jiaojiang Jiaobei	PRC/Mainland	RMB5,000,000	100%	Dormant
Qingquan Water Supply	China
Service Co., Ltd. (“Jiaobei	8 December
Qingquan Water Supply”)	2010
(台州市椒江椒北清泉供水服
務有限公司) (a), (b)

Notes:

(a) The statutory financial statements of this entity for the years ended 31 December 2018, 2019 and 2020 prepared under PRC Generally Accepted Accounting Principles were audited by Zhongxingcai Guanghua Certified Public Accountants LLP (中興財光華會計師事務所（特殊普通合夥）), certified public accountants registered in the PRC.
(b) The English name of this entity registered in the PRC represents the best effort made by management of the Target Company to directly translate its Chinese name as it does not register any official English name.

2.1 BASIS OF PREPARATION

The Historical Financial Information has been prepared under the historical cost convention.

– IIB-9 –

APPENDIX IIB

ACCOUNTANTS’ REPORT OF JIAOBEI WATER SUPPLY

Going concern

As at 31 December 2020, the Target Group recorded net current liabilities of approximately RMB26,539,000. Included therein, the Target Group recorded other payables and accruals of RMB46,271,000 as at 31 December 2020.

Basis of consolidation

The Historical Financial Information includes the financial information of the Target Company and its subsidiary for the Relevant Periods. A subsidiary is an entity (including a structured entity), directly or indirectly, controlled by the Target Company. Control is achieved when the Target Group is exposed, or has rights, to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee (i.e., existing rights that give the Target Group the current ability to direct the relevant activities of the investee).

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

The results of subsidiary are included in the Target Company’s profit or loss to the extent of dividends received and receivable. The Target Company’s investments in subsidiary are stated at cost less any impairment losses.

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

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

– IIB-10 –

APPENDIX IIB

ACCOUNTANTS’ REPORT OF JIAOBEI WATER SUPPLY

2.2 ISSUED BUT NOT YET EFFECTIVE HONG KONG FINANCIAL REPORTING STANDARDS

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

Amendments to HKFRS 3 Reference to the Conceptual Framework[2] Amendments to HKFRS 9, HKAS 39, Interest Rate Benchmark Reform – Phase 2[1] HKFRS 7, HKFRS 4 and HKFRS 16 Amendments to HKFRS 10 and Sale or Contribution of Assets between an Investor and its HKAS 28 (2011) Associate or Joint Venture[4] HKFRS 17 Insurance Contracts[3] Amendments to HKFRS 17 Insurance Contracts[3,6] Amendments to HKAS 1 Classification of Liabilities as Current or Non-current[3,5] Amendments to HKAS 16 Property, Plant and Equipment: Proceeds before Intended Use[2] Amendments to HKAS 37 Onerous Contracts – Cost of Fulfilling a Contract[2] Annual Improvements to HKFRSs Amendments to HKFRS 1, HKFRS 9, Illustrative Examples 2018-2020 accompanying HKFRS 16, and HKAS 41[2]

1 Effective for annual periods beginning on or after 1 January 2021
2 Effective for annual periods beginning on or after 1 January 2022
3 Effective for annual periods beginning on or after 1 January 2023
4 No mandatory effective date yet determined but available for adoption
5 As a consequence of the amendments to HKAS 1, Hong Kong Interpretation 5 Presentation of Financial Statements – Classification by the Borrower of a Term Loan that Contains a Repayment on Demand Clause was revised in October 2020 to align the corresponding wording with no change in conclusion
6 As a consequence of the amendments to HKFRS 17 issued in October 2020, HKFRS 4 was amended to extend the temporary exemption that permits insurers to apply HKAS 39 rather than HKFRS 9 for annual periods beginning before 1 January 2023

Further information about those HKFRSs that are expected to be applicable to the Target Group is described below.

– IIB-11 –

APPENDIX IIB

ACCOUNTANTS’ REPORT OF JIAOBEI WATER SUPPLY

designated as a risk component. The relief allows an entity, upon designation of the hedge, to assume that the separately identifiable requirement is met, provided the entity reasonably expects the RFR risk component to become separately identifiable within the next 24 months. Furthermore, the amendments require an entity to disclose additional information to enable users of financial statements to understand the effect of interest rate benchmark reform on an entity’s financial instruments and risk management strategy. The amendments are effective for annual periods beginning on or after 1 January 2021 and shall be applied retrospectively, but entities are not required to restate the comparative information. As the Target Group does not have any financial assets or financial liabilities based on any benchmark rates subject to interest rate benchmark reform, the amendments are not expected to have any significant impact on the Target Group’s financial statements.

Amendments to HKAS 37 clarify that for the purpose of assessing whether a contract is onerous under HKAS 37, the cost of fulfilling the contract comprises the costs that relate directly to the contract. Costs that relate directly to a contract include both the incremental costs of fulfilling that contract (e.g., direct labour and materials) and an allocation of other costs that relate directly to fulfilling that contract (e.g., an allocation of the depreciation charge for an item of property, plant and equipment used in fulfilling the contract as well as contract management and supervision costs). General and administrative costs do not relate directly to a contract and are excluded unless they are explicitly chargeable to the counterparty under the contract. The amendments are effective for annual periods beginning on or after 1 January 2022 and shall be applied to contracts for which an entity has not yet fulfilled all its obligations at the beginning of the annual reporting period in which it first applies the amendments. Earlier application is permitted. Any cumulative effect of initially applying the amendments shall be recognised as an adjustment to the opening equity at the date of initial application without restating the comparative information. The amendments are not expected to have any significant impact on the Target Group’s financial statements.

– IIB-12 –

APPENDIX IIB

ACCOUNTANTS’ REPORT OF JIAOBEI WATER SUPPLY

HKFRS 9 Financial Instruments : clarifies the fees that an entity includes when assessing whether the terms of a new or modified financial liability are substantially different from the terms of the original financial liability. These fees include only those paid or received between the borrower and the lender, including fees paid or received by either the borrower or lender on the other’s behalf. An entity applies the amendment to financial liabilities that are modified or exchanged on or after the beginning of the annual reporting period in which the entity first applies the amendment. The amendment is effective for annual periods beginning on or after 1 January 2022. Earlier application is permitted. The amendment is not expected to have a significant impact on the Target Group’s financial statements.
HKFRS 16 Leases : removes the illustration of payments from the lessor relating to leasehold improvements in Illustrative Example 13 accompanying HKFRS 16. This removes potential confusion regarding the treatment of lease incentives when applying HKFRS 16.

2.3 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Investments in associates

When an investment in an associate is classified as held for sale, it is accounted for in accordance with HKFRS 5 Non-current Assets Held for Sale and Discontinued Operations .

– IIB-13 –

APPENDIX IIB

ACCOUNTANTS’ REPORT OF JIAOBEI WATER SUPPLY

Impairment of non-financial assets

Related parties

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

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

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

– IIB-14 –

APPENDIX IIB

ACCOUNTANTS’ REPORT OF JIAOBEI WATER SUPPLY

Property, plant and equipment and depreciation

Buildings	8 – 20 years
Pipelines	10 – 15 years
Machinery and equipment	3 – 10 years
Computer and office equipment	3 – 6 years
Motor vehicles	3 – 5 years
Leasehold improvements	2 – 3 years

Intangible assets (other than goodwill)

Software

Software is stated at cost less any impairment losses and is amortised on the straight-line basis over its estimated useful life of 5-8 years.

Leases

– IIB-15 –

APPENDIX IIB

ACCOUNTANTS’ REPORT OF JIAOBEI WATER SUPPLY

Target Group as a lessor

When the Target Group acts as a lessor, it classifies at lease inception (or when there is a lease modification) each of its leases as either an operating lease or a finance lease.

Leases in which the Target Group does not transfer substantially all the risks and rewards incidental to ownership of an asset are classified as operating leases. When a contract contains lease and non-lease components, the Target Group allocates the consideration in the contract to each component on a relative stand-alone selling price basis. Rental income is accounted according to the lease contract arrangement over the lease terms and is included in other income in profit or loss due to its operating nature. Initial direct costs incurred in negotiating and arranging an operating lease are added to the carrying amount of the leased asset and recognised over the lease term on the same basis as rental income. Contingent rents are recognised as revenue in the period in which they are earned.

Investments and other financial assets

Initial recognition and measurement

Financial assets are classified, at initial recognition, as subsequently measured at amortised cost, fair value through other comprehensive income and fair value through profit or loss.

Subsequent measurement

The subsequent measurement of financial assets depends on their classification as follows:

Financial assets at amortised cost (debt investments)

– IIB-16 –

APPENDIX IIB

ACCOUNTANTS’ REPORT OF JIAOBEI WATER SUPPLY

Derecognition of financial assets

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

Impairment of financial assets

General approach

– IIB-17 –

APPENDIX IIB

ACCOUNTANTS’ REPORT OF JIAOBEI WATER SUPPLY

Stage 1 – Financial instruments for which credit risk has not increased significantly since initial recognition and for which the loss allowance is measured at an amount equal to 12-month ECLs Stage 2 – Financial instruments for which credit risk has increased significantly since initial recognition but that are not credit-impaired financial assets and for which the loss allowance is measured at an amount equal to lifetime ECLs

Stage 3 – Financial assets that are credit-impaired at the reporting date (but that are not purchased or originated credit-impaired) and for which the loss allowance is measured at an amount equal to lifetime ECLs

Simplified approach

Initial recognition and measurement

All financial liabilities are recognised initially at fair value and, in the case of loans and borrowings and payables, net of directly attributable transaction costs.

The Target Group’s financial liabilities include trade and other payables and interest-bearing bank borrowings.

Subsequent measurement

The subsequent measurement of financial liabilities depends on their classification as follows:

Financial liabilities at amortised cost (loans and borrowings)

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

Derecognition of financial liabilities

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

– IIB-18 –

APPENDIX IIB

ACCOUNTANTS’ REPORT OF JIAOBEI WATER SUPPLY

treated as a derecognition of the original liability and a recognition of a new liability, and the difference between the respective carrying amounts is recognised in profit or loss.

Offsetting of financial instruments

Inventories

Cash and cash equivalents

Provisions

Income tax

Deferred tax liabilities are recognised for all taxable temporary differences, except:

(a) where the deferred tax liability arises from the initial recognition of goodwill or an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss; and
(b) in respect of taxable temporary differences associated with investments in subsidiaries, when the timing of the reversal of the temporary differences can be controlled and it is probable that the temporary differences will not reverse in the foreseeable future.

– IIB-19 –

APPENDIX IIB

ACCOUNTANTS’ REPORT OF JIAOBEI WATER SUPPLY

(a) when the deferred tax asset relating to the deductible temporary difference arises from the initial recognition of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss; and
(b) in respect of deductible temporary differences associated with investments in subsidiaries, deferred tax assets are only recognised to the extent that it is probable that the temporary differences will reverse in the foreseeable future and taxable profit will be available against which the temporary differences can be utilised.

Government grants

Revenue recognition

Revenue from contracts with customers

– IIB-20 –

APPENDIX IIB

ACCOUNTANTS’ REPORT OF JIAOBEI WATER SUPPLY

a separate financing transaction between the Target Group and the customer at contract inception. When the contract contains a financing component which provides the Target Group with a significant financial benefit for more than one year, revenue recognised under the contract includes the interest expense accreted on the contract liability under the effective interest method. For a contract where the period between the payment by the customer and the transfer of the promised goods or services is one year or less, the transaction price is not adjusted for the effects of a significant financing component, using the practical expedient in HKFRS 15.

Sale of water

Revenue from the sale of water is recognised at the point in time when control of the water is transferred to the customer, generally on delivery of the water.

Revenue from other sources

Rental income is recognised on a time proportion basis over the lease terms.

Other income

Contract liabilities

Other employee benefits

Pension scheme

The Target Group participates in the central pension schemes as defined by the laws of the countries in which it has operations. The subsidiary established and operating in Mainland China is required to provide certain staff pension benefits to its employees under existing regulations of the PRC. Pension scheme contributions are provided at rates stipulated by PRC regulations and are made to a pension fund managed by government agencies, which are responsible for administering the contributions for the subsidiary’s employees.

Dividends

Final dividends are recognised as a liability when they are approved by the shareholders in a general meeting.

3. SIGNIFICANT ACCOUNTING JUDGEMENTS AND ESTIMATES

Estimation uncertainty

– IIB-21 –

APPENDIX IIB

ACCOUNTANTS’ REPORT OF JIAOBEI WATER SUPPLY

Impairment of non-financial long-lived assets

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

The key assumptions used in the expected future cash flows calculations include appropriate discount rates, expected future selling prices and future cost of sales. Where the expectation is different from the original estimates, the carrying value and provision for such non-financial long-lived assets in the period in which such estimates are changed will be adjusted accordingly.

Based on the test results, no impairment of non-financial long-lived assets were provided as at 31 December 2018, 2019 and 2020.

Provision for expected credit losses of trade receivables

The Target Group uses a provision matrix to calculate ECLs for trade receivables. The provision rates are based on days past due that have similar loss patterns.

The provision matrix is initially based on the Target Group’s historical observed default rates. The Target Group will calibrate the matrix to adjust the historical credit loss experience with forward-looking information. At each reporting date, the historical observed default rates are updated and changes in the forward-looking estimates are analysed.

The assessment of the correlation among historical observed default rates, forecast economic conditions and ECLs is a significant estimate. The amount of ECLs is sensitive to changes in circumstances and of forecast economic conditions. The Target Group’s historical credit loss experience and forecast of economic conditions may also not be representative of a customer’s actual default in the future. The information about the ECLs on the Target Group’s trade receivables as at 31 December 2018, 2019 and 2020 are disclosed in note 16 to the Historical Financial Information.

4. OPERATING SEGMENT INFORMATION

For management purposes, the Target Group only has one reportable operating segment which is water supply. Management monitors the operating results of the Target Group’s operating segment as a whole for the purpose of making decisions about resource allocation and performance assessment.

Geographic information

(a) Revenue from external customers

During the Relevant Periods, the Target Group operated within one geographical area as all of the Target Group’s revenue was generated from customers located in Mainland China.

(b) Non-current assets

All non-current assets of the Target Group are located in Mainland China.

Information about major customers

There was no revenue from a single customer which accounted for 10% or more of the Target Group’s revenue during the Relevant Periods.

– IIB-22 –

APPENDIX IIB

ACCOUNTANTS’ REPORT OF JIAOBEI WATER SUPPLY

5. REVENUE, OTHER INCOME AND GAINS

An analysis of revenue is as follows:

Revenue from contracts with customers Revenue from contracts with customers	Year ended 31 December 2018 RMB’000 21,804	Year ended 31 December 2019 RMB’000 22,755	Year ended 31 December 2020 RMB’000 23,157

(a) Disaggregated revenue information

Type of goods or services Sale of water Timing of revenue recognition Goods transferred at a point in time	Year ended 31 December 2018 RMB’000 21,804 21,804	Year ended 31 December 2019 RMB’000 22,755 22,755	Year ended 31 December 2020 RMB’000 23,157

			23,157

(b) Contract liabilities

The Target Group recognised the following revenue-related contract liabilities:

				As at	As at	As at
			31	December	31 December	31 December
				2018	2019	2020
				RMB’000	RMB’000	RMB’000
Current	_(note _	20(c))		1,102	1,101	1,055

(i) Significant changes in contract liabilities

The changes in the contract liabilities are mainly attributable to the short-term advances received to transfer goods to customers and satisfaction of performance obligations.

– IIB-23 –

APPENDIX IIB

ACCOUNTANTS’ REPORT OF JIAOBEI WATER SUPPLY

(ii) Revenue recognised in relation to contract liabilities

	Year ended	Year ended	Year ended
	31 December	31 December	31 December
	2018	2019	2020
	RMB’000	RMB’000	RMB’000
Revenue recognised that was
included in the contract liabilities
balance at the beginning of the
Relevant Periods:
Sale of water	1,103	1,102	1,101

(c) Performance obligation

Information about the Target Group’s performance obligation is summarised below:

Sale of water

The performance obligation is satisfied upon delivery of the water and payment is generally due within three months.

An analysis of other income and gains is as follows:

Other income Bank interest income Interest income from loans to the immediate holding company Government grants Value added tax refund Others Gain Gain on disposal of items of property, plant and equipment	Year ended 31 December 2018 RMB’000 31 12,481 – 597 104 13,213 60 13,273	Year ended 31 December 2019 RMB’000 28 10,766 – 625 151 11,570 – 11,570	Year ended 31 December 2020 RMB’000 37 – 54 691 161
			943
			–
			943

– IIB-24 –

APPENDIX IIB

ACCOUNTANTS’ REPORT OF JIAOBEI WATER SUPPLY

6. PROFIT BEFORE TAX

The Target Group’s profit before tax is arrived at after charging/(crediting):

Notes Cost of inventories sold Depreciation of property, plant and equipment 12 Amortisation of other intangible assets 14 Impairment of trade receivables, net 16 Impairment of other receivables, net 17 Government grants Deferred government grants 22 Impairment of inventories, net *** Auditor’s remuneration Employee benefit expense (excluding directors’, chief executive’s and supervisors’ remuneration (note 8)): Wages and salaries Pension scheme contributions Staff welfare expenses Loss/(gain) on disposal of items of property, plant and equipment	Year ended 31 December 2018 RMB’000 16,699 4,778 2 (92) 806 – (510) 21 15 7,763 507 602 8,872 (60)	Year ended 31 December 2019 RMB’000 16,274 3,595 18 379 542 – (510) 238 10 8,129 484 583 9,196 10	Year ended 31 December 2020 RMB’000 14,405 3,261 29 (475) 420 (54) (510) (36) 10 7,990 (82) 563
			8,471
			40

The cost of inventories sold includes RMB6,521,000, RMB5,724,000 and RMB4,671,000, relating to staff costs and depreciation of property, plant and equipment for the years ended 31 December 2018, 2019 and 2020, respectively, which are also included in the respective total amounts disclosed above for each type of expenses.
** The amortisation of other intangible assets for the years ended 31 December 2018, 2019 and 2020 is included in “Administrative expenses” in the consolidated statements of profit or loss and other comprehensive income.
*** The government grants mainly represent compensation by the local governments to support the Target Group’s operation in Taizhou City, the PRC. There were no unfulfilled conditions or contingencies attached to these government grants. Deferred government grants represent the amount released from deferred government grants.
**** The impairment of inventories is included in “Cost of sales” in the consolidated statements of profit or loss and other comprehensive income.

– IIB-25 –

APPENDIX IIB

ACCOUNTANTS’ REPORT OF JIAOBEI WATER SUPPLY

7. FINANCE COSTS

An analysis of finance costs is as follows:

Interest on bank borrowings Interest on loans from the immediate holding company (note 27)	Year ended 31 December 2018 RMB’000 12,481 – 12,481	Year ended 31 December 2019 RMB’000 10,766 – 10,766	Year ended 31 December 2020 RMB’000 – 68
			68

8. DIRECTORS’, CHIEF EXECUTIVE’S AND SUPERVISORS’ REMUNERATION

Fee Other emoluments: Salaries, allowances and benefits in kind Pension scheme contributions	Year ended 31 December 2018 RMB’000 – 536 30 566	Year ended 31 December 2019 RMB’000 – 477 32 509	Year ended 31 December 2020 RMB’000 –
			481 6
			487

(a) Independent non-executive directors

The Target Company did not have any independent non-executive directors during the Relevant Periods.

(b) Executive director and supervisors

Year ended 31 December 2018 Executive director: Zheng Ziyi* Supervisors: Ying Zhihua (i) Lin Yunfei (ii)	Salaries, allowances and benefits in kind Pension scheme contributions RMB’000 RMB’000 292 15 244 15 – – 244 15 536 30	Total RMB’000 307
		259 –
		259
		566

– IIB-26 –

APPENDIX IIB

ACCOUNTANTS’ REPORT OF JIAOBEI WATER SUPPLY

Year ended 31 December 2019 Executive director: Zheng Ziyi Supervisor: Ying Zhihua (i) Year ended 31 December 2020 Executive director: Zheng Ziyi Supervisor: Ying Zhihua (i)	Salaries, allowances and benefits in kind Pension scheme contributions RMB’000 RMB’000 261 16 216 16 477 32 268 3 213 3 481 6	Total RMB’000 277
		232
		509

		271
		216
		487

Mr. Zheng Ziyi was the chief executive of the Target Company during the Relevant Periods.

Notes:

(i) Ying Zhihua was appointed as a supervisor in August 2018.
(ii) Lin Yunfei retired in August 2018.

There was no arrangement under which a director waived or agreed to waive any remuneration during the Relevant Periods.

– IIB-27 –

APPENDIX IIB

ACCOUNTANTS’ REPORT OF JIAOBEI WATER SUPPLY

9. FIVE HIGHEST PAID EMPLOYEES

The five highest paid employees included two directors for the years ended 31 December 2018, 2019 and 2020, respectively, details of whose remuneration are set out in note 8 above. Details of the remuneration of the remaining three highest paid employees who were neither a director nor chief executive of the Target Company during the Relevant Periods are as follows:

Salaries, allowances and benefits in kind Pension scheme contributions	Year ended 31 December 2018 RMB’000 623 53 676	Year ended 31 December 2019 RMB’000 590 61 651	Year ended 31 December 2020 RMB’000 556 5
			561

The number of non-director and non-chief executive highest paid employees whose remuneration fell within the following band is as follows:

			Number of employees	Number of employees	Number of employees
			Year ended	Year ended	Year ended
			31 December	31 December	31 December
			2018	2019	2020
Nil	to	HK$1,000,000	3	3	3

10. INCOME TAX EXPENSE

The Target Group is subject to income tax on an entity basis on profit arising in or derived from the jurisdictions in which members of the Target Group are domiciled and operate.

During the Relevant Periods, except for Jiaobei Qingquan Water Supply which was entitled to a preferential income tax rate of 5% for small and micro enterprises, the provision for current income tax in Mainland China was based on the statutory rate of 25% of the assessable profits of certain PRC subsidiary of the Target Group as determined in accordance with the PRC Corporate Income Tax Law, which was approved and became effective on 1 January 2008. No provision for profits tax has been made as the Target Group did not generate any assessable profits during the Relevant Periods.

– IIB-28 –

APPENDIX IIB

ACCOUNTANTS’ REPORT OF JIAOBEI WATER SUPPLY

A reconciliation of the tax expense applicable to profit/(loss) before tax at the statutory rate in Mainland China to the tax expense at the effective tax rate is as follows:

Profit/(loss) before Tax Tax at the statutory tax rate of 25% in Mainland China Effect of non-deductible expenses Tax losses not recognised Lower tax rate for specific provinces or enacted by local authority Temporary differences utilised from previous periods Temporary differences not recognised Tax charge at the Target Group’s effective rate	Year ended 31 December 2018 RMB’000 % (3,816) (954) 25.0 10 (0.3) 810 (21.2) (16) 0.4 – – 150 (3.9) – –	Year ended 31 December 2019 RMB’000 % (2,557) (639) 25.0 13 (0.5) 575 (22.5) (6) 0.2 – – 57 (2.2) – –	Year ended 31 December 2020 RMB’000 % 951 238 25.0 28 2.9 115 12.2 (14) (1.5) (367) (38.6) – – – –	Year ended 31 December 2020 RMB’000 % 951 238 25.0 28 2.9 115 12.2 (14) (1.5) (367) (38.6) – – – –
				–

Deferred tax assets have not been recognised in respect of the following items:

Temporary differences Tax losses Total	Year ended 31 December 2018 RMB’000 19,869 5,644 25,513	Year ended 31 December 2019 RMB’000 20,097 7,944 28,041	Year ended 31 December 2020 RMB’000 18,629 6,888
			25,517

The above tax losses arising in Mainland China will expire in one to five years for offsetting against taxable profits. Deferred tax assets have not been recognised in respect of these losses as it is not considered probable that taxable profits will be available against which the tax losses can be utilised.

11. DIVIDENDS

No dividend was declared and paid by the Target Company in respect of the Relevant Periods.

– IIB-29 –

APPENDIX IIB

ACCOUNTANTS’ REPORT OF JIAOBEI WATER SUPPLY

12. PROPERTY, PLANT AND EQUIPMENT

31 December 2018 At 1 January 2018: Cost Accumulated depreciation Net carrying amount At 1 January 2018, net of accumulated depreciation Additions Disposals Depreciation provided during the year_(note 6)_ Transfers At 31 December 2018, net of accumulated depreciation At 31 December 2018: Cost Accumulated depreciation Net carrying amount	Buildings RMB’000 36,983 (16,250) 20,733 20,733 – – (1,913) 192 19,012 37,175 (18,163) 19,012	Pipelines RMB’000 33,944 (29,502) 4,442 4,442 – – (1,459) 481 3,464 34,425 (30,961) 3,464	Machinery and equipment RMB’000 9,704 (5,090) 4,614 4,614 331 – (1,053) 706 4,598 10,741 (6,143) 4,598	Computer and office equipment RMB’000 1,750 (1,188) 562 562 156 (3) (219) 879 1,375 2,713 (1,338) 1,375	Motor vehicles Leasehold improvements Construction in progress RMB’000 RMB’000 RMB’000 1,379 74 627 (1,094) (50) – 285 24 627 285 24 627 – 165 2,180 (31) – – (69) (65) – – – (2,258) 185 124 549 775 239 549 (590) (115) – 185 124 549	Total RMB’000 84,461 (53,174)
						31,287

						31,287 2,832 (34) (4,778) –
						29,307

						86,617 (57,310)
						29,307

– IIB-30 –

APPENDIX IIB

ACCOUNTANTS’ REPORT OF JIAOBEI WATER SUPPLY

31 December 2019 At 1 January 2019: Cost Accumulated depreciation Net carrying amount At 1 January 2019, net of accumulated depreciation Additions Disposals Depreciation provided during the year_(note 6) Transfers At 31 December 2019, net of accumulated depreciation At 31 December 2019: Cost Accumulated depreciation Net carrying amount 31 December 2020 At 1 January 2020: Cost Accumulated depreciation Net carrying amount At 1 January 2020, net of accumulated depreciation Additions Disposals Depreciation provided during the year(note 6)_ Transfers At 31 December 2020, net of accumulated depreciation At 31 December 2020: Cost Accumulated depreciation Net carrying amount	Buildings RMB’000 37,175 (18,163) 19,012 19,012 – – (1,878) – 17,134 37,175 (20,041) 17,134 37,175 (20,041) 17,134 17,134 – (38) (1,878) – 15,218 36,419 (21,201) 15,218	Pipelines RMB’000 34,425 (30,961) 3,464 3,464 – – (466) – 2,998 34,425 (31,427) 2,998 34,425 (31,427) 2,998 2,998 – – (163) – 2,835 34,425 (31,590) 2,835	Machinery and equipment RMB’000 10,741 (6,143) 4,598 4,598 89 – (777) 661 4,571 11,491 (6,920) 4,571 11,491 (6,920) 4,571 4,571 55 (4) (765) 149 4,006 11,610 (7,604) 4,006	Computer and office equipment RMB’000 2,713 (1,338) 1,375 1,375 81 (1) (344) 59 1,170 2,835 (1,665) 1,170 2,835 (1,665) 1,170 1,170 66 (5) (303) – 928 2,861 (1,933) 928	Motor vehicles Leasehold improvements Construction in progress RMB’000 RMB’000 RMB’000 775 239 549 (590) (115) – 185 124 549 185 124 549 148 210 720 (10) – – (53) (77) – – – (720) 270 257 549 729 413 549 (459) (156) – 270 257 549 729 413 549 (459) (156) – 270 257 549 270 257 549 – 36 14,931 – – – (65) (87) – – – (149) 205 206 15,331 729 375 15,331 (524) (169) – 205 206 15,331	Total RMB’000 86,617 (57,310)
						29,307

						29,307 1,248 (11) (3,595) –
						26,949

						87,617 (60,668)
						26,949

						87,617 (60,668)
						26,949

						26,949 15,088 (47) (3,261) –
						38,729

						101,750 (63,021)
						38,729

– IIB-31 –

APPENDIX IIB

ACCOUNTANTS’ REPORT OF JIAOBEI WATER SUPPLY

13. INVESTMENT IN AN ASSOCIATE

As at
31 December
2018
As at
31 December
2019
RMB’000
RMB’000
Share of net assets
1,400
1,400
Particulars of the associate are as follows:
Name
Place of
incorporation/
registration and
business
Nominal value
of issued/
registered share
capital
Percentage of
ownership
interest
attributable to
the Target
Group
Taizhou Bada Municipal
Engineering Co., Ltd.
(“Bada Municipal
Engineering”)
PRC/Mainland
China
RMB7,200,000
19.44

As at
31 December
2020
RMB’000
1,400

Principal
activities
Municipal
Engineering
construction
and pipeline
installation
service

In the opinion of the directors, the associate is not material to the Target Group.

The Target Group’s shareholding in the associate is held through the wholly-owned subsidiary of the Target Company.

– IIB-32 –

APPENDIX IIB

ACCOUNTANTS’ REPORT OF JIAOBEI WATER SUPPLY

14. OTHER INTANGIBLE ASSETS

At 1 January 2018: Cost Accumulated amortisation Net carrying amount Cost at 1 January 2018, net of accumulated amortisation Additions Amortisation provided during the year (note 6) At 31 December 2018 At 31 December 2018: Cost Accumulated amortisation Net carrying amount Cost at 1 January 2019, net of accumulated amortisation Additions Amortisation provided during the year (note 6) At 31 December 2019 At 31 December 2019: Cost Accumulated amortisation Net carrying amount Cost at 1 January 2020, net of accumulated amortisation Additions Amortisation provided during the year (note 6) At 31 December 2020 At 31 December 2020: Cost Accumulated amortisation Net carrying amount	Software RMB’000 5 (5)
	–

	– 95 (2)
	93

	100 (7)
	93

	93 50 (18)
	125

	150 (25)
	125

	125 3 (29)
	99

	153 (54)
	99

– IIB-33 –

APPENDIX IIB

ACCOUNTANTS’ REPORT OF JIAOBEI WATER SUPPLY

15. INVENTORIES

Raw materials 16. TRADE RECEIVABLES Trade receivables Impairment	As at 31 December 2018 RMB’000 553 As at 31 December 2018 RMB’000 5,422 (1,865) 3,557	As at 31 December 2019 RMB’000 25 As at 31 December 2019 RMB’000 6,890 (2,232) 4,658	As at 31 December 2020 RMB’000 377

			As at 31 December 2020 RMB’000 5,705 (1,757)
			3,948

The Target Group’s trading terms with its customers are mainly on credit. The credit period is generally three months. The Target Group seeks to maintain strict control over its outstanding receivables and overdue balances are reviewed regularly by senior management. The Target Group does not hold any collateral or other credit enhancements over its trade receivable balances. Trade receivables are non-interest-bearing.

An ageing analysis of the trade receivables as at the end of each of the Relevant Periods, based on the invoice date and net of loss allowance, is as follows:

Within 3 months 3 to 6 months 6 to 12 months 1 to 2 years Over 2 years	As at 31 December 2018 RMB’000 2,471 201 230 598 57 3,557	As at 31 December 2019 RMB’000 3,282 413 242 642 79 4,658	As at 31 December 2020 RMB’000 2,986 228 343 286 105
			3,948

– IIB-34 –

APPENDIX IIB

ACCOUNTANTS’ REPORT OF JIAOBEI WATER SUPPLY

The movements in the loss allowance for impairment of trade receivables are as follows:

At beginning of year Amount written off as uncollectible Impairment losses, net (note 6) At end of year	As at 31 December 2018 RMB’000 1,957 – (92) 1,865	As at 31 December 2019 RMB’000 1,865 (12) 379 2,232	As at 31 December 2020 RMB’000 2,232 – (475)
			1,757

31 December 2018 Less than 1 year Between 1 and 2 years Over 2 years 31 December 2019 Less than 1 year Between 1 and 2 years Over 2 years	Amount RMB’000 3,195 952 1,275 5,422 Amount RMB’000 4,321 1,002 1,567 6,890	Expected credit loss rate 9.17% 37.18% 95.53% 34.40% Expected credit loss rate 8.89% 35.93% 94.96% 32.39%	Expected credit losses RMB’000 293 354 1,218
			1,865

			Expected credit losses RMB’000 384 360 1,488
			2,232

– IIB-35 –

APPENDIX IIB

ACCOUNTANTS’ REPORT OF JIAOBEI WATER SUPPLY

31 December 2020 Less than 1 year Between 1 and 2 years Over 2 years 17. PREPAYMENTS, OTHER RECEIVABLES AND OTHER	Amount RMB’000 3,892 438 1,375 5,705 ASSETS	Expected credit loss rate 8.61% 34.70% 92.36% 30.80%	Expected credit losses RMB’000 335 152 1,270 1,757

Prepayments Other receivables Due from related parties (note 27(b)) Non-current portion included in other receivables* Impairment allowance	As at 31 December 2018 RMB’000 122 1,629 226,030 227,781 (224,000) (1,440) 2,341	As at 31 December 2019 RMB’000 30 2,256 2,403 4,689 – (1,982) 2,707	As at 31 December 2020 RMB’000 162 2,448 3,075
			5,685 –
			(2,402)
			3,283

Non-current portion included in other receivables represents the loan to Jiaojiang Urban Development amounting to RMB224,000,000 (note 27).

The movements in the loss allowance for impairment of other receivables are as follows:

At beginning of year Amount written off as uncollectible Impairment losses, net (note 6) At end of year	As at 31 December 2018 RMB’000 776 (142) 806 1,440	As at 31 December 2019 RMB’000 1,440 – 542 1,982	As at 31 December 2020 RMB’000 1,982 – 420
			2,402

Management makes periodic collective assessments as well as individual assessment on the recoverability of other receivables and amounts due from related parties based on historical settlement records and past experiences. As at 31 December 2018, 2019 and 2020, the credit ratings of other receivables and amounts due from related parties were assessed. Except for the default receivables amounting to RMB1,439,000, RMB1,981,000, RMB2,401,000, the Target Group assessed that the expected credit losses for these receivables and amounts due from related parties are not material under the 12-month ECL method. In view of the history of cooperation with debtors and the sound collection

– IIB-36 –

APPENDIX IIB

ACCOUNTANTS’ REPORT OF JIAOBEI WATER SUPPLY

history of other receivables and amounts due from related parties, management believes that the credit risk inherent in the Target Group’s outstanding other receivables and amounts due from related parties balances are not significant.

18. CASH AND CASH EQUIVALENTS

					As at	As at	As at
				31	December	31 December	31 December
					2018	2019	2020
					RMB’000	RMB’000	RMB’000
Cash	and	bank	balances		8,990	10,561	13,791

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

19. TRADE PAYABLES

			As at	As at	As at
		31	December	31 December	31 December
			2018	2019	2020
			RMB’000	RMB’000	RMB’000
Trade	payables		1,552	1,235	1,157

An ageing analysis of the trade payables as at the end of each of the Relevant Periods, based on the invoice date, is as follows:

Within 3 months 3 to 6 months 6 to 12 months Over 12 months	As at 31 December 2018 RMB’000 1,497 – – 55 1,552	As at 31 December 2019 RMB’000 1,099 50 – 86 1,235	As at 31 December 2020 RMB’000 1,021 – – 136
			1,157

Trade payables are non-interest-bearing and are normally settled on terms of one to two months.

– IIB-37 –

APPENDIX IIB

ACCOUNTANTS’ REPORT OF JIAOBEI WATER SUPPLY

20. OTHER PAYABLES AND ACCRUALS

Notes Other payables (a) Interest payable Due to related parties (b) Accrued salaries Contract liabilities (c) Other taxes payables	As at 31 December 2018 RMB’000 19,527 363 4,203 2,507 1,102 162 27,864	As at 31 December 2019 RMB’000 22,032 – 5,370 2,870 1,101 59 31,432	As at 31 December 2020 RMB’000 27,480 – 14,785 2,799 1,055 152
			46,271

Notes:

(a) Other payables are non-interest-bearing and repayable on demand.
(b) The balances due to related parties are non-interest-bearing and repayable on demand except RMB3,273,000 which bears interest at 4.65% per annum.
(c) Contract liabilities represent short-term advances received to supply water.

21. INTEREST-BEARING BANK BORROWINGS

As at 31 December 2019 RMB’000 – –	As at 31 December 2020 RMB’000 – – – As at 31 December 2020 RMB’000 – –	As at 31 December 2020 RMB’000 – –
–		–

	–

– IIB-38 –

APPENDIX IIB

ACCOUNTANTS’ REPORT OF JIAOBEI WATER SUPPLY

The immediate holding company of the Target Company, Jiaojiang Urban Development, has guaranteed all of the Target Group’s bank loan of RMB224,000,000 as at 31 December 2018.

22. DEFERRED GOVERNMENT GRANTS

At 1 January Amount released At 31 December Current portion Non-current portion	As at 31 December 2018 RMB’000 5,396 (510) 4,886 (510) 4,376	As at 31 December 2019 RMB’000 4,886 (510) 4,376 (510) 3,866	As at 31 December 2020 RMB’000 4,376 (510)
			3,866 (510)
			3,356

The government grants are related to the compensation for the construction of the original water supply pipelines of certain projects of the Target Group. Upon completion of the related projects and successful final assessment of the relevant government authorities, the grants related to assets would be released to profit or loss over the expected useful lives of the relevant assets.

23. PAID-UP CAPITAL

					As at	As at	As at
				31	December	31 December	31 December
					2018	2019	2020
					RMB’000	RMB’000	RMB’000
Registered	and	paid-up	capital		15,500	15,500	15,500

24. ACCUMULATED LOSSES

The amounts of the Target Group’s accumulated losses and the movements therein for each of the Relevant Periods are presented in the consolidated statements of changes in equity.

– IIB-39 –

APPENDIX IIB

ACCOUNTANTS’ REPORT OF JIAOBEI WATER SUPPLY

25. NOTES TO THE CONSOLIDATED STATEMENTS OF CASH FLOWS

Changes in liabilities arising from financing activities

At 1 January 2018 Changes from financing cash flows Interest expense At 31 December 2018 and 1 January 2019 Changes from financing cash flows Interest expense At 31 December 2019 and 1 January 2020 Changes from financing cash flows Interest expense At 31 December 2020	Interest- bearing bank borrowings RMB’000 249,000 (25,000) – 224,000 (224,000) – – – – –	Loans from the immediate holding company included in other payables and accruals RMB’000 – – – – – – – 3,273 68 3,341	Interest payable RMB’000 403 (12,521) 12,481
			363 (11,129) 10,766
			– – –
			–

26. COMMITMENTS

The Group had the following capital commitments at the end of each of the Relevant Periods:

			As at	As at	As at
			31 December	31 December	31 December
			2018	2019	2020
			RMB’000	RMB’000	RMB’000
Contracted,	but	not provided for:
Pipelines	and	buildings	–	–	2,591

27. RELATED PARTY TRANSACTIONS

The Target Group’s related parties are as follows:

Name

Relationship with the Target Company

Jiaojiang Urban Development Taizhou Water Supply Co., Ltd. (“ Taizhou Water Supply ”) Taizhou Bada Municipal Engineering Co., Ltd. (“ Bada Municipal Engineering ”)

Taizhou Jiaojiang City Construction Co., Ltd. (“ Jiaojiang City Construction ”)

The immediate holding company An entity controlled by the immediate holding company

An associate of the Target Group

An entity controlled by the immediate holding company

– IIB-40 –

APPENDIX IIB

ACCOUNTANTS’ REPORT OF JIAOBEI WATER SUPPLY

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

Notes Interest income from: Jiaojiang Urban Development (i) Interest expense to: Jiaojiang Urban Development (ii) Proceeds of a new loan from: Jiaojiang Urban Development (ii) Repayment of a loan to: Jiaojiang City Construction (i) Jiaojiang Urban Development (i) Construction services from: Bada Municipal Engineering (iii) Other services from: Taizhou Water Supply (iii) Other services to: Jiaojiang Urban Development (iii)	Year ended 31 December 2018 RMB’000 12,481 – – 24,000 – 24,000 1,329 1,181 672	Year ended 31 December 2019 RMB’000 10,766 – – – 224,000 224,000 97 1,152 694	Year ended 31 December 2020 RMB’000 –

			68

			3,273

			– –
			–

			–

			1,086

			630

Notes:

(i) The Target Group made a loan to Jiaojiang City Construction amounting to RMB248,000,000 as working capital during the year ended 31 December 2017. RMB24,000,000 has been repaid by Jiaojiang City Construction in 2018. RMB224,000,000 was transferred to Jiaojiang Urban Development during the year ended 31 December 2018. The loan was unsecured and bore interest at 5.3% per annum and had been repaid in 2019. The loan will mature in 2020.
(ii) The Target Group obtained a loan of RMB3,273,000 from Jiaojiang Urban Development in 2020. The loan is used for the construction of Jiaobei water plant enlargement project. The loan is unsecured and bore interest at 4.65% per annum. The balance has no fixed terms of repayment.
(iii) Provision of construction and other services from/to the related parties were conducted according to the published prices and conditions offered by the Target Group and the related parties to their major customers.
(iv) The immediate holding company of Target Company, Jiaojiang Urban Development, has guaranteed all of the Target Group’s bank loan of RMB224,000,000 as at 31 December 2018.

– IIB-41 –

APPENDIX IIB

ACCOUNTANTS’ REPORT OF JIAOBEI WATER SUPPLY

(b) Outstanding balances with related parties:

Due from related parties: Non-trade in nature Jiaojiang Urban Development Bada Municipal Engineering Balance included in prepayments, deposits and other receivables Due to related parties: Non-trade in nature Taizhou Water Supply Jiaojiang Urban Development Bada Municipal Engineering Balance included in other payables and accruals	As at 31 December 2018 RMB’000 225,613 417 226,030 2,494 – 1,709 4,203	As at 31 December 2019 RMB’000 1,944 459 2,403 3,646 280 1,444 5,370	As at 31 December 2020 RMB’000 2,574 501
			3,075

			4,732 8,609 1,444
			14,785

The balances with related parties are unsecured, interest-free and repayable on demand except the loan balances due to Jiaojiang Urban Development in 2020 amounting to RMB3,273,000 which bear interest at 4.65% per annum and are repayable on demand.

Salaries, allowances and benefits in kind Pension scheme contributions Total compensation paid to key management personnel	Year ended 31 December 2018 RMB’000 734 48 782	Year ended 31 December 2019 RMB’000 680 54 734	Year ended 31 December 2020 RMB’000 689 8
			697

Further details of directors’, chief executive’s and supervisors’ emoluments are included in note 8 to the Historical Financial Information.

28. FINANCIAL INSTRUMENTS BY CATEGORY

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

– IIB-42 –

APPENDIX IIB

ACCOUNTANTS’ REPORT OF JIAOBEI WATER SUPPLY

Financial assets at amortised cost

Trade receivables Financial assets included in prepayments, other receivables and other assets Cash and cash equivalents *Financial liabilities at amortised cost* Trade payables Financial liabilities included in other payables and accruals Interest-bearing bank borrowings	As at 31 December 2018 RMB’000 3,557 226,219 8,990 238,766 As at 31 December 2018 RMB’000 1,552 24,093 224,000 249,645	As at 31 December 2019 RMB’000 4,658 2,677 10,561 17,896 As at 31 December 2019 RMB’000 1,235 27,402 – 28,637	As at 31 December 2020 RMB’000 3,948 3,121 13,791
			20,860

			As at 31 December 2020 RMB’000 1,157 42,265 –
			43,422

29. FAIR VALUE AND FAIR VALUE OF HIERARCHY OF FINANCIAL INSTRUMENTS

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

Management has assessed that the fair values of the non-current portion of interest-bearing bank borrowings approximate to their carrying amounts largely due to the fact that such borrowings were made between the Target Group and an independent third party financial institution based on prevailing market interest rates.

The Target Group did not have any financial assets and liabilities measured at fair value as at 31 December 2018, 2019 and 2020.

30. FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES

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

– IIB-43 –

APPENDIX IIB

ACCOUNTANTS’ REPORT OF JIAOBEI WATER SUPPLY

Credit risk

Maximum exposure and year-end staging

The amounts presented are gross carrying amounts for financial assets.

31 December 2018

Trade receivables Financial assets included in prepayments, other receivables and other assets – Normal – Doubtful* Cash and cash equivalents – Not yet past due	12-month ECLs Stage 1 RMB’000 – 226,220 – 8,990 235,210	Lifetime ECLs Stage 2 Stage 3 Simplified approach RMB’000 RMB’000 RMB’000 – – 5,422 – – – – 1,439 – – – – – 1,439 5,422	Total RMB’000 5,422 226,220 1,439 8,990
		Stage 2 RMB’000 – – – – –
			242,071

31 December 2019

Trade receivables Financial assets included in prepayments, other receivables and other assets – Normal – Doubtful* Cash and cash equivalents – Not yet past due	12-month ECLs Stage 1 RMB’000 – 2,678 – 10,561 13,239	Lifetime ECLs Stage 2 Stage 3 Simplified approach RMB’000 RMB’000 RMB’000 – – 6,890 – – – – 1,981 – – – – – 1,981 6,890	Total RMB’000 6,890 2,678 1,981 10,561
		Stage 2 RMB’000 – – – – –
			22,110

– IIB-44 –

APPENDIX IIB

ACCOUNTANTS’ REPORT OF JIAOBEI WATER SUPPLY

31 December 2020

Trade receivables Financial assets included in prepayments, other receivables and other assets – Normal – Doubtful* Cash and cash equivalents – Not yet past due	12-month ECLs Stage 1 RMB’000 – 3,122 – 13,791 16,913	Lifetime ECLs Stage 2 Stage 3 Simplified approach RMB’000 RMB’000 RMB’000 – – 5,705 – – – – 2,401 – – – – – 2,401 5,705	Total RMB’000 5,705 3,122 2,401 13,791
		Stage 2 RMB’000 – – – – –
			25,019

For trade receivables to which the Target Group applies the simplified approach for impairment, information based on the provision matrix is disclosed in note 16 to the Historical Financial Information.
** The credit quality of the financial assets included in prepayments, other receivables and other assets is considered to be “normal” when they are not past due and there is no information indicating that the financial assets had a significant increase in credit risk since initial recognition. Otherwise, the credit quality of the financial assets is considered to be “doubtful”.

Further quantitative data in respect of the Target Group’s exposure to credit risk arising from trade receivables are disclosed in note 16 to the Historical Financial Information.

Liquidity risk

The Target Group’s objective is to maintain a balance between continuity of funding and flexibility through the use of interest-bearing bank borrowings.

– IIB-45 –

APPENDIX IIB

ACCOUNTANTS’ REPORT OF JIAOBEI WATER SUPPLY

The maturity profile of the Target Group’s financial liabilities as at the end of each of the Relevant Periods, based on the contractual undiscounted payments, is as follows:

31 December 2018

		Less
	On	than 3	3 to 12	1 to 5	Over 5
	demand	months	months	years	years	Total
	_RMB’000 _	_RMB’000 _	_RMB’000 _	_RMB’000 _	_RMB’000 _	RMB’000
Interest-bearing bank borrowings	–	2,968	33,033	212,986	–	248,987
Trade payables	55	1,497	–	–	–	1,552
Financial liabilities included in other
payables and accruals	19,594	4,493	6	–	–	24,093
	19,649	8,958	33,039	212,986	–	274,632

			31 December 2019
		Less
	On	than 3	3 to 12	1 to 5	Over 5
	demand	months	months	years	years	Total
	_RMB’000 _	_RMB’000 _	_RMB’000 _	_RMB’000 _	_RMB’000 _	RMB’000
Trade payables	136	1,099	–	–	–	1,235
Financial liabilities included in other
payables and accruals	21,493	5,662	247	–	–	27,402
	21,629	6,761	247	–	–	28,637

			31 December 2020
		Less
	On	than 3	3 to 12	1 to 5	Over 5
	demand	months	months	years	years	Total
	_RMB’000 _	_RMB’000 _	_RMB’000 _	_RMB’000 _	_RMB’000 _	RMB’000
Trade payables	136	1,021	–	–	–	1,157
Financial liabilities included in other
payables and accruals	26,795	15,143	327	–	–	42,265
	26,931	16,164	327	–	–	43,422

Capital management

– IIB-46 –

APPENDIX IIB

ACCOUNTANTS’ REPORT OF JIAOBEI WATER SUPPLY

The Target Group monitors capital using a gearing ratio, which is net debt divided by total capital plus net debt. Net debt includes interest-bearing bank borrowings, trade payables, other payables and accruals, less cash and cash equivalents. Total capital represents equity attributable to owners of the parent. The gearing ratios as at the end of each of the Relevant Periods were as follows:

Interest-bearing bank borrowings Trade payables Other payables and accruals Less: Cash and cash equivalents Net debt Equity attributable to owners of the parent Total capital and net debt Gearing ratio	As at 31 December 2018 RMB’000 224,000 1,552 27,864 (8,990) 244,426 11,939 256,365 95%	As at 31 December 2019 RMB’000 – 1,235 31,432 (10,561) 22,106 9,382 31,488 70%	As at 31 December 2020 RMB’000 – 1,157 46,271 (13,791)
			33,637
			10,333
			43,970

			76%

– IIB-47 –

APPENDIX IIB

ACCOUNTANTS’ REPORT OF JIAOBEI WATER SUPPLY

31. STATEMENTS OF FINANCIAL POSITION OF THE TARGET COMPANY

NON-CURRENT ASSETS Property, plant and equipment Investment in a subsidiary Other intangible assets Other receivables Total non-current assets CURRENT ASSETS Inventories Trade receivables Prepayments, other receivables and other assets Cash and cash equivalents Total current assets CURRENT LIABILITIES Trade payables Other payables and accruals Interest-bearing bank borrowings Deferred government grants Total current liabilities NET CURRENT LIABILITIES TOTAL ASSETS LESS CURRENT LIABILITIES TOTAL ASSETS LESS CURRENT LIABILITIES NON-CURRENT LIABILITIES Interest-bearing bank borrowings Deferred government grants Total non-current liabilities Net assets EQUITY Equity attributable to owners of the parent Paid-up capital Accumulated losses (note) Total equity	As at 31 December 2018 RMB’000 29,307 – 93 224,000 253,400 553 3,557 2,076 8,639 14,825 1,552 27,441 25,000 510 54,503 (39,678) 213,722 213,722 199,000 4,376 203,376 10,346 15,500 (5,154) 10,346	As at 31 December 2019 RMB’000 26,949 – 125 – 27,074 25 4,658 2,838 10,411 17,932 1,235 31,648 - 510 33,393 (15,461) 11,613 11,613 – 3,866 3,866 7,747 15,500 (7,753) 7,747	As at 31 December 2020 RMB’000 38,729 – 99 –
			38,828
			377 3,948 3,872 13,381
			21,578
			1,157 46,781 - 510
			48,448
			(26,870)
			11,958
			11,958
			– 3,356
			3,356
			8,602

			15,500 (6,898)
			8,602

– IIB-48 –

APPENDIX IIB

ACCOUNTANTS’ REPORT OF JIAOBEI WATER SUPPLY

Note:

A summary of movements in the Target Company’s accumulated losses is as follows:

At 1 January 2018 Profit and total comprehensive income for the year At 31 December 2018 and 1 January 2019 Profit and total comprehensive income for the year At 31 December 2019 and 1 January 2020 Profit and total comprehensive income for the year At 31 December 2020	Accumulated losses RMB’000 (1,229) (3,925) (5,154) (2,599) (7,753) 855 (6,898)	Total RMB’000 (1,229) (3,925)
		(5,154) (2,599)
		(7,753) 855
		(6,898)

32. SUBSEQUENT FINANCIAL STATEMENTS

– IIB-49 –

APPENDIX IIC

ACCOUNTANTS’ REPORT OF LUQIAO WATER SUPPLY

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

27/F, One Taikoo Place, 979 King's Road, Quarry Bay, Hong Kong

ACCOUNTANTS’ REPORT ON HISTORICAL FINANCIAL INFORMATION TO THE DIRECTORS OF TAIZHOU WATER GROUP CO., LTD.

Introduction

We report on the historical financial information of Taizhou Luqiao Water Supply Co., Ltd. (the “ Target Company ”) and its subsidiaries (together, the “ Target Group ”) set out on pages IIC-3 to IIC-60, which comprises the consolidated statements of profit or loss and other comprehensive income, statements of changes in equity and statements of cash flows of the Target Group for each of the years ended 31 December 2018, 2019 and 2020 (the “ Relevant Periods ”), and the consolidated statements of financial position of the Target Group as at 31 December 2018, 2019 and 2020 and a summary of significant accounting policies and other explanatory information (together, the “ Historical Financial Information ”). The Historical Financial Information set out on pages IIC-3 to IIC-60 forms an integral part of this report, which has been prepared for inclusion in the circular of Taizhou Water Group Co., Ltd. (the “ Company ”) dated 24 June 2021 (the “ Circular ”) in connection with the proposed acquisition of 45% equity interest in the Target Company by the Company.

Directors’ responsibility for the Historical Financial Information

Reporting accountants’ responsibility

– IIC-1 –

APPENDIX IIC

ACCOUNTANTS’ REPORT OF LUQIAO WATER SUPPLY

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

Opinion

Report on matters under the Rules Governing the Listing of Securities on the Stock Exchange and the Companies (Winding Up and Miscellaneous Provisions) Ordinance

Adjustments

In preparing the Historical Financial Information, no adjustments to the Underlying Financial Statements as defined on page IIC-3 have been made.

Dividends

We refer to note 11 to the Historical Financial Information which states that no dividends have been paid by the Target Company in respect of the Relevant Periods.

Yours faithfully,

Ernst & Young Certified Public Accountants Hong Kong 24 June 2021

– IIC-2 –

APPENDIX IIC ACCOUNTANTS’ REPORT OF LUQIAO WATER SUPPLY

I HISTORICAL FINANCIAL INFORMATION

Preparation of Historical Financial Information

Set out below is the Historical Financial Information which forms an integral part of this accountants’ report.

The Historical Financial Information is presented in Renminbi (“ RMB ”) and all values are rounded to the nearest thousand (RMB’000) except when otherwise indicated.

– IIC-3 –

APPENDIX IIC

ACCOUNTANTS’ REPORT OF LUQIAO WATER SUPPLY

CONSOLIDATED STATEMENTS OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME

Notes REVENUE 5 Cost of sales Gross profit Other income and gains 5 Administrative expenses Other expenses Finance costs 7 PROFIT BEFORE TAX 6 Income tax expense 10 PROFIT FOR THE YEAR OTHER COMPREHENSIVE INCOME Other comprehensive income that will not be reclassified to profit or loss in subsequent periods: Remeasurement gain/(loss) on defined benefit plan 25 OTHER COMPREHENSIVE INCOME FOR THE YEAR, NET OF TAX TOTAL COMPREHENSIVE INCOME FOR THE YEAR Attributable to: Owner of the parent	Year ended 31 December 2018 RMB’000 175,861 (154,647) 21,214 7,446 (18,423) (295) (5,236) 4,706 (1,956) 2,750 (5,683) (5,683) (2,933) (2,933)	Year ended 31 December 2019 RMB’000 185,753 (152,366) 33,387 6,495 (18,434) (93) (5,976) 15,379 (4,821) 10,558 (317) (317) 10,241 10,241	Year ended 31 December 2020 RMB’000 181,544 (163,438) 18,106 6,879 (15,237) (256) (6,288) 3,204 (1,470) 1,734 2,005 (2,005) 3,739 3,739

– IIC-4 –

APPENDIX IIC

ACCOUNTANTS’ REPORT OF LUQIAO WATER SUPPLY

CONSOLIDATED STATEMENTS OF FINANCIAL POSITION

Notes NON-CURRENT ASSETS Property, plant and equipment 12 Investment properties 13 Prepayments for property, plant and equipment Deferred tax assets 24 Right-of-use assets 14(a) Total non-current assets CURRENT ASSETS Inventories 15 Trade receivables 16 Contract assets 18 Prepayments, other receivables and other assets 17 Cash and cash equivalents 19 Total current assets CURRENT LIABILITIES Trade payables 20 Other payables and accruals 21 Interest-bearing bank borrowings 22 Deferred government grants 23 Lease liabilities 14(b) Tax payable Total current liabilities NET CURRENT ASSETS TOTAL ASSETS LESS CURRENT LIABILITIES	As at 31 December 2018 RMB’000 213,701 1,918 956 6,843 19,510 242,928 6,308 76,135 3,239 70,316 139,217 295,215 30,055 116,664 70,000 10,572 – 9,884 237,175 58,040 300,968	As at 31 December 2019 RMB’000 199,493 1,831 606 8,228 19,290 229,448 3,337 63,437 4,694 71,432 111,267 254,167 27,314 59,245 70,000 10,614 68 12,962 180,203 73,964 303,412	As at 31 December 2020 RMB’000 182,888 1,745 606 10,395 18,714
			214,348
			3,469 46,423 4,117 71,408 193,732
			319,149
			31,426 110,478 70,000 10,614 68 14,503
			237,089
			82,060
			296,408

– IIC-5 –

APPENDIX IIC

ACCOUNTANTS’ REPORT OF LUQIAO WATER SUPPLY

Notes TOTAL ASSETS LESS CURRENT LIABILITIES NON-CURRENT LIABILITIES Deferred government grants 23 Lease liabilities 14(b) Net employee defined benefit liabilities 25 Total non-current liabilities Net assets EQUITY Equity attributable to owner of the parent Paid-up capital 26 Reserves 27 Total equity	As at 31 December 2018 RMB’000 300,968 156,011 – 37,429 193,440 107,528 64,460 43,068 107,528	As at 31 December 2019 RMB’000 303,412 145,683 224 39,736 185,643 117,769 64,460 53,309 117,769	As at 31 December 2020 RMB’000 296,408
			135,024 156 39,720
			174,900
			121,508

			64,460 57,048
			121,508

– IIC-6 –

APPENDIX IIC

ACCOUNTANTS’ REPORT OF LUQIAO WATER SUPPLY

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

At 1 January 2018 Profit for the year Other comprehensive income for the year: Remeasurement on defined benefit plan Total comprehensive income for the year Transfer to statutory surplus reserve At 31 December 2018 and 1 January 2019 Profit for the year Other comprehensive income for the year: Remeasurement on defined benefit plan Total comprehensive income for the year Transfer to statutory surplus reserve At 31 December 2019 and 1 January 2020 Profit for the year Other comprehensive income for the year: Remeasurement on defined benefit plan Total comprehensive income for the year Transfer to statutory surplus reserve At 31 December 2020	Paid-up capital RMB’000 (note 26) 64,460 – – – – 64,460 – – – – 64,460 – – – – 64,460	Capital reserve* RMB’000 (note 27) 10,808 – – – – 10,808 – – – – 10,808 – – – – 10,808	Statutory surplus reserve* RMB’000 (note 27) 4,336 – – – 799 5,135 – – – 848 5,983 – – – 140 6,123	Retained profits* RMB’000 30,857 2,750 (5,683) (2,933) (799) 27,125 10,558 (317) 10,241 (848) 36,518 1,734 2,005 3,739 (140) 40,117	Total equity RMB’000 110,461 2,750 (5,683)
					(2,933)
					–
					107,528 10,558 (317)
					10,241
					–
					117,769 1,734 2,005
					3,739
					–
					121,508

These reserve accounts comprise the consolidated reserves of RMB43,068,000, RMB53,309,000 and RMB57,048,000 in the consolidated statements of financial position as at 31 December 2018, 2019 and 2020, respectively.

– IIC-7 –

APPENDIX IIC

ACCOUNTANTS’ REPORT OF LUQIAO WATER SUPPLY

CONSOLIDATED STATEMENTS OF CASH FLOWS

Notes CASH FLOWS FROM OPERATING ACTIVITIES Profit before tax Adjustments for: Interest income from a loan to immediate holding company 5 Loss/(gain) on disposal of items of property, plant and equipment 6 Finance costs 7 Depreciation of property, plant and equipment 12 Depreciation of investment properties 13 Depreciation of right-of-use assets 14 Amortisation of government grants 23 Impairment of inventories, net 6 Impairment of contract assets, net 18 Impairment of trade receivables, net 16 Impairment of other receivables 17 Decrease/(increase) in inventories Decrease/(increase) in trade receivables Decrease/(increase) in prepayments, other receivables and other assets Decrease/(increase) in contract assets Increase/(decrease) in trade payables Increase/(decrease) in other payables and accruals Increase in deferred government grants Increase in net employee defined benefit liabilities Cash generated from/(used in) operations Income tax paid Net cash flows from/(used in) operating activities	Year ended 31 December 2018 RMB’000 4,706 (3,904) 188 5,236 17,029 94 506 (10,582) (11) (44) 4,696 202 (1,344) (32,206) 1,965 2,836 (1,014) 49,156 60 307 37,876 (3,223) 34,653	Year ended 31 December 2019 RMB’000 15,379 (4,579) – 5,976 17,295 87 576 (10,585) 1 1,545 3,853 203 2,970 8,845 7 (3,000) (2,741) (56,868) 299 606 (20,131) (3,128) (23,259)	Year ended 31 December 2020 RMB’000 3,204 (4,825) (45) 6,288 17,196 86 576 (10,659) – 2,075 (855) 148 (132) 17,869 (179) (1,498) 4,112 51,591 – 536 85,488 (2,096) 83,392

– IIC-8 –

APPENDIX IIC

ACCOUNTANTS’ REPORT OF LUQIAO WATER SUPPLY

Note CASH FLOWS FROM INVESTING ACTIVITIES Purchases of items of property, plant and equipment Proceeds from disposal of items of property, plant and equipment Interests received from a loan to the immediate holding company Net cash flows from/(used in) investing activities CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from new bank borrowings 28 Repayment of bank borrowings 28 Interest paid for lease liabilities 28 Principal portion of lease payments 28 Interest paid 28 Net cash flows used in financing activities NET INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS Cash and cash equivalents at beginning of year CASH AND CASH EQUIVALENTS AT END OF YEAR ANALYSIS OF BALANCES OF CASH AND CASH EQUIVALENTS Cash and cash equivalents as stated in the consolidated statements of financial position and consolidated statements of cash flows	Year ended 31 December 2018 RMB’000 (6,907) 418 5,198 (1,291) – – – – (3,904) (3,904) 29,458 109,759 139,217 139,217	Year ended 31 December 2019 RMB’000 (3,320) – 3,253 (67) 70,000 (70,000) (13) (64) (4,547) (4,624) (27,950) 139,217 111,267 111,267	Year ended 31 December 2020 RMB’000 (952) 93 4,880 4,021 70,000 (70,000) (10) (68) (4,870) (4,948) 82,465 111,267 193,732 193,732

– IIC-9 –

APPENDIX IIC

ACCOUNTANTS’ REPORT OF LUQIAO WATER SUPPLY

II NOTES TO THE HISTORICAL FINANCIAL INFORMATION

1. CORPORATE INFORMATION

The Target Company is a joint stock company with limited liability established in the People’s Republic of China (“ PRC ”). The registered office of the Target Company is located at No. 565, Xin An Western Road Lubei Street, Lu Qiao District, Taizhou, Zhejiang Province, PRC.

During the Relevant Periods, the Target Group was principally engaged in supplying tap water directly to end-users and the installation of the water pipelines for distributing tap water to end-users.

The Target Company is 100% owned by Taizhou Luqiao District Urban Construction Group Co., Ltd. (“ Luqiao Urban Construction ”) (台州市路橋區城市建設集團有限公司), which is registered in the PRC. In the opinion of the directors of the Target Company, the State-owned Assets Supervision and Administration Commission of Taizhou Luqiao District (台州市路橋區國有資產監督管理委員會) is the ultimate holding company of the Target Company at the end of 31 December 2018, 2019 and 2020.

As at the date of this report, the Target Company had direct interests in its subsidiaries, which are private limited liability companies, the particulars of which are set out below:

			Percentage
	Place and		of equity
	date of	Nominal	interest
	incorporation/	value of	attributable
	registration and	registered	to the target	Principal
Name	place of operations	share capital	Company	activities
Taizhou Luqiao Lixin	PRC/Mainland China	RMB6,000,000	100%	Pipeline
Municipal Engineering	15 December 2005			installation
Co., Ltd. (“Lixin				service
Engineering”)
(台州市路橋立信市政工程
有限公司) (a), (b)
Taizhou Luqiao Urban	PRC/Mainland China	RMB1,000,000	100%	Dormant
and Rural Water Supply	22 March 2011
Service Co., Ltd.
(“Urban and Rural
Water Supply”)
(台州市路橋城鄉供水服務
有限公司) (a), (b)

Notes:

(a) The statutory financial statements of these entities for the years ended 31 December 2018, 2019 and 2020 prepared under PRC Generally Accepted Accounting Principles (“ PRC GAAP ”) were audited by Zhejiang Zhongyong Zhongtian Certified Public Accountants Co., Ltd. (浙江中永中天會計師事務所有限公司), certified public accountants registered in the PRC.
(b) The English names of these entities registered in the PRC represent the best efforts made by management of the target Company to directly translate their Chinese names as they do not register any official English names.

– IIC-10 –

APPENDIX IIC

ACCOUNTANTS’ REPORT OF LUQIAO WATER SUPPLY

2.1 BASIS OF PREPARATION

The Historical Financial Information has been prepared under the historical cost convention.

Basis of consolidation

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

– IIC-11 –

APPENDIX IIC

ACCOUNTANTS’ REPORT OF LUQIAO WATER SUPPLY

2.2 ISSUED BUT NOT YET EFFECTIVE HONG KONG FINANCIAL REPORTING STANDARDS

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

Amendments to HKFRS 3 Reference to the Conceptual Framework[2] Amendments to HKFRS 9, Interest Rate Benchmark Reform – Phase 2[1] HKAS 39, HKFRS 7, HKFRS 4 and HKFRS 16 Amendments to HKFRS 10 and Sale or Contribution of Assets between an Investor and its HKAS 28 (2011) Associate or Joint Venture[4] HKFRS 17 Insurance Contracts[3] Amendments to HKFRS 17 Insurance Contracts[3,6] Amendments to HKAS 1 Classification of Liabilities as Current or Non-current[3,5] Amendments to HKAS 16 Property, Plant and Equipment: Proceeds before Intended Use[2] Amendments to HKAS 37 Onerous Contracts – Cost of Fulfilling a Contract[2] Annual Improvements to Amendments to HKFRS 1, HKFRS 9, Illustrative Examples HKFRSs 2018-2020 accompanying HKFRS 16, and HKAS 41[2]

1 Effective for annual periods beginning on or after 1 January 2021
2 Effective for annual periods beginning on or after 1 January 2022
3 Effective for annual periods beginning on or after 1 January 2023
4 No mandatory effective date yet determined but available for adoption
5 As a consequence of the amendments to HKAS 1, Hong Kong Interpretation 5 Presentation of Financial Statements – Classification by the Borrower of a Term Loan that Contains a Repayment on Demand Clause was revised in October 2020 to align the corresponding wording with no change in conclusion
6 As a consequence of the amendments to HKFRS 17 issued in October 2020, HKFRS 4 was amended to extend the temporary exemption that permits insurers to apply HKAS 39 rather than HKFRS 9 for annual periods beginning before 1 January 2023

Further information about those HKFRSs that are expected to be applicable to the Target Group is described below.

– IIC-12 –

APPENDIX IIC

ACCOUNTANTS’ REPORT OF LUQIAO WATER SUPPLY

a temporary relief to entities from having to meet the separately identifiable requirement when an RFR is designated as a risk component. The relief allows an entity, upon designation of the hedge, to assume that the separately identifiable requirement is met, provided the entity reasonably expects the RFR risk component to become separately identifiable within the next 24 months. Furthermore, the amendments require an entity to disclose additional information to enable users of financial statements to understand the effect of interest rate benchmark reform on an entity’s financial instruments and risk management strategy. The amendments are effective for annual periods beginning on or after 1 January 2021 and shall be applied retrospectively, but entities are not required to restate the comparative information. As the Target Group does not have any financial assets or financial liabilities based on any benchmark rates subject to interest rate benchmark reform, the amendments are not expected to have any significant impact on the Target Group’s financial statements.

– IIC-13 –

APPENDIX IIC

ACCOUNTANTS’ REPORT OF LUQIAO WATER SUPPLY

HKFRS 9 Financial Instruments : clarifies the fees that an entity includes when assessing whether the terms of a new or modified financial liability are substantially different from the terms of the original financial liability. These fees include only those paid or received between the borrower and the lender, including fees paid or received by either the borrower or lender on the other’s behalf. An entity applies the amendment to financial liabilities that are modified or exchanged on or after the beginning of the annual reporting period in which the entity first applies the amendment. The amendment is effective for annual periods beginning on or after 1 January 2022. Earlier application is permitted. The amendment is not expected to have a significant impact on the Target Group’s financial statements.
HKFRS 16 Leases : removes the illustration of payments from the lessor relating to leasehold improvements in Illustrative Example 13 accompanying HKFRS 16. This removes potential confusion regarding the treatment of lease incentives when applying HKFRS 16.

2.3 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Impairment of non-financial assets

Related parties

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

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

– IIC-14 –

APPENDIX IIC

ACCOUNTANTS’ REPORT OF LUQIAO WATER SUPPLY

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

Property, plant and equipment and depreciation

Buildings	10–35 years
Pipelines	15–20 years
Machinery and equipment	2–20 years
Computer and office equipment	2–20 years
Motor vehicles	4–10 years
Leasehold improvements	20 years

– IIC-15 –

APPENDIX IIC

ACCOUNTANTS’ REPORT OF LUQIAO WATER SUPPLY

Investment properties

Investment properties are interests in land and buildings (including the leasehold property held as a right-of-use asset which would otherwise meet the definition of an investment property) held to earn rental income and/or for capital appreciation, rather than for use in the production or supply of goods or services or for administrative purposes; or for sale in the ordinary course of business. Such properties are measured initially at cost, including transaction costs. Subsequent to initial recognition, investment properties are stated at cost less accumulated depreciation and any impairment losses.

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

Buildings

20–35 years

Leases

Target Group as a lessee

The Target Group applies a single recognition and measurement approach for all leases, except for short-term leases and leases of low-value assets. The Target Group recognises lease liabilities to make lease payments and right-of-use assets representing the right to use the underlying assets.

(a) Right-of-use assets

Leasehold lands 40–50 years Machinery 5 years

– IIC-16 –

APPENDIX IIC

ACCOUNTANTS’ REPORT OF LUQIAO WATER SUPPLY

(b) Lease liabilities

Target Group as a lessor

When the Target Group acts as a lessor, it classifies at lease inception (or when there is a lease modification) each of its leases as either an operating lease or a finance lease.

Investments and other financial assets

Initial recognition and measurement

Financial assets are classified, at initial recognition, as subsequently measured at amortised cost, fair value through other comprehensive income and fair value through profit or loss.

– IIC-17 –

APPENDIX IIC

ACCOUNTANTS’ REPORT OF LUQIAO WATER SUPPLY

through other comprehensive income are held within a business model with the objective of both holding to collect contractual cash flows and selling. Financial assets which are not held within the aforementioned business models are classified and measured at fair value through profit or loss.

Subsequent measurement

The subsequent measurement of financial assets depends on their classification as follows:

Financial assets at amortised cost (debt investments)

Derecognition of financial assets

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

Impairment of financial assets

General approach

– IIC-18 –

APPENDIX IIC

ACCOUNTANTS’ REPORT OF LUQIAO WATER SUPPLY

The Target Group considers a financial asset in default when contractual payments are 60 days past due. However, in certain cases, the Target Group may also consider a financial asset to be in default when internal or external information indicates that the Target Group is unlikely to receive the outstanding contractual amounts in full before taking into account any credit enhancements held by the Target Group. A financial asset is written off when there is no reasonable expectation of recovering the contractual cash flows.

Stage 1 – Financial instruments for which credit risk has not increased significantly since initial recognition and for which the loss allowance is measured at an amount equal to 12-month ECLs
Stage 2 – Financial instruments for which credit risk has increased significantly since initial recognition but that are not credit-impaired financial assets and for which the loss allowance is measured at an amount equal to lifetime ECLs

Simplified approach

Financial liabilities

Initial recognition and measurement

All financial liabilities are recognised initially at fair value and, in the case of loans and borrowings and payables, net of directly attributable transaction costs.

The Target Group’s financial liabilities include trade and other payables and interest-bearing bank borrowings.

– IIC-19 –

APPENDIX IIC

ACCOUNTANTS’ REPORT OF LUQIAO WATER SUPPLY

Subsequent measurement

The subsequent measurement of financial liabilities depends on their classification as follows:

Financial liabilities at amortised cost (loans and borrowings)

Derecognition of financial liabilities

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

Offsetting of financial instruments

Inventories

Cash and cash equivalents

For the purpose of the consolidated statements of cash flows, cash and cash equivalents comprise cash on hand and demand deposits, and short-term highly liquid investments that are readily convertible into known amounts of cash, are subject to an insignificant risk of changes in value, and have a short maturity of generally within three months when acquired, less bank overdrafts which are repayable on demand and form an integral part of the Target Group’s cash management.

Provisions

Income tax

– IIC-20 –

APPENDIX IIC

ACCOUNTANTS’ REPORT OF LUQIAO WATER SUPPLY

Deferred tax liabilities are recognised for all taxable temporary differences, except:

(a) where the deferred tax liability arises from the initial recognition of goodwill or an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss; and
(b) in respect of taxable temporary differences associated with investments in subsidiaries, when the timing of the reversal of the temporary differences can be controlled and it is probable that the temporary differences will not reverse in the foreseeable future.

(a) when the deferred tax asset relating to the deductible temporary difference arises from the initial recognition of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss; and
(b) in respect of deductible temporary differences associated with investments in subsidiaries, deferred tax assets are only recognised to the extent that it is probable that the temporary differences will reverse in the foreseeable future and taxable profit will be available against which the temporary differences can be utilised.

Government grants

– IIC-21 –

APPENDIX IIC

ACCOUNTANTS’ REPORT OF LUQIAO WATER SUPPLY

Revenue recognition

Revenue from contracts with customers

(a) Sale of water

Revenue from the sale of water is recognised at the point in time when control of the water is transferred to the customer, generally on delivery of the water.

(b) Installation services

The Target Group provides installation services separately to customers.

Revenue from other sources

Rental income is recognised on a time proportion basis over the lease terms. Variable lease payments that do not depend on an index or a rate are recognised as income in the accounting period in which they are incurred.

Other income

Contract assets

– IIC-22 –

APPENDIX IIC

ACCOUNTANTS’ REPORT OF LUQIAO WATER SUPPLY

Contract liabilities

Other employee benefits

Pension scheme

Defined benefit plan

Past service costs are recognised in profit or loss at the earlier of:

the date of the plan amendment or curtailment; and
the date that the Target Group recognises restructuring-related costs

service costs comprising current service costs, past-service costs, gains and losses on curtailments and non-routine settlements
net interest expense or income

Dividends

Final dividends are recognised as a liability when they are approved by the shareholders in a general meeting.

– IIC-23 –

APPENDIX IIC

ACCOUNTANTS’ REPORT OF LUQIAO WATER SUPPLY

3. SIGNIFICANT ACCOUNTING JUDGEMENTS AND ESTIMATES

Estimation uncertainty

Impairment of non-financial assets (other than goodwill)

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

Provision for expected credit losses of trade receivables

The Target Group uses a provision matrix to calculate ECLs for trade receivables and contract assets. The provision rates are based on days past due that have similar loss patterns.

The assessment of the correlation among historical observed default rates, forecast economic conditions and ECLs is a significant estimate. The amount of ECLs is sensitive to changes in circumstances and of forecast economic conditions. The Target Group’s historical credit loss experience and forecast of economic conditions may also not be representative of a customer’s actual default in the future. The information about the ECLs on the Target Group’s trade receivables and contract assets as at 31 December 2018, 2019 and 2020 is disclosed in note 16 and note 18 to the Historical Financial Information respectively.

Deferred tax assets

Defined benefit plans (pension benefits)

– IIC-24 –

APPENDIX IIC

ACCOUNTANTS’ REPORT OF LUQIAO WATER SUPPLY

future salary increases, mortality rates and future pension increases. Due to the complexities involved in the valuation and its long-term nature, a defined benefit obligation is highly sensitive to changes in these assumptions.

4. OPERATING SEGMENT INFORMATION

Geographic information

(a) Revenue from external customers

During the Relevant Periods, the Target Group operated within one geographical area as all of the Target Group’s revenue was generated from customers located in Mainland China.

(b) Non-current assets

All non-current assets of the Target Group are located in Mainland China.

Information about major customers

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

		Year ended	Year ended	Year ended
		31 December	31 December	31 December
		2018	2019	2020
		RMB’000	RMB’000	RMB’000
Customer	1	21,939	21,506	N/A*

The corresponding revenue from the customer is not disclosed as the revenue did not individually account for 10% or more of the Target Group’s revenue for the respective year.

– IIC-25 –

APPENDIX IIC

ACCOUNTANTS’ REPORT OF LUQIAO WATER SUPPLY

5. REVENUE, OTHER INCOME AND GAINS

An analysis of revenue is as follows:

Revenue from contracts with customers Revenue from contracts with customers	Year ended 31 December 2018 RMB’000 175,861	Year ended 31 December 2019 RMB’000 185,753	Year ended 31 December 2020 RMB’000 181,544

(a) Disaggregated revenue information

Types of goods or services Sale of water Installation services Total revenue from contracts with customers Timing of revenue recognition Goods transferred at a point in time Services transferred over time Total revenue from contracts with customers	Year ended 31 December 2018 RMB’000 150,860 25,001 175,861 150,860 25,001 175,861	Year ended 31 December 2019 RMB’000 154,843 30,910 185,753 154,843 30,910 185,753	Year ended 31 December 2020 RMB’000 145,101 36,443
			181,544

			145,101 36,443
			181,544

(b) Contract liabilities

The Target Group recognised the following revenue-related contract liabilities:

				As at	As at	As at
			31	December	31 December	31 December
				2018	2019	2020
				RMB’000	RMB’000	RMB’000
Current	_(note _	21(b))		33,483	27,445	63,783

Contract liabilities represented the obligations to transfer goods or provide services to a customer for which the Target Group has received consideration. The amount was included in “Other payables and accruals” in the consolidated statements of financial position.

(i) Significant changes in contract liabilities

The changes in the contract liabilities are mainly attributable to the short-term advances received to transfer goods to customers and satisfaction of performance obligations.

– IIC-26 –

APPENDIX IIC

ACCOUNTANTS’ REPORT OF LUQIAO WATER SUPPLY

(ii) Revenue recognised in relation to contract liabilities

Revenue recognised that was included in the contract liabilities balance at the beginning of the Relevant Periods: Sale of water Installation services	Year ended 31 December 2018 RMB’000 177 26,813 26,990	Year ended 31 December 2019 RMB’000 14 33,469 33,483	Year ended 31 December 2020 RMB’000 49 27,396
			27,445

(c) Performance obligations

Information about the Target Group’s performance obligations is summarised below:

Sale of water

The performance obligation is satisfied upon delivery of the water and payment is generally due within two months.

Installation services

The performance obligation is satisfied over time as services are rendered and payment is generally due upon completion of installation and customer acceptance.

The amounts of transaction prices allocated to the remaining performance obligations (unsatisfied or partially unsatisfied) in the Relevant Periods are as follows:

	As at	As at	As at
	31 December	31 December	31 December
	2018	2019	2020
	RMB’000	RMB’000	RMB’000
Amounts expected to be recognised as
revenue:
Within one year	22,181	16,338	58,991

– IIC-27 –

APPENDIX IIC

ACCOUNTANTS’ REPORT OF LUQIAO WATER SUPPLY

Other income Bank interest income Interest income from a loan to the immediate holding company Rental income from investment property operating leases Government grants Value added tax refund Others Gain Gain on disposal of items of property, plant and equipment	Year ended 31 December 2018 RMB’000 476 3,904 210 1,421 477 958 7,446 – 7,446	Year ended 31 December 2019 RMB’000 353 4,579 213 – 467 883 6,495 – 6,495	Year ended 31 December 2020 RMB’000 418 4,825 319 216 233 823
			6,834
			45
			6,879

– IIC-28 –

APPENDIX IIC

ACCOUNTANTS’ REPORT OF LUQIAO WATER SUPPLY

6. PROFIT BEFORE TAX

The Target Group’s profit before tax is arrived at after charging/(crediting):

Notes Cost of inventories sold Cost of services provided Depreciation of property, plant and equipment 12 Depreciation of right-of-use assets 14 Depreciation of investment properties 13 Impairment of trade receivables, net 16 Impairment of contract assets, net 18 Impairment of other receivables, net 17 Government grants Deferred government grants 23 Impairment of inventories, net*** Auditor’s remuneration Employee benefit expense (excluding directors’, chief executive’s and supervisors’ remuneration (note 8)): Wages and salaries Pension scheme contributions Staff welfare expenses Defined benefit plan Loss/(gain) on disposal of items of property, plant and equipment	Year ended 31 December 2018 RMB’000 138,265 16,382 17,029 506 94 4,696 (44) 202 (1,421) (10,582) (11) 38 24,096 3,090 3,740 948 31,874 188	Year ended 31 December 2019 RMB’000 134,679 17,687 17,295 576 87 3,853 1,545 203 – (10,585) 1 38 23,019 3,260 3,987 1,179 31,445 –	Year ended 31 December 2020 RMB’000 142,841 20,597 17,196 576 86 (855) 2,075 148 (216) (10,659) – 38 28,452 1,525 4,435 1,220
			35,632
			(45)

The cost of inventories sold and services provided includes RMB40,479,000, RMB41,039,000 and RMB44,498,000, relating to staff costs and depreciation of property, plant and equipment for the years ended 31 December 2018, 2019 and 2020, respectively, which are also included in the respective total amounts disclosed above for each type of expenses.
** The government grants mainly represent compensation by the local governments to support the Target Group’s operation in Taizhou City, the PRC. There were no unfulfilled conditions or contingencies attached to these government grants. Deferred government grants represent the amount released from deferred government grants.
*** The impairment of inventories is included in “Cost of sales” in the consolidated statements of profit or loss and other comprehensive income.

– IIC-29 –

APPENDIX IIC

ACCOUNTANTS’ REPORT OF LUQIAO WATER SUPPLY

7. FINANCE COSTS

An analysis of finance costs is as follows:

Interest on bank borrowings Interest expense arising from defined benefit plans Interest on lease liabilities (note 14(b))	Year ended 31 December 2018 RMB’000 3,904 1,332 – 5,236	Year ended 31 December 2019 RMB’000 4,579 1,384 13 5,976	Year ended 31 December 2020 RMB’000 4,825 1,453 10
			6,288

8. DIRECTORS’, CHIEF EXECUTIVE’S AND SUPERVISORS’ REMUNERATION

Fee Other emoluments: Salaries, allowances and benefits in kind Pension scheme contributions Defined benefit plan	Year ended 31 December 2018 RMB’000 – 2,496 193 54 2,743	Year ended 31 December 2019 RMB’000 – 1,852 162 54 2,068	Year ended 31 December 2020 RMB’000 –
			2,335 30 66
			2,431

(a) Independent non-executive directors

The Target Company did not have any independent non-executive directors during the Relevant Periods.

– IIC-30 –

APPENDIX IIC

ACCOUNTANTS’ REPORT OF LUQIAO WATER SUPPLY

(b) Executive directors, non-executive director and supervisors

Year ended 31 December 2018 Executive directors: Ying Xuanfang Yu Gonggen Yu Yuejin (i) Luo Guobin Luo Huayuan Non-executive director: Yu Yuejin (i) Supervisors: Liu Hua (ii) Liu Xiaobin Cai Qinlong (iii) Year ended 31 December 2019 Executive directors: Ying Xuanfang Yu Gonggen Luo Guobin Luo Huayuan Non-executive director: Yu Yuejin (i) Supervisors: Liu Hua (ii) Liu Xiaobin Cai Qinlong (iii)	Salaries, allowances and benefits in kind Pension scheme contributions RMB’000 RMB’000 350 25 301 25 306 20 305 25 321 25 1,583 120 – – – – 304 23 305 25 304 25 913 73 2,496 193 341 27 297 27 301 27 313 27 1,252 108 – – – – – – 303 27 297 27 600 54 1,852 162	Defined benefit plan RMB’000 7 7 6 7 7 34 – – 6 7 7 20 54 9 9 9 9 36 – – – 9 9 18 54	Total RMB’000 382 333 332 337 353
			1,737 –
			– 333 337 336
			1,006
			2,743

			377 333 337 349
			1,396 –
			– – 339 333
			672
			2,068

– IIC-31 –

APPENDIX IIC

ACCOUNTANTS’ REPORT OF LUQIAO WATER SUPPLY

Year ended 31 December 2020 Executive directors: Ying Xuanfang Luo Guobin* Yu Gonggen Luo Huayuan Cai Qinlong (iii) Xie Weitao (iv) Non-executive director: Yu Yuejin (i) Supervisors: Liu Hua (ii) Cai Qinlong (iii) Zhou Lingwei (v) Liu Xiaobin Xu Chenwei (v)	Salaries, allowances and benefits in kind Pension scheme contributions RMB’000 RMB’000 157 5 313 5 308 5 325 5 207 – 205 – 1,515 20 – – – – – – 103 5 208 – 315 5 194 – 820 10 2,335 30	Defined benefit plan RMB’000 3 9 9 9 6 6 42 – – – 3 6 9 6 24 66	Total RMB’000 165 327 322 339 213 211
			1,577 –
			– – 111 214 329 200
			854
			2,431

Mr. Ying Xuanfang was the chief executive of the Target Company during the Relevant Periods and retired in April 2020.
** Mr. Luo Guobin was appointed as the chief executive of the Target Company in April 2020.

Notes:

(i) Yu Yuejin retired as an executive director and was appointed as a non-executive director in October 2018, and retired in April 2020.
(ii) Liu Hua retired as a supervisor in April 2020.
(iii) Cai Qinlong retired as a supervisor and was appointed as an executive director in April 2020.
(iv) Xie Weitao was appointed as an executive director in April 2020.
(v) Zhou Lingwei and Xu Chenwei were appointed as supervisors in April 2020.

There was no arrangement under which a director waived or agreed to waive any remuneration during the Relevant Periods.

– IIC-32 –

APPENDIX IIC

ACCOUNTANTS’ REPORT OF LUQIAO WATER SUPPLY

9. FIVE HIGHEST PAID EMPLOYEES

The five highest paid employees included five directors and supervisors for the years ended 31 December 2018, 2019 and 2020, respectively, details of whose remuneration are set out in note 8 above.

10. INCOME TAX EXPENSE

The Target Group is subject to income tax on an entity basis on profit arising in or derived from the jurisdictions in which members of the Target Group are domiciled and operate.

The income tax expense of the Target Group during the Relevant Periods is analysed as follows:

Current tax – Mainland China Charge for the year Deferred tax (note 24) Total tax charge for the year	Year ended 31 December 2018 RMB’000 3,268 (1,312) 1,956	Year ended 31 December 2019 RMB’000 6,206 (1,385) 4,821	Year ended 31 December 2020 RMB’000 3,637 (2,167)
			1,470

A reconciliation of the tax expense applicable to profit before tax at the statutory rate in Mainland China to the tax expense at the effective tax rate is as follows:

	Year	ended	Year	ended	Year	ended
	31 December		31 December		31 December
	2018		2019		2020
	RMB’000	_% _	RMB’000	_% _	RMB’000	%
Profit before tax	4,706		15,379		3,204

Tax at the statutory tax rate of 25%
in Mainland China	1,176	25.0	3,844	25.0	801	25.0
Effect of non-deductible expenses	239	5.1	276	1.8	296	9.2
Tax losses not recognised	56	1.2	233	1.5	41	1.3
Temporary differences not recognised	485	10.3	468	3.0	332	10.4
Tax charge at the Target Group’s
effective rate	1,956	41.6	4,821	31.3	1,470	45.9

11. DIVIDENDS

No dividend was declared and paid by the Target Company in respect of the Relevant Periods.

– IIC-33 –

APPENDIX IIC

ACCOUNTANTS’ REPORT OF LUQIAO WATER SUPPLY

12. PROPERTY, PLANT AND EQUIPMENT

31 December 2018 At 1 January 2018: Cost Accumulated depreciation Net carrying amount At 1 January 2018, net of accumulated depreciation Additions Transfers to investment properties_(note 13)_ Disposals Depreciation provided during the year Transfers At 31 December 2018, net of accumulated depreciation At 31 December 2018: Cost Accumulated depreciation Net carrying amount	Buildings RMB’000 112,844 (39,174) 73,670 73,670 – (211) (3) (4,363) 106 69,199 112,540 (43,341) 69,199	Pipelines RMB’000 198,731 (67,779) 130,952 130,952 – – – (9,053) – 121,899 198,731 (76,832) 121,899	Machinery and equipment RMB’000 36,468 (19,326) 17,142 17,142 1,507 – (509) (2,793) – 15,347 33,091 (17,744) 15,347	Computer and office equipment RMB’000 3,719 (2,353) 1,366 1,366 260 – (12) (449) 1,610 2,775 5,339 (2,564) 2,775	Motor vehicles Leasehold improvements Construction in progress RMB’000 RMB’000 RMB’000 3,325 130 1,268 (1,961) – – 1,364 130 1,268 1,364 130 1,268 59 – 3,829 – – – (82) – – (365) (6) – – – (1,716) 976 124 3,381 2,593 130 3,381 (1,617) (6) – 976 124 3,381	Total RMB’000 356,485 (130,593)
						225,892

						225,892 5,655 (211) (606) (17,029) –
						213,701

						355,805 (142,104)
						213,701

– IIC-34 –

APPENDIX IIC

ACCOUNTANTS’ REPORT OF LUQIAO WATER SUPPLY

31 December 2019 At 1 January 2019: Cost Accumulated depreciation Net carrying amount At 1 January 2019, net of accumulated depreciation Additions Depreciation provided during the year Transfers At 31 December 2019, net of accumulated depreciation At 31 December 2019: Cost Accumulated depreciation Net carrying amount 31 December 2020 At 1 January 2020: Cost Accumulated depreciation Net carrying amount At 1 January 2020, net of accumulated depreciation Additions Disposals Depreciation provided during the year At 31 December 2020, net of accumulated depreciation At 31 December 2020: Cost Accumulated depreciation Net carrying amount	Buildings RMB’000 112,540 (43,341) 69,199 69,199 – (4,412) 2,711 67,498 115,251 (47,753) 67,498 115,251 (47,753) 67,498 67,498 – – (4,359) 63,139 115,251 (52,112) 63,139	Pipelines RMB’000 198,731 (76,832) 121,899 121,899 – (9,053) – 112,846 198,731 (85,885) 112,846 198,731 (85,885) 112,846 112,846 2 – (8,638) 104,210 198,733 (94,523) 104,210	Machinery and equipment RMB’000 33,091 (17,744) 15,347 15,347 120 (2,867) 3,247 15,847 36,458 (20,611) 15,847 36,458 (20,611) 15,847 15,847 155 – (3,221) 12,781 36,613 (23,832) 12,781	Computer and office equipment RMB’000 5,339 (2,564) 2,775 2,775 245 (665) 110 2,465 5,694 (3,229) 2,465 5,694 (3,229) 2,465 2,465 436 (3) (715) 2,183 6,119 (3,936) 2,183	Motor vehicles Leasehold improvements Construction in progress RMB’000 RMB’000 RMB’000 2,593 130 3,381 (1,617) (6) – 976 124 3,381 976 124 3,381 – – 2,722 (292) (6) – – – (6,068) 684 118 35 2,593 130 35 (1,909) (12) – 684 118 35 2,593 130 35 (1,909) (12) – 684 118 35 684 118 35 46 – – (45) – – (257) (6) – 428 112 35 2,580 130 35 (2,152) (18) – 428 112 35	Total RMB’000 355,805 (142,104)
						213,701

						213,701 3,087 (17,295) –
						199,493

						358,892 (159,399)
						199,493

						358,892 (159,399)
						199,493

						199,493 639 (48) (17,196)
						182,888

						359,461 (176,573)
						182,888

– IIC-35 –

APPENDIX IIC

ACCOUNTANTS’ REPORT OF LUQIAO WATER SUPPLY

13. INVESTMENT PROPERTIES

At the beginning of year Cost Accumulated depreciation and impairment Net carrying amount At the beginning of the year, net of accumulated depreciation Transfer from owner-occupied property (note 12) Depreciation provided during the year At the end of the year, net of accumulated depreciation At the end of year Cost Accumulated depreciation and impairment Net carrying amount	As at 31 December 2018 RMB’000 3,395 (1,594) 1,801 1,801 211 (94) 1,918 3,718 (1,800) 1,918	As at 31 December 2019 RMB’000 3,718 (1,800) 1,918 1,918 – (87) 1,831 3,718 (1,887) 1,831	As at 31 December 2020 RMB’000 3,718 (1,887)
			1,831

			1,831 – (86)
			1,745

			3,718 (1,973)
			1,745

The Target Group’s investment properties consist of four commercial properties situated in Mainland China and are held under medium term leases. The investment properties were leased to third parties.

14. LEASES

The Target Group as a lessee

The Target Group has lease contracts for lands and machinery used in its operations. Lump sum payments were made upfront to acquire the leased land from the government with lease periods of 40 or 50 years, and no ongoing payments will be made under the terms of these land leases. The lease of a machinery has a lease term of 5 years. Generally, the Target Group is restricted from assigning and subleasing the leased assets outside the Target Group. There are no lease contracts that include extension and termination options and variable lease payments.

– IIC-36 –

APPENDIX IIC

ACCOUNTANTS’ REPORT OF LUQIAO WATER SUPPLY

(a) Right-of-use assets

The carrying amounts of the Target Group’s right-of-use assets and the movements during the Relevant Periods are as follows:

As at 1 January 2018 Depreciation charge (note 6) As at 31 December 2018 and 1 January 2019 Additions Depreciation charge (note 6) As at 31 December 2019 and 1 January 2020 Depreciation charge (note 6) As at 31 December 2020	Leasehold lands RMB’000 20,016 (506) 19,510 – (505) 19,005 (505) 18,500	Machinery RMB’000 – – – 356 (71) 285 (71) 214	Total RMB’000 20,016 (506)
			19,510 356 (576)
			19,290 (576)
			18,714

(b) Lease liabilities

The carrying amount of lease liabilities and the movements during the Relevant Periods are as follows:

Carrying amount at 1 January New leases Accretion of interest recognised during the year (note 7) Payments Net carrying amount at 31 December Analysed into: Current portion Non-current portion	As at 31 December 2018 RMB’000 – – – – – – –	As at 31 December 2019 RMB’000 – 356 13 (77) 292 68 224	As at 31 December 2020 RMB’000 292 – 10 (78)
			224

			68 156

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APPENDIX IIC

ACCOUNTANTS’ REPORT OF LUQIAO WATER SUPPLY

(c) The amounts recognised in profit or loss in relation to leases are as follows:

Interest on lease liabilities Depreciation charge of right-of-use assets Total amount recognised in profit or loss	Year ended 31 December 2018 RMB’000 – 506 506	Year ended 31 December 2019 RMB’000 13 576 589	Year ended 31 December 2020 RMB’000 10 576
			586

(d) The total cash outflow for leases is disclosed in note 28 to the Historical Financial Information.

The Target Group as a lessor

The Target Group leases its investment properties consisting of four commercial properties in Mainland China (note 13 to the Historical Financial Information) under operating lease arrangements. Rental income recognised by the Target Group during the years ended 31 December 2018, 2019 and 2020 were RMB210,000, RMB213,000 and RMB319,000, respectively, details of which are included in note 5 to the Historical Financial Information.

As at 31 December 2018, 2019 and 2020, the lease payments receivable by the Target Group in future periods under non-cancellable operating leases with its tenants are as follows:

Within one year After one year but within two years After two years but within three years After three years but within four years After four years but within five years After five years 15. INVENTORIES Raw materials	Year ended 31 December 2018 RMB’000 215 208 174 183 192 636 1,608 As at 31 December 2018 RMB’000 6,308	Year ended 31 December 2019 RMB’000 213 179 183 192 202 434 1,403 As at 31 December 2019 RMB’000 3,337	Year ended 31 December 2020 RMB’000 205 183 192 202 212 221
			1,215

			As at 31 December 2020 RMB’000 3,469

– IIC-38 –

APPENDIX IIC

ACCOUNTANTS’ REPORT OF LUQIAO WATER SUPPLY

16. TRADE RECEIVABLES

Trade receivables Impairment	As at 31 December 2018 RMB’000 89,782 (13,647) 76,135	As at 31 December 2019 RMB’000 80,937 (17,500) 63,437	As at 31 December 2020 RMB’000 63,068 (16,645)
			46,423

The Target Group’s trading terms with its customers are mainly on credit. The credit period generally ranges from two to six months. The Target Group seeks to maintain strict control over its outstanding receivables and overdue balances are reviewed regularly by senior management. The Target Group does not hold any collateral or other credit enhancements over its trade receivable balances. Trade receivables are non-interest-bearing.

An ageing analysis of the trade receivables as at the end of each of the Relevant Periods, based on the invoice date and net of loss allowance, is as follows:

Within 3 months 3 to 6 months 6 to 12 months 1 to 2 years Over 2 years	As at 31 December 2018 RMB’000 32,246 17,038 17,464 9,252 135 76,135	As at 31 December 2019 RMB’000 36,956 9,214 10,793 5,871 603 63,437	As at 31 December 2020 RMB’000 23,239 3,852 13,511 4,340 1,481
			46,423

The movements in the loss allowance for impairment of trade receivables are as follows:

At beginning of year Impairment losses, net (note 6) At end of year	As at 31 December 2018 RMB’000 8,951 4,696 13,647	As at 31 December 2019 RMB’000 13,647 3,853 17,500	As at 31 December 2020 RMB’000 17,500 (855)
			16,645

– IIC-39 –

APPENDIX IIC

ACCOUNTANTS’ REPORT OF LUQIAO WATER SUPPLY

31 December 2018 Less than 1 year Between 1 and 2 years Over 2 years 31 December 2019 Less than 1 year Between 1 and 2 years Over 2 years 31 December 2020 Less than 1 year Between 1 and 2 years Over 2 years	Amount RMB’000 71,473 15,656 2,653 89,782 Amount RMB’000 61,065 12,490 7,382 80,937 Amount RMB’000 42,533 6,468 14,067 63,068	Expected credit loss rate 6.61% 40.90% 94.91% 15.20% Expected credit loss rate 6.72% 52.99% 91.83% 21.62% Expected credit loss rate 4.54% 32.90% 89.47% 26.39%	Expected credit losses RMB’000 4,725 6,404 2,518
			13,647

			Expected credit losses RMB’000 4,102 6,619 6,779
			17,500

			Expected credit losses RMB’000 1,931 2,128 12,586
			16,645

– IIC-40 –

APPENDIX IIC

ACCOUNTANTS’ REPORT OF LUQIAO WATER SUPPLY

17. PREPAYMENTS, OTHER RECEIVABLES AND OTHER ASSETS

Prepayments Other receivables Due from the immediate holding company (note 30(b)) Impairment allowance	As at 31 December 2018 RMB’000 153 6,674 68,814 75,641 (5,325) 70,316	As at 31 December 2019 RMB’000 91 6,729 70,140 76,960 (5,528) 71,432	As at 31 December 2020 RMB’000 629 6,370 70,085
			77,084 (5,676)
			71,408

The movements in the loss allowance for impairment of other receivables are as follows:

At beginning of year Impairment losses, net (note 6) At end of year 18. CONTRACT ASSETS Contract assets arising from: Installation services Impairment	As at 31 December 2018 RMB’000 5,123 202 5,325 As at 31 December 2018 RMB’000 4,978 (1,739) 3,239	As at 31 December 2019 RMB’000 5,325 203 5,528 As at 31 December 2019 RMB’000 7,978 (3,284) 4,694	As at 31 December 2020 RMB’000 5,528 148
			5,676

			As at 31 December 2020 RMB’000 9,476 (5,359)
			4,117

The Target Group’s trading terms and credit policy with customers are disclosed in note 16 to the Historical Financial Information.

– IIC-41 –

APPENDIX IIC

ACCOUNTANTS’ REPORT OF LUQIAO WATER SUPPLY

The expected timing of recovery or settlement for contract assets is as follows:

Within one year After one year Total contract assets	As at 31 December 2018 RMB’000 1,592 1,647 3,239	As at 31 December 2019 RMB’000 3,243 1,451 4,694	As at 31 December 2020 RMB’000 1,497 2,620
			4,117

The movements in the loss allowance for impairment of contract assets are as follows:

At beginning of year Impairment losses, net (note 6) At end of year	As at 31 December 2018 RMB’000 1,783 (44) 1,739	As at 31 December 2019 RMB’000 1,739 1,545 3,284	As at 31 December 2020 RMB’000 3,284 2,075
			5,359

Set out below is the information about the credit risk exposure on the Target Group’s contract assets using a provision matrix:

	31 December	31 December	31 December
	2018	2019	2020
Expected credit loss rate	34.93%	41.16%	56.55%
Gross carrying amount (RMB’000)	4,978	7,978	9,476
Expected credit losses (RMB’000)	1,739	3,284	5,359

– IIC-42 –

APPENDIX IIC

ACCOUNTANTS’ REPORT OF LUQIAO WATER SUPPLY

19. CASH AND CASH EQUIVALENTS

					As at	As at	As at
				31	December	31 December	31 December
					2018	2019	2020
					RMB’000	RMB’000	RMB’000
Cash	and	bank	balances		139,217	111,267	193,732

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

20. TRADE PAYABLES

Trade payables Due to related parties (note 30(b))	As at 31 December 2018 RMB’000 9,189 20,866 30,055	As at 31 December 2019 RMB’000 7,896 19,418 27,314	As at 31 December 2020 RMB’000 10,873 20,553
			31,426

An ageing analysis of the trade payables as at the end of each of the Relevant Periods, based on the invoice date, is as follows:

Within 3 months 3 to 6 months 6 to 12 months Over 12 months	As at 31 December 2018 RMB’000 17,132 5,762 7,053 108 30,055	As at 31 December 2019 RMB’000 12,907 7,193 1,268 5,946 27,314	As at 31 December 2020 RMB’000 21,033 10,069 15 309
			31,426

Trade payables are non-interest-bearing and are normally settled on terms of one to two months.

– IIC-43 –

APPENDIX IIC

ACCOUNTANTS’ REPORT OF LUQIAO WATER SUPPLY

21. OTHER PAYABLES AND ACCRUALS

Notes Other payables (a) Accrued salaries Interest payable Contract liabilities (b) Advance from customers Other taxes payables	As at 31 December 2018 RMB’000 74,260 6,406 118 33,483 15 2,382 116,664	As at 31 December 2019 RMB’000 23,502 5,563 150 27,445 – 2,585 59,245	As at 31 December 2020 RMB’000 34,517 4,876 105 63,783 273 6,924
			110,478

Notes:

(a) Other payables are non-interest-bearing and repayable on demand.

(b) Details of contract liabilities as at 31 December 2018, 2019 and 2020 are as follows:

Short-term advances received from customers Sale of water Installation services Total contract liabilities	As at 31 December 2018 RMB’000 14 33,469 33,483	As at 31 December 2019 RMB’000 49 27,396 27,445	As at 31 December 2020 RMB’000 232 63,551
			63,783

– IIC-44 –

APPENDIX IIC

ACCOUNTANTS’ REPORT OF LUQIAO WATER SUPPLY

22. INTEREST-BEARING BANK BORROWINGS

Effective interest rate Maturity (%) Current Current portion of long term bank loans – secured 5.50 2019 Bank loans – secured 7.00 2020 Bank loans – secured 4.90 2021 Analysed into: Bank loans repayable: Within one year	As at 31 December 2018 RMB’000 70,000 – – 70,000 70,000	As at 31 December 2019 RMB’000 – 70,000 – 70,000 70,000	As at 31 December 2020 RMB’000 – – 70,000
			70,000

			70,000

Luqiao Urban Construction, the immediate holding company, has guaranteed certain of the Target Group’s bank loans of RMB70,000,000, RMB70,000,000 and RMB70,000,000 as at 31 December 2018, 2019 and 2020, respectively.

23. DEFERRED GOVERNMENT GRANTS

At 1 January Grants received during the year Amount released At 31 December Current portion Non-current portion	As at 31 December 2018 RMB’000 177,105 60 (10,582) 166,583 (10,572) 156,011	As at 31 December 2019 RMB’000 166,583 299 (10,585) 156,297 (10,614) 145,683	As at 31 December 2020 RMB’000 156,297 – (10,659)
			145,638 (10,614)
			135,024

– IIC-45 –

APPENDIX IIC

ACCOUNTANTS’ REPORT OF LUQIAO WATER SUPPLY

24. DEFERRED TAX

The movements in deferred tax assets during the Relevant Periods are as follows:

Deferred tax assets

Deferred tax assets as at 1 January 2018 Deferred tax credited/(charged) to profit or loss during the year (note 10) Deferred tax assets as at 31 December 2018 and 1 January 2019 Deferred tax credited/(charged) to profit or loss during the year (note 10) Deferred tax as at 31 December 2019 and 1 January 2020 Deferred tax credited/(charged) to profit or loss during the year (note 10) Deferred tax assets as at 31 December 2020	Impairment of financial and contract assets RMB’000 3,965 1,213 5,178 1,400 6,578 342 6,920	Accrued salaries RMB’000 830 (54) 776 (223) 553 (219) 334	Loss available for offsetting against future taxable profits RMB’000 – – – – – 1,858 1,858	Inventory provision RMB’000 40 (3) 37 – 37 (9) 28	Deferred revenue RMB’000 – – – 64 64 (11) 53	Defined benefit plan RMB’000 410 40 450 47 497 50 547	Depreciation and amortisation RMB’000 286 116 402 97 499 156 655	Total RMB’000 5,531 1,312
								6,843 1,385
								8,228 2,167
								10,395

– IIC-46 –

APPENDIX IIC

ACCOUNTANTS’ REPORT OF LUQIAO WATER SUPPLY

Deferred tax assets have not been recognised in respect of the following items:

Tax losses Deductible temporary differences	As at 31 December 2018 RMB’000 264 2,080 2,344	As at 31 December 2019 RMB’000 1,196 3,952 5,148	As at 31 December 2020 RMB’000 1,360 5,280
			6,640

The above tax losses will expire in two to five years for offsetting against taxable profits of the companies in which the losses arose. Deferred tax assets have not been recognised in respect of the above items as they have arisen in subsidiaries that have been loss-making for some time and it is not considered probable that taxable profits will be available against which the above items can be utilised.

25. NET EMPLOYEE DEFINED BENEFIT LIABILITIES

The Target Group has a defined benefit pension plan in Mainland China. The Target Group provides certain pension plan benefits to employees (unfunded).

				As at	As at	As at
			31	December	31 December	31 December
				2018	2019	2020
				RMB’000	RMB’000	RMB’000
Defined	benefit	plan		37,429	39,736	39,720

The carrying amount of defined benefit obligations and the movements during the Relevant Periods are as follows:

Defined benefit obligation Net employee defined benefit liabilities	1 January 2018 RMB’000 30,107 30,107	Pension cost charged to profit or loss Service cost Net interest expense Sub-total included in profit or loss RMB’000 RMB’000 RMB’000 1,001 1,332 2,333 1,001 1,332 2,333	Pension cost charged to profit or loss Service cost Net interest expense Sub-total included in profit or loss RMB’000 RMB’000 RMB’000 1,001 1,332 2,333 1,001 1,332 2,333	Benefit paid RMB’000 (694) (694)	Remeasurement gains/(losses) in other comprehensive income	Remeasurement gains/(losses) in other comprehensive income
		Service cost RMB’000 1,001 1,001	Net interest expense RMB’000 1,332 1,332		Actuarial changes arising from changes in financial assumptions Sub-total included in other comprehensive income RMB’000 RMB’000 5,683 5,683 5,683 5,683	As at 31 December 2018 RMB’000 37,429
						37,429

– IIC-47 –

APPENDIX IIC

ACCOUNTANTS’ REPORT OF LUQIAO WATER SUPPLY

Pension cost charged to profit or loss

Remeasurement gains/(losses) in other comprehensive income

		Pension cost charged to profit or loss	Pension cost charged to profit or loss		Remeasurement gains/(losses) in other comprehensive income	osses) in ncome
Defined benefit obligation Net employee defined benefit liabilities Defined benefit obligation Net employee defined benefit liabilities	1 January 2019 RMB’000 37,429 37,429 1 January 2020 RMB’000 39,736 39,736	Service cost Net interest expense Sub-total included in profit or loss RMB’000 RMB’000 RMB’000 1,232 1,384 2,616 1,232 1,384 2,616 Pension cost charged to profit or loss Service cost Net interest expense Sub-total included in profit or loss RMB’000 RMB’000 RMB’000 1,288 1,453 2,741 1,288 1,453 2,741		Benefit paid RMB’000 (626) (626) Benefit paid RMB’000 (752) (752)	Actuarial changes arising from changes in financial assumptions Sub-total included in other comprehensive income As at 31 December 2019 RMB’000 RMB’000 RMB’000 317 317 39,736 317 317 39,736 Remeasurement gains/(losses) in other comprehensive income	As at 31 December 2019 RMB’000 39,736
						39,736

		Service cost RMB’000 1,288 1,288	Net interest expense RMB’000 1,453 1,453		Actuarial changes arising from changes in financial assumptions Sub-total included in other comprehensive income RMB’000 RMB’000 (2,005) (2,005) (2,005) (2,005)	As at 31 December 2020 RMB’000 39,720
						39,720

The principal assumptions used in determining pension and post-employment medical benefit obligations for the Target Group’s plans are shown below:

	31 December	31 December	31 December
	2018	2019	2020
Discount rate	3.67%	3.63%	3.86%
Future medical benefit increase rate	6.00%	6.00%	6.00%

As at 31 December 2018, 2019 and 2020

Life expectation for pensioners

China Life Insurance Mortality Table (2010-2013)

– IIC-48 –

APPENDIX IIC

ACCOUNTANTS’ REPORT OF LUQIAO WATER SUPPLY

A quantitative sensitivity analysis for significant assumptions as at 31 December is shown below:

	Impact on	defined benefit	obligation
	31 December	31 December	31 December
	2018	2019		2020
Discount rate
0.5% decrease	3,953	4,196		4,195
0.5% increase	(3,424)	(3,635)		(3,634)
Future medical benefit increase rate
1% decrease	(3,539)	(3,758)		(3,756)
1% increase	4,768	5,062		5,060
Life expectation China Life Insurance
Mortality Table
1 year back	1,229	1,305		1,305
1 year forward	(1,222)	(1,297)		(1,297)
3 year forward	(3,639)	(3,863)		(3,861)

The following payments are expected contributions to the defined benefit plan in future years:

Less than 1 year Between 1 and 5 years Over 5 years 26. PAID-UP CAPITAL Registered and paid-up capital	As at 31 December 2018 625 5,026 146,907 152,558 As at 31 December 2018 RMB’000 64,460	As at 31 December 2019 751 5,631 145,552 151,934 As at 31 December 2019 RMB’000 64,460	As at 31 December 2020 920 6,176 144,087
			151,183

			As at 31 December 2020 RMB’000 64,460

27. RESERVES

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

Capital reserve

Capital reserve as at 1 January 2018 mainly represented the following:

(1) Before the conversion of Luqiao Waterworks (the predecessor company of the Target Company) into a joint stock limited liability company, Taizhou Construction Planning Bureau (Luqiao Branch) injected cash contribution of RMB7,782,000 into the Target Company which exceeded the the paid-up capital of the Target Company. The amount was recorded as capital reserve.
(2) In August 2014, the shareholder of the Target Company was Luqiao District Urban Construction. The appraised value of the net assets of the Target Company on 8 August 2018 increased by RMB3,026,000 which was recorded as capital reserve.

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APPENDIX IIC

ACCOUNTANTS’ REPORT OF LUQIAO WATER SUPPLY

Statutory surplus reserve

28. NOTES TO THE CONSOLIDATED STATEMENTS OF CASH FLOWS

(a) Changes in liabilities arising from financing activities

At 1 January 2018 Changes from financing cash flows Interest expense At 31 December 2018 and 1 January 2019 Changes from financing cash flows Interest expense New lease At 31 December 2019 and 1 January 2020 Changes from financing cash flows Interest expense At 31 December 2020	Interest- bearing bank borrowings RMB’000 70,000 – – 70,000 – – – 70,000 – – 70,000	Lease liabilities RMB’000 – – – – (77) 13 356 292 (78) 10 224	Interest payable RMB’000 118 (3,904) 3,904
			118 (4,547) 4,579 –
			150 (4,870) 4,825
			105

(b) Total cash outflow for leases

The total cash outflow for leases included in the statement of cash flows is as follows:

			2018	2019	2020
			RMB’000	RMB’000	RMB’000
Within	financing	activities	–	77	78

29. COMMITMENTS

The Group had the following capital commitments at the end of each of the Relevant Periods:

	As at	As at	As at
	31 December	31 December	31 December
	2018	2019	2020
	RMB’000	RMB’000	RMB’000
Contracted, but not provided for:
Plant and machinery	5,368	3,295	3,043

– IIC-50 –

APPENDIX IIC

ACCOUNTANTS’ REPORT OF LUQIAO WATER SUPPLY

30. RELATED PARTY TRANSACTIONS

The Target Group’s related parties are as follows:

Name	Relationship with the Target Company
Luqiao Urban Construction	The immediate holding company
Taizhou Water Group Co., Ltd	An entity over which the immediate holding entity
(“Taizhou Water Group”)	exercises significant influence
Taizhou City Water Co., Ltd.	An entity over which the immediate holding entity
(“Taizhou City Water”)	exercises significant influence

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

Notes Purchases of water from: Taizhou Water Group (i) Taizhou City Water (i) Interest income from: Luqiao Urban Construction (ii)	Year ended 31 December 2018 RMB’000 33,853 68,403 102,256 3,904	Year ended 31 December 2019 RMB’000 32,811 66,249 99,060 4,579	Year ended 31 December 2020 RMB’000 33,196 68,237
			101,433

			4,825

Notes:

(i) Purchases of water from the related parties were made according to the published prices and conditions offered by the related parties to their major customers.
(ii) The Target Group made a loan to Luqiao Urban Construction amounting to RMB70,000,000 as working capital during the Relevant Periods. The loan is unsecured, bears interest at 5.50%, 6.54% and 6.89% per annum in 2018, 2019 and 2020, respectively, and has no fixed terms of repayment.
(iii) Luqiao Urban Construction, the immediate holding company, has guaranteed certain of the Target Group’s bank loans of RMB70,000,000, RMB70,000,000 and RMB70,000,000 as at 31 December 2018, 2019 and 2020, respectively.

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APPENDIX IIC

ACCOUNTANTS’ REPORT OF LUQIAO WATER SUPPLY

(b) Outstanding balances with related parties:

Due from a related party: Non-trade in nature Luqiao Urban Construction Balance included in prepayments, deposits and other receivables Due to related parties: Trade in nature Taizhou Water Group Taizhou City Water Balance included in trade payables	As at 31 December 2018 RMB’000 68,814 68,814 2,853 18,013 20,866	As at 31 December 2019 RMB’000 70,140 70,140 2,877 16,541 19,418	As at 31 December 2020 RMB’000 70,085
			70,085

			3,159 17,394
			20,553

The balances with related parties are unsecured, interest-free and repayable on demand.

Salaries, allowances and benefits in kind Pension scheme contributions Defined benefit plan Total compensation paid to key management personnel	Year ended 31 December 2018 RMB’000 1,583 119 33 1,735	Year ended 31 December 2019 RMB’000 1,253 107 36 1,396	Year ended 31 December 2020 RMB’000 1,618 23 46
			1,687

Further details of directors’, chief executive’s and supervisors’ emoluments are included in note 8 to the Historical Financial Information.

– IIC-52 –

APPENDIX IIC

ACCOUNTANTS’ REPORT OF LUQIAO WATER SUPPLY

31. FINANCIAL INSTRUMENTS BY CATEGORY

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

Financial assets at amortised cost

Trade receivables Contract assets Financial assets included in prepayments, other receivables and other assets Cash and cash equivalents Financial liabilities at amortised cost Trade payables Financial liabilities included in other payables and accruals Interest-bearing bank borrowings Lease liabilities	As at 31 December 2018 RMB’000 76,135 3,239 70,163 139,217 288,754 As at 31 December 2018 RMB’000 30,055 74,378 70,000 – 174,433	As at 31 December 2019 RMB’000 63,437 4,694 71,341 111,267 250,739 As at 31 December 2019 RMB’000 27,314 23,652 70,000 292 121,258	As at 31 December 2020 RMB’000 46,423 4,117 70,779 193,732
			315,051

			As at 31 December 2020 RMB’000 31,426 34,622 70,000 224
			136,272

32. FAIR VALUE AND FAIR VALUE OF HIERARCHY OF FINANCIAL INSTRUMENTS

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

The Target Group did not have any financial assets and liabilities measured at fair value as at 31 December 2018, 2019 and 2020.

– IIC-53 –

APPENDIX IIC

ACCOUNTANTS’ REPORT OF LUQIAO WATER SUPPLY

33. FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES

Credit risk

Maximum exposure and year-end staging

The amounts presented are gross carrying amounts for financial assets.

31 December 2018

Trade receivables Contract assets Financial assets included in prepayments, other receivables and other assets – Normal – Doubtful Cash and cash equivalents – Not yet past due	12-month ECLs Stage 1 RMB’000 – 4,978 70,168 – 139,217 214,363	Lifetime ECLs Stage 2 Stage 3 Simplified approach RMB’000 RMB’000 RMB’000 – – 89,782 – – – – – – – 5,320 – – – – – 5,320 89,782	Total RMB’000 89,782 4,978 70,168 5,320 139,217
		Stage 2 RMB’000 – – – – – –
			309,465

– IIC-54 –

APPENDIX IIC

ACCOUNTANTS’ REPORT OF LUQIAO WATER SUPPLY

31 December 2019

Trade receivables Contract assets Financial assets included in prepayments, other receivables and other assets – Normal – Doubtful Cash and cash equivalents – Not yet past due	12-month ECLs Stage 1 RMB’000 – 7,978 71,346 – 111,267 190,591	Lifetime ECLs Stage 2 Stage 3 Simplified approach RMB’000 RMB’000 RMB’000 – – 80,937 – – – – – – – 5,523 – – – – – 5,523 80,937	Total RMB’000 80,937 7,978 71,346 5,523 111,267
		Stage 2 RMB’000 – – – – – –
			277,051

31 December 2020

Trade receivables Contract assets Financial assets included in prepayments, other receivables and other assets – Normal – Doubtful Cash and cash equivalents – Not yet past due	12-month ECLs Stage 1 RMB’000 – 9,476 70,782 – 193,732 273,990	Lifetime ECLs Stage 2 Stage 3 Simplified approach RMB’000 RMB’000 RMB’000 – – 63,068 – – – – – – – 5,673 – – – – – 5,673 63,068	Total RMB’000 63,068 9,476 70,782 5,673 193,732
		Stage 2 RMB’000 – – – – – –
			342,731

For trade receivables to which the Target Group applies the simplified approach for impairment, information based on the provision matrix is disclosed in note 16 to the Historical Financial Information.
** The credit quality of the financial assets included in prepayments, other receivables and other assets is considered to be “normal” when they are not past due and there is no information indicating that the financial assets had a significant increase in credit risk since initial recognition. Otherwise, the credit quality of the financial assets is considered to be “doubtful”.

Further quantitative data in respect of the Target Group’s exposure to credit risk arising from trade receivables are disclosed in note 16 to the Historical Financial Information.

Liquidity risk

– IIC-55 –

APPENDIX IIC

ACCOUNTANTS’ REPORT OF LUQIAO WATER SUPPLY

The Target Group’s objective is to maintain a balance between continuity of funding and flexibility through the use of interest-bearing bank borrowings.

The maturity profile of the Target Group’s financial liabilities as at the end of each of the Relevant Periods, based on the contractual undiscounted payments, is as follows:

		31 December 2018	31 December 2018
On demand RMB’000 – 12,924 74,378 87,302	Less than 3 months RMB’000 963 17,131 – 18,094	3 to 12 months 1 to 5 years RMB’000 RMB’000 70,208 – – – – – 70,208 – 31 December 2019		Over 5 years RMB’000 – – – –	Total RMB’000 71,171 30,055 74,378
					175,604


On demand RMB’000 – 14,407 23,652 – 38,059	Less than 3 months RMB’000 1,225 12,907 – 68 14,200	3 to 12 months 1 to 5 years RMB’000 RMB’000 73,205 – – – – – – 224 73,205 224 31 December 2020		Over 5 years RMB’000 – – – – –	Total RMB’000 74,430 27,314 23,652 292
					125,688


On demand RMB’000 – 10,393 34,622 – 45,015	Less than 3 months RMB’000 858 21,033 – 68 21,959	3 to 12 months RMB’000 72,573 – – – 72,573	1 to 5 years RMB’000 – – – 156 156	Over 5 years RMB’000 – – – – –	Total RMB’000 73,431 31,426 34,622 224
					139,703

– IIC-56 –

APPENDIX IIC

ACCOUNTANTS’ REPORT OF LUQIAO WATER SUPPLY

Capital management

The Target Group monitors capital using a gearing ratio, which is net debt divided by total capital plus net debt. Net debt includes interest-bearing bank borrowings, trade payables, other payables and accruals, lease liabilities, less cash and cash equivalents. Total capital represents equity attributable to owner of the parent. The gearing ratios as at the end of each of the Relevant Periods were as follows:

Interest-bearing bank borrowings Trade payables Other payables and accruals Lease liabilities Less: Cash and cash equivalents Net debt Equity attributable to owners of the parent Total capital and net debt Gearing ratio	As at 31 December 2018 RMB’000 70,000 30,055 116,664 – (139,217) 77,502 107,528 185,030 42%	As at 31 December 2019 RMB’000 70,000 27,314 59,245 292 (111,267) 45,584 117,769 163,353 28%	As at 31 December 2020 RMB’000 70,000 31,426 110,478 224 (193,732)
			18,396
			121,508
			139,904

			13%

– IIC-57 –

APPENDIX IIC

ACCOUNTANTS’ REPORT OF LUQIAO WATER SUPPLY

34. STATEMENTS OF FINANCIAL POSITION OF THE TARGET COMPANY

NON-CURRENT ASSETS Property, plant and equipment Investment properties Prepayments for property, plant and equipment Investments in subsidiaries Deferred tax assets Right-of-use assets Total non-current assets CURRENT ASSETS Trade receivables Prepayments, other receivables and other assets Cash and cash equivalents Total current assets CURRENT LIABILITIES Trade payables Other payables and accruals Interest-bearing bank borrowings Deferred government grants Lease liabilities Tax payable Total current liabilities NET CURRENT ASSETS TOTAL ASSETS LESS CURRENT LIABILITIES	As at 31 December 2018 RMB’000 213,701 1,918 956 6,000 2,876 19,510 244,961 70,640 77,099 70,266 218,005 22,396 80,275 70,000 10,572 – 2,982 186,225 31,780 276,741	As at 31 December 2019 RMB’000 199,399 1,831 606 6,000 2,691 19,290 229,817 57,268 71,408 53,678 182,354 21,054 28,550 70,000 10,614 68 5,946 136,232 46,122 275,939	As at 31 December 2020 RMB’000 182,779 1,745 606 6,000 4,795 18,714
			214,639
			42,829 83,927 84,853
			211,609
			22,019 41,489 70,000 10,614 68 4,992
			149,182
			62,427
			277,066

– IIC-58 –

APPENDIX IIC

ACCOUNTANTS’ REPORT OF LUQIAO WATER SUPPLY

TOTAL ASSETS LESS CURRENT LIABILITIES NON-CURRENT LIABILITIES Deferred government grants Lease liabilities Net employee defined benefit liabilities Total non-current liabilities Net assets EQUITY Paid-up capital Reserves (note) Total equity	As at 31 December 2018 RMB’000 276,741 155,955 – 25,620 181,575 95,166 64,460 30,706 95,166	As at 31 December 2019 RMB’000 275,939 145,638 224 26,647 172,509 103,430 64,460 38,970 103,430	As at 31 December 2020 RMB’000 277,066
			135,024 156 35,272
			170,452
			106,614

			64,460 42,154
			106,614

– IIC-59 –

APPENDIX IIC

ACCOUNTANTS’ REPORT OF LUQIAO WATER SUPPLY

Note:

At 1 January 2018 Profit for the year Remeasurement on defined benefit plan Transfer to statutory surplus reserve At 31 December 2018 and 1 January 2019 Profit for the year Remeasurement on defined benefit plan Transfer to statutory surplus reserve At 31 December 2019 and 1 January 2020 Profit for the year Remeasurement on defined benefit plan Transfer to statutory surplus reserve At 31 December 2020	Capital reserve RMB’000 10,808 – – – 10,808 – – – 10,808 – – – 10,808	Statutory surplus reserve RMB’000 3,163 – – 799 3,962 – – 848 4,810 – – 140 4,950	Retained profits RMB’000 12,638 7,987 (3,890) (799) 15,936 8,477 (213) (848) 23,352 1,403 1,781 (140) 26,396	Total RMB’000 26,609 7,987 (3,890) –
				30,706 8,477 (213) –
				38,970 1,403 1,781 –
				42,154

35. SUBSEQUENT FINANCIAL STATEMENTS

– IIC-60 –

APPENDIX IIIA MANAGEMENT DISCUSSION AND ANALYSIS OF TAIZHOU WATER SUPPLY

Set out below is the management discussion and analysis on Taizhou Water Supply for the three years ended 31 December 2020 (the “ Track Record Period ”). The following financial information is based on the audited financial information of Taizhou Water Supply as set out in Appendix IIA to this circular.

BUSINESS REVIEW

Taizhou Water Supply principally engages in the business of centralised supply of drinking water and non-residential drinking water in the southern area of Jiaojiang River in the Jiaojiang District, Taizhou City, PRC.

FINANCIAL REVIEW

Revenue

During the Track Record Period, Taizhou Water Supply derived its revenue mainly from sales of tap water to users as well as provision of installation services for water supply pipelines. For the years ended 31 December 2018, 2019 and 2020, revenue amounted to approximately RMB253.0 million, RMB299.9 million and RMB276.6 million, respectively. Revenue increased from approximately RMB253.0 million in 2018 to approximately RMB299.9 million in 2019, primarily due to the increase in revenue from installation services for municipal water supply pipeline projects. Revenue decreased to approximately RMB276.6 million in 2020, primarily due to (i) the decrease in revenue from sales of tap water, mainly attributable to the decrease in the average unit selling price of tap water resulting from the reduction by 10% for the price of tap water sold to enterprise end-users, due to the impact of the COVID-19 pandemic; and (ii) the decrease in revenue from installation services.

Cost of sales

For the years ended 31 December 2018, 2019 and 2020, cost of sales amounted to approximately RMB218.4 million, RMB251.0 million and RMB226.9 million, respectively. The increase in cost of sales in 2019 was mainly due to the increase in the revenue from installation services for municipal water supply pipeline projects. Cost of sales decreased to approximately RMB226.9 million in 2020, primarily due to (i) the decrease in raw water procurement fee, mainly attributable to the decrease in the average unit procurement price of raw water, resulting from the reduction by 10% for the unit price of raw water based on the actual water volume sold to enterprise end-users; and (ii) the decrease in cost of sales from installation service.

Gross profit

For the years ended 31 December 2018, 2019 and 2020, gross profit amounted to approximately RMB34.6 million, RMB48.9 million and RMB49.7 million, respectively, and the overall gross profit margin amounted to approximately 13.7%, 16.3% and 18.0%, respectively.

– IIIA-1 –

APPENDIX IIIA

MANAGEMENT DISCUSSION AND ANALYSIS OF TAIZHOU WATER SUPPLY

Administrative expenses

For the years ended 31 December 2018, 2019 and 2020, Taizhou Water Supply incurred administrative expenses of approximately RMB32.6 million, RMB41.3 million and RMB37.7 million, respectively. Administrative expenses increased from approximately RMB32.6 million in 2018 to approximately RMB41.3 million in 2019, mainly due to the increase in impairment of contract assets arising from installation services primarily attributable to the increase in the original cost of contract assets. Administrative expenses decreased to approximately RMB37.7 million in 2020, mainly due to the decrease in impairment of contract assets arising from installation services.

Other income and gains

For the years ended 31 December 2018, 2019 and 2020, other income and gains, net amounted to approximately RMB8.2 million, RMB3.6 million and RMB7.0 million, respectively. Other income and gains primarily consisted of interest income from loans to related parties, government grants, value added tax refund and income from sales of scrap. Other income and gains decreased from approximately RMB8.2 million in 2018 to approximately RMB3.6 million in 2019, mainly due to the (i) the decrease in interest income from loans to related parties, primarily due to the repayment of a loan to a related party (Jiaojiang Urban Development) of RMB60.0 million in October 2018; and (ii) the decrease in government grants. Other income and gains increased to approximately RMB7.0 million in 2020, mainly due to (i) the increase in interest income from a loan to a related party (Jiaojiang Urban Development) of RMB80.0 million in April 2020, which was repaid in December 2020; and (ii) the increase in income from sales of scrap.

Finance costs

For the years ended 31 December 2018, 2019 and 2020, finance costs amounted to approximately RMB8.7 million, RMB9.3 million and RMB11.4 million, respectively, which arose primarily from interest on bank and other borrowings, interest expense arising from defined benefit plan and interest on related parties. The increase in finance costs in 2020 was mainly due to the increase in interest on bank borrowings, primarily resulting from the increase in the average bank borrowings balance.

Income tax expense

Income tax expense comprised PRC corporate income tax, net of deferred tax. For the years ended 31 December 2018, 2019 and 2020, income tax expense amounted to approximately RMB2.2 million, RMB2.3 million and RMB3.7 million, respectively. The effective tax rate, being the income tax expense divided by the profit before taxation, was approximately 164.8%, 151.4% and 50.3% for the years ended 31 December 2018, 2019 and 2020, respectively. The relatively higher effective tax rates were mainly due to the tax losses not recognised and temporary differences not recognised.

– IIIA-2 –

APPENDIX IIIA MANAGEMENT DISCUSSION AND ANALYSIS OF TAIZHOU WATER SUPPLY

Profit for the year

As a result, Taizhou Water Supply recorded loss for the years ended 31 December 2018 and 2019 amounted to approximately RMB0.9 million and RMB0.8 million, respectively, and profit amounted to RMB3.7 million for the year ended 31 December 2020.

Property, plant and equipment

As at 31 December 2018, 2019 and 2020, property, plant and equipment amounted to approximately RMB181.4 million, RMB178.5 million and RMB171.7 million, respectively.

Right of use assets

As at 31 December 2018, 2019 and 2020, right of use assets amounted to approximately RMB10.5 million, RMB13.3 million and RMB12.9 million, respectively. The increase in right of use assets was mainly due to the addition of leasehold land.

Inventories

Inventories mainly comprise raw materials mainly including pipes and engineering consumables. As at 31 December 2018, 2019 and 2020, inventories amounted to approximately RMB8.2 million, RMB8.1 million and RMB7.5 million, respectively.

Trade receivables

Trade receivables represented receivables from users for tap water as well as installation services for water supply pipelines. As at 31 December 2018, 2019 and 2020, trade receivables amounted to approximately RMB56.9 million, RMB55.2 million and RMB55.2 million, respectively.

Contract assets

Contract assets relates to installation services which are not due from customers until installation services are completed. Upon completion of installation and acceptance by the customer, the amounts recognised as contract assets are reclassified to trade receivables. As at 31 December 2018, 2019 and 2020, contract assets amounted to approximately RMB32.1 million, RMB44.4 million and RMB52.1 million, respectively. The increase in contract assets in 2019 and 2020 was mainly due to the increase in the ongoing provision of installation services.

Prepayments, other receivables and other assets

Prepayments, other receivables and other assets primarily consisted of the amounts due from related parties, other receivables, prepayments. The amounts due from related parties are unsecured, interest-free and repayable on demand, except for the loan balances due from Taizhou Bada which bear interest at 5% per annum and were repayable on demand. As at 31 December 2018, 2019 and 2020, prepayments, other receivables and

– IIIA-3 –

APPENDIX IIIA MANAGEMENT DISCUSSION AND ANALYSIS OF TAIZHOU WATER SUPPLY

other assets amounted to approximately RMB49.5 million, RMB55.5 million and RMB53.1 million, respectively. The increase in prepayments, other receivables and other assets in 2019 was mainly due to the increase in amounts due from the related parties, Taizhou Bada and Jiaobei Water Supply.

Trade payables

Trade payables mainly comprised outstanding payments for raw water procurement and engineering construction costs. As at 31 December 2018, 2019 and 2020, trade payables amounted to approximately RMB54.2 million, RMB63.5 million and RMB60.6 million, respectively. The increase in trade payables in 2019 was mainly due to outstanding payments for raw water procurement and engineering construction costs.

Other payables and accruals

Other payables and accruals mainly comprised other payables, contract liabilities, accrued salaries and the amounts due to related parties. Other payables mainly include payables for constructions, project deposits and wastewater treatment fees. Contract liabilities include short-term advances received to deliver water and installation services. As at 31 December 2018, 2019 and 2020, other payables and accruals amounted to approximately RMB97.0 million, RMB97.9 million and RMB110.7 million, respectively. The increase in other payables and accruals in 2020 was mainly due to the increase in contract liabilities resulting from the increase in short-term advances received from customers in relation to installation services.

Deferred government grants

The government grants are related to the subsidies for the compensation of construction, relocation and reconstruction of the original water supply pipelines of certain projects. As at 31 December 2018, 2019 and 2020, deferred government grants amounted to approximately RMB21.3 million, RMB23.0 million and RMB21.4 million, respectively.

Net employee defined benefit liabilities

Taizhou Water Supply has a defined benefit pension plan for retirement in the PRC, and provides certain pension plan to employees (unfunded). As at 31 December 2018, 2019 and 2020, the net employee defined benefit liabilities amounted to approximately RMB47.8 million, RMB49.9 million and RMB49.4 million, respectively.

Gearing ratio

The gearing ratio is the net debt divided by total equity, which net debt is the total bank borrowings less cash and cash equivalents. As at 31 December 2018, 2019 and 2020, the gearing ratio was approximately 162.8%, 183.0% and 122.0%, respectively.

– IIIA-4 –

APPENDIX IIIA MANAGEMENT DISCUSSION AND ANALYSIS OF TAIZHOU WATER SUPPLY

The gearing ratio increased from approximately 162.8% as at 31 December 2018 to approximately 183.0% as at 31 December 2019, primarily due to (i) the increase in bank borrowings; and (ii) the decrease in total equity resulting from the comprehensive loss for the year of 2019. The gearing ratio decreased to 122.0% as at 31 December 2020, primarily due to (i) the increase in cash and cash equivalents; and (ii) the increase in total equity resulting from the comprehensive income for the year of 2020.

Liquidity, financial resources and capital structure

During the Track Record Period, Taizhou Water Supply’s principal use of cash was working capital, which was primarily funded from cash flows generated from operations and bank borrowings. It is expected that cash flow generated from operations and bank borrowings will continue to be the principal source of liquidity.

As at 31 December 2018, 2019 and 2020, Taizhou Water Supply’s cash and cash equivalents were mainly denominated in RMB and its borrowings were denominated in RMB.

Interest-bearing bank borrowings comprised bank loans and other borrowings.

Current Current portion of long term bank loans – secured Bank loans – secured Current portion of other borrowings – secured Non-current Bank loans – secured Other borrowings – secured Total	As at 31 December 2018 2019 2020 RMB’000 RMB’000 RMB’000 5,000 – – 50,000 60,000 80,000 55,000 60,000 80,000 – 60,000 – 55,000 120,000 80,000 – 10,000 50,000 60,000 – – 60,000 10,000 50,000 115,000 130,000 130,000	As at 31 December 2018 2019 2020 RMB’000 RMB’000 RMB’000 5,000 – – 50,000 60,000 80,000 55,000 60,000 80,000 – 60,000 – 55,000 120,000 80,000 – 10,000 50,000 60,000 – – 60,000 10,000 50,000 115,000 130,000 130,000
		80,000 –
		80,000

		50,000 –
		50,000

		130,000

– IIIA-5 –

APPENDIX IIIA MANAGEMENT DISCUSSION AND ANALYSIS OF TAIZHOU WATER SUPPLY

As at 31 December 2018, 2019 and 2020, the bank borrowings amounted to approximately RMB115.0 million, RMB130.0 million and RMB130.0 million, respectively. The effective interest rates of the current portion of secured long term bank loans and other borrowings ranged from 5.00% to 6.62% per annum as at 31 December 2018, 5.00% to 6.62% per annum as at 31 December 2019, and 4.80% to 5.22% per annum as at 31 December 2020. The effective interest rates of the non-current portion of secured bank loans and other borrowings ranged at 5.80% as at 31 December 2018, 5.83% per annum as at 31 December 2019, and 4.75% and 4.79% per annum as at 31 December 2020.

The maturity profile of the bank borrowings is set out as follows:

Bank loans Within one year In the second year Other borrowings Within one year In the second year Total	As at 31 December 2018 2019 2020 RMB’000 RMB’000 RMB’000 55,000 60,000 80,000 – 10,000 50,000 55,000 70,000 130,000 – 60,000 – 60,000 – – 60,000 60,000 – 115,000 130,000 130,000	As at 31 December 2018 2019 2020 RMB’000 RMB’000 RMB’000 55,000 60,000 80,000 – 10,000 50,000 55,000 70,000 130,000 – 60,000 – 60,000 – – 60,000 60,000 – 115,000 130,000 130,000
		130,000

		– –
		–

		130,000

Notes:

(a) The immediate holding company of Taizhou Water Supply, Jiaojiang Urban Development has guaranteed certain of Taizhou Water Supply’s bank loans of up to RMB30.0 million, RMB130.0 million and RMB190.0 million as at 31 December 2018, 2019 and 2020, respectively.
(b) The immediate holding company of Taizhou Water Supply, Jiaojiang Urban Development has guaranteed certain of Taizhou Water Supply’s other borrowings of up to RMB60.0 million and RMB60.0 million as at 31 December 2018 and 2019, respectively.
(c) An entity controlled by the immediate holding company of Taizhou Water Supply, Taizhou Jiaojiang Municipal Engineering Co., Ltd, has guaranteed certain of Taizhou Water Supply’s bank loans of up to RMB20.0 million, RMB20.0 million and RMB20.0 million as at 31 December 2018, 2019 and 2020, respectively.
(d) An entity controlled by the immediate holding company of Taizhou Water Supply, Taizhou Water Treatment Development Co., Ltd. and Taizhou Jiaojiang City Construction Development Co., Ltd., have jointly guaranteed certain of Taizhou Water Supply’s bank loans of up to RMB48.0 million as at 31 December 2018.

– IIIA-6 –

APPENDIX IIIA MANAGEMENT DISCUSSION AND ANALYSIS OF TAIZHOU WATER SUPPLY

As at 31 December 2018, 2019 and 2020, the net current liabilities amounted to approximately RMB34.9 million, RMB91.9 million and RMB40.5 million, respectively. The net current liabilities increased from approximately RMB34.9 million as at 31 December 2018 to approximately RMB91.9 million as at 31 December 2019, primarily due to the increase in the principal in current bank borrowings of approximately RMB65.0 million. The net current liabilities decreased to approximately RMB40.5 million as at 31 December 2020, primarily due to the decrease in the principal in current bank borrowings of approximately RMB40.0 million.

The capital commitments of Taizhou Water Supply are set out as follows:

Contracted, but not provided for: Plant and machinery	As at 31 December 2018 2019 2020 RMB’000 RMB’000 RMB’000 7,378 58 116

Charge of assets

As at 31 December 2018, 2019 and 2020, there were no charge on assets.

Significant investments, material acquisitions and disposals

During the Track Record Period, Taizhou Water Supply did not make any material acquisitions or disposals of subsidiaries or associated companies.

During the Track Record Period, Taizhou Water Supply did not hold any significant investments.

Future plans for material investments and acquisition of capital assets

Taizhou Water Supply had no plans for material investments and acquisition of material capital assets as at 31 December 2020.

– IIIA-7 –

APPENDIX IIIA MANAGEMENT DISCUSSION AND ANALYSIS OF TAIZHOU WATER SUPPLY

Contingent liabilities

Taizhou Water Supply provided guarantees to banks in respect of credit facilities utilised by the following companies:

Credit guarantees provided to: Independent third parties	As at 31 December 2018 2019 2020 RMB’000 RMB’000 RMB’000 300,000 300,000 –

During the Track Record Period, Taizhou Water Supply did not incur any material losses in respect of credit guarantees provided to independent third parties.

Foreign exchange exposure

During the Track Record Period, the principal activities of Taizhou Water Supply were conducted in the PRC and its income and expenses were denominated in RMB. In light of this, Taizhou Water Supply was not exposed to material risks in relation to foreign exchange rate fluctuation and has not entered into any contracts to hedge its exposure to foreign currency risks.

Employees and remuneration policy

The employees of Taizhou Water Supply are generally remunerated by way of fixed salary, and are also entitled to a performance based bonus, paid leave and various subsidies as well as retirement benefits. During the Track Record Period, Taizhou Water Supply did not experience any significant labour disputes causing any material impact on its normal business operations.

As at 31 December 2018, 2019 and 2020, Taizhou Water Supply had 175, 170 and 178 employees, respectively; and the employees benefit expense amounted to approximately RMB49.8 million, RMB45.8 million and RMB44.9 million for the years ended 31 December 2018, 2019 and 2020, respectively.

– IIIA-8 –

APPENDIX IIIB MANAGEMENT DISCUSSION AND ANALYSIS OF JIAOBEI WATER SUPPLY

Set out below is the management discussion and analysis on Jiaobei Water Supply for the three years ended 31 December 2020 (the “ Track Record Period ”). The following financial information is based on the audited financial information of Jiaobei Water Supply as set out in Appendix IIB to this circular.

BUSINESS REVIEW

Jiaobei Water Supply principally engages in the business of centralised water supply in the northern area of Jiaojiang River in the Jiaojiang District, Taizhou City, PRC.

FINANCIAL REVIEW

Revenue

During the Track Record Period, Jiaobei Water Supply derived its revenue mainly from sales of tap water to users. For the years ended 31 December 2018, 2019 and 2020, revenue amounted to approximately RMB21.8 million, RMB22.8 million and RMB23.2 million, respectively.

Cost of sales

For the years ended 31 December 2018, 2019 and 2020, cost of sales amounted to approximately RMB16.7 million, RMB16.3 million and RMB14.4 million, respectively. The decrease in cost of sales in 2020 was mainly due to (i) the decrease in employee benefit expenses, mainly attributable to the partial social insurance exemptions granted by government authorities to mitigate the negative effect of COVID-19 pandemic in 2020; (ii) the decrease in depreciation expenses, primarily due to that some water pipelines arrived at the end of their estimated useful lives in April 2019, and thus ceased to provide depreciation; and (iii) the decrease in raw water procurement fee, mainly attributable to the decrease in the average unit procurement price of raw water, resulting from the reduction by 10% for the unit price of raw water based on the actual water volume sold to enterprise end-users.

Gross profit

For the years ended 31 December 2018, 2019 and 2020, gross profit amounted to approximately RMB5.1 million, RMB6.5 million and RMB8.8 million, respectively; and the overall gross profit margin amounted to approximately 23.4%, 28.5% and 37.9%, respectively.

Administrative expenses

For the years ended 31 December 2018, 2019 and 2020, Jiaobei Water Supply incurred administrative expenses of approximately RMB9.7 million, RMB9.8 million and RMB8.6 million, respectively. The decrease in administrative expenses in 2020, mainly due to the decrease in impairment of trade receivables primarily resulting from the decrease in the original cost of trade receivables.

– IIIB-1 –

APPENDIX IIIB

MANAGEMENT DISCUSSION AND ANALYSIS OF JIAOBEI WATER SUPPLY

Other income and gains

For the years ended 31 December 2018, 2019 and 2020, other income and gains amounted to approximately RMB13.3 million, RMB11.6 million and RMB0.9 million, respectively. Other income and gains primarily consisted of interest income from loans to immediate holding company, value added tax refund and others. The decrease in other income and gains in 2020 was mainly due to the decrease in interest income from loan to immediate holding company, primarily attributable to the repayment of a loan to immediate holding company in April and December 2019.

Finance costs

For the years ended 31 December 2018, 2019 and 2020, finance costs amounted to approximately RMB12.5 million, RMB10.8 million and RMB0.1 million, respectively, which arose primarily from interest on bank borrowings. The decrease in finance costs in 2020 was mainly due to the repayment of bank borrowings in April and December 2019.

Income tax expense

For the years ended 31 December 2018, 2019 and 2020, income tax expense amounted to nil.

Loss/Profit for the year

As a result, Jiaobei Water Supply recorded loss for the years ended 31 December 2018 and 2019 amounted to approximately RMB3.8 million and RMB2.6 million, respectively, and profit amounted to approximately RMB1.0 million for the year ended 31 December 2020.

Property, plant and equipment

As at 31 December 2018, 2019 and 2020, property, plant and equipment amounted to approximately RMB29.3 million, RMB26.9 million and RMB38.7 million, respectively. The increase in property, plant and equipment was mainly due to the addition of construction in progress of water treatment plant to expand the capacity.

Other receivables

Other receivables represents the loan to Jiaojiang Urban Development amounting to RMB224.0 million as at 31 December 2018.

Inventories

Inventories mainly comprise raw materials mainly including water meters, pipes, engineering consumables as well as chemicals used in the water treatment process. As at 31 December 2018, 2019 and 2020, inventories amounted to approximately RMB0.6 million, RMB0.1 million and RMB0.4 million, respectively.

– IIIB-2 –

APPENDIX IIIB

MANAGEMENT DISCUSSION AND ANALYSIS OF JIAOBEI WATER SUPPLY

Trade receivables

Trade receivables represented receivables from users for sales of tap water. As at 31 December 2018, 2019 and 2020, trade receivables amounted to approximately RMB3.6 million, RMB4.7 million and RMB3.9 million, respectively.

Prepayments, other receivables and other assets

Prepayments, other receivables and other assets primarily consisted of the amounts due from related parties, other receivables, prepayments. The amounts due from related parties are unsecured, interest-free and repayable on demand. As at 31 December 2018, 2019 and 2020, prepayments, other receivables and other assets amounted to approximately RMB2.3 million, RMB2.7 million and RMB3.3 million, respectively.

Trade payables

Trade payables mainly comprised outstanding payments for raw water procurement and and engineering construction costs. As at 31 December 2018, 2019 and 2020, trade payables amounted to approximately RMB1.6 million, RMB1.2 million and RMB1.2 million, respectively.

Other payables and accruals

Other payables and accruals mainly comprised other payables, amounts due to related parties, accrued salaries and contract liabilities. Other payables mainly include payables for construction, project deposits and wastewater treatment fees. Contract liabilities include short-term advances received to deliver water. As at 31 December 2018, 2019 and 2020, other payables and accruals amounted to approximately RMB27.9 million, RMB31.4 million and RMB46.3 million, respectively. The increase in other payables and accruals in 2020 was mainly due to the increase in amounts due to related parties, primarily for Jiaojiang Urban Development.

Gearing ratio

The gearing ratio is the net debt divided by total equity, which net debt is the total bank borrowings less cash and cash equivalents. As at 31 December 2018, the gearing ratio was approximately 1,800.9%, mainly due to the bank borrowings of approximately RMB224.0 million, which was paid up in 2019.

Liquidity, financial resources and capital structure

During the Track Record Period, Jiaobei Water Supply’s principal use of cash was working capital, which was primarily funded from cash flows generated from operations and bank borrowings. It is expected that cash flow generated from operations and bank borrowings will continue to be the principal source of liquidity.

– IIIB-3 –

APPENDIX IIIB MANAGEMENT DISCUSSION AND ANALYSIS OF JIAOBEI WATER SUPPLY

As at 31 December 2018, 2019 and 2020, Jiaobei Water Supply’s cash and cash equivalents were mainly denominated in RMB and its borrowings were denominated in RMB.

Interest-bearing bank borrowings comprised bank loans.

Current Current portion of long term bank loans – secured Bank loans – secured Non-current Bank loans – secured Total	As at 31 December 2018 2019 2020 RMB’000 RMB’000 RMB’000 25,000 – – 199,000 – – 224,000 – –	As at 31 December 2018 2019 2020 RMB’000 RMB’000 RMB’000 25,000 – – 199,000 – – 224,000 – –
		–

As at 31 December 2018, 2019 and 2020, the bank borrowings amounted to approximately RMB224.0 million, nil and nil, respectively. The effective interest rate of the secured bank loans was 5.30% per annum as at 31 December 2018.

The maturity profile of the bank borrowings is set out as follows:

Bank loans Within one year In the second year	As at 31 December 2018 2019 2020 RMB’000 RMB’000 RMB’000 25,000 – – 199,000 – – 224,000 – –	As at 31 December 2018 2019 2020 RMB’000 RMB’000 RMB’000 25,000 – – 199,000 – – 224,000 – –
		–

Note: The immediate holding company of Jiaobei Water Supply, Jiaojiang Urban Development has guaranteed certain of Jiaobei Water Supply’s bank loan of RMB224.0 million as at 31 December 2018.

As at 31 December 2018, 2019 and 2020, the net current liabilities amounted to approximately RMB39.5 million, RMB15.2 million and RMB26.5 million, respectively. The net current liabilities decreased from approximately RMB39.5 million as at 31 December 2018 to approximately RMB15.2 million as at 31 December 2019, primarily due to the decrease in the principal in current bank borrowings of approximately RMB25.0 million. The net current liabilities increased to approximately RMB26.5 million as at 31 December 2020, primarily due to the increase in other payables and accruals.

– IIIB-4 –

APPENDIX IIIB

MANAGEMENT DISCUSSION AND ANALYSIS OF JIAOBEI WATER SUPPLY

The capital commitments of Jiaobei Water Supply are set out as follows:

				at 31 December
			2018	2019	2020
			RMB’000	RMB’000	RMB’000
Contracted,	but	not provided for:
Pipelines	and	buildings	–	–	2,591

Charge of assets

As at 31 December 2018, 2019 and 2020, there were no charge on assets.

Significant investments, material acquisitions and disposals

During the Track Record Period, Jiaobei Water Supply did not make any material acquisitions or disposals of subsidiaries or associated companies.

During the Track Record Period, Jiaobei Water Supply did not hold any significant investments.

Future plans for material investments and acquisition of capital assets

Jiaobei Water Supply had no plans for material investments and acquisition of material capital assets as at 31 December 2020.

Contingent liabilities

As at 31 December 2018, 2019 and 2020, Jiaobei Water Supply did not have any material contingent liabilities.

Foreign exchange exposure

During the Track Record Period, the principal activities of Jiaobei Water Supply were conducted in the PRC and its income and expenses were denominated in RMB. In light of this, Jiaobei Water Supply was not exposed to material risks in relation to foreign exchange rate fluctuation and has not entered into any contracts to hedge its exposure to foreign currency risks.

Employees and remuneration policy

The employees of Jiaobei Water Supply are generally remunerated by way of fixed salary, and are also entitled to a performance based bonus, paid leave and various subsidies. During the Track Record Period, Jiaobei Water Supply did not experience any significant labour disputes causing any material impact on its normal business operations.

As at 31 December 2018, 2019 and 2020, Jiaobei Water Supply had 40, 40 and 38 employees, respectively; and the employees benefit expense amounted to approximately RMB9.4 million, RMB9.7 million and RMB9.0 million for the years ended 31 December 2018, 2019 and 2020, respectively.

– IIIB-5 –

APPENDIX IIIC

MANAGEMENT DISCUSSION AND ANALYSIS OF LUQIAO WATER SUPPLY

Set out below is the management discussion and analysis on Luqiao Water Supply for the three years ended 31 December 2020 (the “ Track Record Period ”). The following financial information is based on the audited financial information of Luqiao Water Supply as set out in Appendix IIC to this circular.

BUSINESS REVIEW

Luqiao Water Supply principally engages in the business of centralised water supply services in the Luqiao District, Taizhou City, PRC.

FINANCIAL REVIEW

Revenue

During the Track Record Period, Luqiao Water Supply derived its revenue mainly from sales of tap water to users and provision of installation services for water supply pipelines. For the years ended 31 December 2018, 2019 and 2020, revenue amounted to approximately RMB175.9 million, RMB185.8 million and RMB181.5 million, respectively. Revenue increased from approximately RMB175.9 million in 2018 to approximately RMB185.8 million in 2019, primarily due to (i) the increase in revenue from installation services for municipal water supply pipeline projects; and (ii) the increase in revenue from sales of tap water mainly resulting from the increase in the sales volume. Revenue decreased to approximately RMB181.5 million in 2020, primarily due to the decrease in revenue from sales of tap water, mainly attributable to (i) the decrease in the average unit selling price of tap water resulting from the reduction by 10% for the price of tap water sold to enterprise end-users due to the impact of the COVID-19 pandemic; and (ii) the decrease in the sales volume, which was partially offset by the increase in revenue from installation services.

Cost of sales

For the years ended 31 December 2018, 2019 and 2020, cost of sales amounted to approximately RMB154.6 million, RMB152.4 million and RMB163.4 million, respectively. The decrease in cost of sales in 2019 was mainly due to the decrease in raw water procurement fee. Cost of sales increased to approximately RMB163.4 million in 2020, primarily due to (i) the increase in employee benefit expenses mainly attributable to the increase in the number of employees; and (ii) the increase in raw water procurement fee.

Gross profit

For the years ended 31 December 2018, 2019 and 2020, gross profit amounted to approximately RMB21.3 million, RMB33.4 million and RMB18.1 million, respectively; and the overall gross profit margin amounted to approximately 12.1%, 18.0% and 10.0%, respectively.

– IIIC-1 –

APPENDIX IIIC

MANAGEMENT DISCUSSION AND ANALYSIS OF LUQIAO WATER SUPPLY

Administrative expenses

For the years ended 31 December 2018, 2019 and 2020, Luqiao Water Supply incurred administrative expenses of approximately RMB18.4 million, RMB18.4 million and RMB15.2 million, respectively. The decrease in administrative expenses in 2020, mainly due to the decrease in impairment of trade receivables primarily attributable to the decrease in the original cost of trade receivables.

Other income and gains

For the years ended 31 December 2018, 2019 and 2020, other income and gains amounted to approximately RMB7.4 million, RMB6.5 million and RMB6.9 million, respectively. Other income and gains primarily consisted of interest income from loans to immediate holding company, government grants, value added tax refund and others.

Finance costs

For the years ended 31 December 2018, 2019 and 2020, finance costs amounted to approximately RMB5.2 million, RMB6.0 million and RMB6.3 million, respectively, which arose primarily from interest on bank borrowings and interest expense arising from defined benefit plans.

Income tax expense

Income tax expense comprised PRC corporate income tax, net of deferred tax. For the years ended 31 December 2018, 2019 and 2020, income tax expense amounted to approximately RMB2.0 million, RMB4.8 million and RMB1.5 million, respectively. The effective tax rate, being the income tax expense divided by the profit before taxation, was approximately 41.6%, 31.3% and 45.9% for the years ended 31 December 2018, 2019 and 2020, respectively. The relatively higher effective tax rate was mainly due to the temporary differences not recognised and effect of non-deductible expenses.

Profit for the year

As a result, Luqiao Water Supply recorded profit for the years ended 31 December 2018, 2019 and 2020 amounted to approximately RMB2.8 million, RMB10.6 million and RMB1.7 million, respectively.

Property, plant and equipment

As at 31 December 2018, 2019 and 2020, property, plant and equipment amounted to approximately RMB213.7 million, RMB199.5 million and RMB182.9 million, respectively.

Right of use assets

As at 31 December 2018, 2019 and 2020, right of use assets amounted to approximately RMB19.5 million, RMB19.3 million and RMB18.7 million, respectively.

– IIIC-2 –

APPENDIX IIIC

MANAGEMENT DISCUSSION AND ANALYSIS OF LUQIAO WATER SUPPLY

Inventories

Inventories mainly comprise raw materials mainly including pipes and engineering consumables. As at 31 December 2018, 2019 and 2020, inventories amounted to approximately RMB6.3 million, RMB3.3 million and RMB3.5 million, respectively.

Trade receivables

Trade receivables represented receivables from users for tap water as well as installation services for water supply pipelines. As at 31 December 2018, 2019 and 2020, trade receivables amounted to approximately RMB76.1 million, RMB63.4 million and RMB46.4 million, respectively. The decrease in trade receivables was mainly due to the improvement in the collection of receivables.

Contract assets

Contract assets relates to installation services which are not due from customers until installation services are completed. Upon completion of installation and acceptance by the customer, the amounts recognised as contract assets are reclassified to trade receivables. As at 31 December 2018, 2019 and 2020, contract assets amounted to approximately RMB3.2 million, RMB4.7 million and RMB4.1 million, respectively.

Prepayments, other receivables and other assets

Prepayments, other receivables and other assets primarily consisted of a loan to immediate holding company, other receivables and prepayments. The loan to immediate holding company was unsecured, interest-free and repayable on demand. As at 31 December 2018, 2019 and 2020, prepayments, other receivables and other assets amounted to approximately RMB70.3 million, RMB71.4 million and RMB71.4 million, respectively.

Trade payables

Other payables and accruals

Other payables and accruals mainly comprised other payables, contract liabilities, accrued salaries and other tax payables. Other payables mainly include payables for project deposits, wastewater treatment fees and plant and machinery. Contract liabilities include short-term advances received to deliver water and installation services. As at 31 December 2018, 2019 and 2020, other payables and accruals amounted to approximately RMB116.7 million, RMB59.2 million and RMB110.5 million, respectively. The decrease in other payables and accruals in 2019 was mainly due to (i) the decrease in other payables for wastewater treatment fees; and (ii) the decrease in contract liabilities resulting from

– IIIC-3 –

APPENDIX IIIC

MANAGEMENT DISCUSSION AND ANALYSIS OF LUQIAO WATER SUPPLY

decrease in short-term advances received from customers in relation to installation services rendered. The increase in other payables and accruals in 2020 was mainly due to (i) the increase in contract liabilities resulting from the increase in short-term advances received from customers in relation to installation services rendered; and (ii) the increase in other payables for wastewater treatment fees.

Deferred government grants

The government grants are related to the subsidies for the compensation of construction, relocation and reconstruction of the original water supply pipelines of certain projects. As at 31 December 2018, 2019 and 2020, deferred government grants amounted to approximately RMB166.6 million, RMB156.3 million and RMB145.6 million, respectively.

Net employee defined benefit liabilities

Luqiao Water Supply has a defined benefit pension plan for retirement in Mainland China, and provides certain pension plan to employees (unfunded). As at 31 December 2018, 2019 and 2020, the net employee defined benefit liabilities amounted to approximately RMB37.4 million, RMB39.7 million and RMB39.7 million, respectively.

Gearing ratio

The gearing ratio is the net debt divided by total equity, which net debt is the total bank borrowings less cash and cash equivalents. As at 31 December 2018, 2019 and 2020, the cash and cash equivalents exceeded total bank borrowings.

Liquidity, financial resources and capital structure

During the Track Record Period, Luqiao Water Supply’s principal use of cash was working capital, which was primarily funded from cash flows generated from operations and bank borrowings. It is expected that cash flow generated from operations and bank borrowings will continue to be the principal source of liquidity.

As at 31 December 2018, 2019 and 2020, Luqiao Water Supply’s cash and cash equivalents were mainly denominated in RMB and its borrowings were denominated in RMB.

– IIIC-4 –

APPENDIX IIIC

MANAGEMENT DISCUSSION AND ANALYSIS OF LUQIAO WATER SUPPLY

Interest-bearing bank borrowings comprised bank loans and other borrowings.

Current Current portion of long term bank loans – secured Bank loans – secured Total	As at 31 December 2018 2019 2020 RMB’000 RMB’000 RMB’000 70,000 70,000 – – – 70,000 70,000 70,000 70,000 70,000 70,000 70,000	As at 31 December 2018 2019 2020 RMB’000 RMB’000 RMB’000 70,000 70,000 – – – 70,000 70,000 70,000 70,000 70,000 70,000 70,000
		70,000
		70,000

As at 31 December 2018, 2019 and 2020, the bank borrowings amounted to approximately RMB70.0 million, RMB70.0 million and RMB70.0 million, respectively. The effective interest rate of the secured bank loans was 5.50% per annum as at 31 December 2018, 7.00% per annum as at 31 December 2019, and 4.90% per annum as at 31 December 2020.

The maturity profile of the bank borrowings is set out as follows:

Bank loans Within one year	As at 31 December 2018 2019 2020 RMB’000 RMB’000 RMB’000 70,000 70,000 70,000 70,000 70,000 70,000	As at 31 December 2018 2019 2020 RMB’000 RMB’000 RMB’000 70,000 70,000 70,000 70,000 70,000 70,000
		70,000

Notes: The immediate holding company of Luqiao Water Supply, Luqiao Urban Construction has guaranteed certain of Luqiao Water Supply’s bank loans of RMB70.0 million, RMB70.0 million and RMB70.0 million as at 31 December 2018, 2019 and 2020, respectively.

As at 31 December 2018, 2019 and 2020, the net current assets amounted to approximately RMB58.0 million, RMB74.0 million and RMB82.1 million, respectively. The net current assets increased from approximately RMB58.0 million as at 31 December 2018 to approximately RMB74.0 million as at 31 December 2019, primarily due to the decrease in other payables and accruals. The net current assets further increased to approximately RMB82.1 million as at 31 December 2020, primarily due to the increase in cash and cash equivalents, mainly contributed by the cash flows generated from operating activities.

– IIIC-5 –

APPENDIX IIIC

MANAGEMENT DISCUSSION AND ANALYSIS OF LUQIAO WATER SUPPLY

The capital commitments of Luqiao Water Supply are set out as follows:

		at 31 December
	2018	2019	2020
	RMB’000	RMB’000	RMB’000
Contracted, but not provided for:
Plant and machinery	5,368	3,295	3,043

Charge of assets

As at 31 December 2018, 2019 and 2020, there were no charge on assets.

Significant investments, material acquisitions and disposals

During the Track Record Period, Luqiao Water Supply did not make any material acquisitions or disposals of subsidiaries or associated companies.

During the Track Record Period, Luqiao Water Supply did not hold any significant investments.

Future plans for material investments and acquisition of capital assets

Luqiao Water Supply had no plans for material investments and acquisition of material capital assets as at 31 December 2020.

Contingent liabilities

As at 31 December 2018, 2019 and 2020, Luqiao Water Supply did not have any material contingent liabilities.

Foreign exchange exposure

During the Track Record Period, the principal activities of Luqiao Water Supply were conducted in the PRC and its income and expenses were denominated in RMB. In light of this, Luqiao Water Supply was not exposed to material risks in relation to foreign exchange rate fluctuation and has not entered into any contracts to hedge its exposure to foreign currency risks.

Employees and remuneration policy

The employees of Luqiao Water Supply are generally remunerated by way of fixed salary, and are also entitled to a performance based bonus, paid leave and various subsidies as well as retirement benefits. During the Track Record Period, Luqiao Water Supply did not experience any significant labour disputes causing any material impact on its normal business operations.

As at 31 December 2018, 2019 and 2020, Luqiao Water Supply had 164, 173 and 197 employees, respectively; and the employees benefit expense amounted to approximately RMB34.6 million, RMB33.5 million and RMB38.1 million for the years ended 31 December 2018, 2019 and 2020, respectively.

– IIIC-6 –

APPENDIX IV

UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

This Unaudited Pro Forma Financial Information has been prepared for the purpose of providing shareholders of the Company with information about how the proposed acquisition of 45% equity interests in Taizhou Jiaobei Water Supply Co., Ltd. (the “ Jiaobei Water Supply ”) and its subsidiary, Taizhou Water Supply Co., Ltd. (the “ Taizhou Water Supply ”) and its subsidiaries and Taizhou Luqiao Water Supply Co., Ltd. (the “ Luqiao Water Supply ”) and its subsidiaries (the “ Target Groups ”) might have affected the financial position of the Group as at 31 December 2020, had the completion of the Acquisitions taken place on 31 December 2020.

The Unaudited Pro Forma Financial Information has been prepared based on a number of assumptions, estimates, uncertainties and currently available information, and is provided for illustrative purpose only. Accordingly, the Unaudited Pro Forma Financial Information does not purport to describe the actual financial position of the Enlarged Group that would have been attained had the Acquisitions been completed on 31 December 2020. Neither does the Unaudited Pro Forma Financial Information purport to predict the future financial position of the Enlarged Group.

This Unaudited Pro Forma Financial Information has been prepared for illustrative purposes only and because of its nature, it may not give a true picture of the financial position of the Enlarged Group following the completion of the Acquisitions.

The Unaudited Pro Forma Financial Information is prepared based on the audited consolidated statement of financial position of the Group as at 31 December 2020, which has been extracted from the annual report of the Company for the year ended 31 December 2020, after making certain pro forma adjustments that are (i) directly attributable to the Acquisitions; and (ii) factually supportable, as further described in the accompanying notes.

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

– IV-1 –

APPENDIX IV

UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

Unaudited pro forma consolidated statement of financial position

NON-CURRENT ASSETS Property, plant and equipment Prepayment for property, plant and equipment Prepayments for land use rights Other intangible asset Investments in associates Deferred tax assets Right-of-use assets Total non-current assets CURRENT ASSETS Inventories Trade receivables Prepayments, other receivables and other assets Pledged deposits Cash and cash equivalents Total current assets Trade payables Other payables and accruals Interest-bearing loans and other borrowings Deferred government grants Lease Liabilities Tax payable Total current liabilities Net current liabilities Total assets less current liabilities	The Group as at 31 December 2020 RMB’000 Note (1) 2,545,168 32,209 165 335 125,000 21,314 412,222 3,136,413 3,788 101,586 13,662 17,238 230,369 366,643 60,145 343,231 193 3,261 20,875 14,521 442,226 (75,583) 3,060,830	Pro forma adjustments RMB’000 Note (2) 171,020 (171,020)	Unaudited pro forma of the Enlarged Group RMB’000 2,545,168 32,209 165 335 296,020 21,314 412,222 3,307,433 3,788 101,586 13,662 17,238 59,349 195,623 60,145 343,231 193 3,261 20,875 14,521 442,226 (246,603) 3,060,830

– IV-2 –

APPENDIX IV

UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

Total assets less current liabilities NON-CURRENT LIABILITIES Interest-bearing bank and other borrowings Deferred government grants Other liabilities Total non-current liabilities Net assets EQUITY Equity attributable to owners of the parent Share capital Reserves Non-controlling interests Total equity	The Group as at 31 December 2020 Pro forma adjustments RMB’000 RMB’000 Note (1) Note (2) 3,060,830 1,963,807 76,886 1,634 2,042,327 1,018,503 200,000 635,634 835,634 182,869 1,018,503	Unaudited pro forma of the Enlarged Group RMB’000 3,060,830
		1,963,807 76,886 1,634
		2,042,327
		1,018,503

		200,000 635,634
		835,634
		182,869
		1,018,503

– IV-3 –

APPENDIX IV

UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

Notes:

(1) The audited consolidated statement of financial position of the Group as at 31 December 2020 is extracted from the Group’s published annual report for the year ended 31 December 2020.
(2) According to the Equity Transfer Agreement, the Company will acquire 45% equity interest in the Target Groups. Upon the completion of the Acquisitions, the Company will hold 45% equity interest of the Target Groups and over which the Company is in the position to exercise significant influences over the Target Groups.

The aggregate consideration of the Acquisitions of RMB171,020,000 will be settled in cash by instalments, as set out in Letter From The Board to this Circular.

The Target Groups will be accounted for using the equity method of accounting in accordance with HKAS 28 Investments in Associates and Joint Ventures in the consolidated financial statements of the Group. In accordance with HKAS 28, on acquisition of the investment of associates, any difference between the total consideration and the Group’s share of the net fair value of the Target Groups’ identifiable assets and liabilities is accounted for as follows (a) goodwill relating to an associate is included in the carrying amount of the investment in the Target Groups; or (b) excess of the Group’s share of the net fair value of the Target Groups’ identifiable assets and liabilities over the total consideration is included as income in the determination of the Group’s share of the Target Groups’ profit or loss in the period in which the investment is acquired, as illustrated below:

The Group’s share of the net fair value of the identified assets and liabilities of Taizhou Water Supply and its subsidiaries Goodwill/(excess of the Group’s share of the net fair value of Taizhou Water Supply and its subsidiaries’ identifiable assets and liabilities over the total consideration) Total consideration The Group’s share of the net fair value of the identified assets and liabilities of Jiaobei Water Supply and its subsidiary Goodwill/(excess of the Group’s share of the net fair value of Jiaobei Water Supply and its subsidiary’s identifiable assets and liabilities over the total consideration) Total consideration The Group’s share of the net fair value of the identified assets and liabilities of Luqiao Water Supply and its subsidiaries Goodwill/(excess of the Group’s share of the net fair value of Luqiao Water Supply and its subsidiaries’ identifiable assets and liabilities over the total consideration) Total consideration	RMB’000 24,815 (1,595)
	23,220

	RMB’000 4,650 18,730
	23,380

	RMB’000 54,679 69,741
	124,420

– IV-4 –

APPENDIX IV UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

For the purpose of this Unaudited Pro Forma Financial Information, the Directors assumed that the Group’s share of the net fair value of the identified assets and liabilities of the Target Groups is approximate to the carrying value of the 45% equity interest of the Target Groups, being RMB84,144,000, which is determined based on the net assets of the Target Groups as at 31 December 2020. Since the fair value of the identifiable net assets of the Target Groups at the acquisition date may be substantially different from the fair value used in the preparation of the Unaudited Pro Forma Financial Information purpose, the goodwill or negative goodwill recognised at the completion date may be different from the amount presented above.

Assuming that the completion of the Acquisitions and agreement between all parties on the audit results, consideration adjustment and loss and profit arrangements regarding the Transition Period having been reached, the aggregate consideration of the Acquisitions after adjustments as set out in Letter From The Board to this circular shall not exceed RMB216,170,000 and the aggregate goodwill resulting from the Acquisitions shall not exceed RMB132,060,000.

The investment cost in the Target Groups are subject to impairment assessment in accordance with HKAS 36 Impairment of Assets , by comparing the recoverable amounts to the carrying amount, wherever there are indicators that the investment may be impaired.

In the opinion of the Directors, there is no impairment indicators that the investment in the Target Groups may be impaired as the assets and liabilities of the Target Groups were carried at fair value at completion date.

(3) The transaction costs of the Acquisitions are immaterial and have not been taken into account for the purpose of preparing the Unaudited Pro Forma Financial Information.
(4) No adjustments have been made to adjust any trading results or other transactions of the Group and the Target Groups entered into subsequent to 31 December 2020.

– IV-5 –

APPENDIX IV

UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

The following is the text of a report received from the reporting accountants of the Company, Ernst & Young, Certificated Public Accountants, Hong Kong, prepared for the purpose of incorporation in this circular, in respect of the unaudited pro forma financial information of the Enlarged Group.

27/F, One Taikoo Place, 979 King's Road, Quarry Bay, Hong Kong

INDEPENDENT REPORTING ACCOUNTANTS’ ASSURANCE REPORT ON THE COMPILATION OF UNAUDITED PRO FORMA FINANCIAL INFORMATION

To the Directors of Taizhou Water Group Co., Ltd.

We have completed our assurance engagement to report on the compilation of unaudited pro forma financial information of Taizhou Water Group Co., Ltd. (the “ Company ”) and its subsidiaries (hereinafter collectively referred to as the “ Group ”), Taizhou Water Supply Co., Ltd. and its subsidiaries, Taizhou Jiaobei Water Supply Co., Ltd. and its subsidiary, and Taizhou Luqiao Water Supply Co., Ltd. and its subsidiaries (together, the “ Target Groups ”) (the Group and the Target Groups are hereinafter collectively referred to as the “ Enlarged Group ”) by the directors of the Company (the “ Directors ”) for illustrative purposes only. The unaudited pro forma financial information consists of the unaudited pro forma consolidated statement of financial position of the Enlarged Group as at 31 December 2020 and related notes as set out on pages IV-1 to IV-5 of the circular dated 24 June 2021 issued by the Company (the “ Circular ”) (the “ Unaudited Pro Forma Financial Information ”). The applicable criteria on the basis of which the Directors have compiled the Unaudited Pro Forma Financial Information are described in Appendix IV of the Circular.

The Unaudited Pro Forma Financial Information has been compiled by the Directors to illustrate the impact of the proposed acquisition of 45% equity interest in the Target Groups (the “ Acquisitions ”) on the Group’s financial position as at 31 December 2020 as if the Acquisitions had taken place at 31 December 2020. As part of this process, information about the Group’s financial position has been extracted by the Directors from the Group’s financial statements for the year ended 31 December 2020, on which an audit report has been published.

DIRECTORS’ RESPONSIBILITY FOR THE UNAUDITED PRO FORMA FINANCIAL INFORMATION

The Directors are responsible for compiling the Unaudited Pro Forma Financial Information in accordance with paragraph 4.29 of the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited (the “ Listing Rules ”) and with reference to Accounting Guideline (“ AG ”) 7 Preparation of Pro Forma Financial Information for Inclusion in Investment Circulars issued by the Hong Kong Institute of Certified Public Accountants (the “ HKICPA ”).

– IV-6 –

APPENDIX IV

UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

OUR INDEPENDENCE AND QUALITY CONTROL

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

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

REPORTING ACCOUNTANTS’ RESPONSIBILITIES

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

We conducted our engagement in accordance with Hong Kong Standard on Assurance Engagements 3420 Assurance Engagements to Report on the Compilation of Pro Forma Financial Information Included in a Prospectus issued by the HKICPA. This standard requires that the reporting accountants plan and perform procedures to obtain reasonable assurance about whether the Directors have compiled the Unaudited Pro Forma Financial Information in accordance with paragraph 4.29 of the Listing Rules and with reference to AG 7 issued by the HKICPA.

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

The purpose of the Unaudited Pro Forma Financial Information included in the Circular is solely to illustrate the impact of the Acquisitions by the Company on the Group’s financial position as at 31 December 2020 as if the Acquisitions had been undertaken at an earlier date selected for purposes of the illustration. Accordingly, we do not provide any assurance that the actual outcome of the Acquisitions would have been as presented.

– IV-7 –

APPENDIX IV

UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

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

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

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

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

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

Opinion

In our opinion:

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

Yours faithfully,

Ernst & Young Certified Public Accountants Hong Kong 24 June 2021

– IV-8 –

APPENDIX VA

SUMMARY OF THE TAIZHOU WATER SUPPLY VALUATION REPORT

The following is an English translation of the summary of the Taizhou Water Supply Valuation Report, which is prepared by the Independent Valuer for the purpose of, among others, inclusion in this circular. The Taizhou Water Supply Valuation Report is prepared in Chinese and this English translation is provided for your reference only. In the event of any inconsistency between the Chinese and English versions, the Chinese version shall prevail.

Summary of the Asset Valuation Report in relation to the Proposed Acquisition of Equity Interests of Taizhou Water Supply Co., Ltd. by Taizhou Water Group Co., Ltd.

Kun Yuan Ping Bao (2021) No. 185

I. PURPOSE OF VALUATION

Pursuant to the Notice by the Municipal Committee Office of Taizhou and the Taizhou Municipal People’s Government Office on the Issue of Implementation Opinions on the Reform of Integration of Water Supply in Taizhou (Tai Shi Wei Ban [2018] No. 28), Taizhou Water Group Co., Ltd. proposes to acquire the equity interest of Taizhou Water Supply Co., Ltd., and it is necessary to assess the value of total shareholders’ equity of Taizhou Water Supply Co., Ltd. that such an economic activity involves.

The purpose of the valuation is to provide a reference basis for the value of total shareholders’ equity of Taizhou Water Supply Co., Ltd. to the economic activity.

II. SCOPE OF WORK

The target of the valuation is the total shareholders’ equity of Taizhou Water Supply Co., Ltd. that the aforesaid economic activity involves.

The scope of the valuation is all the assets and relevant liabilities as at 31 October 2020 (the “ Valuation Reference Date ”) that are reported by Taizhou Water Supply Co., Ltd. and audited by Zhejiang Zhongyong Zhongtian Certified Public Accountants Co., Ltd., including current assets, non-current assets, current liabilities and non-current liabilities. As reflected in the financial statements as at 31 October 2020 (adopting the same basis as that of the financial statements of parent company, namely Taizhou Jiaojiang Urban Development Investment Group Co., Ltd.) which are provided by Taizhou Water Supply Co., Ltd. and audited by Zhejiang Zhongyong Zhongtian Certified Public Accountants Co., Ltd., the book values of assets, liabilities and shareholders’ equity are RMB473,816,988.39, RMB393,123,179.45 and RMB80,693,808.94, respectively.

– VA-1 –

APPENDIX VA

SUMMARY OF THE TAIZHOU WATER SUPPLY VALUATION REPORT

III. ECONOMIC AND INDUSTRY OVERVIEW (ECONOMIC AND INDUSTRY ANALYSIS)

1. Analysis of macro and regional economic factors that affect the operation of the enterprise

(1) Macro economy of China

Based on the preliminary estimate, GDP of the first half of 2020 amounted to RMB45.6614 trillion, representing a year-on-year decrease of 1.6% in terms of the comparable price. In terms of quarter, the first quarter recorded a year-on-year decrease of 6.8%, while the second quarter witnessed a growth of 3.2%. In terms of sector, the primary industry reported value added of RMB2.6053 trillion, representing a year-on-year growth of 0.9%; the secondary industry recorded value added of RMB17.2759 trillion, representing a decrease of 1.9%; the tertiary industry recorded value added of RMB25.7802 trillion, representing a decrease of 1.6%. On the quarter-on-quarter basis, the second quarter witnessed a GDP growth of 11.5%.

(2) Analysis of regional economic factors that affect the operation of the enterprise

Taizhou Water Supply Co., Ltd. is located in Taizhou, Zhejiang Province. Taizhou is a prefecture-level city of Zhejiang Province, one of the 27 cities of the core region of Yangtze River Delta, and the regional core city and modern port city in the coastal areas of Zhejiang Province which is approved by the State Council. In the first three quarters of 2020, the city reported a GDP growth of 1.7%, turning the negative growth to a positive one.

In the third quarter of 2020, Taizhou’s economy followed the growth trend gained in the second quarter and recorded a GDP growth of 6.0%. In the first three quarters, Taizhou realized GDP of RMB373.912 billion, representing a growth of 1.7% as compared with the same period of prior year and turning the negative growth in the first half to a positive one. Specifically, the primary industry realized value added of RMB17.076 billion, representing a growth of 2.2%; the secondary industry realized value added of RMB164.503 billion, representing a growth of 0.4%; the tertiary industry realized value added of RMB192.333 billion, representing a growth of 3.0%. The industrial value added amounted to RMB139.275 billion, representing a growth of 0.7% and returning to the positive range. Generally, economic fundamentals fared better.

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SUMMARY OF THE TAIZHOU WATER SUPPLY VALUATION REPORT

2. Analysis of current development and prospect of the industry in which the enterprise operates

(1) Industrial classification

Taizhou Water Supply Co., Ltd. principally engages in the business of water supply. According to the industrial classification standard contained in the Industrial Classification for National Economic Activities (GB/T4754-2011), the industry to which it belongs is classified as “water production and supply” (industry code: D4610) in the “water production and supply industry” (industry code: D46).

(2) Development of water supply industry

1) National water consumption

The economic and social development creates a huge demand for water, and the water demand grows with China’s continuous and rapid economic development and ever-increasing population.

In 2019, the national water consumption was 599.1 billion m[3] , which was basically the same level as that of the prior year, and the per capita water consumption is 429 m[3] .

Changes of National Water Consumption and Per Capita Water Consumption from 2008 to 2019

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

8,000 480
5,910 5,965.2 6,022 6,107.2 6,131.2 [6,183.4] 6,094.9 6,103.2 6,040.2 6,043.4 6,015.5 5,991
6,000 464
454.4 453.9 455.54
450.17
446.15 448.04 446.75 445.09
4,000 448
438.12
435.91
431.32
429
2,000 432
0 416
National water consumption (100,000,000 m [3] ) Per capita water consumption (m [3] )
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
3
Unit: m3
Unit: 100,000,000 m
----- End of picture text -----

Source: the National Bureau of Statistics of China (“ NBS ”), Forward Business and Intelligence Co., Ltd. (“ Forward Intelligence ”)

@ FORWARD-THE ECONOMIST APP

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APPENDIX VA

SUMMARY OF THE TAIZHOU WATER SUPPLY VALUATION REPORT

From the perspective of China’s structure of water resource consumption in 2019, agricultural, industrial, domestic and ecological water consumptions reached 367.46 billion m[3] , 123.48 billion m[3] , 87.62 billion m[3] and 20.19 billion m[3] respectively.

China’s Structure of Water Resource Consumption in 2019

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

100
75
3,723.1 3,689.1 3,743.6 3,902.5 3,921.5 3,869 3,852.2 3,768 3,766.4 3,693.1 3,674.6
50
25
1,390.9 1,447.3 1,461.8 1,380.7 1,406.4 1,356.1 1,334.8 1,308 1,277 1,261.3 1,234.8
0
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
Agricultural water consumption (100,000,000 m [3] ) Industrial water consumption (100,000,000 m [3] )
Unit: %
----- End of picture text -----

Source: the NBS, Forward Intelligence

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

@ FORWARD-THE ECONOMIST APP
----- End of picture text -----

China’s Structure of Water Resource Consumption in 2019

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

100
75
748.2 765.8 789.9 739.7 750.1 766.6 793.5 821.6 838.1 859.9 876.2
50
25
103 119.8 111.9 108.3 105.4 103.2 122.7 142.6 161.9 200.9 201.9
0
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
Domestic water consumption (100,000,000 m [3] ) Ecological water consumption (100,000,000 m [3] )
3Unit: 100,000,000 m
----- End of picture text -----

Source: the NBS, Forward Intelligence

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

@ FORWARD-THE ECONOMIST APP
----- End of picture text -----

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APPENDIX VA

SUMMARY OF THE TAIZHOU WATER SUPPLY VALUATION REPORT

Data released by the NBS showed that from 2012 to 2018, industrial enterprises above designated size in China’s water production and supply industry recorded steady year-on-year growth in both revenues and profits of principal businesses, with compound growth rates reaching 12.52% and 25.44% respectively. In 2018, China had 1,934 water supply enterprises above designated size, whose revenue from principal businesses reached RMB260 billion; cost of principal businesses exceeded RMB190 billion; and total profit was about RMB28 billion.

Total Profit of Industrial Enterprises Above Designated Size in China’s Water Production and Supply Industry from 2012 to 2019

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

400
327
300 290.27 282
208.26
200 187.69
151.22
104.13
100 72.55
0
2012 2013 2014 2015 2016 2017 2018 2019
Total profit of industrial enterprises above designated size in
China’s water production and supply industry (RMB100,000,000)
3Unit: 100,000,000 m
----- End of picture text -----

Source: the NBS, Forward Intelligence @ FORWARD-THE ECONOMIST APP

To meet the increasing water demand from urban water users, China’s comprehensive urban water supply capacity has been growing steadily over the recent ten years. According to data of the NBS, as of the end of 2018, the comprehensive urban water supply capacity reached 312,000,000 m[3] /day, which included 32,880,000,000 m[3] of domestic water consumption and covered 503 million people. The daily domestic water consumption per capita was 179.7 liters, and the water penetration rate was 98.36%.

China’s Comprehensive Urban Water Supply Capacity from 2010 to 2018

	Comprehensive	Length of	Total	Population with	Water
Year	water supply capacity	water pipelines	water supply	access to water	penetration rate
	(100,000,000 m3/day)	(10,000 km)	(100,000,000 tonnes)	(100,000,000)	(%)
2010	2.76	54	507.9	3.82	96.68%
2011	2.67	57.4	513.4	3.97	97.04%
2012	2.72	59.2	523	4.1	97.16%
2013	2.81	64.6	537.3	4.23	97.56%
2014	2.87	67.7	546.7	4.35	97.64%
2015	2.97	71	560.5	4.51	98.07%
2016	3.03	75.7	580.7	4.7	98.42%
2017	3.05	79.7	593.8	4.83	98.30%
2018	3.12	86.7	614.6	5.03	98.36%

Source: the NBS, Forward Intelligence @ FORWARD-THE ECONOMIST APP

– VA-5 –

APPENDIX VA

SUMMARY OF THE TAIZHOU WATER SUPPLY VALUATION REPORT

2) Great potential of the rural water supply market

Rural water supply programs are the integral part of development-oriented poverty alleviation. The Outline for Development-oriented Poverty Alleviation of China’s Rural Areas states that by 2020, the water security and penetration rate in rural areas will be further improved on the basis of basically addressing the availability of drinking water.

In January 2016, six ministries including the National Development and Reform Commission (“ NDRC ”), the Ministry of Water Resources, the Ministry of Finance, the National Health and Family Planning Commission, Ministry of Environmental Protection and the Ministry of Housing and Urban-Rural Development (“ MOHURD ”) jointly released the Notice on the Work for Improving the Drinking Water Safety in Rural Areas and Preparing the Plan in “13th Five-Year Plan” Period, which set the following objectives: by 2020, the safe and centralised water supply rate in China’s rural areas would stay above 85%, and the water penetration rate would be over 80%; the rate of water quality reaching the standard would be significantly improved; the water supply guarantee of small projects would not be lower than 95%. Public services of urban water supply would be extended to rural areas to improve the proportion of villages covered by the urban water supply network to 33%. China has a great potential in water supply project construction, especially in urban built-up areas, village areas and rural areas in central and western China.

3) Continuous market growth boosted by urbanisation

Since the 1990s, China’s urbanisation has been accelerating. In recent years, China’s urbanisation rate grows continuously, which stimulates rural people flock to cities, and rural residents and workforce engaged in agriculture will significantly decrease. China’s urbanisation rate improves continuously from 26.44% in 1990 to 60.60% in 2019, but it still lags far behind the advanced countries. As the urbanisation is promoted and urban population increases, the original urban water supply system and wastewater treatment system bear greater operation pressure year on year. Some cities opt to upgrade and renovate the existing facilities to improve the capacity, and some cities prefer to build new water supply and wastewater treatment systems. The said construction projects boost the continuous growth of the water market and also stimulate the rapid development of the industry.

– VA-6 –

APPENDIX VA

SUMMARY OF THE TAIZHOU WATER SUPPLY VALUATION REPORT

IV. OVERVIEW OF TARGET COMPANY (BUSINESS CONDITIONS)

Taizhou Water Supply Co., Ltd. principally engages in the business of water supply. Currently, it supplies water to the southern area of Jiaojiang District and Taizhou Bay New Area (Jiaojiang Part) with a daily water supply capacity of 240,000 m[3] , and serves 450,000 people. The company has water production branches, business operation branches, installation branches and nine functional departments: Party Affairs Office, Business Management Department, Intelligent Water Office, Finance Department, Materials Department, Business Department, Water Quality Department, Security Department and Technology Improvement Office. It has over 300 employees, including 82 technical specialists. The water supply volume of the company in 2018 exceeded 70,000,000 m[3] .

The company currently possesses Shetoushang Water Treatment Plant, Jiaonan Pumping Station, Yongning Water Treatment Plant and Hongjia Pumping Station. Shetoushang Water Treatment Plant and Yongning Water Treatment Plant draw the water of Huangyan Changtan Reservoir as the water source, and Jiaonan Pumping Station and Hongjia Pumping Station draw the clean water of Taizhou Water Group Co., Ltd. as raw water. The company has water quality department and water laboratory, and is equipped with online monitoring instruments and achieves automatic production. It implements the three-tier water quality management system covering group-level, plant-level and company-level measures and strictly follows GB5749-2006 (Standards for Drinking Water Quality) and GB/T206-2005.

V. VALUATION BASIS (VALUATION REFERENCE DATE)

To make the Valuation Reference Date close to the dates of proposed economic activity and valuation work, the client determines the Valuation Reference Date as 31 October 2020, and includes the relevant agreement in the engagement contract.

The Valuation Reference Date is determined by the client on basis of the actual conditions of this project, taking into account factors that the Valuation Reference Date is most close to the date of materializing the economic activity and that there will be fewest adjustments after the Valuation Reference Date.

VI. INVESTIGATION AND ANALYSIS (PERFORMANCE OF VALUATION PROCEDURES)

(I) Asset verification stage

The valuer provides the appraised entity with the sample of Asset Reporting Form for Valuation according to the requirements of asset valuation, and assists the appraised entity to check the assets;
Gain the information of basic conditions of the appraised entity and conditions of assets to be appraised, and collect relevant materials;

– VA-7 –

APPENDIX VA

SUMMARY OF THE TAIZHOU WATER SUPPLY VALUATION REPORT

Review and verify the Asset Reporting Form for Valuation and the relevant calculation materials provided by the appraised entity;
Conduct on-site verification and investigation based on the content of Asset Reporting Form for Valuation, collect relevant information of asset acquisition and construction, operation and maintenance, and check and record asset conditions;
Collect property evidences including contracts and invoices related to assets to be appraised, and verify the asset ownership;
Collect and reorganise industry data, and gain the information of the competitiveness and risks of the appraised entity;
Obtain materials including historical revenues, costs, expenses and other aspects of the appraised entity to learn its existing production capability and development plans;
Collect and verify other relevant information that is necessary to the asset valuation.

(II) Estimate stage

Prepare specific valuation methods for each category of assets based on the actual conditions and characteristics of assets to be appraised;
Collect market information;
Valuate the assets to be appraised, and calculate their appraised values;
Base on the future earnings forecast materials provided by the appraised entity, take into consideration actual conditions of the appraised entity, review the relevant information, reasonably determine valuation assumptions, and formulate the future earnings forecast. Then analyse and compare each category of parameters, select specific calculation methods, and determine the valuation result.

– VA-8 –

APPENDIX VA

SUMMARY OF THE TAIZHOU WATER SUPPLY VALUATION REPORT

VII. VALUATION METHODS

(I) Selection of valuation methods

According to the existing asset valuation standards and relevant provisions, basic methods for assessing the value of an enterprise include asset-based approach, market approach and income approach.

Given the characteristics of the enterprise under the valuation, it is difficult for valuers to identify comparable companies that are similar to the enterprise to be appraised in the open market. In addition, as the marketisation and informationization in China currently stay at relatively lower levels, it is difficult to collect sufficient equity transactions of similar enterprises, and it is also impossible to acquire information of factors and conditions that affect prices of the aforesaid transactions through open and regular channels and to adjust the transaction prices through quantifying each category of factors to correction coefficients. Therefore, the adoption of market approach has valuation technical defects, and it is inappropriate for the valuation to adopt the market approach.

Taizhou Water Supply Co., Ltd. principally engages in the business of water supply and belongs to the asset-heavy industry. Despite the relatively lower profits in recent years, its cash flows are acceptable, and its future earnings can be reasonably forecast under the circumstance that it can continue to operate the existing business content and scope, with the discount rate corresponding to the risk levels associated with its future earnings to be reasonably estimated as well. Therefore, it is appropriate for the valuation to adopt the income approach.

As each category of assets and liabilities of the appraised entity can be reasonably identified in accordance with accounting policies, its business operation and other conditions, the valuation has the condition to select appropriate and specific valuation methods based on the characteristics of each category of assets and liabilities and the operation condition to perform such valuation methods. Therefore, it is appropriate for the valuation to adopt the asset-based approach.

Taking into account the target and purpose of asset valuation and the information collected by valuers, the valuation adopts the asset-based approach and the income approach to respectively assess the value of total shareholders’ equity of Taizhou Water Supply Co., Ltd. to be appraised.

(II) Introduction of asset-based approach

– VA-9 –

APPENDIX VA

SUMMARY OF THE TAIZHOU WATER SUPPLY VALUATION REPORT

According to the specific conditions of each breakdown of assets to be appraised, it selects the appropriate method to estimate the values of each breakdown of assets, sums them up and then deducts the values of relevant liabilities to arrive at the appraised value of the total shareholders’ equity. The formula is:

Appraised value of total shareholders’ equity = ∑Appraised values of each breakdown of assets - ∑Appraised values of each breakdown of liabilities

(III) Introduction of income approach

The income approach is a valuation method that determines the value of valuation target by capitalising or discounting the expected incomes of the appraised entity.

I) Model of income approach

Considering the purpose and the target, the valuation adopts the FCFF model to determine the value of free cash flow for the firm (FCFF), analyses the value of surplus assets and non-operating assets to measure the overall value of the enterprise, and deducts its interest-bearing debts to determine the value of total shareholders’ equity. The specific formula is:

Value of total shareholders’ equity = Overall value of the enterprise – Interest-bearing debts

Overall value of the enterprise = Appraised value of FCFF + Value of non-operating assets + Value of surplus assets

==> picture [245 x 29] intentionally omitted <==

Where: n – definite forecast years

CFFt – cash flow for the firm in the t[th] year

r – weighted average cost of capital

t – the t[th] year in the future

Pn – going concern value after the n[th] year

– VA-10 –

APPENDIX VA

SUMMARY OF THE TAIZHOU WATER SUPPLY VALUATION REPORT

II) Determination of income period and forecast period

The valuation assumes that the period of the enterprise’s continued existence is perpetual period, and the income period is indefinite period. It adopts the sectioning method to forecast the incomes of the enterprise, which means that the enterprise’s future incomes are divided into those of definite forecast period and those after definite forecast period. The determination of definite forecast period comprehensively considers the cyclicity of industry products and the development of relevant enterprises. Based on valuers’ market research and forecast, it is appropriate to adopt five years (being the end of 2024) as the section point.

III) Determination of income – cash flow

The expected incomes in the valuation are based on the FCFF, with the formula shown below:

FCFF = Profit before interest but after tax + Depreciation and amortisation – Increase of working capital – Capital expenditures

Profit before interest but after tax = Revenue – Costs of operation – Taxes and surcharges – General and administrative expenses – Operating expenses – Finance costs (other than interest expenses) – Asset impairment losses + Non-operating revenue – Non-operating expenses – Income taxes

IV) Determination of discount rate

The appraised value of FCFF corresponds to the value of owners’ equity and the value of creditors’ equity, and the corresponding discount rate is the weighted average cost of capital (WACC) of the enterprise’s capital.

==> picture [205 x 26] intentionally omitted <==

Where: WACC – weighted average cost of capital;

Ke – cost of equity capital;

Kd – cost of debt capital;

T – income tax rate;

D/E – capital structure.

– VA-11 –

APPENDIX VA

SUMMARY OF THE TAIZHOU WATER SUPPLY VALUATION REPORT

The cost of debt capital Kd adopts the one-year lending rate, and the weight is calculated by adopting the average debt composition of listed companies in the same industry where the enterprise operates.

The cost of equity capital is calculated by adopting the international generally accepted CAPM model, with the formula shown below:

==> picture [126 x 14] intentionally omitted <==

Where: Ke – cost of equity capital

Rf – current risk-free interest rate

Beta – systemic risk factor of equity

ERP – market risk premium

Rc – company-specific risk adjustment factor

V) Value of non-operating assets and surplus assets

Non-operating assets (liabilities) represent assets (liabilities) not related to operating incomes of the enterprise.

Surplus assets represent the portion of operating assets in excess of those required for the enterprise’s normal operation, and include surplus cash and cash equivalents and negotiable securities.

The value of non-operating assets and liabilities is determined by the appraised value of corresponding assets and liabilities under the asset-based approach.

VI) Value of interest-bearing debts

As at the Valuation Reference Date, interest-bearing debts represent bank borrowings. The appraised value of interest-bearing debts is the verified book value.

– VA-12 –

APPENDIX VA SUMMARY OF THE TAIZHOU WATER SUPPLY VALUATION REPORT

VIII. KEY ASSUMPTIONS (VALUATION ASSUMPTIONS)

1. Basic assumptions

(1) The valuation is based on the changes in the subject of title interests of the assets to be appraised. The changes in the subject of title interests include all changes and partial changes of the subject of interests.
(2) The evaluation is based on the assumption of open market transactions.
(3) The evaluation is based on the premise that the appraised unit continues to operate in accordance with the predetermined business objectives, that is, all assets of the appraised unit are still used in accordance with the current use and method, while change of the current use or remaining use unchanged but changing the planning and use method is not considered.
(4) The evaluation is based on the fact that the relevant legal documents, various accounting documents, account books and other information provided by the appraised unit are true, complete, legal and reliable.
(5) The evaluation assumes that the macro-environment is relatively stable, that is, the country’s existing macroeconomic, politics, policies and industrial policies of the industry in which the appraised unit is located have no major changes, and the socio-economic development is sustained, healthy and stable; the national monetary and financial policies remain in the current state and will not cause major fluctuations in the social economy; national taxation maintains the current regulations, tax types and tax rates have no major changes; the country’s current interest rates, exchange rates, etc. have no major changes.
(6) The evaluation assumes that the business environment of the appraised unit is relatively stable, that is, there are no major changes in the social, political, legal, and economic business environment of the appraised unit’s main business premises and the areas in which it operates; there are no policy, legal or man-made obstacles for the appraised unit to carry out business activities within its established business scope.

2. Specific assumptions

(1) The profit forecast in the valuation is based on the development plan and profit forecast of the company provided by the appraised unit while maintaining its current business scope and continuing operations;

– VA-13 –

APPENDIX VA

SUMMARY OF THE TAIZHOU WATER SUPPLY VALUATION REPORT

(2) It is assumed that the management of the appraised unit is diligent and responsible and has sufficient management skills and good professional ethics;
(3) It is assumed that the operating income, costs, renewal and transformation expenditures of the appraised unit in each year are incurred evenly throughout the year;
(4) It is assumed that the accounting policies adopted by the appraised unit during the earnings forecast period are consistent with the accounting policies adopted on the Valuation Reference Date in all major aspects;
(5) It is assumed that there are no material adverse effects on the appraised unit caused by other force majeure factors beyond the control of human and unforeseeable factors.

According to the requirements of asset evaluation, the appraiser determines that these preconditions are established on the Valuation Reference Date. When the above evaluation preconditions and assumptions change, conclusion of the valuation will become invalid.

IX. REVIEWED INFORMATIONS (EVALUATION BASIS)

(I) Economic Behavior Basis

Notice on the issue of Implementation Opinions on the Reform of Integration of Water Supply in Taizhou issued by the Municipal Committee Office of Taizhou and the Taizhou Municipal People’s Government Office ( Tai Shi Wei Ban [2018] No. 28).

(II) Legal and Regulation Basis

Asset Appraisal Law 《資產評估法》( );
Measures for the Administration of State-owned Asset Valuation 《國有( 資產評估管理辦法》);
Provisions on Certain Issues Concerning the Management of the Valuation of State-owned Assets 《國有資產評估管理若干問題的規定》( );
Interim Regulations on Supervision and Administration of State-owned Assets of Enterprises 《企業國有資產監督管理暫行條例》( );
Interim Measures for the Administration of the Appraisal of State-owned Assets of Enterprises 《企業國有資產評估管理暫行辦法》( );

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APPENDIX VA

SUMMARY OF THE TAIZHOU WATER SUPPLY VALUATION REPORT

Notice on Issues Relating to Strengthening the Management of the Valuation of State-owned Assets of Enterprises 《關於加強企業國有資產( 評估管理工作有關問題的通知》);
Enterprise State-owned Assets Law 《企業國有資產法》( );
Measures for the Supervision and Administration of the Transactions of State-Owned Assets of Enterprises 《企業國有資產交易監督管理辦法》( );
The Company Law 《公司法》( ), the Contract Law 《合同法》( ) and etc.;
Other laws and regulations related to asset valuation.

(III) Valuation Standard Basis

Basic Standards for Asset Valuation 《資產評估基本準則》( );
Code of Professional Ethics for Assets Valuation 《資產評估職業道德準( 則》);
Code of Practice on Asset Valuation – Asset Valuation Procedures (《資產評估執業準則－資產評估程序》);
Code of Practice on Asset Valuation – Asset Valuation Report (《資產評估執業準則－資產評估報告》);
Code of Practice on Asset Valuation – Asset Valuation Engagement Contract 《資產評估執業準則－資產評估委托合同》( );
Code of Practice on Asset Valuation – Asset Valuation Files (《資產評估執業準則－資產評估檔案》);
Code of Practice on Asset Valuation – Asset Valuation Methods (《資產評估執業準則－資產評估方法》);
Code of Practice on Asset Valuation – Engagement of Experts and Use of Relevant Reports 《資產評估執業準則－利用專家工作及相關報告》( );
Code of Practice on Asset Valuation – Enterprise Value 《資產評估執業( 準則－企業價值》);
Code of Practice on Asset Valuation – Machinery and Equipment (《資產評估執業準則－機器設備》);

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Code of Practice on Asset Valuation – Real Property (《資產評估執業準則－不動產》);
Guiding Opinions on Types of Value in Asset Valuation 《資產評估價值( 類型指導意見》);
Guiding Opinions on Legal Ownership of Valuation Subjects (《資產評估對象法律權屬指導意見》);
Guide to the Valuation Report on State-owned Assets of Enterprises 《企業國有資產評估報告指南》( ).

(IV) Basis of Ownership

The business registration certificate and articles of association provided by Taizhou Water Supply Co., Ltd.;
Economic contracts, agreements, capital appropriation certificates (vouchers), financial statements and other accounting materials related to the acquisition and use of assets and rights;
Certificates of title in real estate, house ownership certificates, state-owned land use certificates, land allocation approval documents, motor vehicle driving certificates, invoice and other ownership certificates;
Other certification documents for property rights.

(V) Basis for Pricing

Evaluation declaration form provided by the appraised unit;
The audit report and related financial statements of the appraised unit as of the Valuation Reference Date;
Regulations on Calculation of Costs of Construction Works of Zhejiang Province (2018 version), Budget Quota for Building Construction and Decoration Works of Zhejiang Province (2018 version), Budget Quota for General Installation Works of Zhejiang Province (2018 version), Budget Quota for Public Utilities Works of Zhejiang Province (2018 version), Budget Quota for Landscape, Antique and Construction Works of Zhejiang Province (2018 version), Charge Quota for Construction Machinery of Zhejiang Province (2018 version), Base-period Prices for Building and Installation Materials in Zhejiang Province (2018 version), Indicators for Investment Estimation of Public Utilities Works - Water Supply Works, Indicators for Investment Estimation of Public Utilities Works – Drainage Works;

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Price Information for Construction Works in Zhejiang Province (2020.10);
Notice of the NDRC on Further Easing Management over Professional Service Pricing for Construction Projects;
Notice on Issue of the Measures for Construction Cost Management for Basic Construction Works;
Construction work related original information, business contracts, quotation records, and etc.;
Survey information on market prices of properties in the area where the assets are located;
Quotation Booklet for Electrical and Mechanical Products and other market price information and quotation records;
Purchase contracts, invoices and payment vouchers for major equipment and pipelines; technical files, inspection reports, operation records and other information on the equipment;
Manual of Data and Parameters Commonly Used in Assets Valuation, Basic Construction Financial Rules, Rate Charging Standards for Engineering Survey and Design and other reference materials for the determination of valuation parameters;
Relevant polices, provisions, measures for implementation and other regulatory documents promulgated by Zhejiang Provincial People’s Government and related government departments;
Historical production and operation information, business planning and revenue projections of the appraised entity;
Industry statistics, capacity of relevant industries and markets, market outlook, information on market development and trend analysis, pricing strategies and future marketing approaches, relevant information on companies with similar businesses;
Relevant data as retrieved via the RoyalFlush iFinD financial data portal;

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The loan prime rate as published by the People’s Bank of China on the Valuation Reference Date;
Accounting Standards for Business Enterprises and other accounting regulations and systems, departmental rules and regulations, etc.;
Supporting documents as gathered by valuation professionals for the verification, survey, testing and analysis of assets;
Other documents.

X. RESTRICTIONS (RESTRICTIONS ON THE USE OF ASSET VALUATION REPORT)

The asset valuation report may only serve the purpose of valuation stated herein.
The asset valuation institution and the valuer will not be held liable or take the consequences, in case the client or other users of the valuation report fail to comply with the relevant laws, administrative regulations and use the report for other purposes than what is stated herein.
Any institution and individual shall not use the asset valuation report other than the client, other report users stated in the commission contract for asset valuation, and report users in compliance with laws and administrative regulations.
The user of the asset valuation report should correctly understand the valuation conclusion, which is not equal to the achievable price of the valuation object, and the valuation conclusion should not be considered as a guarantee for the achievable price of the valuation object.
The validity period of the valuation conclusion is one year, that is from 31 October 2020 (the Valuation Reference Date) to 30 October 2021. When the objective of the valuation is hit within one year from the Valuation Reference Date, the valuation conclusion shall be a useful guideline on the transaction price. The valuation conclusion shall be re-determined if the one-year limit is exceeded.

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The valuation conclusion cannot be directly used when significant events occur after the asset Valuation Reference Date and within the validity period. If there is a change in the quantity of assets, the value of assets should be adjusted accordingly in accordance with the original valuation method; and if there is a material change in the asset pricing standard which has significantly affected the appraised value of assets, the client should promptly engage a valuer to re-determine the valuation conclusion.
If any policy change has a significant impact on the valuation conclusion, it should re-determine the Valuation Reference Date for another valuation.
The valuation conclusion shall not be used until the valuation report has been approved or filed with.

XI. NOTES (EXPLANATIONS ON SPECIAL MATTERS)

In the assessment of the market value of total shareholders’ equity of Taizhou Water Supply Co., Ltd., valuers conduct necessary verification to the legal ownership information of valuation target and relevant assets provided by the appraised entity and the source of such information, and have not noticed any defects in other ownership information of valuation target and relevant assets, except the following matters. It is the responsibility of the appraised entity to provide true, lawful and complete legal ownership information, and the responsibility of valuers is to perform necessary verification to the information provided by the appraised entity. The asset valuation report shall not be taken as the confirmation and assurance of the legal ownership of valuation target and relevant assets. If the appraised entity does not have the ownership or other relevant rights of the aforesaid assets, or is subject to partial restrictions in respect of the ownership or other relevant rights of the aforesaid assets, the valuation conclusion for the said assets and the valuation conclusion for the value of total shareholders’ equity of the appraised entity will be affected.
(1) As at the Valuation Reference Date, 19 buildings (with an aggregated floor area of 10,251.98 m[2] ) stated in the “Valuation Schedule of Fixed Assets – Buildings”, including the business hall at Qingnian Road and the meter room of Water Consumption Division, have not been registered for immovable property certificates. Taizhou Water Supply Co., Ltd. has provided the construction information and other relevant information and guarantees that the said assets are owned by itself.

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(2) As at the Valuation Reference Date, Item 18 in the “Valuation Schedule of Fixed Assets – Buildings”, namely buildings 1 and 2, Alley 186, Jingyuan Road, have not acquired the land use right certificate but have obtained the building ownership certificate. Taizhou Water Supply Co., Ltd. has provided the original contracts and other relevant materials and guarantees that the said assets are owned by itself.
(3) As at the Valuation Reference Date, the land use right (with a land area of 26,666.44 m[2] ) stated in Item 5 in the “Valuation Schedule of Intangible Assets – Land Use Rights” has not been registered for the immovable property certificate. Taizhou Water Supply Co., Ltd. has provided the original acquisition materials and guarantees that the said land is owned by itself.

For the aforesaid buildings and land use right that have not been registered for immovable property certificates, valuers take the area data provided by the relevant personnel of Taizhou Water Supply Co., Ltd. after site measurement as the calculation basis and include such data in the valuation result. Any difference between such data and the area stated in the certificates or the actual floor area will affect the valuation result.

As at the Valuation Reference Date, the appraised entity had the following external guarantees that may affect the relevant assets and make it difficult for valuers to consider in the process of valuation:

Taizhou Water Supply Co., Ltd. provided a guarantee for bank borrowings to Taizhou Jiaojiang Municipal Engineering Co., Ltd., with an amount of RMB50 million and a term from 9 July 2017 to 8 November 2020. The guarantee contract was not renewed when the term expired.

The appraised entity warrants that save as disclosed above, there were no other contingent events including pledge or charge of assets, external guarantees, pending litigations and significant financial commitments as at the Valuation Reference Date.

Pipelines to be appraised have been rebuilt for multiple times in the period from the establishment to the Valuation Reference Date, and data (including the material, the length) of such pipelines recorded in the books cannot be measured reliably. Therefore, the valuation determines the value of such pipelines by the information of material, length and diameter provided by the enterprise. If the length of pipelines is different from the actual length, or Taizhou Water Supply Co., Ltd. does not have the full ownership of such pipelines, the valuation result will be affected.

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For Jiaohong Pipeline Project and other pipeline projects (with an aggregated book value of RMB1,203,949.32) stated in Items 44 to 49 in the “Valuation Schedule of Fixed Assets – Pipelines and Trenches”, the relevant pipeline construction materials are not available, and the relevant data cannot be provided due to the long history of such projects. Therefore, the book value is taken as the appraised value.
As agreed by the client, the value of business hall at Qingnian Road stated in Item 1 in the “Valuation Schedule of Fixed Assets – Buildings”, renovation of business hall at Qingnian Road stated in Item 1 in the “Valuation Schedule of Fixed Assets – Buildings and Other Ancillary Facilities” and pipeline assets of Taizhou Second Phase Water Supply Project (water pipes from Taizhou Water Treatment Plant to Jiaojiang Jiaonan Distribution and Pumping Station) stated in Items 212 to 215 in the “Valuation Schedule of Fixed Assets – Pipelines and Trenches” are not to be included in the consideration of equity acquisition. The aggregate appraised value of the aforesaid assets is RMB26,063,515.80. Excluding the value of the aforesaid assets, the appraised value of total shareholders’ equity of Taizhou Water Supply Co., Ltd. is RMB51,493,069.63 (FIFTY-ONE MILLION, FOUR HUNDRED AND NINETY-THREE THOUSAND, SIXTY-NINE YUAN, AND SIXTY-THREE CENTS).
In the valuation, valuers have not conducted technical inspection to the technical parameter and performance of facilities as at the Valuation Reference Date. After site investigation, valuers make judgements on the assumption that the relevant technical information and operation records provided by the appraised entity is true and valid.

In the valuation, valuers have not conducted technical inspection to the concealed works and interior structures (which cannot be observed directly by eyes) of buildings and structures. After site investigation, valuers make judgements without the assistance of measuring instruments but on the assumption that the relevant project information provided by the appraised entity is true and valid.

As most of the water pipes to be appraised, including process pipelines, are underground, valuers verify the authenticity of such assets mainly by obtaining design documents and the relevant distribution maps, project settlement reports, facility and pipeline inspection reports, original accounting evidences and invoices, and conduct random inspections to verify the inspection shafts of some pipelines according to the design and monitoring information stated above.

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The valuation adopts the impairment treatment to identified fixed asset demolition and retirement or assets recorded in the books but having no physical items. The enterprise shall perform the due procedures for reporting if it requires accounting treatments.
In the valuation, valuers have not considered the tax implications related to the valuation appreciation or depreciation of assets.
The outbreak of COVID-19 in many countries around the world in 2020 has greatly affected the macro economy and market information. Currently, the impact of the pandemic on economic development cannot be estimated accurately, so the valuation has not considered the potential impact the subsequent development of the pandemic may bring to the valuation conclusion as at the Valuation Reference Date.
The valuation conclusion is the current market value of total shareholders’ equity based on the purpose of the valuation and the assumptions disclosed in the report, without considering the impact on the appraised value caused by the potentially increased or decreased price resulted from the special transaction method, or the impact on the asset value caused by changes of the macroeconomic environment and the natural force and other force majeure. The target of valuation is the value of total shareholders’ equity, and the value of any part of shareholders’ equity is not necessarily equal to the product of the value of total shareholders’ equity and the shareholding percentage. There may be a premium resulted from the control right or a discount resulted from the lack of control right.
When assessing the market value of total shareholders’ equity, valuers make necessary and reasonable assumptions according to the current actual conditions and state such assumptions in the asset valuation report. Such assumptions serve as the prerequisites for valuers to conduct the asset valuation. When there are material changes of future economic environment and the aforesaid assumptions, valuers do not have the responsibility to derive a different asset valuation conclusion because of the changes of these prerequisites.
The appraisal agency and valuers accept no responsibility in respect of the validity, completeness and truthfulness of information provided by the client of asset valuation and the appraised entity, including business licenses, capital verification reports, audit reports and accounting evidences.
In the valuation, for other potential defects of the appraised entity that may affect the valuation conclusion, the appraisal agency and valuers accept no responsibility when the appraised entity has not provided special explanations in the process of asset valuation and valuers are unable to identify such defects with their professional experience.

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XII. OPINION OF VALUE (VALUATION CONCLUSION)

The total shareholders’ equity of Taizhou Water Supply Co., Ltd. is appraised, using the asset-based approach to be RMB77,636,516.73 and using the income approach to be RMB17,480,000.00, representing a difference of RMB60,156,516.73 or 344.14%.

After analysis, valuers considered the implementation of the above two valuation approaches to be normal and the selection of parameters reasonable. Given that the revenue estimation is based on expectations and judgments on future macro policies and the water supply industry, and that the quality and quantity of data used in the income approach is inferior to that of the asset-based approach due to more uncertainties in the prevailing economic and market environment, valuers are of the view that the valuation results derived using the asset-based approach are more suitable for the purpose of the valuation.

Accordingly, the valuation result under the asset-based approach of RMB77,636,516.73 (SEVENTY-SEVEN MILLION, SIX HUNDRED AND THIRTY-SIX THOUSAND, FIVE HUNDRED AND SIXTEEN YUAN, AND SEVENTY-THREE CENTS) was eventually adopted as the appraised value of the total shareholders’ equity of Taizhou Water Supply Co., Ltd.

As agreed by the client, the value of business hall at Qingnian Road stated in Item 1 in the “Valuation Schedule of Fixed Assets – Buildings”, renovation of business hall at Qingnian Road stated in Item 1 in the “Valuation Schedule of Fixed Assets – Buildings and Other Ancillary Facilities” and pipeline assets of Taizhou Second Phase Water Supply Project (water pipes from Taizhou Water Treatment Plant to Jiaojiang Jiaonan Distribution and Pumping Station) stated in Items 212 to 215 in the “Valuation Schedule of Fixed Assets – Pipelines and Trenches” are not to be included in the consideration of equity acquisition. The aggregate appraised value of the aforesaid assets is RMB26,051,260.00. Excluding the value of the aforesaid assets, the appraised value of total shareholders’ equity of Taizhou Water Supply Co., Ltd. is RMB51,585,256.73 (FIFTY-ONE MILLION, FIVE HUNDRED AND EIGHTY-FIVE THOUSAND, TWO HUNDRED AND FIFTY-SIX YUAN, AND SEVENTY-THREE CENTS).

The above content is extracted from the Taizhou Water Supply Valuation Report. To learn more about the valuation process and better understand the valuation conclusions, please read the complete Taizhou Water Supply Valuation Report.

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SUMMARY OF THE JIAOBEI WATER SUPPLY VALUATION REPORT

The following is an English translation of the summary of the Jiaobei Water Supply Valuation Report, which is prepared by the Independent Valuer for the purpose of, among others, inclusion in this circular. The Jiaobei Water Supply Valuation Report is prepared in Chinese and this English translation is provided for your reference only. In the event of any inconsistency between the Chinese and English versions, the Chinese version shall prevail.

Summary of the Asset Valuation Report in relation to the Proposed Acquisition of Equity Interests of Taizhou Jiaobei Water Supply Co., Ltd. by Taizhou Water Group Co., Ltd.

Kun Yuan Ping Bao (2021) No. 186

I. PURPOSE OF VALUATION

Pursuant to the Notice the Municipal Committee Office of Taizhou and the Taizhou Municipal People’s Government Office on the Issue of Implementation Opinions on the Reform of Integration of Water Supply in Taizhou (Tai Shi Wei Ban [2018] No. 28), Taizhou Water Group Co., Ltd. proposes to acquire the equity interest of Taizhou Jiaobei Water Supply Co., Ltd., and it is necessary to assess the value of total shareholders’ equity of Taizhou Jiaobei Water Supply Co., Ltd. that such an economic activity involves.

The purpose of the valuation is to provide a reference basis for the value of total shareholders’ equity of Taizhou Jiaobei Water Supply Co., Ltd. to the economic activity.

II. SCOPE OF WORK

The target of the valuation is the total shareholders’ equity of Taizhou Jiaobei Water Supply Co., Ltd. that the aforesaid economic activity involves.

The scope of the valuation is all the assets and relevant liabilities as at 31 October 2020 that are reported by Taizhou Jiaobei Water Supply Co., Ltd. and audited by Zhejiang Zhongyong Zhongtian Certified Public Accountants Co., Ltd. As reflected in the financial statements as at 31 October 2020 (adopting the same basis as that of the financial statements of parent company) which are provided by Taizhou Jiaobei Water Supply Co., Ltd., the book values of assets, liabilities and shareholders’ equity are RMB56,837,061.28, RMB32,462,358.13 and RMB24,374,703.15, respectively.

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SUMMARY OF THE JIAOBEI WATER SUPPLY VALUATION REPORT

III. ECONOMIC AND INDUSTRY OVERVIEW (ECONOMIC AND INDUSTRY ANALYSIS)

1. Analysis of macro and regional economic factors that affect the operation of the enterprise

(1) Macro economy of China

(2) Analysis of regional economic factors that affect the operation of the enterprise

Taizhou Jiaobei Water Supply Co., Ltd. is located in Taizhou, Zhejiang Province. Taizhou is a prefecture-level city of Zhejiang Province, one of the 27 cities of the core region of Yangtze River Delta, and the regional core city and modern port city in the coastal areas of Zhejiang Province which is approved by the State Council. In the first three quarters of 2020, the city reported a GDP growth of 1.7%, turning the negative growth to a positive one.

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2. Analysis of current development and prospect of the industry in which the enterprise operates

(1) Industrial classification

Taizhou Jiaobei Water Supply Co., Ltd. principally engages in the business of water supply. According to the industrial classification standard contained in the Industrial Classification for National Economic Activities (GB/T4754-2011), the industry to which it belongs is classified as “water production and supply” (industry code: D4610) in the “water production and supply industry” (industry code: D46).

(2) Development of water supply industry

1) National water consumption

The economic and social development creates a huge demand for water, and the water demand grows with China’s continuous and rapid economic development and ever-increasing population.

In 2019, the national water consumption was 599.1 billion m[3] , which was basically the same level as that of the prior year, and the per capita water consumption is 429 m[3] .

Changes of National Water Consumption and Per Capita Water Consumption from 2008 to 2019

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Source: the National Bureau of Statistics of China (“ NBS ”), Forward Business and Intelligence Co., Ltd. (“ Forward Intelligence ”) @ FORWARD-THE ECONOMIST APP

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China’s Structure of Water Resource Consumption in 2019

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Source: the NBS, Forward Intelligence @ FORWARD-THE ECONOMIST APP

China’s Structure of Water Resource Consumption in 2019

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Source: the NBS, Forward Intelligence

@ FORWARD-THE ECONOMIST APP

Data released by the National Bureau of Statistics showed that from 2012 to 2018, industrial enterprises above designated size in China’s water production and supply industry recorded steady year-on-year growth in both revenues and profits of principal businesses, with compound growth rates reaching 12.52% and 25.44% respectively. In 2018, China had 1,934 water supply enterprises above designated size, whose revenue from principal businesses reached RMB260 billion; cost of principal businesses exceeded RMB190 billion, and total profit was about RMB28 billion.

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Total Profit of Industrial Enterprises Above Designated Size in China’s Water Production and Supply Industry from 2012 to 2019

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Source: the NBS, Forward Intelligence

@ FORWARD-THE ECONOMIST APP

China’s Comprehensive Urban Water Supply Capacity from 2010 to 2018

	Comprehensive	Length of	Total	Population with	Water
Year	water supply capacity	water pipelines	water supply	access to water	penetration rate
	(100,000,000 m3/day)	(10,000 km)	(100,000,000 tonnes)	(100,000,000)	(%)
2010	2.76	54	507.9	3.82	96.68%
2011	2.67	57.4	513.4	3.97	97.04%
2012	2.72	59.2	523	4.1	97.16%
2013	2.81	64.6	537.3	4.23	97.56%
2014	2.87	67.7	546.7	4.35	97.64%
2015	2.97	71	560.5	4.51	98.07%
2016	3.03	75.7	580.7	4.7	98.42%
2017	3.05	79.7	593.8	4.83	98.30%
2018	3.12	86.7	614.6	5.03	98.36%

Source: the NBS, Forward Intelligence @ FORWARD-THE ECONOMIST APP

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2) Great potential of the rural water supply market

In January 2016, six ministries including the NDRC, the Ministry of Water Resources, the Ministry of Finance, the National Health and Family Planning Commission, Ministry of Environmental Protection and the MOHURD jointly released the Notice on the Work for Improving the Drinking Water Safety in Rural Areas and Preparing the Plan in “13th Five-Year Plan” Period, which set the following objectives: by 2020, the safe and centralised water supply rate in China’s rural areas would stay above 85%, and the water penetration rate would be over 80%; the rate of water quality reaching the standard would be significantly improved; the water supply guarantee of small projects would not be lower than 95%. Public services of urban water supply would be extended to rural areas to improve the proportion of villages covered by the urban water supply network to 33%. China has a great potential in water supply project construction, especially in urban built-up areas, village areas and rural areas in central and western China.

3) Continuous market growth boosted by urbanisation

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IV. OVERVIEW OF TARGET COMPANY (BUSINESS CONDITIONS)

Taizhou Jiaobei Water Supply Co., Ltd. was established in 2003, which is located at Zhangan Street, Jiaojiang District, Taizhou City, Zhejiang Province, and is mainly responsible for supplying domestic and production water for Zhangan and Qiansuo, two streets in Jiaobei. Its water source is drawn from Xikou Reservoir in Linhai. The designed scale of water supply volume of Taizhou Jiaobei Water Supply Co., Ltd. is currently 25,000 m[3] per day.

V. VALUATION BASIS (VALUATION REFERENCE DATE)

VI. INVESTIGATION AND ANALYSIS (PERFORMANCE OF VALUATION PROCEDURES)

(I) Asset verification stage

The valuer provides the appraised entity with the sample of Asset Reporting Form for Valuation according to the requirements of asset valuation, and assists the appraised entity to check the assets;
Gain the information of basic conditions of the appraised entity and conditions of assets to be appraised, and collect relevant materials;
Review and verify the Asset Reporting Form for Valuation and the relevant calculation materials provided by the appraised entity;
Conduct on-site verification and investigation based on the content of Asset Reporting Form for Valuation, collect relevant information of asset acquisition and construction, operation and maintenance, and check and record asset conditions;
Collect property evidences including contracts and invoices related to assets to be appraised, and verify the asset ownership;
Collect and reorganise industry data, and gain the information of the competitiveness and risks of the appraised entity;

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Obtain materials including historical revenues, costs, expenses and other aspects of the appraised entity to learn its existing production capability and development plans;
Collect and verify other relevant information that is necessary to the asset valuation.

(II) Estimate stage

Prepare specific valuation methods for each category of assets based on the actual conditions and characteristics of assets to be appraised;
Collect market information;
Valuate the assets to be appraised, and calculate their appraised values;
Base on the future earnings forecast materials provided by the appraised entity, take into consideration actual conditions of the appraised entity, review the relevant information, reasonably determine valuation assumptions, and formulate the future earnings forecast. Then analyse and compare each category of parameters, select specific calculation methods, and determine the valuation result.

VII. VALUATION METHODS

(I) Selection of valuation methods

According to the existing asset valuation standards and relevant provisions, basic methods for assessing the value of an enterprise include asset-based approach, market approach and income approach.

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Taizhou Jiaobei Water Supply Co., Ltd. principally engages in the business of water supply and belongs to the asset-heavy industry. Despite the relatively lower profits in recent years, its cash flows are acceptable, and its future earnings can be reasonably forecast under the circumstance that it can continue to operate the existing business content and scope, with the discount rate corresponding to the risk levels associated with its future earnings to be reasonably estimated as well. Therefore, it is appropriate for the valuation to adopt the income approach.

(II) Introduction of asset-based approach

The asset-based approach is a valuation method that bases on the balance sheet of the appraised entity as at the Valuation Reference Date, reasonably assesses the values of assets and liabilities booked in the balance sheet and identifiable off-balance sheet assets and liabilities, and determines the value of the valuation target. The approach is based on the assumption of replacing production elements. According to the specific conditions of each breakdown of assets to be appraised, it selects the appropriate method to estimate the values of each breakdown of assets, sums them up and then deducts the values of relevant liabilities to arrive at the appraised value of the total shareholders’ equity. The formula is:

Appraised value of total shareholders’ equity = ∑Appraised values of each breakdown of assets – ∑Appraised values of each breakdown of liabilities

(III) Introduction of income approach

The income approach is a valuation method that determines the value of valuation target by capitalising or discounting the expected incomes of the appraised entity.

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I) Model of income approach

Value of total shareholders’ equity = Overall value of the enterprise – Interest-bearing debts

Overall value of the enterprise = Appraised value of FCFF + Value of non-operating assets + Value of surplus assets

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Where: n – definite forecast years

CFFt – cash flow for the firm in the t[th] year

r – weighted average cost of capital

t – the t[th] year in the future

Pn – going concern value after the n[th] year

II) Determination of income period and forecast period

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III) Determination of income – cash flow

The expected incomes in the valuation are based on the FCFF, with the formula shown below:

FCFF = Profit before interest but after tax + Depreciation and amortisation – Increase of working capital – Capital expenditures

Profit before interest but after tax = Revenue – Costs of operation - Taxes and surcharges – General and administrative expenses – Operating expenses – Finance costs (other than interest expenses) – Asset impairment losses + Non-operating revenue – Non-operating expenses – Income taxes

IV) Determination of discount rate

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Where: WACC – weighted average cost of capital;

Ke – cost of equity capital;

Kd – cost of debt capital;

T – income tax rate;

D/E – capital structure.

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The cost of equity capital is calculated by adopting the international generally accepted CAPM model, with the formula shown below:

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Where: Ke – cost of equity capital

Rf – current risk-free interest rate

Beta – systemic risk factor of equity

ERP – market risk premium

Rc – company-specific risk adjustment factor

V) Value of non-operating assets and surplus assets

Non-operating assets (liabilities) represent assets (liabilities) not related to operating incomes of the enterprise.

Surplus assets represent the portion of operating assets in excess of those required for the enterprise’s normal operation, and include surplus cash and cash equivalents and negotiable securities.

The value of surplus assets and non-operating assets (liabilities) is determined by the appraised value of corresponding assets and liabilities under the asset-based approach.

VI) Value of interest-bearing debts

As at the Valuation Reference Date, interest-bearing debts represent bank borrowings. The appraised value of interest-bearing debts is the verified book value.

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VIII. KEY ASSUMPTIONS (VALUATION ASSUMPTIONS)

1. Basic assumptions

(1) The valuation is based on the changes in the subject of title interests of the assets to be appraised. The changes in the subject of title interests include all changes and partial changes of the subject of interests.
(2) The evaluation is based on the assumption of open market transactions.
(3) The evaluation is based on the premise that the appraised unit continues to operate in accordance with the predetermined business objectives, that is, all assets of the appraised unit are still used in accordance with the current use and method, while change of the current use or remaining use unchanged but changing the planning and use method is not considered.
(4) The evaluation is based on the fact that the relevant legal documents, various accounting documents, account books and other information provided by the appraised unit are true, complete, legal and reliable.
(5) The evaluation assumes that the macro-environment is relatively stable, that is, the country’s existing macroeconomic, politics, policies and industrial policies of the industry in which the appraised unit is located have no major changes, and the socio-economic development is sustained, healthy and stable; the national monetary and financial policies remain in the current state and will not cause major fluctuations in the social economy; national taxation maintains the current regulations, tax types and tax rates have no major changes; the country’s current interest rates, exchange rates, etc. have no major changes.
(6) The evaluation assumes that the business environment of the appraised unit is relatively stable, that is, there are no major changes in the social, political, legal, and economic business environment of the appraised unit’s main business premises and the areas in which it operates; there are no policy, legal or man-made obstacles for the appraised unit to carry out business activities within its established business scope.

2. Specific assumptions

(1) The profit forecast in the valuation is based on the development plan and profit forecast of the company provided by the appraised unit while maintaining its current business scope and continuing operations;

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(2) It is assumed that the management of the appraised unit is diligent and responsible and has sufficient management skills and good professional ethics;
(3) It is assumed that the operating income, costs, renewal and transformation expenditures of the appraised unit in each year are incurred evenly throughout the year;
(4) It is assumed that the accounting policies adopted by the appraised unit during the earnings forecast period are consistent with the accounting policies adopted on the Valuation Reference Date in all major aspects;
(5) It is assumed that there are no material adverse effects on the appraised unit caused by other force majeure factors beyond the control of human and unforeseeable factors.

IX. REVIEWED INFORMATIONS (EVALUATION BASIS)

(I) Economic Behavior Basis

Notice on the issue of “Implementation Opinions on the Reform of Integration of Water Supply in Taizhou” issued by the Municipal Committee Office of Taizhou and the Taizhou Municipal People’s Government Office ( Tai Shi Wei Ban [2018] No. 28).

(II) Legal and Regulation Basis

The Asset Appraisal Law 《資產評估法》( );
Measures for the Administration of State-owned Asset Valuation 《國有( 資產評估管理辦法》);
Provisions on Certain Issues Concerning the Management of the Valuation of State-owned Assets 《國有資產評估管理若干問題的規定》( );
Interim Regulations on Supervision and Administration of State-owned Assets of Enterprises 《企業國有資產監督管理暫行條例》( );
Interim Measures for the Administration of the Appraisal of State-owned Assets of Enterprises 《企業國有資產評估管理暫行辦法》( );

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Notice on Issues Relating to Strengthening the Management of the Valuation of State-owned Assets of Enterprises 《關於加強企業國有資產( 評估管理工作有關問題的通知》);
Enterprise State-owned Assets Law 《企業國有資產法》( );
Measures for the Supervision and Administration of the Transactions of State-Owned Assets of Enterprises 《企業國有資產交易監督管理辦法》( );
The Company Law 《公司法》( ), the Contract Law 《合同法》( ) and etc.;
Other laws and regulations related to asset valuation.

(III) Valuation Standard Basis

Basic Standards for Asset Valuation 《資產評估基本準則》( );
Code of Professional Ethics for Assets Valuation 《資產評估職業道德準( 則》);
Code of Practice on Asset Valuation – Asset Valuation Procedures (《資產評估執業準則－資產評估程序》);
Code of Practice on Asset Valuation – Asset Valuation Report (《資產評估執業準則－資產評估報告》);
Code of Practice on Asset Valuation – Asset Valuation Engagement Contract 《資產評估執業準則－資產評估委託合同》( );
Code of Practice on Asset Valuation – Asset Valuation Files (《資產評估執業準則－資產評估檔案》);
Code of Practice on Asset Valuation – Asset Valuation Methods (《資產評估執業準則－資產評估方法》);
Code of Practice on Asset Valuation – Engagement of Experts and Use of Relevant Reports 《資產評估執業準則－利用專家工作及相關報告》( );
Code of Practice on Asset Valuation – Enterprise Value 《資產評估執業( 準則－企業價值》);
Code of Practice on Asset Valuation – Machinery and Equipment (《資產評估執業準則－機器設備》);
Code of Practice on Asset Valuation – Real Property (《資產評估執業準則－不動產》);

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Guiding Opinions on Types of Value in Asset Valuation 《資產評估價值( 類型指導意見》);
Guiding Opinions on Legal Ownership of Valuation Subjects (《資產評估對象法律權屬指導意見》);
Guide to the Valuation Report on State-owned Assets of Enterprises (《企業國有資產評估報告指南》).

(IV) Basis of Ownership

The business registration certificate, articles of association and other documents provided by Taizhou Jiaobei Water Supply Co., Ltd.;
Economic contracts, agreements, capital appropriation certificates (vouchers), final accounts, financial statements and other accounting materials related to the acquisition and use of assets and rights;
Vehicle driving certificates, invoices and other ownership certificates;
Other certification documents for property rights.

(V) Basis for Pricing

Evaluation declaration form provided by the appraised unit;
The audit report and related financial statements of the appraised unit as of the Valuation Reference Date;
Regulations on Calculation of Costs of Construction Works of Zhejiang Province (2018 version), Budget Quota for Building Construction and Decoration Works of Zhejiang Province (2018 version), Budget Quota for General Installation Works of Zhejiang Province (2018 version), Budget Quota for Public Utilities Works of Zhejiang Province (2018 version), Budget Quota for Landscape, Antique and Construction Works of Zhejiang Province (2018 version), Charge Quota for Construction Machinery of Zhejiang Province (2018 version), Base-period Prices for Building and Installation Materials in Zhejiang Province (2018 version), Indicators for Investment Estimation of Public Utilities Works - Water Supply Works, Indicators for Investment Estimation of Public Utilities Works - Drainage Works and other project cost and cost calculation basis and standards;
Price Information for Construction Works in Zhejiang Province (2020.10);

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Notice of the NDRC on Further Easing Management over Professional Service Pricing for Construction Projects;
Notice on Issue of the Measures for Construction Cost Management for Basic Construction Works;
Construction work related original information, final account of completed project, project contracts, business contracts, quotation records, and etc.;
Quotation Booklet for Electrical and Mechanical Products and other market price information and quotation records;
Purchase contracts, invoices and payment vouchers for major equipment and pipelines; technical files, inspection reports, operation records and other information on the equipment;
Manual of Data and Parameters Commonly Used in Assets Valuation, Basic Construction Financial Rules, Rate Charging Standards for Engineering Survey and Design and other reference materials for the determination of valuation parameters;
Relevant polices, provisions, measures for implementation and other regulatory documents promulgated by Zhejiang Provincial People’s Government and related government departments;
Historical production and operation information, business planning and revenue projections of the appraised entity;
Industry statistics, capacity of relevant industries and markets, market outlook, information on market development and trend analysis, pricing strategies and future marketing approaches, relevant information on companies with similar businesses;
Relevant data as retrieved via the RoyalFlush iFinD financial data portal;
The LPR as published by the People’s Bank of China on the Valuation Reference Date;
Accounting Standards for Business Enterprises and other accounting regulations and systems, departmental rules and regulations, etc.;
Supporting documents as gathered by valuation professionals for the verification, survey, testing and analysis of assets;
Other documents.

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X. RESTRICTIONS (RESTRICTIONS ON THE USE OF ASSET VALUATION REPORT)

The asset valuation report may only serve the purpose of valuation stated herein.
The asset valuation institution and the valuer will not be held liable or take the consequences, in case the client or other users of the valuation report fail to comply with the relevant laws, administrative regulations and use the report for other purposes than what is stated herein.
Any institution and individual shall not use the asset valuation report other than the client, other report users stated in the commission contract for asset valuation, and report users in compliance with laws and administrative regulations.
The user of the asset valuation report should correctly understand the valuation conclusion, which is not equal to the achievable price of the valuation object, and the valuation conclusion should not be considered as a guarantee for the achievable price of the valuation object.
The validity period of the valuation conclusion is one year, that is from 31 October 2020 (the Valuation Reference Date) to 30 October 2021. When the objective of the valuation is hit within one year from the Valuation Reference Date, the valuation conclusion shall be a useful guideline on the transaction price. The valuation conclusion shall be re-determined if the one-year limit is exceeded.
The valuation conclusion cannot be directly used when significant events occur after the asset Valuation Reference Date and within the validity period. If there is a change in the quantity of assets, the value of assets should be adjusted accordingly in accordance with the original valuation method; and if there is a material change in the asset pricing standard which has significantly affected the appraised value of assets, the client should promptly engage a valuer to re-determine the valuation conclusion.
If any policy change has a significant impact on the valuation conclusion, it should re-determine the valuation date for another valuation.
The valuation conclusion shall not be used until the valuation report has been approved or filed with.

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XI. NOTES (EXPLANATIONS ON SPECIAL MATTERS)

In the assessment of the market value of total shareholders’ equity of Taizhou Jiaobei Water Supply Co., Ltd., valuers conduct necessary verification to the legal ownership information of valuation target and relevant assets provided by the appraised entity and the source of such information, and have not noticed any defects in other ownership information of valuation target and relevant assets, except the following matters. It is the responsibility of the appraised entity to provide true, lawful and complete legal ownership information, and the responsibility of valuers is to perform necessary verification to the information provided by the appraised entity. The asset valuation report shall not be taken as the confirmation and assurance of the legal ownership of valuation target and relevant assets. If the appraised entity does not have the ownership or other relevant rights of the aforesaid assets, or is subject to partial restrictions in respect of the ownership or other relevant rights of the aforesaid assets, the valuation conclusion for the said assets and the valuation conclusion for the value of total shareholders’ equity of the appraised entity will be affected.
(1) As at the Valuation Reference Date, 12 buildings including complex building and dosing room (with an aggregated floor area of 6,001.49 m[2] ) stated in the “Valuation Schedule of Fixed Assets – Buildings”, have not been registered for immovable property certificates. Taizhou Jiaobei Water Supply Co., Ltd. has provided the original construction information and other relevant information and guarantees that the said assets are owned by itself.
(2) As at the Valuation Reference Date, the land use right to be appraised (with an aggregated land area of 40,275.00 m[2] ) has not been registered for the immovable property certificate. Taizhou Jiaobei Water Supply Co., Ltd. has provided the original acquisition materials and guarantees that the said land is owned by itself.

For the aforesaid buildings and land use right that have not been registered for immovable property certificates, valuers take the area data provided by the relevant personnel of Taizhou Jiaobei Water Supply Co., Ltd. after site measurement as the calculation basis and include such data in the valuation result. Any difference between such data and the area stated in the certificates or the actual floor area will affect the valuation result.

Taizhou Jiaobei Water Supply Co., Ltd. guarantees that, there were no other contingent events including pledge or charge of assets to be appraised, external guarantees, pending litigations and significant financial commitments as at the Valuation Reference Date.

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Pipelines to be appraised have been rebuilt for multiple times in the period from the establishment to the Valuation Reference Date, and data (including the material, the length) of such pipelines recorded in the books cannot be measured reliably. Therefore, the valuation determines the value of such pipelines by the information of material, length and diameter provided by the enterprise. If the length of pipelines is different from the actual length, or Taizhou Jiaobei Water Supply Co., Ltd. does not have the full ownership of such pipelines, the valuation result will be affected.
In the valuation, valuers have not conducted technical inspection to the technical parameter and performance of facilities as at the Valuation Reference Date. After site investigation, valuers make judgements on the assumption that the relevant technical information and operation records provided by the appraised entity is true and valid.

As most of the water pipes to be appraised, including process pipelines, are underground, valuers verify the authenticity of such assets mainly by obtaining design documents and the relevant distribution maps, project settlement reports, facility and pipeline inspection reports, original accounting evidences and invoices, and conduct random inspections to verify the inspection shafts of some pipelines according to the design and monitoring information stated above.
The valuation adopts the impairment treatment to identified fixed asset demolition and retirement or assets recorded in the books but having no physical items. The enterprise shall perform the due procedures for reporting if it requires accounting treatments.
In the valuation, valuers have not considered the tax implications related to the valuation appreciation or depreciation of assets.
The outbreak of COVID-19 in many countries around the world has greatly affected the macro economy and market information. Currently, the impact of the pandemic on economic development cannot by estimated accurately, so the valuation has not considered the potential impact of the pandemic may bring to the valuation conclusion as at the Valuation Reference Date.

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The valuation conclusion is the current market value of total shareholders’ equity based on the purpose of the valuation and the assumptions disclosed in the report, without considering the impact on the appraised value caused by the potentially increased or decreased price resulted from the special transaction method, or the impact on the asset value caused by changes of the macroeconomic environment and the natural force and other force majeure. The target of valuation is the value of total corporate shareholders’ equity, and the value of any part of shareholders’ equity is not necessarily equal to the product of the value of total shareholders’ equity and the shareholding percentage. There may be a premium resulted from the control right or a discount resulted from the lack of control right.
When assessing the total shareholders’ equity, we make assumptions that we think necessary and reasonable according to the current actual conditions and state such assumptions in the asset valuation report. Such assumptions serve as the prerequisites for us to conduct the asset valuation. When there are material changes of future economic environment and the aforesaid assumptions, valuers do not have the responsibility to derive a different asset valuation conclusion because of the changes of these prerequisites.
The appraisal agency and valuers accept no responsibility in respect of the validity, completeness and truthfulness of information provided by the client of asset valuation and the appraised entity, including business licenses, capital verification reports, audit reports and accounting evidences.
In the valuation, for other potential defects of the appraised entity that may affect the valuation conclusion, the appraisal agency and valuers accept no responsibility when the appraised entity has not provided special explanations in the process of asset valuation and valuers are unable to notice such defects with their professional experience.

XII. OPINION OF VALUE (VALUATION CONCLUSION)

The total shareholders’ equity of Taizhou Jiaobei Water Supply Co., Ltd. is appraised, using the asset-based approach to be RMB51,935,173.24 and using the income approach to be RMB6,900,000.00, representing a difference of RMB45,035,173.24 or 652.68%.

After analysis, the valuers considered the implementation of the above two valuation approaches to be normal and the selection of parameters reasonable. Given that the revenue estimation is based on expectations and judgments on future macro policies and the water supply industry, and that the quality and quantity of data used in the income approach is inferior to that of the asset-based approach due to more uncertainties in the prevailing economic and market environment, the valuers are of the view that the valuation results derived using the asset-based approach are more suitable for the purpose of the valuation.

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Accordingly, the valuation result under the asset-based approach of RMB51,935,173.24 (FIFTY-ONE MILLION, NINE HUNDRED AND THIRTY-FIVE THOUSAND, ONE HUNDRED AND SEVENTY-THREE YUAN, AND TWENTY-FOUR CENTS) was eventually adopted as the appraised value of the total shareholders’ equity of Taizhou Jiaobei Water Supply Co., Ltd.

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The following is an English translation of the summary of the Luqiao Water Supply Valuation Report, which is prepared by the Independent Valuer for the purpose of, among others, inclusion in this circular. The Luqiao Water Supply Valuation Report is prepared in Chinese and this English translation is provided for your reference only. In the event of any inconsistency between the Chinese and English versions, the Chinese version shall prevail.

Summary of the Asset Valuation Report in relation to the Proposed Acquisition of Equity Interests of Taizhou Luqiao Water Supply Co., Ltd. by Taizhou Water Group Co., Ltd.

Kun Yuan Ping Bao (2021) No. 335

I. PURPOSE OF VALUATION

Pursuant to the Notice by the Municipal Committee Office of Taizhou and the Taizhou Municipal People’s Government Office on the Issue of Implementation Opinions on the Reform of Integration of Water Supply in Taizhou (Tai Shi Wei Ban [2018] No. 28), Taizhou Water Group proposes to acquire the equity interest of Taizhou Luqiao Water Supply Co., Ltd., and it is necessary to assess the value of total shareholders’ equity of Taizhou Luqiao Water Supply Co., Ltd. that such an economic activity involves.

The purpose of the valuation is to provide a reference basis for the value of total shareholders’ equity of Taizhou Luqiao Water Supply Co., Ltd. to the economic activity.

II. SCOPE OF WORK

The target of the valuation is the total shareholders’ equity of Taizhou Luqiao Water Supply Co., Ltd. that the aforesaid economic activity involves.

The scope of the valuation is all the assets and relevant liabilities as at 31 October 2020 (the “ Valuation Date ”) that are reported by Taizhou Luqiao Water Supply Co., Ltd. and audited by Zhejiang Zhongyong Zhongtian Certified Public Accountants Co., Ltd., including current assets, non-current assets, current liabilities and non-current liabilities. As reflected in the account statements as at 31 October 2020 (adopting the same basis as that of the financial statements of parent company, namely Taizhou Luqiao District Urban Construction Group Co. , Ltd.) which are provided by Taizhou Luqiao Water Supply Co., Ltd. and audited by Zhejiang Zhongyong Zhongtian Certified Public Accountants Co., Ltd., the book values of assets, liabilities and shareholders’ equity are RMB357,151,461.15, RMB222,309,249.49 and RMB134,842,211.66 respectively.

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III. ECONOMIC AND INDUSTRY OVERVIEW (ECONOMIC AND INDUSTRY ANALYSIS)

1. Analysis of macro and regional economic factors that affect the operation of the enterprise

(1) Macro economy of China

(2) Analysis of regional economic factors that affect the operation of the enterprise

Taizhou Luqiao Water Supply Co., Ltd. is located in Taizhou, Zhejiang Province. Taizhou is a prefecture-level city of Zhejiang Province, one of the 27 cities of the core region of Yangtze River Delta, and the regional core city and modern port city in the coastal areas of Zhejiang Province which is approved by the State Council. In the first three quarters of 2020, the city reported a GDP growth of 1.7%, turning the negative growth to a positive one.

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2. Analysis of current development and prospect of the industry in which the enterprise operates

(1) Industrial classification

The Company principally engages in the business of water supply. According to the industrial classification standard contained in the Industrial Classification for National Economic Activities (GB/T4754-2011), the industry to which it belongs is classifies as “water production and supply” (industry code: D4610) in the “water production and supply industry” (industry code: D46).

(2) Development of water supply industry

1) National water consumption

The economic and social development creates a huge demand for water, and the water demand grows with China’s continuous and rapid economic development and ever-increasing population.

In 2019, the national water consumption was 599,100,000,000 m[3] , which was basically the same level as that of the prior year, and the per capita water consumption is 429 m[3] .

Changes of National Water Consumption and Per Capita Water Consumption from 2008 to 2019

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Source: the National Bureau of Statistics of China (“ NBS ”), Forward Business and Intelligence Co., Ltd. (“ Forward Intelligence ”)

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China’s Structure of Water Resource Consumption in 2019

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Source: the NBS, Forward Intelligence

China’s Structure of Water Resource Consumption in 2019

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Source: the NBS, Forward Intelligence

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Data released by the NBS showed that from 2012 to 2018, industrial enterprises above designated size in China’s water production and supply industry recorded steady year-on-year growth in both revenues and profits of principal businesses, with compound growth rates reaching 12.52% and 25.44%, respectively. In 2018, China had 1,934 water supply enterprises above designated size, whose revenue from principal businesses reached RMB260 billion; cost of principal businesses exceeded RMB190 billion, and total profit was about RMB28 billion.

Total Profit of Industrial Enterprises Above Designated Size in China’s Water Production and Supply Industry from 2012 to 2019

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Source: the NBS, Forward Intelligence

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To meet the increasing water demand from urban water users, China’s comprehensive urban water supply capacity has been growing steadily over the recent ten years. According to data of the National Bureau of Statistics, as of the end of 2018, the comprehensive urban water supply capacity reached 312,000,000 m[3] /day, which included 32,880,000,000 m[3] of domestic water consumption and covered 503 million people. The daily domestic water consumption per capita was 179.7 liters, and the water penetration rate was 98.36%.

China’s Comprehensive Urban Water Supply Capacity from 2010 to 2018

	Comprehensive	Length of	Total	Population with	Water
Year	water supply capacity	water pipelines	water supply	access to water	penetration rate
	(100,000,000 m3/day)	(10,000 km)	(100,000,000 tonnes)	(100,000,000)	(%)
2010	2.76	54	507.9	3.82	96.68%
2011	2.67	57.4	513.4	3.97	97.04%
2012	2.72	59.2	523	4.1	97.16%
2013	2.81	64.6	537.3	4.23	97.56%
2014	2.87	67.7	546.7	4.35	97.64%
2015	2.97	71	560.5	4.51	98.07%
2016	3.03	75.7	580.7	4.7	98.42%
2017	3.05	79.7	593.8	4.83	98.30%
2018	3.12	86.7	614.6	5.03	98.36%

Source: the NBS, Forward Intelligence

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2) Great potential of the rural water supply market

In January 2016, six ministries including the NDRC, the Ministry of Water Resources, the Ministry of Finance, the National Health and Family Planning Commission, Ministry of Environmental Protection and the MOHURD jointly released the Notice on the Work for Improving the Drinking Water Safety in Rural Areas and Preparing the Plan in “13th Five-Year Plan” Period, which set the following objectives: by 2020, the safe and centralised water supply rate in China’s rural areas would stay above 85%, and the water penetration rate would be over 80%; the rate of water quality reaching the standard would be significantly improved; the water supply guarantee of small projects would not be lower than 95%. Public services of urban water supply would be extended to rural areas, to improve the proportion of villages covered by the urban water supply network to 33%. China has a great potential in water supply project construction, especially in urban built-up areas, village areas and rural areas in central and western China.

3) Continuous market growth boosted by urbanisation

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IV. OVERVIEW OF TARGET COMPANY (BUSINESS CONDITIONS)

Taizhou Luqiao Water Supply Co., Ltd. principally engages in the business of tap water supply. Currently, it supplies water to the Luqiao District, Taizhou City.

Taizhou Luqiao Water Supply Co., Ltd. has comprehensive water production facilities, including a water treatment plant, three booster pump stations and seven business offices, achieving water supply capacity of 170,000 tons/day and its supply and service area covers over 270 km[2] and serves more than 450,000, excluding mobile population. Currently, Taizhou Luqiao Water Supply Co., Ltd. employs more than 120 workers and has advanced production equipment. With a higher degree of automation in the water purification process, Taizhou Luqiao Water Supply Co., Ltd. is one of the first water supply companies in the province to complete the integration of urban and rural areas.

The current business of Taizhou Luqiao Water Supply Co., Ltd. mainly comprised of tap water supply and pipeline installation. As for tap water supply business, it purchases raw water and purified water from Taizhou Water Group and supplies those water to users through its water distribution networks to collect water fees. As for pipeline installation business, it is entrusted by users such as property developers and village committees to construct water distribution networks for them and then connects those networks to the existing networks of Taizhou Luqiao Water Supply Co., Ltd. to collect fees for network construction. The pipeline installation business of Taizhou Luqiao Water Supply Co., Ltd. is currently carried out through its subsidiary Taizhou City Luqiao Lixin Municipal Engineering Co., Ltd. (台州市路橋立信市政工程有限公司). Taizhou Luqiao Water Supply Co., Ltd. and its subsidiary Taizhou Luqiao Urban and Rural Water Supply Service Co., Ltd. (台州市路橋城鄉供水服務有限公司) are mainly engaged in tap water supply.

Tap water supply business has a relatively strong regional and monopolistic nature. Currently, the water supply area of Taizhou Luqiao Water Supply Co., Ltd. mainly covers the Luqiao District and has no competitors in Luqiao District.

V. VALUATION BASIS (VALUATION REFERENCE DATE)

The Valuation Reference Date is determined by the client on basis of the actual conditions of this project, taking account of factors that the Valuation Reference Date is most close to the date of materializing the economic activity and that there will be fewest adjustments after the Valuation Reference Date.

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VI. INVESTIGATION AND ANALYSIS (PERFORMANCE OF VALUATION PROCEDURES)

(I) Asset verification stage

The appraisal agency provides the appraised entity with the sample of Asset Reporting Form for Valuation according to the requirements of asset valuation, and assists the appraised entity to check the assets;
Gain the information of basic conditions of the appraised entity and conditions of assets to be appraised, and collect relevant materials;
Review and verify the Asset Reporting Form for Valuation and the relevant calculation materials provided by the appraised entity;
Conduct on-site verification and investigation based on the content of Asset Reporting Form for Valuation, collect relevant information of asset acquisition and construction, operation and maintenance, and check and record asset conditions;
Collect property evidences including contracts and invoices related to assets to be appraised, and verify the asset ownership;
Collect and reorganise industry data, and gain the information of the competitiveness and risks of the appraised entity;
Obtain materials including historical revenues, costs, expenses and other aspects of the appraised entity to learn its existing production capability and development plans;
Collect and verify other relevant information that is necessary to the asset valuation.

(II) Estimate stage

Prepare specific valuation methods for each category of assets based on the actual conditions and characteristics of assets to be appraised;
Collect market information;
Valuate assets to be appraised, and calculate their appraised values;

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Base on the future earnings forecast materials provided by the appraised entity, take into consideration actual conditions of the appraised entity, review the relevant information, reasonably determine valuation assumptions, and formulate the future earnings forecast. Subsequently, analyse and compare each category of parameters, select specific calculation methods, and determine the valuation result.

VII. VALUATION METHODS

(I) Selection of valuation methods

According to the existing asset valuation standards and relevant provisions, basic methods for assessing the value of an enterprise include asset-based approach, market approach and income approach.

Taizhou Luqiao Water Supply Co., Ltd. principally engages in the business of water supply and belongs to the asset-heavy industry. Despite the relatively lower profits in recent years, its cash flows are acceptable, and its future earnings can be reasonably forecast under the circumstance that it can continue to operate the existing business content and scope, with the discount rate corresponding to the risk levels associated with its future earnings to be reasonably estimated as well. Therefore, it is appropriate for the valuation to adopt the income approach.

Taking into account of the target and purpose of asset valuation and the information collected by valuers, the valuation adopts the asset-based approach and the income approach to respectively assess the value of total shareholders’ equity of Taizhou Luqiao Water Supply Co., Ltd. to be appraised.

– VC-10 –

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SUMMARY OF THE LUQIAO WATER SUPPLY VALUATION REPORT

(II) Introduction of asset-based approach

Appraised value of total shareholders’ equity = ∑Appraised values of each breakdown of assets - ∑Appraised values of each breakdown of liabilities

(III) Introduction of income approach

The income approach is a valuation method that determines the value of valuation target by capitalising or discounting the expected incomes of the appraised entity.

I) Model of income approach

Considering the purpose and the target, the valuation adopts the free cash flow for the firm (FCFF) discount model to determine the value of FCFF, analyses the value of surplus assets and non-operating assets to measure the overall value of the enterprise, and deducts its interest-bearing debts to determine the value of total shareholders’ equity. The specific formula is:

Value of total shareholders’ equity = Overall value of the enterprise - Interest-bearing debts

Overall value of the enterprise = Appraised value of FCFF + Value of non-operating assets + Value of surplus assets

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Where: n – definite forecast years

CFFt – cash flow for the firm in the t[th] year

r – weighted average cost of capital

t – the t[th] year in the future
Pn – going concern value after the n[th] year

– VC-11 –

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SUMMARY OF THE LUQIAO WATER SUPPLY VALUATION REPORT

II) Determination of income period and forecast period

The valuation assumes that the period of the enterprise’s continued existence is perpetual period, and the income period is indefinite period. It adopts the sectioning method to forecast the incomes of the enterprise, which means that the enterprise’s future incomes are divided into those of definite forecast period and those after definite forecast period. The determination of definite forecast period comprehensively considers the cyclicity of industry products and the development of relevant enterprises. Based on valuers’ market research and forecast, it is appropriate to adopt 5 years (being the end of 2024) as the section point.

III) Determination of income – cash flow

The expected incomes in the valuation are based on the FCFF, with the formula shown below:

FCFF = Profit before interest but after tax + Depreciation and amortisation – Increase of working capital – Capital expenditures

Profit before interest but after tax = Revenue - Costs of operation - Taxes and surcharges — General and administrative expenses - Operating expenses – Finance costs (other than interest expenses) – Asset impairment losses + Non-operating revenue – Non-operating expenses – Income taxes

IV) Determination of discount rate

==> picture [205 x 26] intentionally omitted <==

Where: WACC – weighted average cost of capital;

Ke – cost of equity capital;

Kd – cost of debt capital;

T – income tax rate;

D/E – capital structure.

– VC-12 –

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SUMMARY OF THE LUQIAO WATER SUPPLY VALUATION REPORT

The cost of equity capital is calculated by adopting the international generally accepted CAPM model, with the formula shown below:

==> picture [126 x 14] intentionally omitted <==

Where: Ke – cost of equity capital

Rf – current risk-free interest rate

Beta – systemic risk factor of equity

ERP – market risk premium

Rc – company-specific risk adjustment factor

V) Value of non-operating assets and surplus assets

Non-operating assets (liabilities) represent assets (liabilities) not related to operating incomes of the enterprise.

Surplus assets represent the portion of operating assets in excess of those required for the enterprise’s normal operation, and include surplus cash and cash equivalents and negotiable securities.

The value of the abovementioned non-operating assets is determined by the appraised value of corresponding assets under the asset-based approach.

VI) Value of interest-bearing debts

As at the Valuation Reference Date, interest-bearing debts represent bank borrowings. The appraised value of interest-bearing debts is the verified book value.

– VC-13 –

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SUMMARY OF THE LUQIAO WATER SUPPLY VALUATION REPORT

VIII. KEY ASSUMPTIONS (VALUATION ASSUMPTIONS)

1. Basic assumptions

(1) The valuation is based on the changes in the subject of title interests of the assets to be appraised. The changes in the subject of title interests include all changes and partial changes of the subject of interests.
(2) The evaluation is based on the assumption of open market transactions.
(3) The evaluation is based on the premise that the appraised unit continues to operate in accordance with the predetermined business objectives, that is, all assets of the appraised unit are still used in accordance with the current use and method, while change of the current use or remaining use unchanged but changing the planning and use method is not considered.
(4) The evaluation is based on the fact that the relevant legal documents, various accounting documents, account books and other information provided by the appraised unit are true, complete, legal and reliable.
(5) The evaluation assumes that the macro-environment is relatively stable, that is, the country’s existing macroeconomic, politics, policies and industrial policies of the industry in which the appraised unit is located have no major changes, and the socio-economic development is sustained, healthy and stable; the national monetary and financial policies remain in the current state and will not cause major fluctuations in the social economy; national taxation maintains the current regulations, tax types and tax rates have no major changes; the country’s current interest rates, exchange rates, etc. have no major changes.
(6) The evaluation assumes that the business environment of the appraised unit is relatively stable, that is, there are no major changes in the social, political, legal, and economic business environment of the appraised unit’s main business premises and the areas in which it operates; there are no policy, legal or man-made obstacles for the appraised unit to carry out business activities within its established business scope.

2. Specific assumptions

(1) The profit forecast in the valuation is based on the development plan and profit forecast provided by the appraised unit;

– VC-14 –

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SUMMARY OF THE LUQIAO WATER SUPPLY VALUATION REPORT

(2) It is assumed that the management of the appraised unit is diligent and responsible and has sufficient management skills and good professional ethics, and the appraised unit conducts business in a lawful and compliant manner. It is assumed that the management and main business of the appraised unit remains relatively stable;
(3) It is assumed that the appraised entity fully complies with all relevant laws and regulations, and that the acquisition and use of all its assets are in compliance with national laws, regulations and regulatory documents;
(4) It is assumed that the operating income, costs, transformation expenditures of the appraised unit in each year are incurred evenly throughout the year;
(5) It is assumed that there are no material adverse effects on the enterprise caused by other force majeure factors beyond the control of human and unforeseeable factors.
(6) It is assumed that the accounting policies adopted by the appraised unit during the earnings forecast period are consistent with the accounting policies adopted on the Valuation Reference Date in all major aspects;

IX. REVIEWED INFORMATIONS (EVALUATION BASIS)

(1) Economic Behavior Basis

(2) Legal and Regulation Basis

The Asset Appraisal Law 《資產評估法》( );
Measures for the Administration of State-owned Asset Valuation 《國有( 資產評估管理辦法》);
Provisions on Certain Issues Concerning the Management of the Valuation of State-owned Assets 《國有資產評估管理若干問題的規定》( );

– VC-15 –

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SUMMARY OF THE LUQIAO WATER SUPPLY VALUATION REPORT

Interim Regulations on Supervision and Administration of State-owned Assets of Enterprises 《企業國有資產監督管理暫行條例》( );
Interim Measures for the Administration of the Appraisal of State-owned Assets of Enterprises 《企業國有資產評估管理暫行辦法》( );
Notice on Issues Relating to Strengthening the Management of the Valuation of State-owned Assets of Enterprises 《關於加強企業國有資產( 評估管理工作有關問題的通知》);
Enterprise State-owned Assets Law 《企業國有資產法》( );
Measures for the Supervision and Administration of the Transactions of State-Owned Assets of Enterprises 《企業國有資產交易監督管理辦法》( );
The Company Law 《公司法》( ), the Contract Law 《合同法》( ) and etc.;
Other laws and regulations related to asset valuation.

(3) Valuation Standard Basis

Basic Standards for Asset Valuation 《資產評估基本準則》( );
Code of Professional Ethics for Assets Valuation 《資產評估職業道德準( 則》);
Code of Practice on Asset Valuation – Asset Valuation Procedures (《資產評估執業準則－資產評估程序》);
Code of Practice on Asset Valuation – Asset Valuation Report (《資產評估執業準則－資產評估報告》);
Code of Practice on Asset Valuation – Asset Valuation Engagement Contract 《資產評估執業準則－資產評估委託合同》( );
Code of Practice on Asset Valuation – Asset Valuation Files (《資產評估執業準則－資產評估檔案》);
Code of Practice on Asset Valuation – Asset Valuation Methods (《資產評估執業準則－資產評估方法》);
Code of Practice on Asset Valuation – Engagement of Experts and Use of Relevant Reports 《資產評估執業準則－利用專家工作及相關報告》( );
Code of Practice on Asset Valuation – Enterprise Value 《資產評估執業( 準則－企業價值》);

– VC-16 –

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SUMMARY OF THE LUQIAO WATER SUPPLY VALUATION REPORT

Code of Practice on Asset Valuation – Machinery and Equipment (《資產評估執業準則－機器設備》);
Code of Practice on Asset Valuation – Real Property (《資產評估執業準則－不動產》);
Guiding Opinions on Types of Value in Asset Valuation 《資產評估價值( 類型指導意見》);
Guiding Opinions on Legal Ownership of Valuation Subjects (《資產評估對象法律權屬指導意見》);
Guide to the Valuation Report on State-owned Assets of Enterprises 《企業國有資產評估報告指南》( ).

(4) Basis of Ownership

The business registration certificate and articles of association provided by Taizhou Luqiao Water Supply Co., Ltd.;
Economic contracts, agreements, capital appropriation certificates (vouchers), financial statements and other accounting materials related to the acquisition and use of assets and rights;
State-owned construction land use right grant contracts, construction land planning permits, construction work commencement permits, house ownership certificates, state-owned land use certificates, motor vehicle driving certificates, invoices and other ownership certificates;
Other certification documents for property rights.

(5) Basis for Pricing

Evaluation declaration form provided by the appraised unit;
The audit report and related financial statements of the appraised unit as of the Valuation Reference Date;
Fixed price standard for projects of place where the assets are located: Regulations on Calculation of Costs of Construction Works of Zhejiang Province (2018 version), Budget Quota for Building Construction and Decoration Works of Zhejiang Province (2018 version), Budget Quota for General Installation Works of Zhejiang Province (2018 version), Budget Quota for Public Utilities Works of Zhejiang Province (2018 version), Budget Quota for Landscape, Antique and Construction Works of Zhejiang Province (2018 version), Charge Quota for Construction

– VC-17 –

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SUMMARY OF THE LUQIAO WATER SUPPLY VALUATION REPORT

Machinery of Zhejiang Province (2018 version), Base-period Prices for Building and Installation Materials in Zhejiang Province (2018 version), Indicators for Investment Estimation of Public Utilities Works - Water Supply Works, Indicators for Investment Estimation of Public Utilities Works - Drainage Works;

Price Information for Construction Works in Zhejiang Province (2020.10);
Notice of the NDRC on Further Easing Management over Professional Service Pricing for Construction Projects;
Notice on Issue of the Measures for Construction Cost Management for Basic Construction Works;
Construction work related original information, business contracts, quotation records, and etc.;
Survey information on market prices of properties in the area where the assets are located;
Quotation Booklet for Electrical and Mechanical Products and other market price information and quotation records;
Purchase contracts, invoices and payment vouchers for major equipment and pipelines; technical files, inspection reports, operation records and other information on the equipment;
Manual of Data and Parameters Commonly Used in Assets Valuation, Basic Construction Financial Rules, Rate Charging Standards for Engineering Survey and Design and other reference materials for the determination of valuation parameters;
Relevant polices, provisions, measures for implementation and other regulatory documents promulgated by Zhejiang Provincial People’s Government and related government departments;
Historical production and operation information, business planning and revenue projections of the appraised entity;
Industry statistics, capacity of relevant industries and markets, market outlook, information on market development and trend analysis, pricing strategies and future marketing approaches, relevant information on companies with similar businesses;
Relevant data as retrieved via the RoyalFlush iFinD financial data portal;

– VC-18 –

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SUMMARY OF THE LUQIAO WATER SUPPLY VALUATION REPORT

The LPR rate as published by the People’s Bank of China on the Valuation Reference Date;
Accounting Standards for Business Enterprises and other accounting regulations and systems, departmental rules and regulations, etc.;
Supporting documents as gathered by valuation professionals for the verification, survey, testing and analysis of assets;
Other documents.

X. RESTRICTIONS (RESTRICTIONS ON THE USE OF ASSET VALUATION REPORT)

The asset valuation report may only serve the purpose of valuation stated herein.
The asset valuation institution and the valuer will not be held liable or take the consequences, in case the client or other users of the valuation report fail to comply with the relevant laws, administrative regulations and use the report for other purposes than what is stated herein.
Any institution and individual shall not use the asset valuation report other than the client, other report users stated in the commission contract for asset valuation, and report users in compliance with laws and administrative regulations.
The user of the asset valuation report should correctly understand the valuation conclusion, which is not equal to the achievable price of the valuation object, and the valuation conclusion should not be considered as a guarantee for the achievable price of the valuation object.
The validity period of the valuation conclusion is one year, that is from 31 October 2020 (the Valuation Reference Date) to 30 October 2021. When the objective of the valuation is hit within one year from the Valuation Reference Date, the valuation conclusion shall be a useful guideline on the transaction price. The valuation conclusion shall be re-determined if the one-year limit is exceeded.

– VC-19 –

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SUMMARY OF THE LUQIAO WATER SUPPLY VALUATION REPORT

The valuation conclusion cannot be directly used when significant events occur after the Valuation Reference Date and within the validity period. If there is a change in the quantity of assets, the value of assets should be adjusted accordingly in accordance with the original valuation method; and if there is a material change in the asset pricing standard which has significantly affected the appraised value of assets, the client should promptly engage a valuer to re-determine the valuation conclusion.
If any policy change has a significant impact on the valuation conclusion, it should re-determine the valuation date for another valuation.
The valuation conclusion shall not be used until the valuation report has been approved or filed with.

XI. NOTES (EXPLANATIONS ON SPECIAL MATTERS)

In the assessment of the market value of total shareholders’ equity of Taizhou Luqiao Water Supply Co., Ltd., valuers of the Company conduct necessary verification to the legal ownership information of valuation target and relevant assets provided by the appraised entity and the source of such information, and have not noticed any defects in other ownership information of valuation target and relevant assets, except the following matters. It is the responsibility of the appraised entity to provide true, lawful and complete legal ownership information, and the responsibility of valuers is to perform necessary verification to the information provided by the appraised entity. The asset valuation report shall not be taken as the confirmation and assurance of the legal ownership of valuation target and relevant assets. If the appraised entity does not have the ownership or other relevant rights of the aforesaid assets, or is subject to partial restrictions in respect of the ownership or other relevant rights of the aforesaid assets, the valuation conclusion for the said assets and the valuation conclusion for the value of total shareholders’ equity of the appraised entity will be affected.
(1) As at the Valuation Reference Date, Three properties of total gross floor area of 3,598.09 m[2] , including No. 8 Pump Room in Shangzhang and business room in Shangma, listed on the “List of Investment Property Appraisal” and 20 properties including office and pharmacy building stated in the “Valuation Schedule of Fixed Assets Buildings” (with an aggregate floor area of 10,834.96 m[2] ) have not been registered for immovable property certificates. Taizhou Luqiao Water Supply Co., Ltd. has provided the original construction materials and other relevant information and guarantees that the said assets are owned by itself.

– VC-20 –

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SUMMARY OF THE LUQIAO WATER SUPPLY VALUATION REPORT

(2) As at the Valuation Reference Date, the land use rights (with an aggregate land area of 23,873.40 m[2] ) in respect of Items 5 to 10 in the “Valuation Schedule of Intangible Assets – Land Use Rights” have not been registered for the immovable property certificate and are under registration. According to the relevant information provided by the enterprise and the actual situation, the actual use of the five pieces of land without land use right certificate is allocated for public facilities while one piece of land without land use right certificate is transferred for public facilities. Taizhou Luqiao Water Supply Co., Ltd. has provided the original acquisition materials and guarantees that the said land is owned by itself.

For the aforesaid buildings and land use rights that have not been registered for immovable property certificates, valuers take the area data provided by the relevant personnel of Taizhou Luqiao Water Supply Co., Ltd. after site measurement as the calculation basis and include such data in the valuation result. Any difference between such data and the area stated in the certificates or the actual floor area will affect the valuation result.

The appraised entity warrants that, there were no other relevant contingent events including pledge or charge of assets, external guarantees, pending litigations and significant financial commitments as at the Valuation Reference Date
Pipelines to be appraised have been rebuilt for multiple times in the period from the establishment commenced in 1990s to the Valuation Reference Date, and data (including the material, the length) of such pipelines recorded in the books cannot be measured reliably. Therefore, the valuation determines the value of such pipelines by the information of material, length and diameter provided by the enterprise. If the length of pipelines is different from the actual length, or Taizhou Luqiao Water Supply Co., Ltd. does not have the full ownership of such pipelines, the valuation result will be affected.
According to the Notice Regarding the Issue of 20141113 General Command Minutes (Lu Gong Shui Zhi [2014] No.1) issued by the Construction Headquarters of Taizhou Luqiao District Integrated Urban and Rural Water Supply, after the completion of urban-rural integration project, all fixed assets such as Binhai pump station and pipelines shall be transferred to Taizhou Luqiao Water Supply Co., Ltd. for use and management. Taizhou Luqiao Water Supply Co., Ltd. will record them as its own assets and include them in the scope of the valuation. The difference between the recorded value of the above assets and the actual settlement was not considered in the valuation.

– VC-21 –

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SUMMARY OF THE LUQIAO WATER SUPPLY VALUATION REPORT

In the valuation, valuers have not conducted technical inspection to the technical parameter and performance of facilities as at the Valuation Reference Date. After site investigation, valuers make judgements on the assumption that the relevant technical information and operation records provided by the appraised entity is true and valid.

As most of the water pipes to be appraised, including process pipelines, are underground, valuers verify the authenticity of such assets mainly by obtaining design documents and the relevant distribution maps, project settlement reports, facility and pipeline inspection reports, original accounting evidences and invoices, and conduct random inspections to verify the inspection shafts of some pipelines according to the design and monitoring information stated above.
The valuation adopts the impairment treatment to identified fixed asset demolition and retirement or assets recorded in the books but having no physical items. The enterprise shall perform the due procedures for reporting if it requires accounting treatments.
Taizhou Luqiao Water Supply Co., Ltd. had the following leases as at the Valuation Reference Date

Lessor	Lessee	Term	Leased property	Area (㎡)	Rent
Taizhou Luqiao	Wang Yanqin	2017.12.1-	Floor 3, West 3	24	RMB40,000/year
Water Supply	(王燕琴)	2020.11.30	Room, No. 6
Co., Ltd.			Pump Room
Taizhou Luqiao	Yangguang	2020.4.26-	No. 8 Pump Room	280	RMB12,000/year
Water Supply	Kindergarten	2022.4.25	in Shangzhang
Co., Ltd.	(陽光幼兒園),
	Lunan Street,
	Luqiao District,
	Taizhou

– VC-22 –

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SUMMARY OF THE LUQIAO WATER SUPPLY VALUATION REPORT

Lessor Lessee Term Leased property Area (㎡) Rent Taizhou Luqiao Zhangyang Village 2017.2.1Business room in 2,450 RMB158,000/year; Water Supply Economic 2027.1.31 Shangma annual Co., Ltd. Cooperative, increment of Luqiao Street, 5% of the Luqiao District, annual rent Taizhou after the fourth year. Taizhou Luqiao Zhang Chongde 2018.7.20Room 102, Unit 1, 103 RMB4,700/year Water Supply (張崇德) 2026.7.19 Block 170, Xinan Co., Ltd. Community

Impact of the abovementioned leases was not considered in the valuation.

In the valuation, valuers have not considered the tax implications related to the valuation appreciation or depreciation of assets.
The outbreak of COVID-19 in many countries around the world in 2020 may greatly affect the macro economy and market information. Currently, the impact of the pandemic on economic development cannot by estimated accurately, so the valuation has not considered the potential impact of the pandemic may bring to the valuation conclusion as at the Valuation Reference Date.
The valuation conclusion is the current market value of total shareholders’ equity based on the purpose of the valuation and the assumptions disclosed in the report, without considering the impact on the appraised value caused by the potentially increased or decreased price resulted from the special transaction method, or the impact on the asset value caused by changes of the macroeconomic environment and the natural force and other force majeure. The target of valuation is the value of total shareholders’ equity, and the value of any part of shareholders’ equity is not necessarily equal to the product of the value of total shareholders’ equity and the shareholding percentage. There may be a premium resulted from the control right or a discount resulted from the lack of control right.
When assessing the market value of total shareholders’ equity, valuers make necessary and reasonable assumptions according to the current actual conditions and state such assumptions in the asset valuation report. Such assumptions serve as the prerequisites for valuers to conduct the asset valuation. When there are material changes of future economic environment and the aforesaid assumptions, valuers do not have the responsibility to derive a different asset valuation conclusion because of the changes of these prerequisites.

– VC-23 –

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SUMMARY OF THE LUQIAO WATER SUPPLY VALUATION REPORT

The appraisal agency and valuers accept no responsibility in respect of the validity, completeness and truthfulness of information provided by the client of asset valuation and the appraised entity, including business licenses, capital verification reports, audit reports and accounting evidences.
In the valuation, for other potential defects of the appraised entity that may affect the valuation conclusion, the appraisal agency and valuers accept no responsibility when the appraised entity has not provided special explanations in the process of asset valuation and valuers are unable to notice such defects with their professional experience.

XII. OPINION OF VALUE (VALUATION CONCLUSION)

The total shareholders’ equity of Taizhou Luqiao Water Supply Co., Ltd. is appraised, using the asset-based approach to be RMB276,483,631.71 and using the income approach to be RMB148,000,000.00, representing a difference of RMB128,483,631.71 or 46.47%.

After analysis, the valuers considered the implementation of the above two valuation approaches to be normal and the selection of parameters reasonable. Given that the revenue estimation is based on expectations and judgments on future macro policies and the water supply industry, and that the quality and quantity of data used in the income approach is inferior to that of the asset-based approach due to more uncertainties in the prevailing economic and market environment, and that the price of water charges in the water industry is subject to the macro-control of the government and cannot be easily adjusted, the valuers are of the view that the valuation results derived using the asset-based approach are more suitable for the purpose of the valuation.

Accordingly, the valuation result under the asset-based approach of RMB276,483,631.71 (TWO HUNDRED AND SEVENTY-SIX MILLION, FOUR HUNDRED AND EIGHTY-THREE THOUSAND, SIX HUNDRED AND THIRTY-ONE YUAN, AND SEVENTY-ONE CENTS) was eventually adopted as the appraised value of the total shareholders’ equity of Taizhou Luqiao Water Supply Co., Ltd.

The above content is extracted from the Luqiao Water Supply Valuation Report. To learn more about the valuation process and better understand the valuation conclusions, please read the complete Luqiao Water Supply Valuation Report.

– VC-24 –

APPENDIX VI

GENERAL INFORMATION

1. RESPONSIBILITY STATEMENT

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

2. DIRECTORS’, SUPERVISORS’ AND CHIEF EXECUTIVES’ INTERESTS AND SHORT POSITIONS IN SHARES, UNDERLYING SHARES AND DEBENTURES

As at the Latest Practicable Date, the interests and short positions of the Directors, Supervisors and chief executives of the Company in the Shares, underlying Shares and debentures of the Company or any of its associated corporations (within the meaning of Part XV of the SFO) which will have to be notified to the Company and the Stock Exchange pursuant to Divisions 7 and 8 of Part XV of the SFO (including interests and short positions which they were taken or deemed to have taken under such provisions of the SFO), or which were recorded in the register required to be kept pursuant to section 352 of the SFO or as otherwise notified to the Company and the Stock Exchange pursuant to the Model Code were as follows:

					Approximate
				Approximate	percentage of
				percentage of	shareholding in
				shareholding in	the total
				the class of	number of
Name of	Nature of	Class of	Number of	Shares in issue	Shares in issue
Director	interest	Shares	Shares held(1)	(%)	(%)
Mr. Yang Yide	Interest of	Domestic	10,058,338 (L)	6.71%	5.03%
	controlled	Shares
	Corporation(2)

Notes:

(1) As at the Latest Practicable Date, the Company had issued 200,000,000 Shares in total, including 150,000,000 Domestic Shares and 50,000,000 H Shares. The letter “L” denotes the person’s long position in the Shares.
(2) Qufeng Holdings Limited, which is owned as to 80% by Mr. Yang Yide, directly held 10,058,338 Domestic Shares. By virtue of the SFO, Mr. Yang Yide was deemed to have an interest in the Shares held by Qufeng Holdings Limited.

– VI-1 –

APPENDIX VI

GENERAL INFORMATION

Save as disclosed above, as at the Latest Practicable Date, none of the Directors, Supervisors or chief executives of the Company had or was deemed to have any interest or short position in the Shares, underlying Shares or debentures of the Company or any of its associated corporations (within the meaning of Part XV of the SFO) which was required to be notified to the Company and the Stock Exchange pursuant to Divisions 7 and 8 of Part XV of the SFO (including interests and short positions which they were taken or deemed to have taken under such provisions of the SFO), or which were required to be recorded in the register to be kept by the Company under Section 352 of the SFO, or which were required to be notified to the Company and the Stock Exchange pursuant to the Model Code.

3. DIRECTORS’ AND SUPERVISORS’ INTERESTS IN ASSETS AND CONTRACTS

As at the Latest Practicable Date, none of the Directors and the Supervisors had any direct or indirect interest in any assets which have been acquired or disposed of by or leased to any member of the Group or are proposed to be acquired or disposed of by or leased to any member of the Group since 31 December 2020, being the date to which the latest published audited accounts of the Company were made up.

None of the Directors and the Supervisors was materially interested in any contract or arrangement subsisting as at the Latest Practicable Date and which is significant in relation to the business of the Group.

4. DIRECTORS’ SERVICE CONTRACT

None of the Directors and the Supervisors has a service contract with any member of the Group which is not determinable by the Company within one year without payment of compensation other than statutory compensation.

5. INTEREST OF DIRECTORS IN COMPETING BUSINESS

As at the Latest Practicable Date, none of the Directors and his/her close associates was interested in any business, which competes or is likely to compete, either directly or indirectly, with that of the Group.

6. MATERIAL ADVERSE CHANGE

As at the Latest Practicable Date, the Directors confirmed that there was no material adverse change in the financial or operation position of the Group since 31 December 2020, being the date to which the latest published audited consolidated accounts of the Group were made up.

7. LITIGATION

As at the Latest Practicable Date, the Group was not engaged in any litigation, arbitration or claim of material importance and no litigation, arbitration or claim of material importance was known to the Directors to be pending or threatened against any member of the Group.

– VI-2 –

APPENDIX VI

GENERAL INFORMATION

8. EXPERTS’ QUALIFICATION AND CONSENTS

The qualification of the experts who have provided their advice which is contained in this circular is set out as follows:

Name	Qualification
Ernst & Young	Certified Public Accountants
Canwin Appraisal Co., Ltd.	an independent valuer qualified in the PRC

Each of the experts mentioned above has given and has not withdrawn its written consent to the issue of this circular with the inclusion of its letter, report and/or opinions and/or the references to its name in the form and context in which it respectively appears.

As at the Latest Practicable Date, each of the experts mentioned above (i) did not have any interest, either direct or indirect, in any assets which had been, since 31 December 2020, being the date to which the latest published audited financial statements of the Company were made up, acquired or disposed of by or leased to any member of the Group or are proposed to be acquired or disposed of by or leased to any member of the Group; and (ii) did not have any shareholding interests in any member of the Group and it did not have any right, whether legally enforceable or not, to subscribe for or nominate persons to subscribe for securities of any members of the Group.

As at the Latest Practicable Date, each of the experts mentioned above did not have any interest, either directly or indirectly, in any assets which have been since 31 December 2020 (being the date to which the latest published audited consolidated financial statements of the Company were made up) acquired or disposed of by or leased to any member of the Group, or were proposed to be acquired or disposed of by or leased to any member of the Group.

9. MISCELLANEOUS

(a) The registered office and the principal place of business in the PRC of the Company are at No. 308 Yin Quan Road, Xicheng Street, Huangyan District, Taizhou, Zhejiang Province, the PRC.
(b) The Company’s H Share Registrar and transfer office in Hong Kong is Computershare Hong Kong Investor Services Limited, Shops 1712-1716, 17/F, Hopewell Centre, 183 Queen’s Road East, Wanchai, Hong Kong.
(c) The joint company secretaries of the Company are Ms. Chen Liying and Ms. Siu Pui Wah, who is a certified public accountant and a member of the Hong Kong Institute of Certified Public Accountants.
(d) Unless stated otherwise, in the event of inconsistency, the English language text of this circular shall prevail over the Chinese language text.

– VI-3 –

APPENDIX VI

GENERAL INFORMATION

10. MATERIAL CONTRACTS

Save as disclosed below, there are no material contracts (not being contracts entered into in the ordinary course of business) which have been entered into by any member of the Group within the two years immediately preceding the date of this circular:

(a) the deed of indemnity dated 8 November 2019 executed by Taizhou State-owned Capital Operation Group Co., Ltd. (台州市國有資本運營集團有限公司) (“ Taizhou SCOG ”), Taizhou Financial Investment Group Co., Ltd. (台州市金融投資集團有限公司) (“ Taizhou Financial Investment ”) and Taizhou Urban Construction Investment Development Group Co., Ltd. (台州市城市建設投資發展集團有限公司) (“ Taizhou Urban Construction* ”) with and in favour of the Company;
(b) the underwriting agreement dated 16 December 2019 entered into among, inter alia, the Company, Taizhou Urban Construction, Taizhou SCOG, Taizhou Financial Investment, Sinolink Securities (Hong Kong) Company Limited, Innovax Securities Limited and the Hong Kong Underwriters (as defined in the Prospectus) relating to the Hong Kong public offering of the H Shares as described in the Prospectus;
(c) the underwriting agreement dated 23 December 2019 entered into among, inter alia, the Company, Taizhou Urban Construction, Taizhou SCOG, Taizhou Financial Investment, Sinolink Securities (Hong Kong) Company Limited, Innovax Securities Limited and the International Underwriters (as defined in the Prospectus) relating to the international public offering of the H Shares as described in the Prospectus;
(d) the cornerstone investment agreement dated 16 December 2019 entered into among the Company, Shanghai Yangtze River Delta Water Environment Investment Fund Limited and Innovax Securities Limited relating to Shanghai Yangtze River Delta Water Environment Investment Fund Limited’s subscription of the H Shares in the aggregate amount of HK$52,750,000;
(e) the Jiaojiang Equity Transfer Agreement; and
(f) the Luqiao Equity Transfer Agreement.

– VI-4 –

APPENDIX VI

GENERAL INFORMATION

11. DOCUMENTS AVAILABLE FOR INSPECTION

Copies of the following documents will be available for inspection at the office of Jingtian & Gongcheng LLP at Suites 3203-3207, 32/F., Edinburgh Tower, The Landmark, 15 Queen’s Road Central, Hong Kong, during normal business hours from the date of this circular up to and as at the date of the EGM:

(a) the Articles of Association;
(b) the annual reports of the Company for the two financial years ended 31 December 2019 and 2020 and the Prospectus;
(c) the accountants’ report of Taizhou Water Supply prepared by Ernst & Young, the text of which is set out in Appendix IIA to this circular;
(d) the accountants’ report of Jiaobei Water Supply prepared by Ernst & Young, the text of which is set out in Appendix IIB to this circular;
(e) the accountants’ report of Luqiao Water Supply prepared by Ernst & Young, the text of which is set out in Appendix IIC to this circular;
(f) the report from Ernst & Young on the unaudited pro forma financial information of the Enlarged Group, the text of which is set out in Appendix IV to this circular;
(g) the Taizhou Water Supply Valuation Report, the summary of which is set out in Appendix VA to this circular;
(h) the Jiaobei Water Supply Valuation Report, the summary of which is set out in Appendix VB to this circular;
(i) the Luqiao Water Supply Valuation Report, the summary of which is set out in Appendix VC to this circular;
(j) the material contracts referred to in the paragraph headed “10. Material Contracts” in this appendix;
(k) the written consent from each of Ernst & Young and the Independent Valuer referred to in the paragraph headed “8. Experts’ qualifications and consents” in this appendix; and
(l) this circular.

– VI-5 –

NOTICE OF EGM

==> picture [63 x 63] intentionally omitted <==

**Taizhou Water Group Co., Ltd.* 台州市水務集團股份有限公司**

(a joint stock company incorporated in the People’s Republic of China with limited liability)

(Stock Code: 1542)

NOTICE OF EGM

NOTICE IS HEREBY GIVEN that the 2021 First Extraordinary General Meeting (the “ EGM ”) of Taizhou Water Group Co., Ltd. (台州市水務集團股份有限公司) (the “ Company* ”) will be held at Conference Room, Taizhou Water Group Co., Ltd., No. 308 Yin Quan Road, Xicheng Street, Huangyan District, Taizhou, Zhejiang Province, the PRC at 9:30 a.m. on Thursday, 15 July 2021 to consider and, if thought fit, to pass, with or without modifications, the following resolutions of the Company.

ORDINARY RESOLUTIONS

“ THAT :
(a) the equity transfer agreement dated 20 May 2021 (the “ Jiaojiang Equity Transfer Agreement ”) (a copy of which is tabled at the meeting and marked “A” and initialled by the chairman of the meeting for identification purpose) entered into between the Company, Taizhou Jiaojiang Urban Development Investment Group Co., Ltd. (台州市椒江城市發展投資集團有限公司), Taizhou Water Supply Co., Ltd. (台州自來水有限公司) (“ Taizhou Water Supply ”) and Taizhou Jiaobei Water Supply Co., Ltd. (台州市椒北供水有限公司) (“ Jiaobei Water Supply* ”) in relation to, among other matters, the acquisition of 45% of the equity interest in each of Taizhou Water Supply and Jiaobei Water Supply by the Company and the transactions contemplated thereunder, be and are hereby confirmed and approved; and
(b) any one or more director(s) of the Company be and is/are hereby authorised to do all such acts and things, to sign and execute all such documents (and to affix the common seal of the Company thereon, if necessary) as he/she/they may consider necessary, appropriate, desirable or expedient to give effect to or in connection with the Jiaojiang Equity Transfer Agreement and the transactions contemplated thereunder, and to make and agree to make such variations of the terms of the Jiaojiang Equity Transfer Agreement as he/she/they may in his/her/their discretion consider to be appropriate, necessary or desirable and in the interests of the Company and its shareholders as a whole.”

* For identification purposes only

– EGM-1 –

NOTICE OF EGM

“ THAT :
(a) the equity transfer agreement dated 20 May 2021 (the “ Luqiao Equity Transfer Agreement ”) (a copy of which is tabled at the meeting and marked “B” and initialled by the chairman of the meeting for identification purpose) entered into between the Company, Taizhou Luqiao District Urban Construction Group Co., Ltd. (台州市路橋區城市建設集團有限公司) and Taizhou Luqiao Water Supply Co., Ltd. (台州市路橋自來水有限公司) (“ Luqiao Water Supply ”) in relation to, among other matters, the acquisition of 45% of the equity interest in Luqiao Water Supply by the Company and the transactions contemplated thereunder, be and are hereby confirmed and approved; and
(b) any one or more director(s) of the Company be and is/are hereby authorised to do all such acts and things, to sign and execute all such documents (and to affix the common seal of the Company thereon, if necessary) as he/she/they may consider necessary, appropriate, desirable or expedient to give effect to or in connection with the Luqiao Equity Transfer Agreement and the transactions contemplated thereunder, and to make and agree to make such variations of the terms of the Luqiao Equity Transfer Agreement as he/she/they may in his/her/their discretion consider to be appropriate, necessary or desirable and in the interests of the Company and its shareholders as a whole.”

By order of the Board Taizhou Water Group Co., Ltd.* YANG Jun Chairman

Taizhou, the PRC 24 June 2021

Notes:

For details of the resolutions to be approved in this EGM, please refer to the circular.
The register of members of the Company will be closed from Wednesday, 16 June 2021 to Thursday, 15 July 2021 (both days inclusive), during which period no transfer of shares of the Company (the “ Shares ”) will be effected. In order to be qualified to attend and vote at the EGM, all transfers accompanied by the relevant share certificates must be lodged with the H Share registrar of the Company, namely Computershare Hong Kong Investor Services Limited, at Shops 1712-1716, 17th Floor, Hopewell Centre, 183 Queen’s Road East, Wan Chai, Hong Kong no later than 4:30 p.m. on Tuesday, 15 June 2021.
Shareholders of the Company (the “ Shareholders ”) who are entitled to attend and vote at the EGM may appoint one or more proxies to attend and, in the event of a poll, vote on their behalf. A proxy needs not be a Shareholder.
Shareholder shall entrust a proxy by a written form of proxy which shall be signed by such Shareholder or an agent entrusted by such Shareholder in writing under the hand of a Shareholder in writing. If the

– EGM-2 –

NOTICE OF EGM

Shareholder is a legal person, the power of attorney shall be affixed with its official seal or signed by its director or an agent or other personnel officially entrusted thereby. Such power of attorney shall specify the number of Shares held by the Shareholder represented by each proxy.

In order to be valid, the form of proxy must be deposited, for the holders of H Shares, to the H Share registrar of the Company, Computershare Hong Kong Investor Services Limited, at 17M Floor, Hopewell Centre, 183 Queen’s Road East, Wan Chai, Hong Kong or, for the holders of Domestic Shares, to the Company’s registered office in the PRC, not less than 24 hours prior to the commencement of the EGM (i.e. before 9:30 a.m. on Wednesday, 14 July 2021). If the proxy form is signed by a person authorised by the Shareholder, the power of attorney or other authorisation documents shall be notarised. Completion and return of the proxy form will not preclude Shareholders from attending and voting in person at the EGM or any adjourned meetings should you so wish.
Shareholders shall show their identity papers when attending the EGM. A proxy, who is on behalf of a Shareholder, shall show his/her identity paper, proxy form and a copy of identity paper of the Shareholder.
Corporate Shareholder shall appoint its legal representative or authorised representative to attend the EGM. Such person shall show his/her identity paper and a copy of corporate’s business certificate affixed with its official seal. If corporate Shareholders appoint authorised representative to attend the EGM, the authorised representative shall show his/her identity paper, the original document of power of attorney issued by the such legal person and a copy of corporate’s business certificate affixed with its official seal (except for a clearing house or its proxy).
Shareholders who intend to attend the EGM should complete and return the reply slip in writing by hand or by post to the H Share registrar of the Company, namely Computershare Hong Kong Investor Services Limited, at 17M Floor, Hopewell Centre, 183 Queen’s Road East, Wan Chai, Hong Kong (for holders of H Shares) or the registered office of the Company in the PRC (for holders of Domestic Shares) before Tuesday, 29 June 2021.
The EGM is expected to take less than half a day, Shareholders who attend the EGM shall be responsible for their own travel and accommodation expenses.
The name and address of the Company’s H Share registrar in Hong Kong is as follows:

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

The registered office of the Company in the PRC is as follows:

No. 308 Yin Quan Road Xicheng Street Huangyan District Taizhou, Zhejiang Province PRC

If more than one of joint Shareholders attend the meeting, whether in person or by proxy, the vote of the senior joint Shareholder who tenders a vote, whether in person or by proxy, will be accepted to the exclusion of the votes of the other joint Shareholders and for this purpose seniority will be determined by the order in which the names stand in the register of members of the Company in respect of the joint shareholding.

– EGM-3 –

AI assistant

Taizhou Water Group Co., Ltd. — M&A Activity 2021

49988_rns_2021-06-24_8bff4d09-b56a-4c14-8cd7-01eb5552cd12.pdf

Taizhou Water Group Co., Ltd.* 台州市水務集團股份有限公司

(I) MAJOR TRANSACTIONS IN RELATION TO ACQUISITION OF 45% EQUITY INTEREST IN TAIZHOU WATER SUPPLY, JIAOBEI WATER SUPPLY AND LUQIAO WATER SUPPLY; AND

(II) NOTICE OF THE 2021 FIRST EXTRAORDINARY GENERAL MEETING

Taizhou Water Group Co., Ltd.* 台州市水務集團股份有限公司

(Stock Code: 1542)

(I) MAJOR TRANSACTIONS IN RELATION TO ACQUISITION OF 45% EQUITY INTEREST IN TAIZHOU WATER SUPPLY, JIAOBEI WATER SUPPLY AND LUQIAO WATER SUPPLY; AND

(II) NOTICE OF THE 2021 FIRST EXTRAORDINARY GENERAL MEETING

1. INTRODUCTION

2. MAJOR TRANSACTIONS IN RELATION TO ACQUISITION OF 45% EQUITY INTEREST IN TAIZHOU WATER SUPPLY, JIAOBEI WATER SUPPLY AND LUQIAO WATER SUPPLY

The Jiaojiang Equity Transfer Agreement

Subject matter

Jiaojiang consideration and adjustment thereto

Basis of consideration

Completion

Effective date

Termination

Post-completion rights

Board representation

The Luqiao Equity Transfer Agreement

Subject matter

Luqiao consideration and adjustment thereto

Basis of consideration

Completion

Effective date

Termination

Post-completion rights

Board representation

Information of the Targets

Taizhou Water Supply

Name of subsidiary

Jiaobei Water Supply

Luqiao Water Supply

Information of the Parties Involved

The Company

Jiaojiang Urban Development

Luqiao Urban Construction

Reasons for and Benefits of the Acquisitions

Financial Effects of the Acquisitions

Implications under the Listing Rules

3. EGM

4. VOTING BY POLL

5. RECOMMENDATION

6. ADDITIONAL INFORMATION

1. FINANCIAL SUMMARY

2. INDEBTEDNESS

Borrowings

Contingent liabilities

Capital commitment

3. MATERIAL ADVERSE CHANGE

4. WORKING CAPITAL

5. FINANCIAL AND TRADING PROSPECTS OF THE GROUP

ACCOUNTANTS’ REPORT ON HISTORICAL FINANCIAL INFORMATION TO THE DIRECTORS OF TAIZHOU WATER GROUP CO., LTD.

Introduction

Directors’ responsibility for the Historical Financial Information

Reporting accountants’ responsibility

Opinion

Adjustments

Dividends

I HISTORICAL FINANCIAL INFORMATION

Preparation of Historical Financial Information

CONSOLIDATED STATEMENTS OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME

CONSOLIDATED STATEMENTS OF FINANCIAL POSITION

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

CONSOLIDATED STATEMENTS OF CASH FLOWS

II NOTES TO THE HISTORICAL FINANCIAL INFORMATION

1. CORPORATE INFORMATION

2.1 BASIS OF PREPARATION

Going concern

Basis of consolidation

2.2 ISSUED BUT NOT YET EFFECTIVE HONG KONG FINANCIAL REPORTING STANDARDS

APPENDIX IIA

2.3 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Investments in associates

Impairment of non-financial assets

Related parties

Property, plant and equipment and depreciation

Intangible assets (other than goodwill)

Taizhou Water Group Co., Ltd. M&A Activity 2021

**Taizhou Water Group Co., Ltd.* 台州市水務集團股份有限公司**

**Taizhou Water Group Co., Ltd.* 台州市水務集團股份有限公司**