Time Watch Investments Limited — Proxy Solicitation & Information Statement 2007

Nov 16, 2007

THIS CIRCULAR IS IMPORTANT AND REQUIRES YOUR IMMEDIATE ATTENTION

If you are in any doubt as to any aspect of this circular or as to the action to be taken, you should consult your 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 China Water Affairs Group Limited, you should at once hand this circular to the purchaser or the transferee, or to the bank, stockbroker or other agent through whom the sale or the transfer was effected for transmission to the purchaser or the transferee.

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

CHINA WATER AFFAIRS GROUP LIMITED 中國水務集團有限公司[*]

(Incorporated in the Cayman Islands and continued in Bermuda with limited liability)

(Stock code: 855)

DISCLOSEABLE TRANSACTION

• For identification purposes only

Hong Kong, 19 November 2007

CONTENTS

	Page
Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	1
Letter from the Board . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	3
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	3
The Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	3
Information on the Target . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	4
Reason for the Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	6
Additional Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	6
Appendix – General information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	7

DEFINITIONS

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

“Acquisition” the acquisition of 19.375% in the registered capital of the Target pursuant to the Agreement “Agreement” the agreement dated 26 October 2007 made between the Vendor and the Company for the sale and purchase of 19.375% in the registered capital in the Target “associates” has the meaning ascribed to it in the Listing Rules

“Board” the board of Directors of the Company or a duly authorized committee thereof for the time being

“Company” China Water Affairs Group Limited, a company incorporated in the Cayman Islands and continued in Bermuda with limited liability

• “Companies Ordinance” the Companies Ordinance (Chapter 32 of the Laws of Hong Kong) “connected persons” has the meaning ascribed to it in the Listing Rules “Consideration” the total consideration for the Acquisition

• “Directors” directors of the Company “Group” the Company and its subsidiaries “Hong Kong” the Hong Kong Special Administrative Region of The People’s Republic of China

• “HK$” Hong Kong dollars, the lawful currency of Hong Kong “Latest Practicable Date” 16 November 2007, being the latest practicable date prior to the printing of this circular for ascertaining certain information contained herein

• “Listing Rules” the Rules Governing the Listing of Securities on the Stock Exchange

“PRC” The People’s Republic of China which, for the purpose of this circular, excludes Hong Kong, the Macau Special Administrative Region and Taiwan “RMB” Renminbi, the lawful currency of the PRC

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DEFINITIONS

“SFO” The Securities and Future Ordinance (Chapter 571 of the Laws of Hong Kong) “Share(s)” Share(s) of HK$0.01 each in the capital of the Company (or of such other nominal amount as shall result from a sub-division, consolidation, reclassification or reconstruction of the share capital of the Company from time to time) “Shareholder(s)” holder(s) of Share(s) “Stock Exchange” The Stock Exchange of Hong Kong Limited “Target” 中國水務投資有限公司 (China Water Industry Investment Corporation), a company incorporated under the laws of the PRC “Vendor” 山西省萬家寨引黃工程總公司(Shanxi Wanjiazhai Yellow River Diversion Project General Company) “%” per cent

For the purpose of illustration in this announcement, figures in Renminbi are translated into Hong Kong dollars at the approximate exchange rate of RMB1.04 to HK$1.00.

The English translation of Chinese names is included for information purpose only and should not be regarded as their official English translation.

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LETTER FROM THE BOARD

CHINA WATER AFFAIRS GROUP LIMITED 中國水務集團有限公司[*]

(Incorporated in the Cayman Islands and continued in Bermuda with limited liability) (Stock code: 855)

Executive Directors

Mr Duan Chuan Liang (Chairman) Mr Li Ji Sheng

Non-Executive Directors

Mr Chen Guo Ru Mr Wu Jiesi Mr Zhao Hai Hu Mr Zhou Wen Zhi

Independent Non-Executive Directors

Ms Huang Shao Yun Ms Liu Dong Mr Chau Kam Wing Mr Ong King Keung

Registered office Clarendon House 2 Church Street Hamilton HM 11 Bermuda

Head office and principal place

of business on Hong Kong Suite 6408, 64/F Central Plaza, 18 Harbour Road Wanchai Hong Kong

19 November 2007

To the Shareholders

Dear Sir and Madam,

DISCLOSEABLE TRANSACTION

INTRODUCTION

The Directors announced on 30 October 2007 that the Company entered into the Agreement with the Vendor to acquire 19.375% of the registered capital in the Target. The Agreement constitutes a discloseable transaction for the Company under the Listing Rules. The purpose of this circular is to provide you with information on the Acquisition and the Company.

THE AGREEMENT

Date: 26 October 2007

Parties:

1. The Vendor and

2. the Company.

3. For identification purposes only

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LETTER FROM THE BOARD

The Vendor is a PRC state-owned enterprise. To the best of the Directors’ knowledge, information and belief, and after making all reasonable enquiries, the Vendor and its ultimate beneficial owners are third parties independent of the Company and its connected persons and are not connected persons of the Company. The Company has no prior transactions or relationship with the Vendor and its ultimate beneficial owners.

Consideration

The total consideration for the Acquisition is RMB175 million (equivalent to approximately HK$182 million), which shall be payable to the Vendor in cash in the following manner:

1. RMB50,000,000 (equivalent to approximately HK$52,000,000) which has been paid as security deposit prior to the Agreement shall be treated as part payment of the Consideration;

2. the balance of RMB125,000,000 (equivalent to approximately HK$130,000,000) shall be paid within 15 days from the effective date of the Agreement.

The transfer of the 19.375% in the registered capital of the Target was conducted through 山西省 產權交易市場 (Shanxi Property Rights Exchange Market). The Consideration was determined by the Vendor and the Company after arm’s length negotiation with reference to the registered capital and net asset value of the Target as shown in the Target’s unaudited management account as at 31 December 2006 and the business potential of the Target.

The Consideration will be funded by the Group’s internal resources in cash.

INFORMATION ON THE TARGET

The Target is a state-level corporation principally engaged in the investment, operation, management and related value added services in raw water supply and exploitation, cross-region water transfer, urban water supply and waste water treatment as well as desalination of brackish water. The core shareholders of the Target include the Bureau of Comprehensive Development, Ministry of Water Resources, PRC, Sinohydro Corporation and the Vendor. The Target conducted its business in various regions of the PRC including Shandong, Xinjiang, Zhejiang, Inner Mongolia, Jiangsu, Qingdao and Sichuan. The aggregate daily water supply capacity of the Target and its subsidiaries was approximately 2.8 million tonnes. The aggregate daily water supply capacity of other entities in which the Target has invested was approximately 2 million tonnes. The Target holds approximately 25.5% in the share capital of and is the single largest shareholder of 錢江水利開發股份有限公司 (Qianjiang Water Resources Development Co. Ltd.), a PRC company listed on the Shanghai Stock Exchange. The Target also holds approximately 25% in the share capital of 新疆國泰礦業股份公司 (Xinjiang Guotai Mining Industry Co., Ltd.), a PRC company which is interested in coal mines with preliminary estimated coal reserve capacity of approximately 4,000 million tones. The Target also has indirect shareholdings in 新疆金丰科技股份有限公司(Xinjiang Jinfeng Technology Co., Ltd.), a PRC company principally engaged in wind power business and is in the process of applying for listing on the Shanghai Stock Exchange.

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LETTER FROM THE BOARD

The Vendor currently holds 25.625% in the registered capital of the Target.

The Group has previously entered into the following transactions with the Target:

1. The Company entered into an agreement with the Target on 14th July 2006 to acquire from the Target 8% of the enlarged registered capital of 山東水務投資有限公司(Shandong Water Investment Company Limited), a company established in the PRC, as disclosed in the Company’s announcement dated 14 July 2006;

2. 江西萬年銀龍水務有限公司 (Jiangxi Wannian Silver Dragon Water Affairs Company Limited), a non-wholly owned subsidiary of the Company, entered into an investment agreement dated 13 February 2007 with, among others, the Target, pursuant to which it agreed to inject capital up to RMB25 million into 上海自來水建設公司 (Shanghai Water Supply Construction Company), as disclosed in the Company’s announcement dated 13 February 2007. The Target would be interested in 42.86% of the registered capital of Shanghai Water Supply Construction Company after completion of the said investment agreement.

Save as disclosed above, the Company has no prior business transactions with the Target. The Company does not hold any equity interest in the Target prior to the Agreement.

The registered capital of the Target was RMB800 million. According to the unaudited management account of the Target prepared on PRC’s generally accepted accounting principles, the unaudited net assets of the Target as at 31 December 2006 was RMB798.9 million.

According to the unaudited management account of the Target prepared on PRC’s generally accepted accounting principles, the unaudited net profits before and after taxation, minority interest and extraordinary items of the Target for the year ended 31 December 2006 were RMB4.24 million and 0.26 million respectively.

According to the unaudited management account of the Target prepared on PRC’s generally accepted accounting principles, the unaudited loss before and after taxation, minority interest and extraordinary items of the Target for the year ended 31 December 2005 were both RMB3.2 million.

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LETTER FROM THE BOARD

REASON FOR THE AGREEMENT

The Group is principally engaged in city water supply and sewage treatment business in the PRC. The Board is of the view that the entering into of the Agreement enables the Group to further strengthen its water supply and related business in the PRC. It is the Company’s intention to acquire the remaining 6.25% in the registered capital of the Target held by the Vendor, subject to the Vendor’s willingness to sell and on mutually agreeable terms. The Directors do not expect the entering into of the Agreement itself will have any material adverse financial impact on the assets and liabilities of the Group. In view of the profitable track record of the Target, it is expected that the Acquisition will enhance the earrings of the Group. The Vendor has nominated 2 directors to the board of the Target. Upon completion of the Acquisition, it is intended that one of the directors nominated by the Vendor shall resign and the Company shall nominate one directors to the board of the Target. As result, the Target will be accounted for on an equity basis as an associated company of the Group. The Directors (including the independent nonexecutive Directors) consider that the terms of the Agreement are on normal commercial terms and are fair and reasonable and in the interests of the Company and the Shareholders as a whole.

ADDITIONAL INFORMATION

Your attention is drawn to the additional information contained in the Appendix to this circular.

By Order of the Board DUAN CHUAN LIANG Chairman

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GENERAL INFORMATION

APPENDIX

1. RESPONSIBILITY STATEMENT

This circular includes particulars given in compliance with the Listing Rules for the purpose of giving information with regard to the Company. The Directors collectively and individually accept full responsibility for the accuracy of the information contained in this circular and confirm, having made all reasonable enquiries, that to the best of their knowledge and belief there are no other facts the omission of which would make any statement herein misleading.

2. DISCLOSURE OF INTERESTS

(a) Directors’ interests and short positions in the securities of the Company and its associated corporations

As at the Latest Practicable Date, the interests and short positions of the Directors and the chief executives of the Company 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) (a) which were required to be notified to the Company and the Stock Exchange pursuant to Divisions 7 and 8 of Part XV of the SFO (including interests or short positions which the Directors or the chief executives were taken or deemed to have under such provisions of the SFO); or (b) which were required, pursuant to section 352 of the SFO, to be entered in the register referred to therein; or (c) which were required to be notified to the Company and the Stock Exchange pursuant to the Model Code contained in the Listing Rules were as follows:

Long position

• (i) Directors’ interests in the Shares

			% of issue
Name of Director	Nature of interest	No. of Share held	share capital
Mr Duan_(Note)_	Corporate and Personal	145,682,301	11.78%
Chen Guo Ru	Personal	6,290,000	0.51%
Zhao Hai Hu	Personal	1,900,000	0.15%

Note: These 145,682,301 Shares consist of 106,282,301 Shares held by Asset Full Resources Limited and 100,000 Shares held by Tat Chi International Inc, both of which are companies wholly and beneficially owned by Mr Duan, and 39,300,000 Shares held by Mr Duan personally.

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GENERAL INFORMATION

APPENDIX

(ii) Directors’ rights to acquire the Shares

As at the Latest Practicable Date, the outstanding interests of the Directors in share options of the Company which were granted to the relevant Directors pursuant to the share option scheme of the Company adopted on 6th September, 2002 were summarised below:

	No. of Options	Exercise price
Grantee	outstanding	per Share	Date of grant	Exercise period
Zhou Wen Zhi	870,000	HK$0.41	03/01/2006	03/01/2006 to
				02/01/2008
Wu Jiesi	6,000,000	HK$1.45	29/03/2006	29/03/2006 to
				28/03/2011
Mr Duan	50,000,000	HK$3.60	02/04/2007	02/04/2007 to
				01/04/2009

• (iii) Directors’ interest in associated corporations

As at the Latest Practicable Date, Mr Li Ji Sheng is interested in 0.91% of the equity interest of 江河水務投資有限公司 (Foundation Water Affairs Investment Co. Ltd.), a nonwholly owned subsidiary of the Company.

Save as disclosed above, as at the Latest Practicable Date, to the knowledge of the Company, none of the Directors or the chief executives of the Company had or was deemed to have any interests or short positions 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) (a) which were required to be notified to the Company and the Stock Exchange pursuant to Divisions 7 and 8 of Part XV of the SFO (including interests or short positions which the Directors and the chief executives were taken or deemed to have under the provisions of the SFO); or (b) which were required, pursuant to section 352 of the SFO, to be entered in the register referred to therein; or (c) which were required to be notified to the Company and the Stock Exchange pursuant to the Model Code contained in the Listing Rules.

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GENERAL INFORMATION

APPENDIX

(b) Interests of substantial shareholders

As at the Latest Practicable Date, so far as is known to any Director or chief executive of the Company, other than a Director or chief executive of the Company, the following persons had interests or short position in the Shares or underlying Shares which would fall to be disclosed to the Company under the provisions of Divisions 2 and 3 of Part XV of the SFO, or, who was, directly or indirectly, interested in 10% or more of the nominal value of any class of share capital carrying rights to vote in all circumstances at general meetings of any other member of the Group:

Long position

		No. of Share	% of issued share
		held/amount of registered	capital/registered
Name	Name of member of Group	capital interested	capital
Asset Full Resources Limited	The Company	106,282,301	8.59%
Atlantis Investment Management Limited	The Company	185,850,000	15.03%
L-R Global Partners, L.P.	The Company	94,750,000	7.66%
Charlemagne Capital (IOM) for and	The Company	61,870,000	5.00%
on behalf of Managed Fund
Deutsche Bank Aktiengeselischaft	The Company	74,807,386	6.05%
NK Enterprise Limited	Graham Industrial Limited_(Note 1)_	45	45%
AAG (HK) Limited	Cedar Base International Limited_(Note 1)_	3	30%
Renhua County Water Company_(Note 2)_	Guangdong Renhua Silver Dragon Water	RMB4.66 million	27%
（仁化縣自來水公司）	Supply Limited_(Note 2)_
	（廣東仁化銀龍供水有限公司）(Note 1)
Jiangxi Water Resources and	Jiangxi Provincial Silver Dragon	RMB350,000	35%
Hydropower Development	Hotel Limited_(Note 2)_
Company_(Note 2)_	（江西省銀龍大酒店有限公司）(Note 1)
（江西省水利水電開發轂公司）
Xinyu Shi Construction Bureau_(Note 2)_	Xinyu Water Affairs Group	RMB40 million	40%
（新余市建局）	Company_(Note 2)_
	（新余水務集團有限公司）(Note 1)

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GENERAL INFORMATION

APPENDIX

		No. of Share	% of issued share
	held/amount of registered		capital/registered
Name	Name of member of Group	capital interested	capital
Henan Province Zhoukou City People’s	Zhoukou Silver Dragon Company Limited	RMB15 million	30%
Government_(Note 2)_	(Note 2)（周口銀龍水務有限公司）
（河南省周口市人民政府）	(Note 1)
Jingzhou City Infrastructure Investment	Jingzhou Water Affairs Company Limited	RMB113 million	49%
and Development Company_(Note 2)_	(Note 2)（荊州水務集團有限公司）
（荊州市城市建設投資開發有限公司）
Notes:

1. These companies are non-wholly owned subsidiaries of the Group.

2. The English names are for identification purposes only.

Short position

			% of issued
		No. of Share	share
		held/amount	capital/
	Name of member	of registered	registered
Name	of Group	capital interested	capital
Deutsche Bank	The Company	4,447,000	0.36%
Aktiengeselischaft

Save as disclosed above, as at the Latest Practicable Date, so far as is known to any Director or chief executive of the Company, other than a Director or chief executive of the Company, no persons had interests or short position in the Shares or underlying Shares which would fall to be disclosed to the Company under the provisions of Divisions 2 and 3 of Part XV of the SFO, or who was, directly or indirectly, interested in 10% or more of the nominal value of any class of share capital carrying rights to vote in all circumstances at general meetings of any other member of the Group or any options in respect of such capital.

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GENERAL INFORMATION

APPENDIX

3. SERVICE CONTRACTS

The Company entered into a service contract with Mr. Wu Jiesi, a non-executive Director, for an initial term of three years (subject to the termination provisions of the service contract) commencing from 13 February 2006. Mr. Wu is entitled to, among other things, an annual salary of HK$60,000 and share options to subscribe for a total of approximately 6,000,000 Shares.

Save as aforesaid, none of the Directors had entered into any service contracts with the Company or any other member of the Group (excluding contracts expiring or determinable by the employer within one year without payment of compensation (other than statutory compensation)) as at the Latest Practicable Date.

4. COMPETING INTEREST

As at the Latest Practicable Date, so far as the Directors are aware, none of the Directors or their respective associates had any interest in a business which competes or may compete with the business of the Group, or have or may have any other conflicts of interest with the Group pursuant to Rule 8.10 of the Listing Rules.

5. LITIGATION

As at the Latest Practicable Date, there was no litigation or claim of material importance known to the Directors to be pending or threatened against any member of the Group.

6. GENERAL

• (i) The company secretary and the qualified accountant of the Company is Mr. Tam Chun Yip, an associate member of the Association of Chartered Certified Accountants and a member of the Hong Kong Institute of Certified Public Accountants.

• (ii) The registered office of the Company is at Clarendon House, 2 Church Street, Hamilton HM 11, Bermuda.

• (iii) The head office and principal place of business of the Company in Hong Kong is at Suite 6408, 64/F, Central Plaza, 18 Harbour Road, Wanchai, Hong Kong.

• (iv) In case of inconsistency, the English text of this circular shall prevail over the Chinese text.

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