Time Watch Investments Limited — Proxy Solicitation & Information Statement 2014

Oct 16, 2014

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 and the accompanying form of proxy 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.

Hong Kong Exchanges and Clearing Limited and 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.

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

GRANT OF OPTIONS TO A DIRECTOR UNDER THE SHARE OPTION SCHEME AND NOTICE OF SPECIAL GENERAL MEETING

Independent Financial Adviser to Independent Board Committee and Independent Shareholders

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REORIENT Financial Markets Limited

A letter from the Board is set out on pages 3 to 6 of this circular. A letter from the Independent Board Committee containing its recommendations to the Independent Shareholders regarding the grant of the Director Options is set out on page 7 of this circular. A letter from Reorient Financial Market Limited, the independent financial adviser to the Independent Board Committee and the Independent Shareholders containing its advice regarding the Director Options is set out on pages 8 to 19 of this circular.

A notice convening the special general meeting of the Company to be held at Suite 6408, 64/F, Central Plaza, 18 Harbour Road, Wanchai, Hong Kong on 3 November 2014 at 11:00 a.m. or any adjournment thereof is set out on pages 22 to 23 of this circular. Whether or not you intend to attend the special general meeting of the Company, you are advised to complete the accompanying proxy form in accordance with the instructions printed thereon and return the same to the Company’s branch share registrar in Hong Kong, Tricor Tengis Limited, at Level 22, Hopewell Centre, 183 Queen’s Road East, Hong Kong, not less than 48 hours before the time fixed for holding of the meeting or any adjournment thereof. Completion and delivery of the proxy form will not preclude Shareholders from attending and voting in person at the meeting if they so wish.

Hong Kong, 17 October 2014

• For identification purposes only

CONTENTS

	Page
DEFINITIONS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
LETTER FROM THE BOARD. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
LETTER FROM INDEPENDENT BOARD COMMITTEE. . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
LETTER FROM REORIENT. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
APPENDIX I – PARTICULARS OF GRANT. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
NOTICE OF SPECIAL GENERAL MEETING. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22

DEFINITIONS

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

• “Asset Full” Asset Full Resources Limited, a company incorporated in the British Virgin Islands, the entire issued share capital of which is beneficially owned by Mr. Duan

• “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

• “core connected persons” has the meaning ascribed to it in the Listing Rules “Date of Grant” 3 October 2014, being the date of the meeting of the Board granting the Director Options subject to Shareholders’ approval

• “Directors” directors of the Company “Director Options” the proposed grant of options to Mr. Duan, particulars of which are set out in Appendix I

“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

• “Independent Board Committee” the independent committee of the Board comprising all the independent non-executive directors of the Company

• “Independent Financial Adviser” REORIENT Financial Markets Limited, the independent financial or “REORIENT” adviser to the Independent Board Committee and Independent Shareholders in relation to the grant of the Director Options, is a corporation licensed to carry out type 1 (dealing in securities), type 4 (advising on securities), type 6 (advising on corporate finance) and type 9 (asset management) regulated activities under the SFO

“Independent Shareholders” Shareholders other than Asset Full, Mr Duan and all other Directors and substantial shareholders and their respective associates

1

DEFINITIONS

“Latest Practicable Date” 14 October 2014, 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 “Mr. Duan” Mr. Duan Chuan Liang, chairman and executive director of the Company “Scheme Mandate Limit” the total number of Shares (being up to 10% of Shares in issue at the date of the relevant general meeting) which may be issued upon exercise of all options to be granted under the Share Option Scheme as at the date of adoption of the Share Option Scheme or as refreshed “Share Option Scheme” the share option scheme adopted by the Company on 7 September 2012 “SFO” The Securities and Future Ordinance (Chapter 571 of the Laws of Hong Kong) “SGM” the special general meeting of the Company to be held at Suite 6408, 64/F, Central Plaza, 18 Harbour Road, Wanchai, Hong Kong on 3 November 2014 at 11:00 a.m. “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) “substantial shareholder” has the meaning ascribed to it in the Listing Rules “Stock Exchange” The Stock Exchange of Hong Kong Limited “%” per cent

2

LETTER FROM THE BOARD

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

Executive Directors:

Mr Duan Chuan Liang (Chairman) Ms Ding Bin Ms Liu Yu Jie

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

Non-Executive Directors:

Mr Chen Guo Ru Mr Zhao Hai Hu Mr Zhou Wen Zhi Mr Makoto Inoue

Independent Non-Executive Directors: Ms Huang Shao Yun Ms Liu Dong Mr Chau Kam Wing Mr Ong King Keung

Head office and principal place of business on Hong Kong: Suite 6408, 64/F Central Plaza 18 Harbour Road Wanchai Hong Kong

17 October 2014

To the Shareholders

Dear Sir and Madam,

GRANT OF OPTIONS TO A DIRECTOR UNDER THE SHARE OPTION SCHEME AND NOTICE OF SPECIAL GENERAL MEETING

INTRODUCTION

The purpose of this circular is (i) to provide you with information on the grant of the Director Options under the Share Option Scheme; (ii) to set out the recommendations of the Independent Board Committee in relation to the Director Options (iii) to set out the recommendation of the REORIENT in relation to the Director Options and (iv) to give you notice of the SGM at which ordinary resolutions will be proposed to consider and, if thought fit, approve the grant of the Director Options under the Share Option Scheme.

• For identification purposes only

3

LETTER FROM THE BOARD

GRANT OF DIRECTOR OPTIONS

The Company announced on 3 October 2014 that it granted 134,500,000 share options to certain eligible participants of the Company under the Share Option Scheme. Among the share options granted, 70,000,000 options entitling Mr. Duan to subscribe for 70,000,000 Shares, representing approximately 5.00% of the Shares in issue as at the Latest Practicable Date were granted to Mr Duan, subject to Shareholders approval. The exercise price for the Director Options is HK$3.60 per Share, which was determined on the Date of Grant.

As at the Latest Practicable Date, Mr Duan is interested in 333,806,301 Shares representing approximately 23.85% of the issued share capital of the Company, which consist of 152,730,301 Shares held by Asset Full and 181,076,000 Shares held by Mr Duan personally. Mr Duan did not hold any options under the Share Option Scheme as at the Latest Practicable Date. No option has been granted to Mr Duan within 12 months from the Date of Grant.

The total number of Shares to be issued upon exercise of the Director Options by Mr Duan in any 12-month period would exceed 1% of all the Shares in issue (the “Individual Limit”). In addition, Mr. Duan is an associate of Asset Full which is a substantial shareholder of the Company, and the Director Options would result in the Shares to be issued upon exercise of the Director Options in the 12-month period up to and including the Date of Grant representing in aggregate over 0.1% of the total number of issued Shares and having an aggregate value (based on the closing price of the Shares at the Date of Grant) in excess of HK$5 million. Hence the grant of Director Options is subject to approval by the Independent Shareholders.

Further details regarding the grant of the Director Options are set out in Appendix I to this circular.

REASONS

Mr Duan is the chairman and executive director of the Group. Mr Duan is responsible for the overall strategic planning and formulation of corporate policies of the Group. He graduated from the North China College of Water Conservancy and Hydro Power with a bachelor degree, specialising in irrigation and water conservancy works. He worked for The Ministry of Water Resources of the PRC Government for more than ten years.

The Board is of the view that the grant of the Director Options is an appropriate way to motivate Mr. Duan who has contributed significantly to the growth of the Company and the development of the Group in urban water supply businesses without imposing substantial financial burden to the Group. The grant of the Director Options has been approved by the Independent non-executive Directors who are of the view that Mr Duan is valuable to the Group and should be rewarded for his contributions to the Group. The Board also consider that grant of the Director Options could ensure a firm bond between Mr Duan and the Company, which will ultimately benefit the Company.

4

LETTER FROM THE BOARD

The Board has considered other means to reward and incentivise Mr. Duan, such as lump sum cash bonuses, remuneration increment or share award scheme. However, after careful consideration of the costs to be incurred by these alternatives and the potential benefits to be brought to the Group, the Directors are of the view that granting the Director Options to Mr. Duan would be the most appropriate means given that, as compared with the other alternatives, the grant of the Director Options enables the Group to conserve its cash resources while serving the purposes to reward and incentivise Mr. Duan. Further, assuming the Director Options are fully exercised, it will raise an additional general working capital of approximately HK$252 million for the Group.

SGM

Approval from the Independent Shareholders will be sought at the SGM for the grant of the Director Options.

Pursuant to the note to Rule 17.03(4) of the Listing Rules, Asset Full (holding 152,730,301 Shares) and Mr. Duan (holding 181,076,000 Shares) shall abstain from voting in respect of the resolution to approve the grant of the Director Options at the SGM. Pursuant to Rule 17.04(1) of the Listing Rules, Ding Bin (holding 290,000 Shares), Liu Yu Jie (holding 3,054,000 Shares), Chen Guo Ru (holding 3,000,000 Shares), Zhao Hai Hu (holding 1,306,000 Shares), Zhou Wen Zhi (holding 870,000 Shares) and all other core connected persons of the Company will abstain from voting in favour of the resolution to approve the grant of the Director Options at the SGM.

The Independent Board Committee has been established to make recommendations to the Shareholders in respect of the grant of the Director Options.

REORIENT has been appointed as the independent financial adviser to advise the Independent Board Committee and the Independent Shareholders in respect of the grant of the Director Options.

RECOMMENDATION

REORIENT has been appointed to advise the Independent Board Committee and the Independent Shareholders with regard to the grant of the Director Options and consider that the grant of the Director Options is fair and reasonable so far as the interests of the Independent Shareholders are concerned. Your attention is drawn to the letter of advice from REORIENT containing its recommendation and the principal factors and reasons it has taken into account in arriving at its recommendation are set out in this circular.

The Independent Board Committee, having taken the advice of REORIENT into account, considers the terms of the grant of the Director Options fair and reasonable so far as the Independent Shareholders are concerned. Accordingly, the Independent Board Committee recommends the Independent Shareholders to vote in favour of the resolution relating to the grant of the Director Options. The full text of the letter from the Independent Board Committee is set out in this circular.

The Director Options has been approved by all independent non-executive directors. The Directors are of the opinion that the grant of the Director Options is fair and reasonable and in the interests of the Company and the Shareholders as a whole. The Directors recommend that all Shareholders should vote in favour of the relevant resolutions to be proposed at the SGM.

5

LETTER FROM THE BOARD

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.

Yours faithfully, On behalf of the Board DUAN CHUAN LIANG

Chairman

6

LETTER FROM THE INDEPENDENT BOARD COMMITTEE

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

17 October 2014

To the Independent Shareholders

Dear Sir/Madam,

We have been appointed as the Independent Board Committee to advise Independent Shareholders in connection with the grant of the Director Options, details of which are set out in the circular of the Company to the Shareholders dated 17 October 2014 (the “Circular”), of which this letter forms part. Terms defined in the Circular shall have the same meanings when used herein unless the context otherwise requires.

Having considered the advice of REORIENT in relation thereto as set out in the Circular and Mr. Duan’s contribution to the Group and the terms of the proposed grant of Director Options, we are of the view that the terms of the proposed grant of Director Options are fair and reasonable so far as the Independent Shareholders are concerned.

Accordingly, we recommend the Independent Shareholders to vote in favour of the resolution to be proposed at the SGM to approve the grant of the Director Options.

Yours faithfully

Huang Shao Yun	Liu Dong	Chau Kam Wing	Ong King Keung
Independent	Independent	Independent	Independent
non-executive	non-executive	non-executive	non-executive
Director	Director	Director	Director

• For identification purposes only

7

LETTER FROM INDEPENDENT FINANCIAL ADVISER

The following is the text of a letter of advice from REORIENT Financial Markets Limited, the independent financial adviser to the Independent Board Committee and the Independent Shareholders, for the purpose of incorporation into this circular.

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11/F., Far East Finance Centre 16 Harcourt Road, Admiralty Hong Kong

17 October 2014

The Independent Board Committee and the Independent Shareholders China Water Affairs Group Limited

Dear Sirs,

GRANT OF OPTIONS TO A DIRECTOR UNDER THE SHARE OPTION SCHEME

INTRODUCTION

We refer to our appointment as the independent financial adviser to the Independent Board Committee and the Independent Shareholders in connection with the grant of the Director Options, details of which are set out in the circular of the Company dated 17 October 2014 (the “Circular”) of which this letter forms part. Capitalised terms used in this letter have the same meanings as defined in the Circular, unless the context requires otherwise.

The Company granted a total of 134,500,000 share options (the “Options”) of which Mr. Duan was conditionally granted a total of 70,000,000 Director Options which will entitle the holder to subscribe for 70,000,000 Shares under its Share Option Scheme, representing approximately 5% of the Shares in issue as at the Latest Practicable Date. The total number of Shares to be issued upon exercise of the Director Options by Mr. Duan in any 12-month period would exceed 1% of all the Shares in issue as at the Date of Grant. In addition, Mr. Duan is an associate of Asset Full which is a substantial shareholder of the Company, and the Director Options would result in the Shares to be issued upon exercise of the Director Options in the 12-month period up to and including the Date of Grant representing in aggregate over 0.1% of the total number of issued Shares and having an aggregate value (based on the closing price of the Shares at the Date of Grant) in excess of HK$5 million, pursuant to Rule 17.04 of the Listing Rules and the Share Option Scheme, the grant of the Director Options is subject to reporting, announcement and the Independent Shareholders’ approval requirements. As stated in the letter from the Board, pursuant to Rule 17.03(4) of the Listing Rules, Asset Full and Mr. Duan shall abstain from voting in respect of the resolution to approve the grant of the Director Options at the SGM. Pursuant to Rule 17.04(1) of the Listing Rules, Ms. Ding Bin, Ms. Liu Yu Jie, Mr. Chen Guo Ru, Mr. Zhao Hai Hu, Mr. Zhou Wen Zhi and all other core connected persons of the Company will abstain from voting in favour of the resolution to approve the grant of the Director Options at the SGM as set out in the Letter from the Board.

8

LETTER FROM INDEPENDENT FINANCIAL ADVISER

The Independent Board Committee comprising all the independent non-executive Directors, namely Ms. Huang Shao Yun, Ms. Liu Dong, Mr. Chau Kam Wing and Mr. Ong King Keung, has been established to give advice and recommendation to the Independent Shareholders.

REORIENT Financial Markets Limited has been appointed as the independent financial adviser to advise the Independent Board Committee and the Independent Shareholders as to whether the terms of the Director Options are fair and reasonable and in the interests of the Company and the Shareholders as a whole.

In formulating our opinion, we have relied upon the information, facts and representations contained in the announcement of the Company dated 3 October 2014, the Circular, the annual reports of the Company for the ten years ended 31 March 2014 and those supplied or made by the Directors and management of and advisers to the Company to us. We have assumed that all such information, facts and representations were true and accurate in all respects at the time they were supplied or made and continue to be true and accurate as at the Latest Practicable Date and can be relied upon. We have no reason to doubt the truth, accuracy and completeness of such information and representations and have confirmed with the Directors and management of the Company that no material facts have been withheld or omitted from such information and representations.

We have taken all reasonable and necessary steps to comply with the requirements set out in Rule 13.80 of the Listing Rules. We consider that we have been provided with sufficient information to enable us to reach an informed view. We have not, however, conducted any independent verification of such information or any independent in-depth investigation into the business, affairs, financial position or prospects of the Group nor have we carried out any in-depth research on the Group and their respective associates.

PRINCIPAL FACTORS AND REASONS CONSIDERED

In arriving at our opinion and recommendation to the Independent Board Committee and the Independent Shareholders on the fairness and reasonableness of the terms of the Director Options, we have considered the following principal factors and reasons:

I. Background of and reasons for the grant of the Director Options

The Group is principally engaged in city water supply and sewage treatment business in the PRC.

We note from the annual report of the Company for the year ended 31 March 2014 that the Group was committed to seek and assess different opportunities of acquisitions and cooperation to enlarge the Company’s capacities and scale and business mix. The Group would also closely monitor and assess the existing and any potential loans and assets portfolio and strive to capture opportunities to create value for the Shareholders. As stated in the Company’s announcement dated 14 March 2014, the Company entered into a framework agreement with Hegang Government in relation to water related projects in Hegang, Heilongjiang province, PRC. We understand from the Directors that the Group has confidence in the economic growth of China. In order to cope with the sustainable urbanisation in China, solving the issues of water supply and sewage treatment are among the top priorities for the Central Government which the Directors believe will bring considerable business opportunities to the Group.

9

LETTER FROM INDEPENDENT FINANCIAL ADVISER

Financial performance of the Company

We summarise the revenue, the profit/(loss) from principal activities and the profit/(loss) from operation based on the information set out in the annual reports of the Company for each of the ten years ended 31 March 2014 as follows:

Revenue derived from principal activities Cost of sales Selling, administrative and general expenses Profit/(loss) from principal activities Profit/(loss) from operation	2005 (restated) HK$’000 48,467 (44,732) (12,941) (9,206) (15,169)	2006 HK$’000 52,901 (31,178) (32,342) (10,619) (18,133)	2007 (restated) HK$’000 134,735 (78,521) (77,242) (21,028) 149,256	2008 HK$’000 765,538 (498,531) (152,559) 114,448 364,261	Year ended 31 March Audited 2009 2010 HK$’000 HK$’000 1,033,199 1,398,168 (712,430) (811,606) (229,877) (296,887) 90,892 289,675 395,164 632,945	2011 2012 2013 2014 HK$’000 HK$’000 HK$’000 HK$’000 1,478,163 1,896,944 2,250,675 2,746,583 (846,792) (1,061,566) (1,280,830) (1,599,324) (344,336) (397,360) (446,797) (535,627) 287,035 438,018 523,048 611,632 762,515 675,210 841,251 828,540	2011 2012 2013 2014 HK$’000 HK$’000 HK$’000 HK$’000 1,478,163 1,896,944 2,250,675 2,746,583 (846,792) (1,061,566) (1,280,830) (1,599,324) (344,336) (397,360) (446,797) (535,627) 287,035 438,018 523,048 611,632 762,515 675,210 841,251 828,540
							611,632
							828,540

As stated in the above summary, the revenue derived from the principal activities of the Group demonstrated a continuous and substantial growth over the past ten years. The revenue of the Group increased from approximately HK$48 million for the year ended 31 March 2005 to approximately HK$2,747 million for the year ended 31 March 2014, representing a compound annual growth rate (“CAGR”) of approximately 56.8%, and the results from the operation experienced significant improvement from a loss for the year ended 31 March 2005 to a profit of approximately HK$149 million for the year ended 31 March 2007 then further increased to approximately HK$829 million for the year ended 31 March 2014, representing a CAGR of approximately 27.8%.

10

LETTER FROM INDEPENDENT FINANCIAL ADVISER

Historical dividend information of the Company

We refer to the information available on the ‘Investment Service Centre’ according to the corporate website of Hong Kong Exchanges and Clearing Limited and extract the Company’s dividend information as follows:

Entitlement
date announced	Dividend details	Financial year end	Payment date*
27/06/2014	Final dividend of HK$ 0.03 per Share	31/03/2014	10/10/2014
26/11/2013	Interim dividend of HK$ 0.02 per Share	31/03/2014	03/01/2014
26/06/2013	Final dividend of HK$ 0.03 per Share	31/03/2013	27/09/2013
30/11/2012	Interim dividend of HK$ 0.02 per Share	31/03/2013	28/12/2012
28/06/2012	Final dividend of HK$ 0.03 per Share	31/03/2012	28/09/2012
28/11/2011	Interim dividend of HK$ 0.02 per Share	31/03/2012	06/01/2012
28/06/2011	Final dividend of HK$ 0.03 per Share	31/03/2011	23/09/2011
26/11/2010	Interim dividend of HK$ 0.02 per Share	31/03/2011	03/01/2011
27/07/2010	Final dividend of HK$ 0.03 per Share	31/03/2010	17/09/2010
03/12/2009	Interim dividend of HK$ 0.02 per Share	31/03/2010	18/01/2010

• Payment date may be indicative only.

Source: www.hkex.com.hk

As shown in the above table, the Company has consistently declared interim and final dividends for each of the five years ended 31 March 2014. An aggregate of HK$0.25 has been paid out per Share in respect of the latest five financial years up to 31 March 2014.

11

LETTER FROM INDEPENDENT FINANCIAL ADVISER

Historical share price and trading volume of the Shares

We extract below certain share price and trading volume information of the Shares on the Stock Exchange:

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

Share price
(HK$)
4.0
3.5
3.0
2.5
2.0
1.5
Trading volume
(number of shares)
35,000,000
30,000,000
25,000,000
20,000,000
15,000,000
10,000,000
5,000,000
0
Oct-09 Nov-09 Dec-09 Jan-10 Feb-10 Mar-10 Apr-10 May-10 Jun-10 Jul-10 Aug-10 Sep-10 Oct-10 Nov-10 Dec-10 Jan-11 Feb-11 Mar-11 Apr-11May-11 Jun-11 4-Jul-11 Aug-11 Sep-11 Oct-11 Nov-11 Dec-11 Jan-12 Feb-12 Mar-12 Apr-12May-12 Jun-12 Jul-12 Aug-12 Sep-12 Oct-12 Nov-12 Dec-12 Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 Jul-13 Aug-13 Sep-13 Oct-13 Nov-13 Dec-13 Jan-14 Feb-14 Mar-14 Apr-14 May-14 Jun-14 Jul-14 Aug-14 Sep-14 Oct-14
Oct-09 Nov-09 Dec-09 Jan-10 Feb-10 Mar-10 Apr-10 May-10 Jun-10 Jul-10 Aug-10 Sep-10 Oct-10 Nov-10 Dec-10 Jan-11 Feb-11 Mar-11 Apr-11May-11 Jun-11 4-Jul-11 Aug-11 Sep-11 Oct-11 Nov-11 Dec-11 Jan-12 Feb-12 Mar-12 Apr-12May-12 Jun-12 Jul-12 Aug-12 Sep-12 Oct-12 Nov-12 Dec-12 Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 Jul-13 Aug-13 Sep-13 Oct-13 Nov-13 Dec-13 Jan-14 Feb-14 Mar-14 Apr-14 May-14 Jun-14 Jul-14 Aug-14 Sep-14 Oct-14
----- End of picture text -----

Source: Bloomberg

The closing prices of the Shares traded were between HK$1.82 per Share and HK$3.57 per Share during the period of about five years from 1 October 2009 to the Latest Practicable Date (the ‘Five-Year Period’). The daily trading volume of the Shares ranged from 36,000 Shares per day to 34,037,000 Shares per day and the average trading volume was 3,185,111 Shares per day during the Five-Year Period. The closing price of the Shares was generally on an upward trend and peaked at HK$3.57 as at 8 April 2010 during the Five-Year Period. The trading of the Shares was generally liquid during the Five-Year Period.

12

LETTER FROM INDEPENDENT FINANCIAL ADVISER

Historical buy-back of Shares by the Company

As disclosed in the Company’s annual reports for the three years ended 31 March 2014, the Company constantly bought back its Shares on the market with a view to benefiting the Shareholders as a whole by enhancing the net asset value per Share and earnings per Share. The Shares buy-back information is as follows:

		Aggregate price
	Shares bought back by the	of the Shares bought
During the year ended	Company on the market	back (approximately)
31 March 2014	38,120,000 Shares	HK$111,262,000
31 March 2013	9,052,000 Shares	HK$20,929,000
31 March 2012	169,388,000 Shares	HK$417,788,000

We are of the view that the consistent dividend payout during the Five-Year Period and the buy-back of the Shares over the latest three years collectively reinforced the return to equity.

Mr. Duan’s experience and contribution to the Company

We understand from the management of the Company that Mr. Duan has extensive working experience in the water industry in China. Mr. Duan joined the Group as the chairman and executive Director of the Group in January 2003. He has been responsible for the overall strategic planning and formulation of corporate policies of the Group since then. He graduated from the North China College of Water Conservancy and Hydro Power with a bachelor degree, specialising in irrigation and water conservancy works. He worked for The Ministry of Water Resources of the PRC Government for more than ten years.

The Directors are of the view that the sustained growth in the Group’s profitability and share price performance evidenced, among other things, the contribution by Mr. Duan in respect of (i) the overall strategic planning of the Group; (ii) the growth of the Company and the development of the Group in urban water supply businesses; (iii) the negotiation and completion of the investments in the new projects; and (iv) the management and operations of the existing businesses.

As advised by the management of the Company, considering that the purpose of the Share Option Scheme is to incentivise, reward and retain the grantees for their continual services to the Group, the Directors are of the view that the grant of the Director Options is an appropriate way to reward and incentivise Mr. Duan who has contributed significantly to the growth and development of the Group without creating substantial financial burden to the Group. The Directors also consider that the grant of the Director Options could strengthen the alignment of the business goals of Mr. Duan and that of the Company, which will ultimately benefit the Company.

We understand from the management of the Company that the Directors have considered other means to reward and incentivise Mr. Duan, such as paying cash bonuses, remuneration increment or giving Shares under the share award scheme adopted by the Company on 15 April 2013 (the “Share Award Scheme”). Paying cash bonuses or increasing cash remuneration will result in increased expenses and an outflow of cash from the Company equivalent to the amount of such cash payment. Granting new shares

13

LETTER FROM INDEPENDENT FINANCIAL ADVISER

or old shares pursuant to the Company’s share award scheme will also result in increased expenses and an outflow of cash from the Company equivalent to the amount of the aggregate consideration (being the market price) of the Shares awarded. Weighing the costs to be incurred as a result of these alternatives and the potential benefits to be brought to the Group, the Directors are of the view that granting the Director Options to Mr. Duan would be the most appropriate means at this point as the grant of the Director Options would enable the Group to conserve its cash resources while serving the purposes to reward the contribution made by Mr. Duan, and to retain and incentivise him for making more contribution to the Group continuously. Further, assuming the Director Options are fully exercised, it will raise gross proceeds of approximately HK$252 million for the Group (please refer to the section headed “Financial Effects of the Director Options” in this letter for more information of the financial effects of the Director Options).

In view of the above, considering the historical performance of the Group, contribution of Mr. Duan to the Group and the benefits of the Director Options as compared with the other alternatives, we concur the view of the Directors that the grant of the Director Options is in the interests of the Company and the Shareholders as a whole.

II. Principle terms of the Director Options

The terms of the Director Options shall follow the terms of the Share Option Scheme. Principal terms of the Director Options are set out below:

Number of Shares subject to the Director Options

The Director Options confers a right on Mr. Duan to subscribe for a total of 70,000,000 Shares at the subscription price of HK$3.6 per Share (the “Exercise Price”).

The Shares to be allotted and issued upon the exercise of the Director Options will be subject to all the provisions of the Bye-Laws of the Company for the time being in force and will rank pari passu with the fully paid Shares in issue. The Director Options themselves shall not entitle Mr. Duan to any voting rights, or rights to participate in any dividends or other distributions.

Exercise Price

The Exercise Price of HK$3.6 per Share was determined on the Date of Grant which, pursuant to the terms of the Share Option Scheme, shall not be less than the higher of (i) the closing price of the Shares as stated in the daily quotation sheet issued by the Stock Exchange on the Date of Grant (the “Reference Closing Price”); (ii) the average closing price of the Shares as stated in the Stock Exchange’s daily quotation sheets for the five business days immediately preceding the Date of Grant; (iii) the nominal value of each Share of HK$0.01. We note that the Exercise Price of the Director Options is higher than that of the other 64,500,000 Options at HK$3.5 per Share. We understand from the management of the Company that the Exercise Price was resolved by the Directors taking into account the quantity of the Director Options and the interests of the Company and the Shareholders as a whole.

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LETTER FROM INDEPENDENT FINANCIAL ADVISER

In order to assess the fairness and reasonableness of the Exercise Price, we have compared the Exercise Price with reference to the (i) recent price performance of the Shares; and (ii) the audited net asset value per Share as at 31 March 2014, being the period end date for the latest published audited consolidated accounts of the Company.

(i) Reference to recent price performance of the Shares

Based on the closing price of the Shares, we note that the Exercise Price represents (i) a premium of approximately 5.9% over the Reference Closing Price; and (ii) a premium of approximately 5.1% over the average closing price of HK$3.424 of the Shares as quoted on the Stock Exchange for the five business days immediately preceding the Date of Grant.

The following table sets out the historical monthly/period highest and lowest price of the Shares and the average daily closing price of the Shares traded on the Stock Exchange from 1 April 2014 to the Date of Grant:

			Average
	Highest	Lowest	daily closing
	price of the	price of the	price of the
Month/period	month/period	month/period	month/period
	(HK$)	(HK$)	(HK$)
			(Approximately)
2014
April	2.85	2.51	2.70
May	2.67	2.33	2.52
June	2.75	2.48	2.63
July	2.71	2.48	2.62
August	2.95	2.68	2.80
September	3.46	2.74	3.14
October_(Note)_	3.40	3.40	3.40

Note:

There was only one trading day in October 2014 up to 3 October 2014 (being the Date of Grant).

The Exercise Price is higher than both the average closing prices per Share for each month during the six-month period prior to the Date of Grant and the highest closing prices per Shares during the six-month period prior to the Date of Grant.

(ii) Reference to the net asset value

The Exercise Price represents a premium of approximately 42.86% over the audited consolidated net asset value per Share of approximately HK$2.52 as at 31 March 2014 (the “Calculated NAV”) based on the audited consolidated net asset value attributable to the owners of the Company as at 31 March 2014 of HK$3,530,431,000 and the total number of 1,399,718,497 Shares in issue as at the Latest Practicable Date.

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LETTER FROM INDEPENDENT FINANCIAL ADVISER

Having considered that (i) the Exercise Price represents a premium of 5.9% over the Reference Closing Price; (ii) the Exercise Price is higher than both the average closing prices per Share for each month during the six-month period prior to the Date of Grant and the highest closing prices per Share during the six-month period prior to the Date of Grant; (iii) the Exercise Price represents a premium of approximately 42.86% over the Calculated NAV; (iv) in the event that any subscription rights attaching to the Options are exercised, cash proceeds will be generated for the Group; and (v) the terms of the Director Options complies with the terms of the Share Option Scheme and the requirements of Chapter 17 of the Listing Rules, we concur the view of the Directors that the Exercise Price is fair and reasonable.

Exercise Period

As stated in the letter from the Board, the Directors Options shall remain valid for a period of three years from the Date of Grant. As mentioned in the section headed “Background of and reasons for the grant of the Director Options”, the Group is committed to seek and assess different opportunities of acquisitions and cooperation to enlarge the Company’s capacities and scale and business mix. The Group will also closely monitor and assess the existing and potential loans and assets portfolio and strive to capture opportunities to create value for the Shareholders. As a result, the Company considers that granting the Director Options to Mr. Duan and the Exercise Period would help align the interests of Mr. Duan with those of the Group and incentivise Mr. Duan to endeavour to achieve the business goals of the Group. The Director Options may only be exercisable when Mr. Duan is continuing his services the Group, unless the Board determines otherwise in accordance with the terms of the Director Options. We concur with the view of the Directors that the Exercise Period is fair and reasonable.

Vesting Period

50% of the Director Options granted shall become exercisable on or after the first anniversary of the Date of Grant. The remaining Directors Options shall become exercisable on or after the second anniversary of the Date of Grant.

Other terms

The offer of the grant of the Director Options may be accepted by Mr. Duan within 28 days from the Date of Grant and HK$1 is payable by him to the Company on acceptance of the Director Options offer. There is no performance target that must be achieved before the Director Options can be exercised.

Comparisons of terms among share options granted/to be granted

Based on the above, save for the higher Exercise Price of the Director Options, all material terms of the Director Options are identical with that of the other 64,500,000 Options granted by the Company to other grantees on the Date of Grant. The Exercise Price is HK$0.1 higher than the exercise price in respect of the other outstanding 64,500,000 Options of HK$3.5 per Share. We consider that the material terms of the Director Options are less favourable than other outstanding Options.

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LETTER FROM INDEPENDENT FINANCIAL ADVISER

Taking into account the factors stated above, we are of the view that the terms of the Director Options are on normal commercial terms, fair and reasonable so far as the Company and the Independent Shareholders are concerned and in the interests of the Company and the Shareholders as a whole.

III. Financial effects of the Director Options

Indebtedness

There will be no change in the indebtedness of the Group as the Group will not incur or reduce any indebtedness under the grant of the Director Options or the exercise of the subscription right attaching to the Director Options.

Working capital

In the event that Mr. Duan exercises the subscription right of the Director Options in any amount, the working capital of the Company will be improved. Assuming that Mr. Duan exercises the subscription right of the Director Options in full, an aggregate subscription money of approximately HK$252 million will be receivable by the Company.

Net assets values

In the event that Mr. Duan exercises the subscription right of the Director Options in the future, the net asset value of the Company will be improved, with a maximum amount of approximately HK$252 million assuming of the subscription rights of the Director Options are fully exercised.

We are of the view that the impact to be resulted from the issue and the exercise of the Director Options on the financial position of the Group as a whole is in the interests of the Company and the Shareholders as a whole.

IV. Dilution effect on the shareholding of the Independent Shareholders

The Company has adopted the Share Option Scheme on 7 September 2012. As at the Latest Practicable Date, save for the 64,500,000 Options granted and the grant of the Director Options which is subject to the Independent Shareholders’ approval, no option is granted or exercised under the Share Option Scheme and no option has been granted to Mr. Duan within 12 months from the Date of Grant.

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LETTER FROM INDEPENDENT FINANCIAL ADVISER

An illustrative structure of the Company before and after full exercise of the Director Options is summarised as follows (calculated based on the number of Shares in issue as at the Latest Practicable Date):

Mr. Duan_(Note)_ Other Directors Holders of the convertible bonds (the “Bondholders”) ORIX Corporation Public Shareholders Total	Immediately prior to the grant of the Director Options Number of shares % 333,806,301 23.85% 8,520,000 0.60% - - 291,170,277 20.80% 766,221,919 54.75% 1,399,718,497 100.00%	Assuming full exercise of the Director Options held by Mr. Duan but before exercise of any outstanding convertible bonds and other 64,500,000 Options Number of shares % 403,806,301 27.48% 8,520,000 0.58% - - 291,170,277 19.81% 766,221,919 52.13% 1,469,718,497 100.00%	Assuming full exercise of the Director Options held by Mr. Duan and full exercise of all outstanding convertible bonds and other 64,500,000 Options Number of shares % 403,806,301 25.42% 26,020,000 1.64% 54,444,444 3.43% 291,170,277 18.33% 813,221,919 51.18% 1,588,662,941 100.00%	Assuming full exercise of the Director Options held by Mr. Duan and full exercise of all outstanding convertible bonds and other 64,500,000 Options Number of shares % 403,806,301 25.42% 26,020,000 1.64% 54,444,444 3.43% 291,170,277 18.33% 813,221,919 51.18% 1,588,662,941 100.00%
				100.00%

Note:

Mr. Duan was interested in 333,806,301 Shares which consisted of 152,730,301 Shares held by Asset Full which is a company wholly and beneficially owned by Mr. Duan, and 181,076,000 Shares held by Mr. Duan personally as at the Latest Practicable Date.

Assuming exercise in full of the subscription rights attaching to the Director Options are fully exercised by Mr. Duan and none of the convertible bonds and other 64,500,000 Options are exercised, the shareholding in the Company of the other Shareholders (excluding other Directors but including the Bondholders, ORIX Corporation and public Shareholders) will be diluted from approximately 75.55% to approximately 71.94%.

Assuming the subscription rights attaching to the Director Options by Mr. Duan and all outstanding convertible bonds and other 64,500,000 Options are fully exercise, the shareholding in the Company of the other Shareholders (excluding other Directors but including the Bondholders, ORIX Corporation and public Shareholders) will be diluted from approximately 75.55% to approximately 72.94%.

Taking into consideration that the grant of the Director Options can incentivise Mr. Duan to continue his contribution to the building of the corporate value of the Company, it may be possible that the dilution of the shareholding in the Company of the other Shareholders will be justified and compensated by the increment of the Company’s increased productivity, profitability and/or net asset value.

CONCLUSION

Having taken into consideration the following principal factors and reasons:

• the historical performance of the Group, contribution of Mr. Duan to the Group and the benefits of the Director Options as compared with the other alternatives;

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LETTER FROM INDEPENDENT FINANCIAL ADVISER

• the terms of the Director Options complies with the terms of the Share Option Scheme and the requirements of Chapter 17 of the Listing Rules;

• the Exercise Price represents a premium of approximately 5.9% over the Reference Closing Price;

• the Exercise Price is higher than both the average closing prices per Share for each month during the six-month period prior to the Date of Grant and the highest closing prices per Share during the six-month period prior to the Date of Grant;

• the Exercise Price represents a premium of approximately 42.86% over the Calculated NAV;

• in the event that any subscription rights attaching to the Director Options are exercised, cash proceeds of approximately HK$252 million in aggregate will be generated for the Group;

• the Exercise Price is HK$0.1 higher than the exercise price in respect of the other outstanding 64,500,000 Share Options of HK$3.5 per Share. We consider that the material terms of the Director Options are less favourable than other outstanding Options;

• the impact to be resulted from the issue and the exercise of the Director Options on the financial position of the Group as a whole is in the interests of the Company and the Shareholders as a whole; and

• it may be possible that the dilution of the shareholding in the Company of the other Shareholders as a result of the issue and the exercise of the Director Options will be justified and compensated by the increment of the Company’s increased productivity, profitability and/or net asset value,

we are of the opinion that the grant of the Director Options is fair and reasonable so far as the Independent Shareholders is concerned and is in the interests of the Company and the Independent Shareholders as a whole. Accordingly, we advise the Independent Board Committee to recommend the Independent Shareholders to vote in favour of the ordinary resolution to be proposed at the SGM to approve the grant of the Director Options.

Yours faithfully, For and on behalf of

REORIENT Financial Markets Limited Charlotte Yen Managing Director

Ms. Charlotte Yen is a licensed person registered with the SFC to carry out type 1 (dealing in securities) and type 6 (advising on corporate finance) regulated activities under the SFO and has over 10 years of experience in corporate finance industry.

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PARTICULARS OF THE DIRECTOR OPTIONS

APPENDIX I

This Appendix provides information as required by the Listing Rules to be provided to Shareholders for their consideration as to whether to vote for or against the resolution to be proposed at the SGM in relation to the grant of the Director Options, which exceeds the Individual Limit and represent in aggregate over 0.1% of all the Shares in issue and have an aggregate value of over HK$5 million.

PARTICIPANT AND NUMBER OF OPTIONS TO BE GRANTED

The total number of Shares to be issued upon the exercise of the Director Options and the percentage of total issued share capital of the Company, calculated based on the number of Shares in issue on the Latest Practicable Date, would be as follows:

		No. of Shares to be	Percentage
		issued upon exercise	of total no. of
Name of Grantee	Capacity	of the Director Options	Shares in issue
Mr. Duan	Chairman and executive director	70,000,000	5.00 %

As at the Latest Practicable Date, Mr. Duan did not hold any options under the Share Option Scheme.

Pursuant to the shareholders resolution at the annual general meeting of the Company on 7 September 2012, the Share Option Scheme was adopted and the Scheme Mandate Limit was 145,145,849 Shares. As at the Latest Practicable Date, 64,500,000 options (excluding the Director Options) have been granted since adoption of the Share Option Scheme.

The shareholding structures of the Company before and after full exercise of the Director Options are summarised as follows (calculated based on the number of Shares in issue on the Latest Practicable Date):

Mr Duan_(note 1) Ding Bin(note 2) Liu Yu Jie(note 2) Chen Guo Ru(note 2) Zhao Hai Hu(note 2) Zhou Wen Zhi(note 2)_ ORIX Corporation Public Shareholders Total	As at the Latest Practicable Date No. of shares % 333,806,301 23.85 290,000 0.02 3,054,000 0.22 3,000,000 0.21 1,306,000 0.09 870,000 0.06 291,170,277 20.80 766,221,919 54.75 1,399,718,497 100.00	Assuming full exercise of the Director Options No. of shares % 403,806,301 27.48 290,000 0.02 3,054,000 0.21 3,000,000 0.20 1,306,000 0.09 870,000 0.06 291,170,277 19.81 766,221,919 52.13 1,469,718,497 100.00	Assuming full exercise of the Director Options No. of shares % 403,806,301 27.48 290,000 0.02 3,054,000 0.21 3,000,000 0.20 1,306,000 0.09 870,000 0.06 291,170,277 19.81 766,221,919 52.13 1,469,718,497 100.00
			100.00

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PARTICULARS OF THE DIRECTOR OPTIONS

APPENDIX I

Notes:

1. The 333,806,301 Shares consist of 152,730,301 Shares held by Asset Full which is a company wholly and beneficially owned by Mr Duan, and 181,076,000 Shares held by Mr Duan personally.

2. Ms. Ding Bin, Ms. Liu Yu Jie, Mr. Chen Guo Ru, Mr. Zhao Hai Hu and Mr. Zhou Wen Zhi are Directors of the Company.

TERMS OF THE DIRECTOR OPTIONS

The terms of the Director Options shall follow the terms of the Share Option Scheme. The offer of the grant of the Director Options may be accepted by Mr Duan within 28 days from the Date of Grant and HK$1 is payable by him to the Company on acceptance of the Director Options offer. There is no performance target that must be achieved before the Director Options can be exercised. The Directors Options shall remain valid for a period of three years from the Date of Grant. 50% of the Director Options shall become exercisable on or after the first anniversary of the Date of Grant. The remaining Director Options shall become exercisable on or after the second anniversary of the Date of Grant.

The subscription price for Shares upon exercise of the Director Options is HK$3.60 per Share (the “Exercise Price”), which was determined on the Date of Grant. The Exercise Price is higher than (i) the closing price of HK$3.40 per Share as stated in the daily quotation sheet issued by the Stock Exchange on the Date of Grant; (ii) the average closing price of HK$3.424 per Share as stated in the Stock Exchange’s daily quotation sheets for the five business days immediately preceding the Date of Grant; and (iii) HK$0.01, the nominal value of the Share.

The Shares to be allotted and issued upon exercise of the Director Options will be subject to all the provisions of the Bye-Laws of the Company for the time being in force and will rank pari passu with the fully paid Shares in issue. The Director Options themselves shall not entitle Mr Duan to any voting rights, or rights to participate in any dividends or other distributions.

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NOTICE OF SPECIAL GENERAL MEETING

==> picture [333 x 49] intentionally omitted <==

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

NOTICE OF SPECIAL GENERAL MEETING

NOTICE IS HEREBY GIVEN that a special general meeting of China Water Affairs Group Limited (the “Company”) will be held at 11:00 a.m. on 3 November 2014 at Suite 6408, 64/F, Central Plaza, 18 Harbour Road, Wanchai, Hong Kong for the following purposes:

As special business, to consider and, if thought fit, pass the following resolution, which will be proposed with or without amendments, as an ordinary resolution:

ORDINARY RESOLUTION

“ THAT the grant of options to Mr. Duan Chuan Liang pursuant to the share option scheme of the Company adopted on 7 September 2012 as set out in the Company’s circular dated 17 October 2014, be and is hereby approved and the directors of the Company (“the Directors”) be and are hereby authorized to issue and allot shares pursuant to the exercise of such options and to do such things and acts as may be necessary or expedient in the opinion of the Directors in order to give full effect to such grant of options.”

By Order of the Board China Water Affairs Group Limited Duan Chuan Liang Chairman

As at the date of this notice, the Board comprises three executive Directors, being Mr. Duan Chuan Liang, Ms. Ding Bin and Ms. Liu Yu Jie, four non-executive Directors, being Mr. Chen Guo Ru, Mr. Zhao Hai Hu, Mr. Zhou Wen Zhi and Mr. Makoto Inoue, and four independent non-executive Directors, being Ms. Huang Shao Yun, Ms. Liu Dong, Mr. Chau Kam Wing and Mr. Ong King Keung.

Hong Kong, 17 October 2014

• For identification purposes only

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NOTICE OF SPECIAL GENERAL MEETING

Notes:

1. A member of the Company entitled to attend and vote at the meeting shall be entitled to appoint another person as his proxy to attend and vote instead of him. A proxy need not be a member of the Company. In addition, a proxy or proxies representing either an individual member or a member which is a corporation shall be entitled to exercise the same powers on behalf of the member which he or they represent as such member could exercise.

2. The instrument appointing a proxy shall be in writing under the hand of the appointer or of his attorney duly authorised in writing or, if the appointer is a corporation, either under its seal or under the hand of an officer, attorney or other person duly authorised.

3. The instrument appointing a proxy and the power of attorney or other authority, if any, under which it is signed or a certified copy of such power or authority shall be deposited to the Company’s Share Registrar in Hong Kong, Tricor Tengis Limited, at Level 22, Hopewell Centre, 183 Queen’s Road East, Hong Kong not less than 48 hours before the time fixed for holding the meeting.

4. Delivery of an instrument appointing a proxy shall not preclude a member from attending and voting in person at the meeting convened or upon the poll concerned and in such event, the instrument appointing a proxy shall be deemed to be revoked.

5. Where there are joint registered holders of any Shares, any one of such joint holders may vote either personally or by proxy in respect of such Shares as if he/she was solely entitled thereto; but if more than one of such joint holders be present at the Meeting personally or by proxy, that one of the said persons so present whose name stands first on the register in respect of such Share shall alone be entitled to vote in respect thereof.

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