Zhejiang Tengy Environmental Technology Co., Ltd — Proxy Solicitation & Information Statement 2021

Jun 29, 2021

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 licensed securities dealer or registered institution in securities, bank manager, solicitor, professional accountant or other professional adviser.

If you have sold or transferred all your shares in Zhejiang Tengy Environmental Technology Co., Ltd, you should at once hand this circular and the accompanying form of proxy to the purchaser(s) or transferee(s) or to the bank, licensed securities dealer or registered institution in securities or other agent through whom the sale or transfer was effected for transmission to the purchaser(s) or transferee(s).

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.

�������������� Zhejiang Tengy Environmental Technology Co., Ltd

(a joint stock company established in the People’s Republic of China with limited liability) (Stock Code: 1527)

MAJOR AND CONNECTED TRANSACTION AND NOTICE OF EXTRAORDINARY GENERAL MEETING

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

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A letter from the Board is set out on pages 4 to 13 of this circular and a letter from the Independent Board Committee is set out on pages 14 to 15 of this circular. A letter from Rainbow Capital (HK) Limited, the independent financial adviser to the Independent Board Committee and the Independent Shareholders is set out on pages 16 to 40 of this circular.

A notice convening the extraordinary general meeting of the Company (‘‘EGM’’) to be held at conference room, TENGY Industrial Park, Paitou Town, Zhuji City, Zhejiang Province, the People’s Republic of China at 10:00 a.m. on Friday, 30 July 2021, is set out on pages EGM-1 to EGM-2 of this circular.

Shareholders who intend to appoint a proxy to attend the EGM shall complete and return the applicable proxy form in accordance with the instructions printed thereon. The proxy form must be signed by you or your attorney duly authorized in writing or, in case of a legal person, must either be executed under its seal or under the hand of its director or other attorney duly authorised to sign the same. If the proxy form is signed by an attorney of the appointor, the power of attorney authorising that attorney to sign, or other document of authorisation, must be notarised.

In the case of joint holders of shares of the Company, only the holder whose name appears first in the register of members of the Company shall alone be entitled to vote at the EGM either in person or by proxy in respect of such shares.

For H Shareholders, please return the proxy form together with any documents of authority to Tricor Investor Services Limited at Level 54, Hopewell Centre, 183 Queen’s Road East, Hong Kong as soon as possible, and in any event not later than 24 hours before the time appointed for holding the EGM. For Domestic Shareholders, please return the proxy form together with any documents of authority to the registered office of the Company in the PRC at TENGY Industrial Park, Paitou Town, Zhuji City, Zhejiang Province, the PRC as soon as possible, and in any event not later than 24 hours before the time appointed for holding the EGM. Completion and return of the proxy form will not preclude you from attending and voting in person at the EGM or any adjournment thereof should you so wish.

29 June 2021

CONTENTS

	Page
Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	1
Letter from the Board . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	4
Letter from the Independent Board Committee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	14
Letter from the Independent Financial Adviser . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	16
Appendix I – Financial information of the Group . . . . . . . . . . . . . . . . . . . . . . . . .	I-1
Appendix II – Accountant’s report of the Target Company . . . . . . . . . . . . . . . . . .	II-1
Appendix III – Unaudited pro forma financial information of
the Enlarged Group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	III-1
Appendix IV – Management discussion and analysis on the Target Company . .	IV-1
Appendix V – Valuation report on the Target Company . . . . . . . . . . . . . . . . . . . .	V-1
Appendix VI – General information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	VI-1
Notice of EGM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	EGM-1

– i –

DEFINITIONS

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

• ‘‘Acquisition’’

• the acquisition of the Sale Capital by the Company from the Vendor

• ‘‘Agreement’’

the agreement dated 8 June 2021 entered into between the Vendor and the Company in relation to the Acquisition

• ‘‘Board’’

• the board of Directors

• ‘‘Business Day’’

a day (other than a Saturday, Sunday and public holiday) on which licensed banks are generally open for business in Hong Kong

• ‘‘close associates’’

has the meaning ascribed thereto under the Listing Rules

• ‘‘Company’’

Zhejiang Tengy Environmental Technology Co., Ltd（浙江 天潔環境科技股份有限公司）, a joint stock limited liability company established under the laws of the PRC on 28 December 2009, the issued H Shares of which are listed on the Main Board of the Stock Exchange (stock code: 1527)

• ‘‘Completion’’

• completion of the Acquisition in accordance with the terms of the Agreement

• ‘‘Completion Date’’

the date falling within 3 Business Days after the fulfilment (or waiver as the case may be) of all conditions precedent under the Agreement

• ‘‘controlling shareholder(s)’’

has the meaning ascribed thereto under the Listing Rules

• ‘‘Directors’’

• directors of the Company

• ‘‘Domestic Shares’’

ordinary share(s) issued by the Company in the PRC with a nominal value of RMB1.00 each, which are subscribed for or credited as paid up in RMB

• ‘‘Domestic Shareholder(s)’’

the holder(s) of the Domestic Share(s)

• ‘‘EGM’’

an extraordinary general meeting of the Company to be convened and held for the purposes of, among other matters, considering and, if thought fit, approving the Agreement and the transactions contemplated thereunder

– 1 –

DEFINITIONS

• ‘‘Enlarged Group’’

the Group as enlarged immediately after the Completion

• ‘‘Group’’

• the Company and its subsidiaries from time to time

• ‘‘Haiyue Energy’’

• 海越能源集團股份有限公司(Haiyue Energy Group Co., Limited*), a company established in the PRC with limited liability, the shares of which are listed on the Shanghai Stock Exchange (stock code: 600387)

• ‘‘Hong Kong’’

• the Hong Kong Special Administrative Region of the PRC

• ‘‘H Share(s)’’

• overseas-listed foreign invested ordinary share(s) with a nominal value of RMB1.00 each in the share capital of the Company, which is/are listed on the Stock Exchange and traded in HK$

• ‘‘H Shareholder(s)’’ the holder(s) of the H Share(s)

• ‘‘H Share Registrar’’

• Tricor Investor Services Limited

• ‘‘Hunan Tianhui’’

湖南天匯企業發展有限公司(Hunan Tianhui Enterprise Development Co., Limited*), a company established in the PRC with Limited liability

• ‘‘Independent Board Committee’’

the independent board committee of the Company comprising all independent non-executive Directors to advise the Independent Shareholders in respect of the Agreement and the transactions contemplated thereunder

• ‘‘Independent Financial Adviser’’ or ‘‘Rainbow Capital’’

• Rainbow Capital (HK) Limited, the independent financial adviser to advise the Independent Board Committee and the Independent Shareholders in respect of the terms of the Agreement and the transactions contemplated thereunder, and a corporation licensed under the SFO to carry out Type 1 (dealing in securities) and Type 6 (advising on corporate finance) regulated activities

• ‘‘Independent Shareholders’’

Shareholders who are not required to abstain from voting at the EGM to approve the Agreement and the transactions contemplated thereunder

• ‘‘Latest Practicable Date’’

• 24 June 2021

– 2 –

DEFINITIONS

• ‘‘Lianyuan Steel’’

漣源鋼鐵集團有限公司 (Lianyuan Steel Group Co., Limited*), a company established in the PRC with limited liability

• ‘‘Listing Rules’’ the Rules Governing the Listing of Securities on the Stock Exchange

• ‘‘PRC’’ the People’s Republic of China

• ‘‘Sale Capital’’ 40% equity interest in the Target Company held by the Vendor

• ‘‘SFO’’ the Securities and Futures Ordinance (Chapter 571 of the Laws of Hong Kong)

• ‘‘Shares’’ the Domestic Share(s) and the H Share(s) of the Company

• ‘‘Shareholder(s)’’ shareholder(s) of the Company

• ‘‘Stock Exchange’’ The Stock Exchange of Hong Kong Limited

• ‘‘Target Company’’ 浙 江 天 潔 磁 性 材 料 股 份 有 限 公 司 ( Z h e j i a n g T i a n j i e Magnetic Materials Co., Ltd*), a company established in the PRC with limited liability

• ‘‘Vendor’’ or ‘‘TGL’’ 天潔集團有限公司 (Tengy Group Limited*), a company established in the PRC with limited liability and is a controlling shareholder of the Company holding approximately 47.84% interest in the Company as at the Latest Practicable Date

• ‘‘Warranties’’ the warranties representations and undertakings given by the Vendor in the Agreement

• ‘‘HK$’’ Hong Kong dollars, the lawful currency of Hong Kong

• ‘‘RMB’’ Renminbi, the lawful currency of the PRC ‘‘%’’ per cent.

• In this circular, the English names of certain PRC entities are translation or transliteration of their Chinese names, and are included herein for identification purpose only. In the event of any inconsistency, the Chinese names shall prevail.

– 3 –

LETTER FROM THE BOARD

�������������� Zhejiang Tengy Environmental Technology Co., Ltd

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

(Stock Code: 1527)

Executive Directors: Mr. BIAN Yu (Chairman) Mr. BIAN Weican Ms. BIAN Shu

Non-executive Directors: Mr. BIAN Jianguang Mr. CHEN Jiancheng Mr. ZHU Xian Bo

Independent Non-executive Directors: Mr. FUNG Kui Kei Mr. ZHANG Bing Mr. LI Jiannan

Registered office and principal place of business in the PRC: TENGY Industrial Park Paitou Town Zhuji City Zhejiang Province The PRC

Principal place of business in Hong Kong: Room 1201, 12th Floor Chung Ying Building 20 Connaught Road West Sheung Wan Hong Kong

29 June 2021

To the Shareholders

Dear Sir or Madam,

MAJOR AND CONNECTED TRANSACTION AND NOTICE OF EXTRAORDINARY GENERAL MEETING

Reference is made to the announcement of the Company dated 8 June 2021. The purpose of this circular is to provide you with information on the Agreement and the transactions contemplated thereunder and the notice of EGM.

THE AGREEMENT

On 8 June 2021 (after trading hours of the Stock Exchange), the Company entered into the Agreement with the Vendor, pursuant to which the Company conditionally agreed to acquire and the Vendor conditionally agreed to sell the Sale Capital for the consideration of RMB68,000,000 (subject to downward adjustment).

– 4 –

LETTER FROM THE BOARD

The principal terms of the Agreement are as follows:

Date: 8 June 2021 (after trading hours of the Stock Exchange) Parties: (1) The Company (as the purchaser) (2) The Vender

The Vendor is principally engaged in the business of, amongst other things, manufacturing and sale of machineries and spare parts, sale of steel, building materials and other chemical products and scrap metals recycling and construction. As at the Latest Practicable Date, (i) the Vendor is owned as to approximately 64.08%, 22.81% and 13.11% by Mr. Bian Yu, Mr. Bian Jianguang and Ms. Bian Shu respectively; and (ii) the Vendor is the controlling shareholder of the Company, holding approximately 47.84% of the Company’s issued share capital. Therefore, the Vendor is a connected person of the Company under Chapter 14A of the Listing Rules.

Assets to be acquired

Pursuant to the Agreement, the Company has conditionally agreed to acquire and the Vendor has conditionally agreed to sell the Sale Capital, representing 40% of the equity interest in the Target Company.

Consideration

The total consideration for the Acquisition shall be RMB68,000,000 (subject to downward adjustment). Prior to entering into the Agreement, the Company and the Vendor has entered into a memorandum of understanding in relation to the Acquisition, pursuant to which the Company has paid to the Vendor an amount of RMB10,000,000 as earnest money, which shall be applied for payment for part of the consideration upon completion of the Acquisition. Pursuant to the Agreement, the Company will pay the Vender part of the consideration in the amount of RMB20,000,000 in cash within Five Business Days after the Completion and the remaining consideration in the amount of RMB38,000,000 shall be payable by the Company in cash to the Vendor within one year after the Completion. The consideration will be financed by the internal resources of the Company.

– 5 –

LETTER FROM THE BOARD

The consideration for the Acquisition will be adjusted downward in the following circumstances:

• (a) if upon Completion there is any liabilities not disclosed in the management accounts of the Target Company or not approved in advance by the Company, the Company is entitled to deduct the relevant amount from the total consideration for the Acquisition or if the total consideration of the Acquisition has already been paid, the Vendor shall pay the relevant amount to the Company within 1 month upon notification from the Company;

• (b) if the account receivables of the Target Company have remained overdue for more than twelve months, such account receivables will be considered as bad debts of the Target Company and the Company is entitled to deduct the relevant amount from the total consideration for the Acquisition or if the total consideration for the Acquisition has already been paid, the Vendor shall pay the relevant amount to the Company within 1 month upon notification from the Company;

• (c) all account payables, costs and expenses and/or financial loss incurred by the Target Company due to any payment, litigation, arbitration, administrative penalty or other legal proceedings resulting from any non-compliance incidents of the Target Company that occurred before the Completion Date will be borne by the Vendor and the Company is entitled to deduct the relevant amount from the total consideration for the Acquisition or if the total consideration for the Acquisition has already been paid, the Vendor shall pay the relevant amount to the Company within 1 month upon notification from the Company; and

• (d) the Vendor will be responsible for timely and full payment of taxes incurred with respect or the transactions contemplated under the Agreement in accordance with the relevant PRC laws, regulations and the other regulatory documents. If the Company or the Target Company suffers any loss due to the above tax obligation, the Company is entitled to deduct the relevant amount from the total consideration for the Acquisition or if the total consideration of the Acquisition has already been paid, the Vendor shall pay the relevant amount to the Company within 1 month upon notification from the Company.

The consideration was determined after arm’s length negotiations between the parties with reference to, among other things, the preliminary valuation (the ‘‘Valuation’’) of 40% equity interest in the Target Company as at 31 December 2020 by way of market approach at RMB69,400,000, conducted by Masterpiece Valuation Advisory Limited (the ‘‘Valuer’’), an independent professional valuer engaged by the Company, at the time of entering into the Agreement. The Valuer has issued the final valuation report confirming the valuation of the 40% equity interest in the Target Company as at 31 December 2020 at RMB73,800,000, the full text of which is set out in the Appendix V to this circular.

– 6 –

LETTER FROM THE BOARD

Independence and Competence of the Valuer

The Valuer confirms that it is independent of and not connected with the Company, any Director, or any member of the management, executive officer or employee of the Company. The Valuer and its employees do not or will not hold any Shares or beneficial interest in the Company, do not have any financial relationship with the Company (save for being entitled to the service fee for conducting the Valuation), do not have any guarantees from the Company, and do not have any business relationship with the Company that would be reasonably considered to affect its independence in performing the Valuation. Based on the above, the Board considers the Valuer as an independent expert for the purpose of conducting the Valuation.

Mr. Oswald W Y Au (‘‘Mr. Au’’), who is the Managing Director of the Valuer, is a member of the Hong Kong Institute of Surveyors (General Practice), an Associate Member of Australian Property Institute and a Registered Professional Surveyor (General Practice) registered with the Surveyors Registration Board. He has over 10 years of experience in financial valuation, property valuation and business consulting in Hong Kong, the PRC, the U.S. and the Asia Pacific region.

Mr. Benjamin Xu (‘‘Mr. Xu’’), who is the Assistant Manager of the Valuer, is a member of CFA Institute and a Financial Risk Manager. He has over 5 years of experience in financial valuation, property valuation and business consulting in Hong Kong and the PRC.

Taking into account the above qualifications and experience of Mr. Au and Mr. Xu, the Board considers the Valuer as a competent expert in performing the Valuation.

Key Assumptions and Methodology of the Valuation

The key assumptions and the details and bases of the methodology adopted in the Valuation are set out in the paragraphs headed ‘‘Valuation Assumptions of Business Enterprise Value Analysis’’ and ‘‘Selected Valuation Approach’’ in Appendix V to this circular, respectively.

The Company has inquired the Valuer in respect of its experience in valuing similar steel products manufacturers in the PRC and the key assumptions and methodology adopted. The Company understands from the Valuer that the market approach has been selected in the Valuation as there are appropriate comparable companies with similar nature and business with the Target Company. Also, this approach reflects the market expectations over the corresponding industry as the price multiples of the comparable companies were arrived from market consensus. Moreover, the level of uncertainty and significant assumptions of the market approach is relatively low. As such, the Board considers the key assumptions and methodology adopted in the Valuation as fair and reasonable.

– 7 –

LETTER FROM THE BOARD

Conditions precedent

The Completion is conditional upon and subject to the satisfaction (or waiver, as the case may be) of the following conditions:

• (1) the passing by the Independent Shareholders at the EGM of the necessary resolution(s) to approve the Agreement and the transactions contemplated thereunder in accordance with the requirements under the Listing Rules;

• (2) all necessary governmental, regulatory and other third parties’ consents and approvals required to be obtained on the part of the Vendor and the Target Company in respect of the Agreement and the transactions contemplated thereunder having been obtained;

• (3) all necessary governmental, regulatory and other third parties’ consents and approvals required to be obtained on the part of the Company in respect of the Agreement and the transactions contemplated thereunder having been obtained;

• (4) the Company being satisfied with the results of the due diligence review to be conducted in relation to the Target Company;

• (5) the obtaining of a PRC legal opinion (in form and substance satisfactory to the Company) from a PRC legal adviser designated by the Company in relation to the Agreement and the transactions contemplated thereunder;

• (6) the obtaining of a valuation report from the valuer designated by the Company confirming that the valuation of 40% equity interest in the Target Company is not less than RMB69,400,000;

• (7) from the date of the Agreement and up to the Completion Date, no events having occurred which may result in any material adverse effect on the Target Company; and

• (8) from the date of the Agreement and up to the Completion Date, the Warranties remaining true and accurate and not misleading.

The Company may at its absolute discretion at any time waive in writing any of the conditions (4), (7) and (8) above and such waiver may be made subject to such terms and conditions as may be determined by the Company. Other than conditions (4), (7) and (8), all other conditions set out above are not waivable. If the conditions set out in the Agreement have not been satisfied (or as the case may be, waived) on or before 5:00 p.m. on 30 September 2021 (or such later date as may be agreed between the Vendor and the Company in writing), the Agreement shall cease and determine and the Vendor shall within three Business Days refund the earnest money to the Company in full, and thereafter none of the parties to the Agreement shall have any obligations and liabilities towards the other save for any antecedent breaches of the terms of the Agreement, and none of the parties to the Agreement shall claim or enforce any other

– 8 –

LETTER FROM THE BOARD

damages or claims against the other. As at the Latest Practicable Date, conditions (5) and (6) were fulfilled whereas all other conditions remained unfulfilled. The Company does not have any intention to waive any of the conditions (4), (7) and (8).

Completion

Completion shall take place within 3 Business Days after fulfilment (or waiver, as the case may be) of all the conditions precedent under the Agreement. After Completion, the Target Company shall be owned as to 40%, 40%, 15% and 5% by the Company, Lianyuan Steel, Haiyue Energy and Hunan Tianhui respectively. The Target Company will be an associate of the Company and the financial results of the Target Company will not be consolidated into the financial accounts of the Company. The Company will be a passive investor of the Target Company and the Target Company will not be controlled by the Company and the business operation of the Target Company will continue to be managed by Lianyuan Steel after Completion. As at the date of this announcement, the Company has no present intention to further acquire the remaining 60% equity interest in the Target Company. The financial results of the Target Company will be equity accounted for in the consolidated financial statements of the Company upon Completion.

To the best knowledge and information available to the Company, (i) Hunan Tianhui is owned as to approximately 99% and controlled by 楊克偉 (Yang Kewei); and (ii) Lianyuan Steel is a stated-owned enterprise effectively and beneficially owned as to approximately 78.72% and controlled by 湖南省人民政府國有資產監督管理委員會 (State-owned Assets Supervision and Administration Commission of Hunan Provincial People’s Government).

INFORMATION OF THE TARGET COMPANY

The Target Company is a company established in the PRC in August 2007 and is principally engaged in the processing and sale of magnetic materials and cold-rolled silicon steel plates, and the calendaring processing of steel and non-ferrous metals. The Target Company possesses two cold-rolled non-oriented electrical steel production lines, which comprise an advanced continuous decarburization annealing coating unit, with an annual production capacity of 200,000 tons. The Target Company uses the Lianyuan Steel’s cold-rolled silicon steel plates as raw materials, and achieves deep product processing through welding, degreasing, annealing, coating and other procedures. It is the first electrical steel production line built and developed by domestic private capital in the PRC.

The production of the Target Company has the characteristics of stable quality, a short production cycle, low energy consumption and a high level of automation control, and has achieved an advanced domestic level in the PRC. It has obtained the ISO9001 quality system certification and passed the Zhejiang provincial clean production inspection. The products as processed by the Target Company are mainly supplied to the end users directly, and are applied in high-efficiency and energy-saving motors, electrical vehicle motors, electrical tools, submersible pump motors, vacuum cleaner motors, and motors of home appliances such as air-conditioners and refrigerators. The Target Company has been constructing a new production plant for high-

– 9 –

LETTER FROM THE BOARD

grade silicon steel, which is one of the essential raw materials for facilitating the generational upgrade of electrical products, enabling the Target Company to expand the variety of its product specification and meet the growing demand of the domestic market.

As at the Latest Practicable Date, (i) the Target Company is owned as to 40%, 40%, 15% and 5% by the Vendor, Lianyuan Steel, Haiyue Energy and Hunan Tianhui respectively; and (ii) the Target Company has a registered capital of RMB100,000,000 which has been fully paid up. The Vendor acquired its 40% equity interest in the Target Company at the original costs of RMB40,000,000.

The audited financial information of the Target Company for the two financial years ended 31 December 2019 and 31 December 2020 respectively are set out below:

	For the year	For the year
	ended	ended
	31 December	31 December
	2019	2020
	(audited)	(audited)
	(RMB’000)	(RMB’000)
Profit before taxation	2,200	17,755
Profit after taxation	2,182	17,739
	As at	As at
	31 December	31 December
	2019	2020
	(audited)	(audited)
	(RMB’000)	(RMB’000)
Net assets	65,186	82,925

REASONS AND BENEFITS OF THE ACQUISITION

The Group is principally engaged in design, development, manufacturing, installation and sale of environmental pollution prevention equipment and electronic products. The Company is owned as to approximately 47.84% and controlled by the Vendor as at the Latest Practicable Date.

The Board believes that the Acquisition will provide an investment opportunity for the Company to diversify its business portfolio by entering into the new materials market in the PRC.

– 10 –

LETTER FROM THE BOARD

In the past decade, the demands for new materials have been increasing rapidly mainly due to the fact that new materials are considered to be of higher quality, more environmentally friendly with less pollution and involve more advanced technologies compared with traditional materials. In particular, under the context of the ‘‘double-carbon’’ target (peak emissions before 2030 and carbon neutrality before 2060) proposed by the PRC government, low carbon electricity generation will continue to be supported by governmental policies and regulations, leading to an increasing demand for new materials, including silicon steel, which are one of the key raw materials of low carbon electrical products such as electric vehicles. Hence, by entering into the Agreement, the Group can meet its business development strategy to actively search for appropriate acquisition targets to expedite its development, enhance its competitiveness and capture the opportunities in the environmental protection sector of the PRC.

Taking into consideration that (i) China is one of the largest industrial countries in the world; (ii) the demand for new materials is increasing; and (iii) there has been a trend in governmental policies and regulations to encourage and enforce environmental protection, the Directors are of the view that the Acquisition will provide a good investment opportunity for the Group to participate in the promising and growing new materials industry in the PRC. Based on the above, the Directors consider that the Acquisition can further enhance the value of the Group and maximise the returns to the Shareholders.

Taking into consideration of the aforesaid, the Directors (including the independent nonexecutive Directors whose views have been set out in this circular together with the advice of the Independent Financial Adviser) consider that the terms and conditions of the Agreement are on normal commercial terms and are fair and reasonable and that the Acquisition is in the interests of the Company and the Shareholders as a whole. As the Vendor is owned as to approximately 64.08%, 22.81% and 13.11% by Mr. Bian Yu, Mr. Bian Jianguang and Ms. Bian Shu respectively and Mr. Bian Weican is the supervisor of the Vendor, each of Mr. Bian Yu, Mr. Bian Jianguang, Ms. Bian Shu and Mr. Bian Weican is interested or deemed to be interested in the Agreement and the transactions contemplated thereunder and has abstained from voting in respect of the Board resolutions approving the Agreement and the transactions contemplated thereunder.

LISTING RULES IMPLICATIONS

The Vendor is the controlling shareholder of the Company, holding approximately 47.84% of the issued share capital of the Company as at the Latest Practicable Date. Therefore, the Vendor is a connected person of the Company under Chapter 14A of the Listing Rules. Accordingly, the Acquisition constitutes a connected transaction on the part of the Company under Chapter 14A of the Listing Rules and is subject to the reporting, announcement and Independent Shareholders’ approval requirements thereunder.

As the highest applicable percentage ratio (as defined under Rule 14.07 of the Listing Rules) in respect of the Acquisition exceeds 25% but is less than 100%, the Acquisition also constitutes a major acquisition on the part of the Company and is subject to the reporting, announcement and shareholders’ approval requirements under Chapter 14 of the Listing Rules.

– 11 –

LETTER FROM THE BOARD

GENERAL

An Independent Board Committee comprising all the independent non-executive Directors has been formed to advise the Independent Shareholders in respect of the Agreement and the transactions contemplated thereunder. Rainbow Capital has been appointed as the independent financial adviser to advise the Independent Board Committee and the Independent Shareholders in this connection.

EGM

The notice of EGM is set out on pages EGM-1 to EGM-2 of this circular. At the EGM, an ordinary resolution will be proposed to the Independent Shareholders to consider and, if thought fit, to approve, among other matters, the Agreement and the transactions contemplated thereunder.

A form of proxy for use at the EGM is enclosed with this circular and such form of proxy is also published on the websites of the Stock Exchange (www.hkexnews.hk) and the Company (www. tengy.com). Whether or not you intend to attend the EGM, you are requested to complete and return the enclosed form of proxy in accordance with the instructions printed thereon not less than 24 hours before the time fixed for holding the EGM or any adjournment thereof (as the case may be). Completion and return of the form of proxy will not preclude you from attending and voting in person of the EGM or any adjournment thereof (as the case may be) should you so wish, and in such event, the instrument appointing a proxy shall be deemed to be revoked.

In accordance with Rule 13.39(4) of the Listing Rules, voting at the EGM will be conducted by poll. To the best of the Directors’ knowledge, information and belief, having made all reasonable enquiries, no Shareholder (other than the Vendor and its close associates) is required to abstain from voting on the resolution to be proposed at the EGM.

To the extent that the Directors are aware having made all reasonable enquiries, as at the Latest Practicable Date:

• (i) there was no voting trust or other agreement or arrangement or understanding (other than an outright sale) entered into by or binding upon the Vendor;

• (ii) the Vendor was not subject to any obligation or entitlement whereby it had or it might have temporarily or permanently passed control over the exercise of the voting right in respect of its shares in the Company to a third party, either generally or on a case-bycase basis; and

• (iii) it was not expected that there would be any discrepancy between the Vendor’s beneficial shareholding interest in the Company as disclosed in this circular and the number of shares in the Company in respect of which it would control or would be entitled to exercise control over the voting right at the EGM.

The resolution proposed to be approved at the EGM will be taken by poll and an announcement will be made by the Company after the EGM on the results of the EGM.

– 12 –

LETTER FROM THE BOARD

CLOSURE OF REGISTER OF MEMBERS

Shareholders whose names appear on the register of members of the Company as at the close of business on 30 July 2021 are entitled to attend and vote at the EGM. The register of members of the Company will be closed from Tuesday, 27 July 2021 to Friday, 30 July 2021, both days inclusive, during which no transfer of Shares will be effected. In order to be eligible to attend the EGM and to vote thereat as Shareholders, all transfers of H Shares together with the relevant share certificates must be delivered to the Company’s H Share Registrar, Tricor Investor Services Limited, at Level 54, Hopewell Centre, 183 Queen’s Road East, Hong Kong no later than 4:30 p.m. on Monday, 26 July 2021.

RECOMMENDATION

The Directors (including the independent non-executive Directors whose views have been set out in this circular together with the advice of the Independent Financial Adviser) are of the view that the entering into of the Agreement and the resolution proposed for consideration and approval by the Shareholders at the EGM are in the interests of the Company and the Shareholders as a whole. Accordingly, the Directors recommend the Independent Shareholders to vote in favour of the resolution as set out in the notice of EGM.

MISCELLANEOUS

Unless otherwise stated herein, the English text of this circular shall prevail over the Chinese text for the purpose of interpretation.

Your attention is drawn to the additional information set out in the appendices to this circular and the notice of the EGM.

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,

For and on behalf of

Zhejiang Tengy Environmental Technology Co., Ltd Mr. BIAN Yu

Chairman

Zhuji City, Zhejiang Province, the PRC 29 June 2021

– 13 –

LETTER FROM THE INDEPENDENT BOARD COMMITTEE

29 June 2021

�������������� Zhejiang Tengy Environmental Technology Co., Ltd

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

(Stock Code: 1527)

To the Independent Shareholders

Dear Sir or Madam,

MAJOR AND CONNECTED TRANSACTION

We refer to the circular dated 29 June 2021 (the ‘‘Circular’’) issued by the Company to the Shareholders, of which this letter forms part. Capitalised terms defined in the Circular shall have the same meanings herein unless the context otherwise requires.

The Independent Board Committee has been formed to advise the Independent Shareholders as to whether, in its opinion, the terms of the Agreement and the transactions contemplated thereunder are fair and reasonable, are on normal commercial terms and in the interests of the Company and the Shareholders as a whole.

Rainbow Capital has been appointed as the Independent Financial Adviser to advise the Independent Board Committee and the Independent Shareholders in respect of the Agreement and the transactions contemplated thereunder.

We wish to draw your attention to the letter from the Board, as set out on pages 4 to 13 of the Circular and the text of a letter of advice from the Independent Financial Adviser, as set out on pages 16 to 40 of the Circular, both of which provide details of the Agreement and the transactions contemplated thereunder.

Having considered (i) the Agreement and the transactions contemplated thereunder; (ii) the advice of Rainbow Capital; and (iii) the relevant information contained in the letter from the Board, we are of the opinion that the terms of the Agreement and the transactions contemplated thereunder are on normal commercial terms, although not in the ordinary and usual course of business of the Group, are fair and reasonable and in the interests of the Company and the Shareholders as a whole.

– 14 –

LETTER FROM THE INDEPENDENT BOARD COMMITTEE

Accordingly, we recommend the Independent Shareholders to vote in favour of the ordinary resolution in relation to the Agreement and the transactions contemplated thereunder to be proposed at the EGM.

Yours faithfully,

For and on behalf of

The Independent Board Committee of

Zhejiang Tengy Environmental Technology Co., Ltd

Mr. FUNG Kui Kei Mr. ZHANG Bing Mr. LI Jiannan Independent Non-executive Independent Non-executive Independent Non-executive Director Director Director

– 15 –

LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

The following is the full text of a letter of advice from Rainbow Capital, the independent financial adviser to the Independent Board Committee and the Independent Shareholders in respect of the Acquisition, which has been prepared for the purpose of incorporation in this circular.

Rainbow Capital (HK) Limited

29 June 2021

To the Independent Board Committee and the Independent Shareholders

Room 1201, 12th Floor Chung Ying Building 20 Connaught Road West Sheung Wan Hong Kong

Dear Sir or Madam,

MAJOR AND CONNECTED TRANSACTION

INTRODUCTION

We refer to our appointment as the independent financial adviser to the Independent Board Committee and the Independent Shareholders in respect of the Acquisition, details of which are set out in the ‘‘Letter from the Board’’ (the ‘‘Letter from the Board’’) contained in the circular issued by the Company to the Shareholders dated 29 June 2021 (the ‘‘Circular’’), of which this letter forms part. Unless the context otherwise requires, capitalised terms used in this letter shall have the same meanings as those defined in the Circular.

On 8 June 2021 (after trading hours), the Company entered into the Agreement with the Vendor, pursuant to which the Company conditionally agreed to acquire the Sale Capital from the Vendor at a consideration of RMB68,000,000 (subject to downward adjustment). Prior to entering into the Agreement, the Company and the Vendor entered into a memorandum (the ‘‘Memorandum’’) of understanding in relation to the Acquisition, pursuant to which the Company has paid to the Vendor an amount of RMB10,000,000 as earnest money, which shall be applied for payment for part of the consideration upon completion of the Acquisition. Pursuant to the Agreement, the Company will pay the Vender part of the consideration in the amount of RMB20,000,000 in cash within five Business Days after Completion and the remaining consideration in the amount of RMB38,000,000 shall be payable by the Company in cash to the Vendor within one year after Completion. The consideration will be financed by the internal resources of the Company.

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

The Sale Capital represents the 40% equity interest in the Target Company which is principally engaged in the processing and sale of magnetic materials and cold-rolled silicon steel plates, and the calendaring processing of steel and non-ferrous metals. Upon Completion, the Target Company shall become an associated company of the Company and the financial results of the Target Company shall be equity-accounted for in the consolidated financial statements of the Company.

As at the Latest Practicable Date, the Vendor is the controlling shareholder of the Company, holding approximately 47.84% of the issued share capital of the Company. As such, the Vendor is a connected person of the Company under Chapter 14A of the Listing Rules. Accordingly, the Acquisition constitutes a connected transaction for the Company under Chapter 14A of the Listing Rules. As the highest applicable percentage ratio in respect of the Acquisition exceeds 25% but is less than 100%, the Acquisition also constitutes a major transaction for the Company under Chapter 14 of the Listing Rules. The Acquisition is therefore subject to the reporting, announcement and independent shareholders’ approval requirements under the Listing Rules. The Company will seek approval from the Independent Shareholders in respect of the Acquisition by way of a poll at the EGM. In view of the interest above, the Vendor and its associates are required to abstain from voting in respect of the ordinary resolution approving the Acquisition at the EGM.

The Independent Board Committee, comprising all the three independent non-executive Directors, namely Mr. Zhang Bing, Mr. Fung Kui Kei and Mr. Li Jiannan, has been formed to advise the Independent Shareholders on whether (i) the Acquisition is in the ordinary and usual course of business of the Group; and (ii) the terms of the Agreement are on normal commercial terms which are fair and reasonable and in the interests of the Company and the Shareholders as a whole, and advise the Independent Shareholders as to voting. We, Rainbow Capital, have been appointed as the independent financial adviser to advise the Independent Board Committee and the Independent Shareholders in this regard.

As at the Latest Practicable Date, we did not have any relationships or interests with the Group and the Vendor that could reasonably be regarded as relevant to our independence. We have acted as the independent financial adviser to the independent board committee and the independent shareholders of the Company in relation to the acquisition of 49% equity interest in 內蒙古國電和潔風能有限公司 (Inner Mongolia Guodian Hejie Wind Energy Co., Ltd.), details of which are set out in the circular of the Company dated 26 June 2020. Other than that, there was no engagement or connection between the Group or the Vendor and us in the last two years. Apart from normal professional fees paid or payable to us in connection with this appointment as the independent financial adviser, no arrangements exist whereby we had received any fees or benefits from the Group or the Vendor. Accordingly, we are qualified to give independent advice in respect of the Acquisition.

– 17 –

LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

BASIS OF OUR OPINION

In formulating our opinion and advice, we have relied on (i) the information and facts contained or referred to in the Circular; (ii) the information supplied by the Group; (iii) the opinions expressed by and the representations of the Directors and the management of the Group; and (iv) our review of the relevant public information. We have assumed that all the information provided and representations and opinions expressed to us or contained or referred to in the Circular were true, accurate and complete in all respects as at the date thereof and may be relied upon. We have also assumed that all statements contained and representations made or referred to in the Circular are true at the time they were made and continue to be true as at the Latest Practicable Date and all such statements of belief, opinions and intentions of the Directors and the management of the Group and those as set out or referred to in the Circular were reasonably made after due and careful enquiry. We have no reason to doubt the truth, accuracy and completeness of the information and representations provided to us by the Directors and the management of the Group. We have also sought and received confirmation from the Directors that no material facts have been withheld or omitted from the information provided and referred to in the Circular and that all information or representations provided to us by the Directors and the management of the Group are true, accurate, complete and not misleading in all respects at the time they were made and continued to be so until the date of the Circular.

We consider that we have reviewed sufficient information currently available and corroborated and substantiated any public information referred to in this letter to reach an informed view and to justify our reliance on the accuracy of the information contained in the Circular so as to provide a reasonable basis for our recommendation. We have not, however, carried out any independent verification of the information provided, representations made or opinion expressed by the Directors and the management of the Group, nor have we conducted any form of in-depth investigation into the business, affairs, operations, financial position or future prospects of the Group, the Vendor, the Target Company or their respective substantial shareholders, subsidiaries or associates.

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

PRINCIPAL FACTORS AND REASONS CONSIDERED

In considering whether the terms of the Agreement and the transaction contemplated thereunder are fair and reasonable, we have taken into account the principal factors and reasons set out below:

1. Background information of the Group

As an integrated atmospheric pollution control solution provider, the Group is principally engaged in (i) sales of environmental protection equipment, primarily three types of precipitators, i.e. electrostatic precipitators, bag filter precipitators and electrostatic-bag composite precipitators; (ii) sales of materials, including raw materials, spare parts and components and scrap materials; and (iii) provision of technology consultancy services, including repair and replacement, and onsite engineering and maintenance services for those projects which were not constructed by the Group. Sales of environmental protection equipment accounted for approximately 95.6% of the Group’s total revenue for the year ended 31 December 2020.

Precipitators are widely installed at coal-fired power plants, metallurgical plants, paper mills and other industrial production plants. As such, the Group’s customers include the project owners of power plants and industrial production plants, or contractors who undertake the construction work of power plants and industrial production plants.

Set out below is a summary of the consolidated financial information of the Group for the two years ended 31 December 2020 (‘‘FY2019’’ and ‘‘FY2020’’, respectively) as extracted from the annual report of the Company for the year ended 31 December 2020 (the ‘‘2020 Annual Report’’):

(i) Financial performance

			For the year ended 31 December	For the year ended 31 December
			2020	2019
			RMB’000	RMB’000
			(audited)	(audited)
Revenue,		including:	607,078	726,647
–	Sales of environmental protection
	equipment		580,530	696,284
	•	Newly installed	475,044	570,106
	•	Upgrading/modification	105,486	126,178

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

	For the year ended 31 December	For the year ended 31 December
	2020	2019
	RMB’000	RMB’000
	(audited)	(audited)
Gross profit	110,954	125,314
Gross profit margin	18.3%	17.2%
Other income	11,445	11,333
Selling and distribution expenses	(14,017)	(20,922)
Administrative expenses	(102,688)	(63,455)
Other expenses	(124)	(247)
Profit from operations	5,570	52,023
Finance costs	(7,066)	(6,909)
Share of profits of an associate	1,999	–
Profit before tax	503	45,114
Income tax credit/(expenses)	3,986	(10,825)
Profit attributable to the Shareholders	4,489	34,289

Revenue of the Group amounted to approximately RMB607.1 million for FY2020, representing a decrease of approximately 16.5% from approximately RMB726.6 million for FY2019. Such decrease was primarily attributable to the outbreak of COVID-19 which limited the production activities of the Group for FY2020. Sales of environmental protection equipment also decreased by approximately 16.6% to approximately RMB580.5 million for FY2020 from approximately RMB696.3 million for FY2019, which was mainly due to (a) the decrease in sales from newly installed projects from approximately RMB570.1 million for FY2019 to approximately RMB475.0 million for FY2020; and (b) the decrease in sales from upgrading and modification from approximately RMB126.2 million for FY2019 to approximately RMB105.5 million for FY2020, indicating a weakened demand for environmental protection equipment for FY2020 as compared to that for FY2019.

Gross profit of the Group decreased from approximately RMB125.3 million for FY2019 to approximately RMB111.0 million for FY2020, which was in line with the decrease in total revenue as stated above. Due to the decrease in the price of raw materials, the Group’s gross profit margin increased from approximately 17.2% for FY2019 to approximately 18.3% for FY2020.

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

The Group’s profit from operations decreased by approximately 89.3% from approximately RMB52.0 million for FY2019 to approximately RMB5.6 million for FY2020, mainly attributable to (a) the decrease in total revenue by approximately 16.5% from approximately RMB726.6 million for FY2019 to approximately RMB607.1 million for FY2020; and (b) the increase in administrative expenses by approximately 61.8% from approximately RMB63.5 million for FY2019 to RMB102.7 million for FY2020 as a result of the increase in impairment losses for trade receivables from approximately RMB18.8 million for FY2019 to approximately RMB42.1 for FY2020 and the increase in research and development expenses from approximately RMB2.2 million for FY2019 to approximately RMB23.3 million for FY2020.

Profit attributable to the Shareholders amounted to approximately RMB4.5 million for FY2020, representing a decrease of approximately 86.9% from approximately RMB34.3 million for FY2019. Such decrease was primarily attributable to the decrease in profit from operations by approximately RMB46.5 million as mentioned above, which was partially offset by (a) the share of profits of an associate of approximately RMB2.0 million for FY2020; and (b) the income tax credit of approximately RMB4.0 million for FY2020 as compared to an income tax expense of approximately RMB10.8 million for FY2019.

(ii) Financial position

		As at 31	December
		2020		2019
		RMB’000	RMB’000
		(audited)	(audited)
Non-current assets, including:		252,564		166,274
–	Property, plant and equipment	72,320		77,495
–	Right-of-use assets	41,039		43,020
–	Deferred tax assets	56,045		40,147
–	Investment in an associate	75,499		–
Current assets, including:		1,248,007	1,432,406
–	Inventories	226,636		325,135
–	Trade and bills receivables	791,571		800,542
–	Contract assets and contract costs	72,889		200,005
–	Prepayments, deposits and other
	receivables	29,616		25,558
–	Investments at fair value through
	profit or loss	13,464		1,077
–	Bank and cash balance	104,548		39,307
Total	assets	1,500,571	1,598,680

– 21 –

LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

		As at 31	December
		2020		2019
		RMB’000	RMB’000
		(audited)	(audited)
Current liabilities, including:		740,567		843,165
–	Trade and bills payables	265,819		366,417
–	Contract liabilities	247,049		233,103
–	Other payables and accruals	95,358		106,944
–	Bank loans	122,809		126,207
Net current assets		507,440		589,241
Total liabilities		740,567		843,165
Equity attributable to the Shareholders		760,004		755,515

Total non-current assets of the Group increased by approximately 51.9% from approximately RMB166.3 million as at 31 December 2019 to approximately RMB252.6 million as at 31 December 2020 which mainly included (a) property, plant and equipment of approximately RMB72.3 million; (b) right-of-use assets of approximately RMB41.0 million; (c) deferred tax assets of approximately RMB56.0 million; and (d) investment in an associate of approximately RMB75.5 million.

Total current assets of the Group decreased by approximately 12.9% from approximately RMB1,432.4 million as at 31 December 2019 to approximately RMB1,248.0 million as at 31 December 2020 which mainly included (a) inventories of approximately RMB226.6 million; (b) trade and bills receivables of approximately RMB791.6 million; (c) contract assets and contract costs of approximately RMB72.9 million; and (d) bank and cash balance of approximately RMB104.5 million.

Total liabilities of the Group decreased by approximately 12.2% from approximately RMB843.2 million as at 31 December 2019 to approximately RMB740.6 million as at 31 December 2020 which mainly included (a) trade and bills payables of approximately RMB265.8 million; (b) contract liabilities of approximately RMB247.0 million; (c) other payables and accruals of approximately RMB95.4 million; and (d) bank loans of approximately RMB122.8 million.

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

As at 31 December 2020, the Group had net current assets of approximately RMB507.4 million. The Group’s gearing ratio, being bank loans less bank and cash balance and divided by total equity, decreased from approximately 11.5% as at 31 December 2019 to approximately 2.4% as at 31 December 2020 as a result of the increase in bank and cash balance due to the cash generated from operating activities. Equity attributable to the Shareholders was approximately RMB760.0 million as at 31 December 2020.

(iii) Overall comment

Revenue of the Group decreased by approximately 16.5% from approximately RMB726.6 million for FY2019 to approximately RMB607.1 million for FY2020 and the sales of environmental protection equipment also decreased by approximately 16.6% to approximately RMB580.5 million for FY2020 from approximately RMB696.3 million for FY2019, indicating a weakened demand for environmental protection equipment for FY2020 as compared to that for FY2019. As stated in the 2020 Annual Report, the Group will continue to actively seek appropriate acquisition projects to expand its capabilities of research and development, manufacturing and sales, as well as to access new domestic and international markets.

The Group is financially healthy given its net current assets of approximately RMB507.4 million and bank and cash balance of approximately RMB104.5 million as at 31 December 2020.

2. Information of the Target Company

(i) Business of the Target Company

The Target Company, incorporated in the PRC, is principally engaged in the processing and sale of magnetic materials and cold-rolled silicon steel plates, and the calendaring processing of steel and non-ferrous metals. The revenue of the Target Company is mainly generated from processing and sales of magnetic materials and cold-rolled nonoriented silicon steel plates, being 50W800 silicon steel plates, 50W600 silicon steel plates, 50W1000 silicon steel plates and other silicon steel plates.

The Target Company possesses two cold-rolled non-oriented electrical steel production lines, which comprise an advanced continuous decarburization annealing coating unit, with an annual production capacity of 200,000 tons. Its main products are processed from coldrolled silicon steel plates as raw materials through welding, degreasing, annealing, coating and other procedures, and are mainly applied in high-efficiency and energy-saving motors, electrical vehicle motors, electrical tools, submersible pump motors, vacuum cleaner motors, and motors of home appliances such as air-conditioners and refrigerators.

– 23 –

LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

As stated in the Letter from the Board, the Target Company has been constructing a new production plant for high-grade silicon steel, which is one of the essential raw materials for facilitating the generational upgrade of electrical products, enabling the Target Company to expand the variety of its product specification and meet the growing demand of the domestic market.

(ii) Financial information of the Target Company

The following discussion of the financial performance and position of the Target Company is based upon and should be read in conjunction with the accountants’ report on the Target Company set out in Appendix II to the Circular.

Financial performance

Revenue Cost of sales Gross Profit Other income Other gains and losses, net Selling and distribution expenses Administrative and other operating expenses Finance costs Profit before tax Income tax expense Profit and total comprehensive income for the year	For the year ended 31 December 2018 2019 2020 RMB’000 RMB’000 RMB’000 (audited) (audited) (audited) 762,349 705,200 764,832 (741,765) (693,212) (740,118) 20,584 11,988 24,714 3,284 2,426 3,825 54 70 64 (4,007) (3,355) (2,975) (7,276) (7,351) (6,420) (1,560) (1,578) (1,453) 11,079 2,200 17,755 – (18) (16) 11,079 2,182 17,739

– 24 –

LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

• (a) FY2019 compared to the year ended 31 December 2018 (‘‘FY2018’’)

Revenue of the Target Company decreased by approximately 7.5% from approximately RMB762.3 million for FY2018 to approximately RMB705.2 million for FY2019, mainly attributable to the decrease in the market price of silicon steel plates for FY2019. The average selling price of silicon steel plates decreased from approximately RMB4,600 per ton for FY2018 to approximately RMB4,300 per ton for FY2019.

Gross profit of the Target Company decreased by approximately 41.8% from approximately RMB20.6 million for FY2018 to approximately RMB12.0 million for FY2019. Such decrease was primarily attributable to (1) the decrease in revenue as mentioned above; (2) the increase in depreciation on property, plant and equipment and cost of electricity; and (3) the decrease in procurement quantities of major raw materials of silicon steel plates. Gross profit margin of the Target Company decreased from approximately 2.7% for FY2018 to approximately 1.7% for FY2019.

Other income mainly represented sales of scrap materials, bank interest income and government grants, which decreased from approximately RMB3.3 million for FY2018 to approximately RMB2.4 million for FY2019 as a result of the decrease in sales of scrap materials.

Selling and distribution expenses mainly represented out-bound transportation expense and salaries, which decreased from approximately RMB4.0 million for FY2018 to approximately RMB3.4 million for FY2019. Such decrease was mainly due to the decrease in out-bound transportation expense as a large portion of the new customers of the Target Company was required to bear the transportation costs themselves for the delivery of silicon steel plates as a measure of cost control.

Administrative and other operating expenses mainly represented corporate social insurance, salaries and entertainment expenses which remained stable at approximately RMB7.3 million and RMB7.4 million for FY2018 and FY2019, respectively.

Finance cost mainly represented interest expense on bank loans which remained stable at approximately RMB1.6 million for FY2018 and FY2019, respectively.

Profit and total comprehensive income of the Target Company decreased from approximately RMB11.1 million for FY2018 to approximately RMB2.2 million for FY2019. Such decrease was primarily attributable to the decrease in revenue and gross profit as mentioned above.

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

(b) FY2020 compared to FY2019

Revenue of the Target Company increased by approximately 8.5% from approximately RMB705.2 million for FY2019 to approximately RMB764.8 million for FY2020, mainly due to the increase in the average selling price of silicon steel plates from approximately RMB4,300 per ton for FY2019 to approximately RMB4,400 per ton for FY2020.

Gross profit of the Target Company increased by approximately 106.2% from approximately RMB12.0 million for FY2019 to approximately RMB24.7 million for FY2020, as a result of the increase in revenue. Gross profit margin of the Target Company increased from approximately 1.7% for FY2019 to approximately 3.2% for FY2020 due to the increase in selling price of silicon steel plates for FY2020.

Other income increased from approximately RMB2.4 million for FY2019 to approximately RMB3.8 million for FY2020, primarily attributable to the increase in sales of scrap materials and bank interest income.

Selling and distribution expenses further decreased from approximately RMB3.4 million for FY2019 to approximately RMB3.0 million for FY2020 as a result of the decrease in out-bound transportation expense for the same reason stated above.

Administrative and other operating expenses decreased from approximately RMB7.4 million for FY2019 to approximately RMB6.4 million for FY2020. Such decrease was mainly due to the phased reduction and exemption of certain corporate social insurance of the Target Company caused by the outbreak of COVID-19.

Finance costs decreased slightly from approximately RMB1.6 million for FY2019 to approximately RMB1.5 million for FY2020.

Profit and total comprehensive income of the Target Company increased from approximately RMB2.2 million for FY2019 to approximately RMB17.7 million for FY2020, primarily due to the increase in revenue and gross profit as mentioned above.

– 26 –

LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

Financial position

Non-current assets Property, plant and equipment Right-of-use assets Deferred tax assets Current assets Inventories Trade and bills receivables Deposits, prepayments and other receivables Amounts due from shareholders Pledged bank deposits Bank balances and cash Total assets Current liabilities Trade and bills payables Contract liabilities Other payable and accruals Amounts due to shareholders Bank loans Deferred income	As 2018 RMB’000 (audited) 35,377 7,565 37 42,979 27,782 147,236 18,047 44,473 17,478 16,102 271,118 314,097 103,370 4,069 17,209 – 26,000 14 150,662	at 31 December 2019 2020 RMB’000 RMB’000 (audited) (audited) 26,021 16,010 7,341 7,117 19 3 33,381 23,130 16,480 29,685 86,725 82,040 26,660 26,329 – – 27,766 19,345 19,732 41,465 177,363 198,864 210,744 221,994 80,869 61,769 6,775 18,863 18,286 18,823 13,197 13,197 26,000 26,000 14 14 145,141 138,666	at 31 December 2019 2020 RMB’000 RMB’000 (audited) (audited) 26,021 16,010 7,341 7,117 19 3 33,381 23,130 16,480 29,685 86,725 82,040 26,660 26,329 – – 27,766 19,345 19,732 41,465 177,363 198,864 210,744 221,994 80,869 61,769 6,775 18,863 18,286 18,823 13,197 13,197 26,000 26,000 14 14 145,141 138,666
			23,130 29,685 82,040 26,329 – 19,345 41,465
			198,864 221,994 61,769 18,863 18,823 13,197 26,000 14
			138,666

– 27 –

LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

Net current assets Total assets less current liabilities Non-current liabilities Deferred income Net assets Capital and reserves Share capital Reserves Total Equity	As 2018 RMB’000 (audited) 120,456 163,435 431 163,004 200,000 (36,996) 163,004	at 31 December 2019 2020 RMB’000 RMB’000 (audited) (audited) 32,222 60,198 65,603 83,328 417 403 65,186 82,925 100,000 100,000 (34,814) (17,075) 65,186 82,925

As at 31 December 2020, non-current assets of the Target Company mainly represented buildings and plant and machinery included in property, plant and equipment and a leasehold land in the PRC, which amounted to approximately RMB23.1 million, representing a decrease of approximately 46.2% from approximately RMB43.0 million as at 31 December 2018. Such decrease was mainly attributable to the decrease in property, plant and equipment from approximately RMB35.4 million as at 31 December 2018 to approximately RMB16.0 million as at 31 December 2020 primarily due to the depreciation charge for plant and machinery.

Current assets of the Target Company mainly represented inventories, bills receivables, prepayments for the purchase of raw materials, and bank balances and cash, and decreased from approximately RMB271.1 million as at 31 December 2018 to approximately RMB198.9 million as at 31 December 2020, mainly due to (a) the decrease in trade and bills receivables from approximately RMB147.2 million as at 31 December 2018 to approximately RMB82.0 million as at 31 December 2020; and (b) the decrease in amount due from shareholders from approximately RMB44.5 million as at 31 December 2018 to nil as at 31 December 2020, which was partially offset by (a) the increase in deposits, prepayment and other receivables from approximately RMB18.0 million as at 31 December 2018 to approximately RMB26.3 million as at 31 December 2020; and (b) the increase in bank balances and cash from approximately RMB16.1 million as at 31 December 2018 to approximately RMB41.5 million as at 31 December 2020.

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

Current liabilities of the Target Company mainly represented trade and bills payables and bank loans which were secured by a property and a leasehold land in the PRC with an effective interest rate of approximately 6.09% in 2020. The balance decreased from approximately RMB150.7 million as 31 December 2018 to approximately RMB138.7 million as at 31 December 2020, primarily attributable to (a) the decrease in trade and bills payables from approximately RMB103.4 million as at 31 December 2018 to approximately RMB61.8 million as at 31 December 2020; (b) the decrease in other payable and accruals from approximately RMB17.2 million as at 31 December 2018 to approximately RMB18.8 million as at 31 December 2020, which was partially offset by (a) the increase in contract liabilities from approximately RMB4.1 million as at 31 December 2018 to approximately RMB18.9 million as at 31 December 2020; and (b) the increase in amounts due to shareholders from nil as at 31 December 2018 to approximately RMB13.2 million as at 31 December 2020.

Non-current liabilities of the Target Company represented the deferred income which amounted to approximately RMB403,000 as at 31 December 2020. Total equity of the Target Company decreased from approximately RMB163.0 million as at 31 December 2018 to approximately RMB82.9 million as at 31 December 2020 as the registered capital of the Target Company was reduced from RMB200 million to RMB100 million in 2019 by distributing and paying an aggregate of RMB80 million to the shareholders and crediting the amounts due to shareholders of RMB20 million, which was partially offset by the profit for the two years ended 31 December 2020.

Net current assets of the Target Company decreased from approximately RMB120.5 million as at 31 December 2018 to approximately RMB60.2 million as at 31 December 2020 as a result of the decrease in current assets. As at 31 December 2020, the Target Company was in a net cash position of approximately RMB21.6 million, being the sum of bank loans and amounts due to shareholders less pledged bank deposits and bank balances and cash.

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

3. Reasons for and benefits of the Acquisition

As disclosed in the Letter from the Board, the Board believes that the Acquisition will provide an investment opportunity for the Company to diversify its business portfolio by entering into the new materials market in the PRC. The demand for new materials, including silicon steel which is one of the key raw materials for low carbon electrical products such as electric vehicles, will continue to be supported by governmental policies and regulations to promote and enforce environmental protection, given these new materials are considered to be more environmentally friendly with less pollution. It is the business development strategy of the Group to actively search for appropriate acquisition targets to expedite its development, enhance its competitiveness and capture the opportunities in the environmental protection sector of the PRC.

Set out below are the gross domestic product (‘‘GDP’’) and steel production volume of the PRC during the period from 2016 to 2020:

		2016	2017	2018	2019	2020	CAGR
GDP	(RMB’ billion)	74,640	83,204	91,928	98,652	101,599	8.0%
Steel	production volume (billion tonnes)	1.05	1.05	1.13	1.20	1.32	6.0%

Source: http://www.stats.gov.cn/tjsj/

As stated in the table above, GDP of the PRC increased from approximately RMB74,640 billion in 2016 to approximately RMB101,599 billion in 2020 with a compound annual growth rate (‘‘CAGR’’) of approximately 8.0%, indicating a solid economic foundation in the past 5 years. According to the World Economic Outlook, April 2021: Managing Divergent Recoveries released by IMF on 23 March 2021, China’s economy will continue to grow with a projected GDP growth rate of 8.4% and 5.6% in 2021 and 2022, respectively. (Source: https://www.imf.org/ en/publications/weo)

The steel production volume of the PRC also recorded an upward trend after 2016, increasing from approximately 1.05 billion tonnes in 2016 to approximately 1.32 billion tonnes in 2020, representing a CAGR of approximately 6.0%. Such increase indicated the constant development of the domestic steel industry in the recent years.

As stated above, silicon steel is one of the key raw materials for low carbon electrical products such as electric vehicles. As such, the prospect of the Target Company will hinge on the development of the electric vehicles industry.

	2018	2019	2020	CAGR
Production volume of electric vehicles
(thousands)	986	1,020	1,105	5.9%

Source: http://www.caam.org.cn/tjsj

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

As stated in the table above, the production volume of electric vehicles in the PRC increased from approximately 986,000 in 2018 to approximately 1,105,000 in 2020, representing a CAGR of approximately 5.9%. In addition, according to the New Energy vehicle Industry Development Plan (2021-2035) issued by the State Council of the PRC in 2020, electric vehicles shall become the mainstream of new sales vehicles by 2035. Under such industry trend, the demand for silicon steel, being one of the key raw materials for low carbon electric vehicles, is expected to increase.

Given (i) the increasing trend of the GDP and steel production volume of the PRC after 2016; (ii) the upward trend of the production volume of electric vehicles in the past three years; (iii) that electric vehicles shall become the mainstream of new sales vehicles by 2035 according to the State Council of the PRC; and (iv) that silicon steel is one of the key raw materials for low carbon electric vehicles, we consider that the Acquisition represents an opportunity for the Group to diversify its business into the new materials industry with growth potential.

4. Principal terms of the Agreement

Details of the principal terms of the Agreement are set out in the section headed ‘‘The Agreement’’ in the Letter from the Board, which are summarised as follows:

Date : 8 June 2021 (after trading hours of the Stock Exchange) Parties : (i) The Company, as the purchaser; and

• (ii) The Vender

Subject matter : the Sale Capital, representing 40% of the equity interest in the Target Company

Consideration (the : The Consideration shall be RMB68,000,000 (subject to ‘‘Consideration’’) downward adjustment), of which:

• (i) RMB10,000,000 has been paid to the Vendor as earnest money pursuant to the Memorandum;

• (ii) RMB20,000,000 shall be payable by the Company in cash to the Vendor within Five Business Days after Completion; and

• (iii) the remaining balance of RMB38,000,000 shall be payable by the Company in cash to the Vendor within one year after Completion.

The Consideration shall be financed by the internal resources of the Group.

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

The Consideration will be adjusted downward in the following circumstances:

• (i) if upon Completion there is any liabilities not disclosed in the management accounts of the Target Company or not approved in advance by the Company, the Company is entitled to deduct the relevant amount from the Consideration or if the Consideration has already been paid, the Vendor shall pay the relevant amount to the Company within one month upon notification from the Company;

• (ii) if the account receivables of the Target Company have remained overdue for more than twelve months, such account receivables will be considered as bad debts of the Target Company and the Company is entitled to deduct the relevant amount from the Consideration or if the Consideration has already been paid, the Vendor shall pay the relevant amount to the Company within one month upon notification from the Company;

• (iii) all account payables, costs and expenses and/or financial loss incurred by the Target Company due to any payment, litigation, arbitration, administrative penalty or other legal proceedings resulting from any noncompliance incidents of the Target Company that occurred before the Completion Date will be borne by the Vendor and the Company is entitled to deduct the relevant amount from the Consideration or if the Consideration has already been paid, the Vendor shall pay the relevant amount of the Company within one month upon notification from the Company; and

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

• (iv) the Vendor will be responsible for timely and full payment of taxes incurred with respect or the transactions contemplated under the Agreement in accordance with the relevant PRC laws, regulations and the other regulatory documents. If the Company or the Target Company suffers any loss due to the above tax obligation, the Company is entitled to deduct the relevant amount from the Consideration or if the Consideration has already been paid, the Vendor shall pay the relevant amount to the Company within one month upon notification from the Company.

As disclosed in the Letter from the Board, the Consideration was determined after arms’ length negotiations between the parties with reference to, among other things, the preliminary valuation of 40% equity interest in the Target Company as at 31 December 2020 by way of market approach at RMB69,400,000, conducted by Masterpiece Valuation Advisory Limited, an independent professional valuer, at the time of entering into the Agreement.

The Valuer has issued the final valuation report confirming the valuation of the 40% equity interest in the Target Company as at 31 December 2020 at RMB73,800,000.

Conditions precedent : Completion is conditionally on, among other things, the passing by the Independent Shareholders at the EGM of the relevant resolution(s) to approve the Agreement and the transactions contemplated thereunder in accordance with the requirements under the Listing Rules.

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

5. Valuation of the Target Company

The Consideration is determined with reference to an independent valuation of 40% equity interest in the Target Company which amounted to RMB69,400,000 as at 31 December 2020 (the ‘‘Valuation’’) conducted by Masterpiece Valuation Advisory Limited, an independent valuer (the ‘‘Valuer’’), at the time of entering into the Agreement. The Valuer has issued the final valuation report (the ‘‘Valuation Report’’) confirming the valuation of the 40% equity interest in the Target Company as at 31 December 2020 at RMB73,800,000, the full text of which is set out in Appendix V to the Circular, and Independent Shareholders are recommended to read in full.

We have conducted an interview with the responsible officer of the Valuer to enquire his experience in valuing similar steel products manufacturers in the PRC and the Valuer’s independence. We have also reviewed the terms of engagement of the Valuer, in particular to its scope of work. We noted that its scope of work is appropriate to form the opinion required to be given and there are no limitations on the scope of work which might adversely impact on the degree of assurance given by the Valuer in the Valuation Report. We have also performed work as required under note (1)(d) to the Listing Rule 13.80 in relation to the Valuer and its work as regards the Valuation.

We understand from the Valuer that three approaches have been considered by the Valuer in determining the value of the Target Company, namely the income approach, cost approach and market approach. As advised by the Valuer, the income approach was not adopted because this approach requires significant level of assumptions to be made to arrive at the valuation. As regards the cost approach, it was not adopted as it assumed the assets and liabilities of the Target Company were separable and could be sold separately, which is more appropriate for companies with assets that are highly liquid, like real estate companies and financial institutions. Given there are sufficient public companies in similar nature and business to that of the Target Company, the market approach has been adopted for the Valuation.

In arriving at the Valuation, the Valuer has adopted the market approach by considering the price-to-sales (‘‘P/S(s)’’), price-to-earnings (‘‘P/E(s)’’) and price-to-book (‘‘P/B(s)’’) multiples in deriving the market value of the Target Company. Taking into account (i) P/E is usually adopted for judging valuations for companies which are profit making; (ii) P/B can only capture tangible assets of a company and cannot capture company-specific competencies and advantages; and (iii) P/S ignores the cost structure and therefore the profitability of a company, we concur with the Valuer that the valuation methodology using P/E is most appropriate.

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

6. Evaluation of the Consideration

In assessing the fairness and reasonableness of the Consideration, we have performed our own independent valuation of the Target Company by considering comparable companies listed on the Main Board of the Stock Exchange, and comparable transactions involving acquisitions of steel products manufacturers in the PRC, details of which are set out below. As stated in the section headed ‘‘5. Valuation of the Target Company’’ above, we consider that the valuation methodology using P/E is most appropriate in valuing the Target Company. Based on (i) the Consideration of RMB68,000,000; (ii) the 40% equity interest in the Target Company to be acquired by the Company; and (iii) the audited profit after income tax of the Target Company of RMB17,739,000 for FY2020, the P/E as implied by the Acquisition is approximately 9.58 times (the ‘‘Implied P/E’’).

(i) Comparable Companies

In evaluating the fairness and reasonableness of the Consideration, we have, on a best effort basis, searched on Bloomberg and the website of the Stock Exchange and identified an exhaustive list of companies (the ‘‘Comparable Companies’’) which (a) have over 50% of their revenue derived from production, processing, and sale of steel products in their latest financial years; (b) have over 50% of their revenue derived from the PRC; and (c) have their shares listed on the Main Board of Stock Exchange. Based on these criteria, we have identified twelve Comparable Companies. We consider the Comparable Companies are fair and representative given that they are engaged in the same sector as the Target Company does and have a majority of their revenue derived from the PRC.

Details of the Comparable Companies are set out below:

			Market
			capitalisation
Company name		P/E	as at the Latest
(Stock code)	Principal activities	(Note 1)	Practicable Date
		(times)	(HK$’million)
Angang Steel Company	Angang is principally engaged in the	11.81	48,256.95
Limited (‘‘Angang’’)	production and distribution of steel.
(347.HK)
Maanshan Iron & Steel	Maanshan Iron is principally engaged in the	6.94	32,093.28
Company Limited	production and sales of iron and steel
(‘‘Maanshan Iron’’)	products.
(323.HK)
Chongqing Iron & Steel	Chongqing Iron is principally engaged in	8.76	27,119.17
Company Limited	the manufacture and distribution of iron
(‘‘Chongqing Iron’’)	and steel products.
(1053.HK)

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

			Market
			capitalisation
Company name		P/E	as at the Latest
(Stock code)	Principal activities	(Note 1)	Practicable Date
		(times)	(HK$’million)
Tiangong International	Tiangong is principally engaged in the	13.52	9,475.05
Company Limited	manufacture and sales of high speed steel.
(‘‘Tiangong’’)
(826.HK)
China Oriental Group	China Oriental is principally engaged in the	5.10	9,753.13
Company Limited	iron and steel businesses.
(‘‘China Oriental’’)
(581.HK)
Da Ming International	Da Ming is principally engaged in the	8.90	3,760.47
Holdings Limited	processing, distribution and sales of
(‘‘Da Ming’’)	stainless steel and carbon steel products.
(1090.HK)
Huajin International Holdings	Huajin is principally engaged in providing	39.81	1,740.00
Limited	cold-rolled carbon steel strips, sheets and	(outlier)
(‘‘Huajin’’)	welded steel tubes customised to the	(Note 2)
(2738.HK)	specifications of its customers.
Xiwang Special Steel	Xiwang is principally engaged in the	39.87	876.57
Company Limited	manufacture and sales of steel products.	(outlier)
(‘‘Xiwang’’)		(Note 2)
(1266.HK)
Maike Tube Industry	Maike is principally engaged in the	6.01	715.77
Holdings Limited	manufacturing of steel pipe products and
(‘‘Maike’’)	prefabricated pipe nipple products.
(1553.HK)
Shougang Concord Century	Shougang Concord is principally engaged in	3.45	512.64
Holdings Limited	metal materials businesses including
(‘‘Shougang Concord’’)	manufacturing of steel cords, sawing wires
(103.HK)	and hose wires.
Mayer Holdings Limited	Mayer is principally engaged in the steel	25.89	494.18
(‘‘Mayer’’)	related products businesses.
(1116.HK)

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

			Market
			capitalisation
Company name		P/E	as at the Latest
(Stock code)	Principal activities	(Note 1)	Practicable Date
		(times)	(HK$’million)
KangLi International	KangLi is principally engaged in unpainted	4.78	424.38
Holdings Limited	and painted galvanized steel products and
(‘‘KangLi’’)	cold rolled steel products.
(6890.HK)
	Maximum	25.89
	Minimum	3.45
	Average	9.52
	Median	7.85
The Acquisition		9.58

Source: Bloomberg and the website of the Stock Exchange

Notes:

1. Being the P/Es of the respective Comparable Companies as at the Latest Practicable Date as extracted from Bloomberg.

2. Huajin and Xiwang were traded at exceptionally high P/E. Accordingly, we consider them outliers and are excluded in our analysis.

As shown above, the P/Es of the Comparable Companies (excluding outliers) ranged from approximately 3.45 times to approximately 25.89 times with an average and median of approximately 9.52 times and 7.85 times, respectively, as at the Latest Practicable Date. The Implied P/E of 9.58 times is within the range of, and very close to the average of, those of the Comparable Companies.

(ii) Comparable Transactions

In evaluating the fairness and reasonableness of the Consideration, we have, on a best effort basis, identified an exhaustive list of comparable transactions (the ‘‘Comparable Transactions’’) involving acquisitions of steel products manufacturers which are either private companies or listed companies in the PRC announced during the period from 1 January 2020 to the Latest Practicable Date with available P/Es. Based on these criteria, we have identified six Comparable Transactions, of which the target companies are all private companies. We consider that the aforesaid criteria allow us to identify a sufficient number of comparable transactions for comparison purpose.

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

Details of the Comparable Transactions are set out below:

		Percentage of
Target companies (Date of	Principal activities of target	equity interest		P/E implied by
announcement)	companies	acquired	Consideration	the transaction
			(RMB million)	(Note)
Jiangsu Yinyang Stainless Steel	Yinyang is principally engaged	51%	103.8	14.37
Pipe Industry Company	in the manufacture of stainless
Limited	steel drinking water pipe.
(‘‘Yinyang’’)
(30 March 2021)
Suqian Nangang Jinxin Steel	Suqian is principally engaged in	93.3%	333.2	6.44
Rolling Company Limited	processing and manufacture of
(‘‘Suqian’’)	steel products.
(23 December 2020)
Fujian Qingtuo Shangke	Qingtuo is principally engaged in	100%	300.0	29.60
Stainless Steel Company	the manufacture and sale of
Limited	cold-rolled stainless steel.
(‘‘Qingtuo’’)
(10 November 2020)
Shougang Jingtang United Iron	Shougang Jingtang is principally	19.1823%	5,574.0	28.35
& Steel Company Limited	engaged in processing and
(‘‘Shougang Jingtang’’)	manufacture of steel products.
(25 September 2020)
Hangzhou Xinyongfeng Steel	Xinyongfeng is principally	51%	54.6	23.35
Company Limited	engaged in processing and
(‘‘Xinyongfeng’’)	manufacture of steel products.
(29 July 2020)
Fujian Luoyuan Minguang Steel	Luoyuan is principally engaged	100%	2,151.8	3.30
Company Limited	in processing and manufacture
(‘‘Luoyuan’’)	of pig iron and steel products.
(2 June 2020)
			Maximum	29.60
			Minimum	3.30
			Average	17.57
			Median	18.86
The Target Company		40%	68.0	9.58

Source: Bloomberg and the announcements in relation to the respective Comparable Transactions

Note: Calculated by dividing the consideration for the respective Comparable Transactions (on a 100% basis) by the net profit for the latest available financial year before the date of the respective announcements.

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

As shown above, the P/Es as implied by the Comparable Transactions ranged from approximately 3.30 times to approximately 29.60 times with an average and median of approximately 17.57 times and 18.86 times, respectively. The Implied P/E of 9.58 times is lower than the average and median of those of Comparable Transactions.

(iii) Conclusion

Having considered that (a) the Acquisition will provide an investment opportunity for the Company to diversify its business portfolio by entering into the new materials market in the PRC with growth potential given the government support to promote and enforce environmental protection, which is in line with the business strategy of the Group as discussed in the section headed ‘‘3. Reasons for and benefits of the Acquisition’’ above; (b) the P/E as implied by the Acquisition is within the range of, and very close to the average of, those of the Comparable Companies; (c) the P/E as implied by the Acquisition is lower than the average and median of those of the Comparable Transactions; and (d) the Consideration shall be adjusted downwards based on the liabilities and potential expenses or losses of the Target Company on or before Completion, we consider the Consideration to be fair and reasonable.

7. Financial effects of the Acquisition

Upon Completion, the Target Company shall become an associated company of the Company and the financial results of the Target Company will be equity accounted for in the consolidated financial statements of the Company upon Completion. The unaudited pro forma financial information of the Enlarged Group (the ‘‘Unaudited Pro Forma Financial Information’’) is set out in Appendix III to the Circular.

(i) Earnings

As the Target Company has been generating revenue and profit in the last three financial years, the Acquisition is expected to contribute to the Group’s results upon Completion.

(ii) Net Assets

As set out in the Unaudited Pro Forma Financial Information, the pro forma consolidated net assets shall remain the same at approximately RMB760.0 million after Completion as compared to that as at 31 December 2020. The pro forma net assets after Completion have taken into account, among other things, the recognition of the Target Company as an associate, the part settlement of the Consideration and the legal and professional fees incurred in connection with the Acquisition.

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LETTER FROM THE INDEPENDENT FINANCIAL ADVISER

(iii) Gearing

The Acquisition shall be entirely financed the Group’s internal resources, resulting in a decrease in the Group’s cash level. Therefore, the gearing ratio of the Group, being bank loans less bank and cash balance and divided by total equity, is expected to increase from approximately 2.4% as at 31 December 2020 to approximately 3.7% upon Completion.

(iv) Working capital

The Consideration shall be satisfied by cash payment within one year after Completion which shall be funded by the Group’s internal resources. Upon Completion, the net current assets would amount to approximately RMB438.1 million, representing a decrease of approximately 13.7% as compared to approximately RMB507.4 million as at 31 December 2020.

As set out in Appendix I to the Circular, the Directors are of the opinion that, taking into account the financial resources including internally generated fund, the banking facilities available to the Group as well as the effect of the transactions contemplated under the Agreement, the Group will have sufficient working capital to satisfy its present requirements for the next twelve months from the date of the Circular in the absence of unforeseen circumstances.

OPINION AND RECOMMENDATION

Taking into account the above principal factors and reasons, we consider that the Agreement is on normal commercial terms which are fair and reasonable so far as the Independent Shareholders are concerned. We also consider that the entering into of the Agreement, while not in the ordinary and usual course of business of the Company, is nevertheless in the interests of the Company and its shareholders as a whole. We therefore advise the Independent Board Committee to recommend, and ourselves recommend, the Independent Shareholders to vote in favour of the ordinary resolution to be proposed at the EGM to approve the Agreement.

Yours faithfully, For and on behalf of Rainbow Capital (HK) Limited Larry Choi Managing Director

Mr. Larry Choi is a licensed person and a responsible officer of Rainbow Capital (HK) Limited registered with the Securities and Futures Commission to carry out type 1 (dealing in securities) and type 6 (advising on corporate finance) regulated activities under the SFO. He has over ten years of experience in the corporate finance industry.

– 40 –

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

Financial information of the Group for each of the three financial years ended 31 December 2018, 2019 and 2020 are disclosed in the following documents which have been published on the websites of the Stock Exchange (http://www.hkexnews.hk) and the Company (www.tengy.com):

• annual report of the Group for the year ended 31 December 2018 published on 15 April 2019 (pages 80 to 147), available on

https://www1.hkexnews.hk/listedco/listconews/sehk/2019/0415/ltn20190415231.pdf

• annual report of the Group for the year ended 31 December 2019 published on 11 May 2020 (pages 85 to 159), available on

https://www1.hkexnews.hk/listedco/listconews/sehk/2020/0511/2020051101287.pdf

• annual report of the Group for the year ended 31 December 2020 published on 28 April 2021 (pages 81 to 159), available on

https://www1.hkexnews.hk/listedco/listconews/sehk/2021/0428/2021042800615.pdf

STATEMENT OF INDEBTEDNESS

As at the close of business on 30 April 2021, being the latest practicable date for the purpose of this indebtedness statement prior to the printing of this circular, the total indebtedness of the Group was as follows:

(a) Borrowings

The Group had outstanding secured borrowings of (i) RMB46,500,000, which were secured by the Group’s building situated in the PRC; and (ii) in aggregate of RMB60,000,000, which were secured by buildings situated in the PRC held by the subsidiaries of the controlling shareholder of the Company and corporate guarantee under controlling shareholder of the Company.

(b) Contingent liabilities

The Group did not have any significant contingent liabilities.

• (c) Finance lease obligation

The Group did not have any significant finance lease obligation.

I – 1

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

Disclaimer

Save as aforesaid or as otherwise disclosed herein, as at the close of business on 30 April 2021, and apart from intra-group liabilities, the Group did not have any loan capital issued and outstanding or agreed to be issued, or any outstanding bank overdrafts, loans or other similar indebtedness, liabilities under acceptances or acceptance credits, debentures, mortgages, charges, hire purchases commitments, guarantees or other material contingent liabilities.

MATERIAL ADVERSE CHANGE

As at the Latest Practicable Date, the Directors are not aware of any material adverse change in the financial or trading position of the Group since 31 December 2020, the date to which the latest published audited financial statements of the Group were made up.

WORKING CAPITAL SUFFICIENCY

The Directors are of the opinion that, taking into account the financial resources including internally generated fund, the banking facilities available to the Group as well as the effect of the transactions contemplated under the Agreement, the Group will have sufficient working capital to satisfy its present requirements for the next twelve months from the date of this circular in the absence of unforeseen circumstances.

FINANCIAL AND TRADING PROSPECTS

Following the Completion, the Company intends to continue the operation of its existing businesses (i.e. the sales of environmental protection equipment, sales of materials and rendering of services) and has no intention to scale down or introduce any changes to the existing businesses of the Group. The Company currently does not have any plan or intention, nor has it entered into any agreement, arrangement, understanding or negotiation (whether formal or informal, expressed or implied), to acquire any new businesses or dispose of any of its existing business in the next twelve months.

As mentioned in the annual report of the Company for the year ended 31 December 2020, the Company will continue to actively search for appropriate acquisition targets to expedite its development, enhance its competitiveness and capture the opportunities in the pollution control sector of the PRC. New materials, which are considered to be more environmentally friendly compared with traditional materials, matches the mission and vision of the Group.

The Board is of the view that the Acquisition will enable the Group to diversify its business portfolio by entering into the new materials market in the PRC, which will in turn strengthen and expand the revenue and the asset base of the Group and maximise the Shareholders’ interests in the long run.

I – 2

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

Set out below is the management discussion and analysis of performance and other information of the Group for the year ended 31 December 2020 principally extracted from the annual report of the Company for the year ended 31 December 2020. Unless the context otherwise requires, capitalised terms used herein shall have the same meanings as those defined in the Company’s annual report for the year ended 31 December 2020.

MANAGEMENT DISCUSSION AND ANALYSIS

Overview

The Group is a well-established integrated atmospheric pollution control solution provider, with a primary focus on particulate emission control by offering mega-sized precipitators to customers in various industries. The Group has years of industry experience and record of continual innovation in industrial technologies.

During the Year, the Group generated its revenue primarily from (i) sales of environmental protection equipment; (ii) sales of materials; and (iii) rendering of services.

The Group’s sales of environmental protection equipment represented tailor-made and integrated atmospheric pollution control solutions offered by the Group to its customers, comprising engineering design, equipment procurement and manufacturing, supervision of installation and commissioning, customer training, and repair and maintenance services provided to its customers on a project basis. During the Year, the Group mainly offered three types of precipitators: electrostatic precipitators, bag filter precipitators and electrostatic-bag composite precipitators.

The Group’s sales of materials represented sales of materials, including raw materials, spare parts and components and scrap materials to related parties or independent third parties.

The Group’s rendering of services represented its technology consultancy services provided to its customers on a stand-alone basis, which include repair and replacement, and on-site engineering and maintenance services for those projects which were not constructed by the Group.

Precipitators are widely installed at coal-fired power plants, metallurgical plants, paper mills and other industrial production plants. As such, the Group has an extensive range of customers including the project owners of power plants and industrial production plants, or contractors who undertake the construction work of power plants and industrial production plants.

Business Review

As one of the largest economies in the world, China has introduced numerous environmental protection policies. The introduction of China’s ‘‘14th Five-Year’’ Plan for Ecological and Environmental Protection’’（《國家「十四五」生態環境保護計劃》） and the Summary of the ‘‘14th Five-Year’’ Plan for Provincial National Economic and Social Development’’（《省國民經濟 和社會發展第十四個五年規劃綱要》） has continuously deepened the revolution in the environmental protection industry, making the environmental protection industry to be one of China’s key strategic emerging industries with boundless prospects for development.

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APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

China is committed to improving the green and low-carbon production mode and lifestyle, and substantially reducing the total amount of major pollutants discharged by 2025, so as to ensure the overall improvement in the ecological and environmental quality and the adaption of ecological civilization construction to the building of a moderately prosperous society in all respects.

As one of China’s key strategic industries, governments at all levels throughout the country also attach great importance to the environmental protection industry in provinces and cities by actively taking measures to promote energy saving, emission reduction and environmental governance, including the implementation of the urban air quality checklist management system and the continuous carrying out of the ‘‘Provincial Blue Sky Project Action Plan’’（《省藍天工程 行動計劃》）, aiming to significantly lower the number of days of serious pollution; as well as the deepening of industrial pollution treatment by implementing cleaner production technology transformation in key industries such as steel, building materials, coking, non-ferrous metals, etc.

Up to now, almost all provinces and cities in China have promulgated relevant policies, financial support or project management plans for ecological environment protection, providing strong support for China’s comprehensive promotion of the environmental protection industry.

Meanwhile, China has been implementing a large number of infrastructure projects and telecommunications engineering projects in recent years, where the related projects need the support of the power generation industry, which has increased the demand for the Group’s environmental protection equipment.

In addition, in view of China being committed to developing clean energy to improve green and low-carbon levels, the Group acquired 49% equity interest of 內蒙古國電和潔風能有限公司 (Inner Mongolia Guodian Hejie Wind Energy Co., Ltd.) from the controlling shareholder of the Group on 1 June 2020. The Group believes that the acquisition will lay a foundation for the Group to enter the wind power market in China, and will also broaden the Group’s source of income, further improve the value of the Group, and maximize the returns to the Shareholders.

The Group believes that leveraging on its track record and advanced technologies together with its stable workplaces and staff, its ability to secure new projects will be improved.

Moreover, the Group has successively begun to execute orders in respect of mega-sized precipitators related works for different state-owned and private enterprises in the second half of 2020. This laid a solid foundation for the Group to secure orders in 2021.

I – 4

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

For the Year, the revenue and total comprehensive income of the Group amounted to approximately RMB607.1 million and approximately 4.5 million respectively. During the Year, the Group’s gross profit amounted to approximately RMB111.0 million, representing a decrease of approximately 11.4% as compared with approximately RMB125.3 million of the corresponding period of last year; while the Group’s gross margin increased by approximately 1.1% from last year to approximately 18.3%. The increase in the gross margin for the Year of the Group was mainly attributable to the decrease in the price of raw materials of the products produced by the Group during the Year.

For the Year, the value of the Group’s new contracts (which represents the aggregate value of the contracts it entered into during a specified period) was approximately RMB345 million. As at 31 December 2020, the Group’s backlog (including applicable value-added tax) (which represents the total estimated contract value of work that remains to be completed pursuant to outstanding contracts as of a certain date and assuming performance in accordance with the terms of the contract) was approximately RMB2,199.7 million.

The Group’s profit before tax for the Year decreased to approximately RMB0.5 million while profits attributable to owners of the Company decreased to approximately RMB4.5 million, representing a year-on-year decrease of approximately 98.9% and decrease of approximately 86.9% respectively. The aforesaid decrease in profits attributable to owners of the Company is mainly due to the increase in the loss allowance for trade receivables during the Year to approximately RMB42.1 million and due to the decrease in the revenue during the Year to approximately RMB607.1 million.

At the time of raising the amount of product sales, the Group spent great effort in enhancing cost management to make its products and solutions more cost competitive. The atmospheric pollution control solutions offered by the Group mainly comprise the atmospheric pollution control devices designed and manufactured on its own. The Group possesses the qualifications and expertise in manufacture and supply of the key atmospheric pollution control system of the projects it undertakes based on customised design proposals. The Group is dedicated to improving its manufacturing process and management system by managing the product quality and operation, reducing energy consumption and assessing the environmental impact in accordance with international standards. The quantitative management, environmental management and quality management systems of the Group were awarded with a number of ISO certificates. These systems help the company in estimating costs, smoothening project operations and improving operating efficiency.

I – 5

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

As at 31 December 2020, the Group had 47 registered patents (including 3 invention patents and 44 utility model patents) in the PRC. Based on its strong design and engineering capabilities, the Group primarily provides comprehensive atmospheric pollution control solutions to its customers. The Group offers a wide range of models of electrostatic precipitators which support electricity generators with capacity spanning from 6MW to over 1,240MW. The Group is one of the few manufacturers in the PRC which provides electrostatic precipitators for single generator unit with capacity of 1,000MW or above.

As at 31 December 2020, the Group maintained a total of 501 full-time employees (2019: 550). The remuneration payable to the Group’s employees includes basic wages, bonuses and other staff benefit. The Group conducts periodic performance reviews for the employees and determine their remuneration based on factors including qualifications, contributions, years of experience and performance.

FINANCIAL REVIEW

Revenue

The revenue of the Group amounted to approximately RMB607.1 million for the Year representing a decrease of approximately 16.5% from approximately RMB726.6 million of the corresponding period of last year. The decrease was mainly due to the outbreak of the novel coronavirus disease (COVID-19) epidemic (the ‘‘Epidemic’’) which limited the production activities of the Group during the Year.

The following table sets forth a breakdown of the Group’s revenue by segment and each item as a percentage of revenue for the respective years indicated:

Revenue Sales of environmental protection equipment Sales of materials Rendering of services Total	Year ended 31 December 2020 2019 RMB’000 % RMB’000 % 580,530 95 696,284 96 25,491 4 10,596 1 1,057 1 19,767 3 607,078 100 726,647 100	Year ended 31 December 2020 2019 RMB’000 % RMB’000 % 580,530 95 696,284 96 25,491 4 10,596 1 1,057 1 19,767 3 607,078 100 726,647 100
		100

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FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

Revenue generated from sales of environmental protection equipment of the Group amounted to over 95% of its total revenue. Depending on the specifications and requirements of its customers, the Group may provide an integrated set of atmospheric pollution control devices comprising precipitators, desulfurisation system and/or denitrification system, or only provide one type of the said atmospheric pollution control devices on a stand-alone basis towards new installation projects or upgrading or modification projects. A majority of the Group’s sales of environmental protection equipment are related to the manufacturing, installation and sales of electrostatic precipitators.

The following table sets forth a further revenue breakdown of sales of environmental protection equipment by types of atmospheric pollution control solutions for the respective years indicated:

Environmental protection equipment Ash removal and transfers – Electrostatic precipitator – Electrostatic-bag composite precipitator – Bag filter precipitator – Others (e.g. Pneumatic ash conveying system) – SO2 and NOx emission reduction (desulfurisation and denitrification devices)	Year ended 31 December 2020 2019 RMB’000 % RMB’000 % 271,097 47 458,886 66 53,077 9 78,916 11 52,038 9 101,844 15 38,764 7 3,481 1 165,554 28 53,157 7 580,530 100 696,284 100	Year ended 31 December 2020 2019 RMB’000 % RMB’000 % 271,097 47 458,886 66 53,077 9 78,916 11 52,038 9 101,844 15 38,764 7 3,481 1 165,554 28 53,157 7 580,530 100 696,284 100
		100

The Group’s revenue for the Year was mainly generated from sales of electrostatic precipitator and SO2 and NOx emission reduction (desulfurisation and denitrification devices). During the Year, as compared with the corresponding period of last year, the revenue derived from sales of electrostatic precipitator and bag filter precipitator were decreased by approximately RMB187.8 million and approximately RMB49.8 million respectively while the revenue derived from sales of SO2 and NOx emission reduction (desulfurisation and denitrification devices) were increased by approximately RMB112.4 million.

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FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

With the experience in delivery of new installation projects, the Group also provided large scale upgrading and modification projects for power plants and other industries. The following table sets forth a revenue breakdown of sales of environmental protection equipment by types of new installation project as well as upgrading/modification project for the respective years indicated:

Revenue Newly installed Upgrading/modification	Year ended 31 December 2020 2019 RMB’000 % RMB’000 % 475,044 82 570,106 82 105,486 18 126,178 18 580,530 100 696,284 100	Year ended 31 December 2020 2019 RMB’000 % RMB’000 % 475,044 82 570,106 82 105,486 18 126,178 18 580,530 100 696,284 100
		100

Cost of sales

The Group’s costs incurred in sales of environmental protection equipment principally comprise material costs, staff costs, depreciation and overhead costs. The Group’s major raw materials used in the manufacturing process of ash removal and transfer devices and desulfurisation and denitrification devices are steel, electrical instruments, filter bags and others.

The cost of sales of the Group amounted to approximately RMB496.1 million for the Year representing a decrease of approximately 17.5% from approximately RMB601.3 million of the corresponding period of last year.

Gross profit and gross margin

The following table sets forth the breakdown of gross profit and gross margin of the Group (stated as a percentage of revenue) for the respective years indicated:

Gross profit (RMB’000) Gross margin (%)	Year ended 31 December 2020 2019 110,954 125,314 18.3% 17.2%

I – 8

APPENDIX I

FINANCIAL INFORMATION OF THE GROUP

The Group’s gross profit of the Year amounted to approximately RMB111.0 million, representing a decrease of approximately 14.4 million or approximately 11.5% as compared with approximately RMB125.3 million of the corresponding period of last year. The gross margin of the Group increased to approximately 18.3% for the Year. The increase in gross margin of the Group was attributable to the decrease in the price of raw materials of the products produced by the Group during the Year.

Other income and gains

Other income and gains of the Group during the Year increased to approximately RMB11.4 million, representing an increase of approximately 0.9% from approximately RMB11.3 million of the corresponding period of last year. The other income and gains of the Group are mainly comprised of bank interest income and government grants amounting to approximately RMB1.0 million and approximately RMB9.7 million respectively.

Selling and distribution expenses

The Group’s selling and distribution expenses of the Year amounted to approximately RMB14.0 million, representing a decrease of approximately RMB6.9 million as compared with approximately RMB20.9 million of the corresponding period of last year.

• (i) The business hospitality expenses in 2020 decreased by approximately RMB3.75 million, or approximately 41.2%, to approximately RMB5.36 million as compared with approximately RMB9.11 million of the corresponding of last year; and

• (ii) The staff salaries expenses in 2020 was approximately RMB1.8 million. Compared with the corresponding period of last year, the amount for the Year decreased by approximately RMB1.6 million, or approximately 47.1%, from approximately RMB3.4 million.

Administrative expenses

The administrative expenses of the Group for the Year amounted to approximately RMB102.7 million, representing an increase of approximately 61.7% as compared with approximately RMB63.5 million of the corresponding period of last year, mainly due to:

• (i) the impairment losses for trade receivables in 2020 increased to approximately RMB42.1 million; and

• (ii) the research and development expenses in 2020 increased by approximately RMB21.1 million from 2019 to approximately RMB23.3 million, mainly due to the increase in the number of technicians employed by the Group and the related efforts in research and development during the Year.

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FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

Finance cost

The finance cost of the Year amounted to approximately RMB7.1 million, representing an increase of 2.9% as compared with approximately RMB6.9 million of the corresponding period of last year.

Income tax credit/(expense)

The Group’s income tax credit of the Year amounted to approximately RMB4.0 million, representing an increase of 137% as compared with the income tax expenses approximately RMB10.8 million of the corresponding period of last year.

Trade and bills receivables

As at 31 December 2020, the trade and bills receivables of the Group were approximately RMB791.6 million, decreased by approximately RMB8.9 million as compared to approximately RMB800.5 million of the corresponding period of last year. The increase in trade receivables by approximately RMB52.3 million as compared with the corresponding period of the last year is mainly due to the increase in the number of on-progress projects while the decrease in bill receivables by approximately RMB61.3 million as compared with the corresponding period of last year is mainly due to the fact that more bill receivables are used for the settlement of trade payables during the Year.

Inventories

As at 31 December 2020, the Group experienced a decrease of inventories by approximately RMB98.5 million to approximately RMB226.6 million when compared to approximately RMB325.1 million of the corresponding period of last year. The inventories mainly consisted of steels, filter bags, electrical instruments and other components.

Liquidity and capital resources

Cash and cash equivalents

As at 31 December 2020, the cash and cash equivalents of the Group increased by approximately RMB65.2 million to approximately RMB104.5 million when compared to approximately RMB39.3 million of the corresponding period of last year, which was mainly due to:

• (i) the net cash outflow of approximately RMB18.6 million generated from financing activities, which mainly consists of the cash outflow of approximately RMB18.6 million on proceeds from bank borrowings and repayments of bank borrowings;

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FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

• (ii) the net cash outflow of approximately RMB44.9 million used in investing activities of the Group in the Year, which mainly consists of the cash outflow of approximately RMB73.5 million on acquisition of the 49% of the equity interest of 內蒙古國電和潔風能有限公司 (Inner Mongolia Guodian Hejie Wind Energy Co., Ltd.); and

• (iii) the net cash inflow of approximately RMB129.5 million generated from the operation of the Group in the Year.

Indebtedness

As at 31 December 2020, the Group incurred outstanding bank loans of approximately RMB106.5 million.

Net current assets

As at 31 December 2020, the net current assets of the Group (the difference between total current assets and current liabilities) decreased by approximately 13.9% from approximately RMB589.2 million of the corresponding period of last year to approximately 507.4 million for the Year.

Capital expenditure

No capital expenditures of the Group were used for the purchase of property, plant and equipment in the Year.

Exchange risk

The Group has transactional currency exposures. Such exposures arise from sales by operating units in currencies other than the functional currencies adopted by the units. Approximately 2.7% (2019: 3.4%) of its sales for the Year were denominated in currencies other than the functional currencies of the operating units making the sale. At present, the Group does not intend to seek to hedge its exposure to foreign exchange fluctuations. However, the Group’s management will constantly monitor the economic situation and the foreign exchange risk profile of the Group, and will consider appropriate hedging measures in the future should the need arise.

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FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

Major acquisitions and disposals

On 1 June 2020, the Company entered into the agreement with 浙江天潔新能源股份有 限公司 (Zhejiang Tengy New Energy Company Limited) (‘‘Tengy New Energy’’), pursuant to which the Company conditionally agreed to acquire and Tengy New Energy conditionally agreed to sell 49% of the equity interest of 內蒙古國電和潔風能有限公司 (Inner Mongolia Guodian Hejie Wind Energy Co., Ltd.) for the consideration of RMB73,500,000. For details, please refer to the announcement of the Company dated 1 June 2020 and the circular of the Company dated 26 June 2020. Save as above, the Group did not have any other material acquisition and disposal of subsidiaries, associates and joint ventures during the Year.

Significant investments

The Group did not have any significant investments during the Year.

Contingent liabilities

The Group is neither currently involved in any material legal proceedings nor aware of any pending or potential material legal proceedings involving itself. If the Group were involved in such material legal proceedings, the Group would record any loss or contingent events when, based on information then available, it is likely that a loss has been incurred and the amount of the loss can be reasonably estimated.

As at 31 December 2020, the Group did not have any material contingent liabilities or guarantees.

PROSPECTS

In order to cooperate with the relevant environmental protection policies in PRC, the Group will devote time and resource to enhance its research and development capabilities, develop new technologies and expand our product portfolio (such as ash conveyers) to fight the atmospheric pollution control battle for our country, protect our country’s blue sky and water, and give back to the society.

Besides, the Group will continue to actively seek appropriate acquisition projects to expand its capabilities of research and development, manufacturing and sales, as well as to access new domestic and international markets.

The Group hopes to capture the growing opportunities in the atmospheric pollution control solution industry in the PRC through internal research and development and external expansion to consolidate the Group’s existing business, and enhance the Group’s national and international brand recognition in order to expand its domestic and international market share.

I – 12

FINANCIAL INFORMATION OF THE GROUP

APPENDIX I

The Group believes that its established customer base in the PRC and its exposure to overseas markets could help it lay a solid foundation for future expansion in both domestic and overseas markets of the Group, and enable it to become the leading player in the atmospheric pollution control solution industry.

FINANCIAL EFFECTS OF THE ACQUISITION

Upon Completion, the Target Company will become an associate of the Company and the financial results of the Target Company will not be consolidated into the accounts of the Company. The financial results of the Target Company will be equity accounted for in the consolidated financial statements of the Company upon Completion.

Based on the unaudited pro forma financial information of the Enlarged Group as set out in Appendix III to this circular, assuming completion of the Acquisition had taken place on 31 December 2020, the pro forma total assets of the Enlarged Group would have increased by approximately RMB59.3 million from approximately RMB1,500.6 million to approximately RMB1,559.9 million, and the total liabilities of the Enlarged Group would have increased by approximately RMB59.3 million from approximately RMB740.6 million to approximately RMB799.9 million. It is expected that the impact of the Acquisition on the Group’s earning will not be significant for the year ending 31 December 2021. In view of the future prospects of the new materials market in the PRC, it is anticipated that the Acquisition will improve the Enlarged Group’s trading prospects in the future and the Directors consider that the Acquisition will contribute to the revenue and earning of the Enlarged Group upon Completion but the quantification of such contribution will depend on the future performance of the Target Company.

I – 13

APPENDIX II

ACCOUNTANT’S REPORT OF THE TARGET COMPANY

The following is the text of a report, prepared for the sole purpose of inclusion in this circular, from the independent reporting accountant, Moore Stephens CPA Limited, Certified Public Accountants, Hong Kong:

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ACCOUNTANT’S REPORT ON HISTORICAL FINANCIAL INFORMATION TO THE DIRECTORS OF ZHEJIANG TENGY ENVIRONMENTAL TECHNOLOGY CO., LTD

We report on the historical financial information of Zhejiang Tianjie Magnetic Materials Co., Ltd (the ‘‘Target Company’’) set out on pages II-4 to II-54, which comprises the statements of financial position of the Target Company as at 31 December 2018, 2019 and 2020, and the statements of comprehensive income, the statements of changes in equity and the statements of cash flows for the years ended 31 December 2018, 2019 and 2020 (the ‘‘Track Record Period’’) and a summary of significant accounting policies and other explanatory information (together, the ‘‘Historical Financial Information’’). The Historical Financial Information set out on pages II-4 to II-54 forms an integral part of this report, which has been prepared for inclusion in the circular of Zhejiang Tengy Environmental Technology Co., Ltd (the ‘‘Company’’) dated 29 June 2021 (the ‘‘Circular’’) in connection with the proposed acquisition of the 40% of the issued share capital of the Target Company by the Company.

Directors’ responsibility for the Historical Financial Information

The directors of the Company are responsible for the preparation of Historical Financial Information that gives a true and fair view in accordance with the basis of preparation set out in Note 2 to the Historical Financial Information that is free from material misstatement, whether due to fraud or error.

The financial statements of the Target Company for the Track Record Period (the ‘‘Underlying Financial Statements’’), on which the Historical Financial Information is based, were prepared by the directors of the Target Company. The directors of the Target Company are responsible for the preparation of the Underlying Financial Statements that gives a true and fair view in accordance with Hong Kong Financial Reporting Standards (‘‘HKFRSs’’) issued by the Hong Kong Institute of Certified Public Accountants (‘‘HKICPA’’), and for such internal control as the directors of the Target Company determine is necessary to enable the preparation of the Target Company’s financial statements that are free from material misstatement, whether due to fraud or error.

II – 1

ACCOUNTANT’S REPORT OF THE TARGET COMPANY

APPENDIX II

Reporting accountant’s 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 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.

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 accountant’s 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 accountant considers 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 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 of the Target Company, 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 accountant’s report, a true and fair view of the Target Company’s financial positions as at 31 December 2018, 2019 and 2020 and of the Target Company’s financial performance and cash flows for the Track Record Period in accordance with the basis of preparation set out in Note 2 to the Historical Financial Information.

II – 2

ACCOUNTANT’S REPORT OF THE TARGET COMPANY

APPENDIX II

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

Adjustments

In preparing the Historical Financial Information, no adjustments to the Underlying Financial Statements have been made.

Dividends

We refer to Note 12 to the Historical Financial Information, which states that no dividends have been paid by the Target Company in respect of the Track Record Period.

Moore Stephens CPA Limited

Certified Public Accountants

Ng Ngai Yan

Practising Certificate Number: P07422

Hong Kong, 29 June 2021

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ACCOUNTANT’S REPORT OF THE TARGET COMPANY

APPENDIX II

HISTORICAL FINANCIAL INFORMATION OF THE TARGET COMPANY

Preparation of Historical Financial Information

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

The Underlying Financial Statements, on which the Historical Financial Information is based, were audited by Moore Stephens CPA Limited in accordance with Hong Kong Standards on Auditing issued by the Hong Kong Institute of Certified Public Accountants.

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

Statements of Comprehensive Income

Notes Revenue 6 Cost of sales Gross profit Other income 7 Other gains and losses, net 8 Selling and distribution expenses Administrative and other operating expenses Finance costs 9 Profit before income tax 10 Income tax expense 11 Profit and total comprehensive income for the year	Year ended 31 December 2018 2019 2020 RMB’000 RMB’000 RMB’000 762,349 705,200 764,832 (741,765) (693,212) (740,118) 20,584 11,988 24,714 3,284 2,426 3,825 54 70 64 (4,007) (3,355) (2,975) (7,276) (7,351) (6,420) 1,560) (1,578) (1,453) 11,079 2,200 17,755 – (18) (16) 11,079 2,182 17,739

II – 4

ACCOUNTANT’S REPORT OF THE TARGET COMPANY

APPENDIX II

Statements of Financial Position

Notes ASSETS AND LIABILITIES Non-current assets Property, plant and equipment 13 Right-of-use assets 14 Deferred tax assets 24 Current assets Inventories 15 Trade and bills receivables 16 Deposits, prepayments and other receivables 17 Amounts due from shareholders 18 Pledged bank deposits 19 Bank balances and cash 19 Current liabilities Trade and bills payables 20 Contract liabilities 21 Other payable and accruals 21 Amounts due to shareholders 18 Bank loans 22 Deferred income 23 Net current assets Total assets less current liabilities Non-current liability Deferred income 23 Net assets CAPITAL AND RESERVES Share capital 25 Reserves 26 Total equity	As 2018 RMB’000 35,377 7,565 37 42,979 27,782 147,236 18,047 44,473 17,478 16,102 271,118 103,370 4,069 17,209 – 26,000 14 150,662 120,456 163,435 431 163,004 200,000 (36,996) 163,004	at 31 December 2019 2020 RMB’000 RMB’000 26,021 16,010 7,341 7,117 19 3 33,381 23,130 16,480 29,685 86,725 82,040 26,660 26,329 – – 27,766 19,345 19,732 41,465 177,363 198,864 80,869 61,769 6,775 18,863 18,286 18,823 13,197 13,197 26,000 26,000 14 14 145,141 138,666 32,222 60,198 65,603 83,328 417 403 65,186 82,925 100,000 100,000 (34,814) (17,075) 65,186 82,925

II – 5

ACCOUNTANT’S REPORT OF THE TARGET COMPANY

APPENDIX II

Statements of Changes in Equity

Balance as at 1 January 2018 Profit and total comprehensive income for the year Balance as at 31 December 2018 and 1 January 2019 Capital reduction (Note 25(ii)) Profit and total comprehensive income for the year Balance as at 31 December 2019 and 1 January 2020 Profit and total comprehensive income for the year Balance as at 31 December 2020	Share capital RMB’000 200,000 – 200,000 (100,000) – 100,000 – 100,000	Statutory reserve RMB’000 32 – 32 – – 32 – 32	Accumulated losses RMB’000 (48,107) 11,079 (37,028) – 2,182 (34,846) 17,739 (17,107)	Total equity RMB’000 151,925 11,079 163,004 (100,000) 2,182 65,186 17,739 82,925

II – 6

ACCOUNTANT’S REPORT OF THE TARGET COMPANY

APPENDIX II

Statements of Cash Flows

Notes Cash flows from operating activities Profit before income tax Adjustments for: Depreciation of property, plant and equipment 13 Depreciation of right-of-use assets 14 Amortisation of deferred income 23 Finance costs 9 Reversal of impairment losses of property, plant and equipment 8 Reversal of loss allowance of expected credit loss on trade receivables 8 Provision for expected credit loss on other receivables 8 Interest income 7 Gain on disposal of property, plant and equipment 8 Operating profit before working capital changes Decrease/(increase) in inventories (Increase)/decrease in trade and bill receivables Decrease/(increase) in deposits, prepayments and other receivables Increase/(decrease)in trade and bills payables (Decrease)/increase in contract liabilities Increase/(decrease) in other payable and accruals Cash generated from operations Interest received Net cash generated from operating activities

Year ended 31 December 2018 2019 2020 RMB’000 RMB’000 RMB’000 11,079 2,200 17,755 8,960 9,758 10,011 224 224 224 (14) (14) (14) 1,560 1,578 1,453 – (70) – – – (65) – – 1 (213) (320) (1,119) (54) – – 21,542 13,356 28,246 50,560 11,302 (13,205) (88,489) 43,186 (31,759) 13,501 (8,613) 330 73,230 (19,723) 18,249 (4,578) 2,706 12,088 14,985 794 (303) 80,751 43,008 13,646 213 320 1,119 80,964 43,328 14,765

II – 7

ACCOUNTANT’S REPORT OF THE TARGET COMPANY

APPENDIX II

Notes Cash flows from investing activities Acquisitions of property, plant and equipment 13 Proceeds from disposal of property, plant and equipment (Placement)/withdrawal in pledged bank deposits Advance to a shareholder Net cash (used in)/generated from investing activities Cash flows from financing activities Proceeds from bank loans 19(b) Repayment of bank loans 19(b) Interest paid 19(b) Payments to shareholders in relation to capital deduction 19(b) Net cash used in financing activities Net increase in cash and cash equivalents Cash and cash equivalents at the beginning of the year Cash and cash equivalents at the end of the year Analysis of cash and cash equivalents Bank balances and cash

Year ended 31 December 2018 2019 2020 RMB’000 RMB’000 RMB’000 (8,235) (332) – 306 – – (16,877) (10,288) 8,421 (10,003) – – (34,809) (10,620) 8,421 58,000 26,000 26,000 (64,000) (26,000) (26,000) (1,560) (1,578) (1,453) (30,000) (27,500) – (37,560) (29,078) (1,453) 8,595 3,630 21,733 7,507 16,102 19,732 16,102 19,732 41,465 16,102 19,732 41,465

II – 8

ACCOUNTANT’S REPORT OF THE TARGET COMPANY

APPENDIX II

NOTES TO HISTORICAL FINANCIAL INFORMATION

1. Corporate information

The Target Company is a limited liability company incorporated on 31 August 2007 in Zhuji City, Zhejiang Province in the People’s Republic of China (the ‘‘PRC’’). The registered office and principal place of business of the Target Company is Xishanxia Village, Paitou Town, Zhuji City.

The principal activity of the Target Company is processing and sales of cold-rolled nonoriented silicon steel plates (the ‘‘Silicon steel plates’’) in the PRC.

2. Basis of preparation of Historical Financial Information

The Historical Financial Information set out in this report has been prepared in accordance with all applicable Hong Kong Financial Reporting Standards (‘‘HKFRSs’’), which collective term includes all applicable individual HKFRSs, Hong Kong Accounting Standards and Interpretations issued by the HKICPA.

The Historical Financial Information is presented in Renminbi (‘‘RMB’’) which is also the functional currency of the Target Company. The measurement basis used in the preparation of the Historical Financial Information is the historical cost basis, except for financial assets at fair value through other comprehensive income (‘‘FVTOCI’’) that is measured at fair values at the end of each reporting period. The measurement bases are fully described in the accounting policies in Note 3. All values are rounded to the nearest thousand except where otherwise indicated.

It should be noted that accounting estimates and assumptions have been used in preparation of the Historical Financial Information. Although these estimates are based on management’s best knowledge and judgement of current events and actions, actual results may ultimately differ from those estimates. The areas involving a higher degree of judgement or complexity, or areas where assumptions and estimates are significant to the Historical Financial Information are set out in Note 4.

The HKICPA has issued a number of new and revised HKFRSs which were relevant to the Target Company and became effective during the Track Record Period. In preparing the Historical Financial Information, the Target Company has applied all these new and revised HKFRSs which are effective for the Target Company’s accounting period beginning on 1 January 2018 consistently throughout the Track Record Period to the extent required or allowed by transitional provisions in the HKFRSs.

II – 9

ACCOUNTANT’S REPORT OF THE TARGET COMPANY

APPENDIX II

2.1 New and amendments to HKFRSs not yet adopted

At the date of this report, certain new and amendments to HKFRSs have been issued but are not yet effective, and have not been applied early by the Target Company.

Amendments to HKFRS 10 Sale or Contribution of Assets between an Investor and its and HKAS 28 (2011) Associate or Joint Venture* Amendments to HKFRS 9, Interest Rate Benchmark Reform – Phase 2[1] HKAS 39, HKFRS 7, HKFRS 4 and HKFRS 16 Amendments to HKFRS 16 Covid-19-Related Rent Concessions[5] Amendments to HKFRS 16 Covid-19-Related Rent concessions beyond 30 June 2021[2] Amendments to HKFRSs Annual Improvements to HKFRSs 2018 – 2020 Cycle[3] Amendments to HKFRS 3 Reference to the Conceptual Framework[3] Amendments to HKAS 16 Property, Plant and Equipment: Proceeds before Intended Use[3] Amendments to HKFRS 37 Onerous Contacts – Cost of Fulfilling a Contract[3] Amendments to HKAS 1 and Disclosure of Accounting Policies[4] HKFRS Practice Statement 2 Amendments to HKAS 8 Definition of Accounting Estimates[4] Amendments to HKAS 12 Deferred Tax related to Assets and Liabilities arising from a Single Transaction[4] Amendments to HKAS 1 Classification of Liabilities as Current or Noncurrent and related amendments to Hong Kong Interpretation 5 (2020)[4] HKFRS 17 Insurance contracts and related Amendments[4]

• 1 Effective for annual periods beginning on or after 1 January 2021

• 2 Effective for annual periods beginning on or after 1 April 2021

• 3 Effective for annual periods beginning on or after 1 January 2022

• 4 Effective for annual periods beginning on or after 1 January 2023

• 5 Effective for annual periods beginning on or after 1 June 2020

• The amendments were original intended to be effective for annual periods beginning on or after 1 January 2016. The effective date has now been deferred.

The Target Company has already commenced an assessment of the related impact of adopting the above new and amendments to HKFRSs. So far, the directors of the Target Company concluded that the above new and amendments to HKFRSs will be adopted at the respective effective dates and the adoption of them is unlikely to have a significant impact on the financial information of the Target Company.

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ACCOUNTANT’S REPORT OF THE TARGET COMPANY

APPENDIX II

3. Significant accounting policies

The principal accounting policies are set out below.

3.1 Property, plant and equipment and depreciation

Property, plant and equipment, other than construction in progress (‘‘CIP’’), are stated in the statements of financial position at cost less provision for depreciation and impairment losses, if any.

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

Depreciation is recognised so as to write off the cost of items of property, plant and equipment less their residual values over their estimated useful lives, using the straight-line method, as follows:

Buildings	5-20 years
Plant and machinery	3-10 years
Motor vehicles	4 years
Furniture, fixtures and equipment	3 years

The estimated useful lives, residual values and depreciation method are reviewed at the end of each reporting period, with the effect of any changes in estimate accounted for on a prospective basis.

CIP, which mainly represents construction on plant and machinery, is stated at cost less any impairment losses. Cost comprises direct costs incurred during the periods of construction, installation and testing. No depreciation is provided on CIP. CIP is reclassified to the appropriate category of property, plant and equipment when the construction is completed and the asset is ready for use.

An item of property, plant and equipment is derecognised upon disposal or when no future economic benefits are expected to arise from the continued use of the asset. Any gain or loss arising on the disposal or retirement of an item of property, plant and equipment is determined as the difference between the sales proceeds and the carrying amount of the asset and is recognised in profit or loss.

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3.2 Lease

The Target Company as a lessee

The Target Company leases properties and land for operation during the Track Record Period. The lease term of the piece of land is approximately 45 years which is granted by the PRC Government authority on the use of land within the pre-approved lease period.

Short-term leases and leases of low-value assets

The Target Company applies the short-term lease recognition exemption to leases of properties, that have a lease term of 12 months or less from the commencement date and do not contain a purchase option. Lease payments on short-term leases is recognised as expense on a straight-line basis or another systematic basis over the lease term.

Right-of-use assets

Leases are recognised as a right-of-use asset and a corresponding liability at the date at which the leased asset is available for use by the Target Company. Each lease payment is allocated between the liability and finance cost. The finance cost is charged to profit or loss over the lease period so as to produce a constant periodic rate of interest on the remaining balance of the liability for each period. Depreciation of rightof-use asset is calculated over the shorter of the asset’s useful life and the lease term on a straight-line basis. The depreciation is recorded in the profit or loss.

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

The lease payments are discounted using the interest rate implicit in the lease, if that rate can be determined, or the Target Company’s incremental borrowing rate. The lease liabilities are recorded in the statements of financial position.

Right-of-use assets are measured at cost comprising the amount of the initial measurement of lease liabilities, lease payment made at or before the commencement date and any initial direct cost.

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During the Track Record Period, the Target Company has no lease liabilities arising from leased assets as the Target Company had fully settled the acquisition cost of approximately RMB10,087,000 for the piece of leasehold land in the year of 2008.

The Group presents right-of-use assets as a separate line item on the statements of financial position.

3.3 Impairment losses on non-financial assets

At the end of the reporting period, the Target Company reviews the carrying amounts of its non-financial assets with finite useful lives to determine whether there is any indication that those assets have suffered an impairment loss. If any such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss, if any. When it is not possible to estimate the recoverable amount of an individual asset, the Target Company estimates the recoverable amount of the cash generated units (‘‘CGU’’) to which the asset belongs. Where a reasonable and consistent basis of allocation can be identified, corporate assets are also allocated to individual CGUs, or otherwise they are allocated to the smallest Target Company of CGUs for which a reasonable and consistent allocation basis can be identified.

Recoverable amount is the higher of fair value less costs of disposal and value in use. In assessing value in use, the estimated future cash flows are discounted to their present values using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset for which the estimates of future cash flows have not been adjusted.

If the recoverable amount of an asset (or a CGU) is estimated to be less than its carrying amount, the carrying amount of the asset (or a CGU) is reduced to its recoverable amount. An impairment loss is recognised immediately in profit or loss.

Where an impairment loss subsequently reverses, the carrying amount of the asset (or a CGU) is increased to the revised estimate of its recoverable amount, but so that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognised for the asset in prior years. A reversal of an impairment loss is recognised as income immediately in profit or loss.

3.4 Borrowing costs

Borrowing costs that are directly attributable to the acquisition, construction or production of an asset which necessarily takes a substantial period of time to get ready for its intended use or sale are capitalised as part of the cost of that asset. Other borrowing costs are expensed in the period in which they are incurred.

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The capitalisation of borrowing costs as part of the cost of a qualifying asset commences when expenditure for the asset is being incurred, borrowing costs are being incurred and activities that are necessary to prepare the asset for its intended use or sale are in progress. Capitalisation of borrowing costs is suspended or ceases when substantially all the activities necessary to prepare the qualifying asset for its intended use or sale are interrupted or complete.

3.5 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 all estimated costs of completion and costs necessary to make the sale.

3.6 Financial instruments

Financial assets are recognised when the Target Company becomes a party to the contractual provisions of the instrument. All regular way purchases or sales of financial assets are recognised and derecognised on a trade date/settlement date basis. Regular way purchases or sales are purchases or sales of financial assets that require delivery of assets within the time frame established by regulation or convention in the market place.

Financial assets are initially measured at fair value except for trade receivables arising from contracts with customers which are initially measured in accordance with HKFRS 15. Transaction costs that are directly attributable to the acquisition of financial assets (other than financial assets at fair value through profit or loss) are added to the fair value of the financial assets, as appropriate, on initial recognition. Transaction costs directly attributable to the acquisition of financial assets at fair value through profit or loss are recognised immediately in profit or loss.

The effective interest method is a method of calculating the amortised cost of a financial asset and of allocating interest income over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash receipts (including all fees and points paid that form an integral part of the effective interest rate, transaction costs and other premiums or discounts) through the expected life of the financial asset, or, where appropriate, a shorter period, to the net carrying amount on initial recognition.

Interest income which are derived from the Target Company is presented as other income.

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Financial assets

Classification and measurement of financial assets

Financial assets that meet the following conditions are subsequently measured at amortised cost:

• the financial asset is held within a business model whose objective is to collect contractual cash flows; and

• the contractual terms give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding.

Financial assets that meet the following conditions are subsequently measured at FVTOCI:

• the financial asset is held within a business model whose objective is achieved by both collecting contractual cash flows and selling; and

• the contractual terms give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding.

All other financial assets are subsequently measured at fair value through profit or loss, except that at the date of initial recognition of a financial asset the Target Company may irrevocably elect to present subsequent changes in fair value of an equity investment in other comprehensive income (‘‘OCI’’) if that equity investment is neither held for trading nor contingent consideration recognised by an acquirer in a business combination to which HKFRS 3 Business Combinations applies.

(i) Amortised cost and interest income

Financial assets are recognised using the effective interest method for financial assets measured subsequently at amortised cost. Interest income is calculated by applying the effective interest rate to the gross carrying amount of a financial asset, except for financial assets that have subsequently become credit-impaired. For financial assets that have subsequently become credit-impaired, interest income is recognised by applying the effective interest rate to the amortised cost of the financial asset from the next reporting period. If the credit risk on the credit-impaired financial instrument improves so that the financial asset is no longer credit-impaired, interest income is recognised by applying the effective interest rate to the gross carrying amount of the financial asset from the beginning of the reporting period following the determination that the asset is no longer credit impaired.

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(ii) Bill receivables classified at FVTOCI

Subsequent changes in the carrying amounts for bill receivables classified at FVTOCI as a result of interest income calculated using the effective interest method are recognised in profit or loss. All other changes in the carrying amount of these bill receivables are recognised in OCI and accumulated under the heading of FVTOCI reserve. Impairment allowances are recognised in profit or loss with corresponding adjustment to OCI without reducing the carrying amounts of these bill receivables. When these bill receivables are derecognised, the cumulative gains or losses previously recognised in OCI are reclassified to profit or loss.

Impairment of financial assets

The Target Company recognises a loss allowance for excepted credit loss (‘‘ECL’’) on financial assets which are subject to impairment under HKFRS 9 (including trade and bills receivables, deposits and other receivables, pledged bank deposits, bank balances and cash and amounts due from shareholders). The amount of ECL is updated at each reporting date to reflect changes in credit risk since initial recognition.

Lifetime ECL represents the ECL that will result from all possible default events over the expected life of the relevant instrument. In contrast, 12-month ECL (‘‘12m ECL’’) represents the portion of lifetime ECL that is expected to result from default events that are possible within 12 months after the reporting date. Assessments are done based on the Target Company’s historical credit loss experience, adjusted for factors that are specific to the debtors, general economic conditions and an assessment of both the current conditions at the reporting date as well as the forecast of future conditions.

The Target Company always recognises lifetime ECL for trade receivables without significant financing component. The ECL on these assets are assessed individually for debtors with significant balances and collectively using a provision matrix with appropriate groupings.

For all other instruments, the Target Company measures the loss allowance equal to 12m ECL, unless when there has been a significant increase in credit risk since initial recognition, the Target Company recognises lifetime ECL. The assessment of whether lifetime ECL should be recognised is based on significant increases in the likelihood or risk of a default occurring since initial recognition.

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(i) Significant increase in credit risk

In assessing whether the credit risk has increased significantly since initial recognition, the Target Company 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. In making this assessment, the Target Company considers both quantitative and qualitative information that is reasonable and supportable, including historical experience and forward-looking information that is available without undue cost or effort.

In particular, the following information is taken into account when assessing whether credit risk has increased significantly:

• an actual or expected significant deterioration in the financial instrument’s external (if available) or internal credit rating;

• significant deterioration in external market indicators of credit risk, e.g. a significant increase in the credit spread, the credit default swap prices for the debtor;

• existing or forecast adverse changes in business, financial or economic conditions that are expected to cause a significant decrease in the debtor’s ability to meet its debt obligations;

• an actual or expected significant deterioration in the operating results of the debtor; or

• an actual or expected significant adverse change in the regulatory, economic, or technological environment of the debtor that results in a significant decrease in the debtor’s ability to meet its debt obligations.

Irrespective of the outcome of the above assessment, the Target Company presumes that the credit risk has increased significantly since initial recognition when contractual payments are more than 30 days past due, unless the Target Company has reasonable and supportable information that demonstrates otherwise.

The Target Company regularly monitors the effectiveness of the criteria used to identify whether there has been a significant increase in credit risk and revises them as appropriate to ensure that the criteria are capable of identifying significant increase in credit risk before the amount becomes past due.

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(ii) Definition of default

For internal credit risk management, the Target Company considers an event of default occurs when information developed internally or obtained from external sources indicates that the debtor is unlikely to pay its creditors, including the Target Company, in full (without taking into account any collaterals held by the Target Company).

Irrespective of the above, the Target Company considers that default has occurred when a financial asset is more than 90 days past due unless the Target Company has reasonable and supportable information to demonstrate that a more lagging default criterion is more appropriate.

(iii) Credit-impaired financial assets

A financial asset is credit-impaired when one or more events of default that have a detrimental impact on the estimated future cash flows of that financial asset have occurred. Evidence that a financial asset is credit-impaired includes observable data about the following events:

• significant financial difficulty of the issuer or the borrower;

• a breach of contract, such as a default or past due event;

• the lender(s) of the borrower, for economic or contractual reasons relating to the borrower’s financial difficulty, having granted to the borrower a concession(s) that the lender(s) would not otherwise consider;

• it is becoming probable that the borrower will enter bankruptcy or other financial reorganisation; or

• the disappearance of an active market for that financial asset because of financial difficulties.

(iv) Write-off policy

The Target Company writes off a financial asset when there is information indicating that the counterparty is in severe financial difficulty and there is no realistic prospect of recovery, for example, when the counterparty has been placed under liquidation or has entered into bankruptcy proceedings, or in the case of trade and retention receivables, when the amounts are over two years past due, whichever occurs sooner. Financial assets written off may still be subject to enforcement activities under the Target Company’s recovery procedures, taking into account legal advice where appropriate. A write-off constitutes a derecognition event. Any subsequent recoveries are recognised in profit or loss.

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(v) Measurement and recognition of ECL

The measurement of ECL is a function of the probability of default, loss given default (i.e. the magnitude of the loss if there is a default) and the exposure at default. The assessment of the probability of default and loss given default is based on historical data adjusted by forward-looking information. Estimation of ECL reflects an unbiased and probability-weighted amount that is determined with the respective risks of default occurring as the weights.

Generally, the ECL is the difference between all contractual cash flows that are due to the Target Company in accordance with the contract and the cash flows that the Target Company expects to receive, discounted at the effective interest rate determined at initial recognition.

Where ECL is measured on a collective basis or cater for cases where evidence at the individual instrument level may not yet be available, the financial instruments are grouped based on:

• Nature, size and industry of debtors;

• Past-due status;

• Nature of financial instruments; and

• External credit ratings where available

The Target Company is regularly reviewed by management to ensure the constituents of each Target Company continue to share similar credit risk characteristics.

Except for the bill receivables measured at FVTOCI, the Target Company recognises an impairment gain or loss in profit or loss for all financial instruments by adjusting their carrying amount, with the exception of trade receivables where the corresponding adjustment is recognised through a loss allowance account. For the bill receivables measured at FVTOCI, the loss allowance is recognised in OCI and accumulated in the FVTOCI reserve without reducing the carrying amount of the bill receivables.

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Derecognition of financial assets

A financial asset is primarily derecognised when:

• the rights to receive cash flows from the asset have expired; or

• the Target Company 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 Company has transferred substantially all the risks and rewards of the asset, or (b) the Target Company has neither transferred nor retained substantially all the risks and rewards of the asset, but has transferred control of the asset.

When the Target Company 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 Company continues to recognise the transferred asset to the extent of the Target Company’s continuing involvement. In that case, the Target Company 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 Company has retained.

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

On derecognition of a financial asset measured at amortised cost, the difference between the asset’s carrying amount and the sum of the consideration received and receivable is recognised in profit or loss.

On derecognition of bill receivables classified as at FVTOCI, the cumulative gain or loss previously accumulated in the FVTOCI reserve is reclassified to profit or loss.

Financial liabilities

The Target Company’s financial liabilities, i.e. trade and bills payables, other payable and accruals, amounts due to shareholders and bank loans are subsequently measured at amortised cost, using the effective interest method.

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Financial liabilities are recognised when the Target Company becomes a party to the contractual provisions of the instrument. All interest related charges are recognised in accordance with the Target Company’s accounting policy for borrowing costs.

The Target Company derecognised financial liabilities when, and only when, the Target Company’s obligations are discharged, cancelled or expire. The difference between the carrying amount of the financial liability derecognised and the consideration paid and payable is recognised in profit or loss.

3.7 Taxation

Income tax expense represents the sum of the tax currently payable and deferred tax.

Income tax represents the sum of 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 the reporting period, taking into consideration interpretations and practices prevailing in the countries in which the Target Company operates.

Deferred tax is provided, using the liability method, on all temporary differences at the end of the reporting period 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:

• when 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; and

• in respect of taxable temporary differences associated with investments in subsidiaries, associates and joint venture, 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.

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

• when the deferred tax asset relating to the deductible temporary differences 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; and

• in respect of deductible temporary differences associated with investments in subsidiaries, associates and joint venture, 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.

Deferred tax is calculated, without discounting, at the tax rates that are expected to apply in the period when the asset is realised or the liability is settled, based on the tax rates (and tax laws) that have been enacted or substantively enacted by the end of the reporting period.

Deferred tax assets and liabilities are offset when they relate to income taxes levied by the same taxation authority and the Target Company intends to settle its current tax assets and liabilities on a net basis.

3.8 Revenue recognition

Under HKFRS 15, the Target Company recognises revenue when (or as) a performance obligation is satisfied, i.e. when ‘‘control’’ of the goods or services underlying the particular performance obligation is transferred to the customer.

A performance obligation represents a good or service (or a bundle of goods or services) that is distinct or a series of distinct goods or services that are substantially the same.

Control is transferred over time and revenue is recognised over time by reference to the progress towards complete satisfaction of the relevant performance obligation if one of the following criteria is met:

• the customer simultaneously receives and consumes the benefits provided by the Target Company’s performance as the Target Company performs;

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• the Target Company’s performance creates and enhances an asset that the customer controls as the Target Company performs; or

• the Target Company’s performance does not create an asset with an alternative use to the Target Company and the Target Company has an enforceable right to payment for performance completed to date.

Otherwise, revenue is recognised at a point in time when the customer obtains control of the distinct good or service.

A contract asset represents the Target Company’s right to consideration in exchange for goods or services that the Target Company has transferred to a customer that is not yet unconditional. It is assessed for impairment in accordance with HKFRS 9. In contrast, a receivable represents the Target Company’s unconditional right to consideration, i.e. only the passage of time is required before payment of that consideration is due.

A contract liability represents the Target Company’s obligation to transfer goods or services to a customer for which the Target Company has received consideration (or an amount of consideration is due) from the customer.

A contract asset and a contract liability relating to a contract are accounted for and presented on a net basis.

Further details of revenue recognition policy of the Target Company’s processing and sales of Silicon steel plates is as follows:

Processing and sales of Silicon steel plates

The Target Company is mainly engaged in processing and sales of Silicon steel plates in the PRC. Revenue are recognised when control of the Silicon steel plates has been transferred, being when the Silicon steel plates is delivered to the customer and there is no unfulfilled obligation that could affect the customer’s acceptance of the Silicon steel plates.

Revenue from these sales is recognised based on the price specified in the contract. The Target Company typically receives certain deposits upon acceptance of orders, which is negotiated on a case by case basis with customers. These deposits are recognised as a contract liability until the revenue recognised exceeds the amounts of the deposits.

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

No element of financing is deemed present as the sales are made under terms whereby the Target Company typically offers a credit term from 30 to 60 days for the remaining balance based on the invoice date.

3.9 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, 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 the 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 the profit or loss by way of a reduced depreciation charge.

3.10 Retirement benefit plans

The employees employed in the PRC are members of the state-managed retirement benefit schemes operated by the PRC government. The Target Company is required to contribute a certain percentage of their payroll to the retirement benefit schemes to fund the benefits. The only obligation of the Target Company with respect to the retirement benefit schemes is to make the required contributions under the schemes.

Payments to state-managed retirement benefit schemes are recognised as an expense when employees have rendered service entitling them to the contributions.

3.11 Short-term employee benefits

Salaries, annual bonuses, paid annual leave and the cost of non-monetary benefits are accrued in the year in which the associated services are rendered by employees. Where payment or settlement is deferred and the effect would be material, these amounts are stated at their present values.

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3.12 Related parties

• (a) A person or a close member of that person’s family is related to the Target Company if that person:

• (i) has control or joint control over the Target Company;

• (ii) has significant influence over the Target Company; or

• (iii) is a member of key management personnel of the Target Company or the Target Company’s parent.

• (b) An entity is related to the Target Company if any of the following conditions apply:

• (i) The entity and the Target Company are members of the same Target Company (which means that each parent, subsidiary and fellow subsidiary is related to the others).

• (ii) One entity is an associate or joint venture of the other entity (or an associate or joint venture of a member of a Target Company of which the other entity is a member).

• (iii) Both entities 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 the employees of the Target Company or an entity related to the Target Company.

• (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 key management personnel of the entity (or of a parent of the entity).

• (viii) The entity, or any member of a Target Company of which it is a part, provides key management personnel services to the Target Company or the Target Company’s parent.

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Close members of the family of a person are those family members who may be expected to influence, or be influenced by, that person in their dealings with the entity and include:

• (i) that person’s children and spouse or domestic partner;

• (ii) children of that person’s spouse or domestic partner; and

• (iii) dependents of that person or that person’s spouse or domestic partner.

3.13 Segment reporting

The Target Company identifies operating segments and prepares segment information based on the regular internal financial information reported to the directors of the Target Company for their decisions about resources allocation to the Target Company’s business components and for their review of the performance of those components. The business components in the internal financial information reported to the directors of the Target Company are determined by following the Target Company’s major operations.

The measurement policies the Target Company uses for reporting segment results under HKFRS 8 Operating Segments are the same as those used in its financial information prepared under HKFRSs.

3.14 Cash and cash equivalents

Cash and cash equivalents comprise cash at bank and on hand, demand deposits with banks and other financial institutions, and short-term, highly liquid investments that are readily convertible into known amounts of cash and which are subject to an insignificant risk of changes in value, having been within three months of maturity at acquisition. Cash and cash equivalents are assessed for ECL in accordance with the policy set out in note 3.6.

3.15 Provision and contingent liabilities

Provisions are recognised when the Target Company has a legal or constructive obligation arising as a result of a past event, it is probable that an outflow of economic benefits will be required to settle the obligation and a reliable estimate can be made. Where the time value of money is material, provisions are stated at the present value of the expenditure expected to settle the obligation.

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Where it is not probable that an outflow of economic benefits will be required, or the amount cannot be estimated reliably, the obligation is disclosed as a contingent liability, unless the probability of outflow of economic benefits is remote. Possible obligations, whose existence will only be confirmed by the occurrence or non-occurrence of one or more future events are also disclosed as contingent liabilities unless the probability of outflow of economic benefits is remote.

4. Key Sources of Estimation Uncertainty

In the application of the Target Company’s accounting policies, which are described in Note 3, the management of the Target Company is required to make judgements, estimates and assumptions about the carrying amounts of assets and liabilities that are not readily apparent from other sources. The estimates are based on historical experience and other factors that are considered to be relevant. Actual results may differ from these estimates.

The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision affects only that period, or in the period of the revision and future periods if the revision affects both current and future periods.

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

(a) Depreciation of property, plant and equipment and right-of-use assets

Other than CIP, the Target Company depreciates property, plant and equipment using straight-line method over the estimated useful lives ranging between 3 to 20 years, starting from the date on which the assets are ready for productive use. For the right-of-use assets, the Target Company depreciates right-of-use assets over the lease term determined at the commencement date for leases. The estimated useful lives and lease term reflect the directors’ estimate of the periods that the Target Company intends to derive future economic benefits from the use of the Target Company’s property, plant and equipment and right-ofuse assets. The carrying amount of property, plant and equipment, other than CIP, as at 31 December 2018, 2019 and 2020 was approximately RMB35,377,000, RMB26,021,000 and RMB16,010,000 and the carrying amount of right-of-use assets as at 31 December 2018, 2019 and 2020 was approximately RMB7,565,000, RMB7,341,000 and RMB7,117,000. Further details are disclosed in Notes 13 and 14, respectively.

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(b) Impairment of financial assets

The measurement of impairment losses under HKFRS 9 across financial assets measured at amortised costs and FVTOCI requires judgement, in particular, the estimation of the amount, timing of future cash flows and forward-looking information when determining impairment losses and the assessment of a significant increase in credit risk. These estimates are driven by a number of factors, changes in which can result in different levels of allowances.

Provision for loss allowance for ECL on trade receivables

The Target Company estimated the amount of loss allowance for ECL on trade receivables. The provision rates are based on the Target Company’s historical settlement experience and historical recoverability rate as groupings of various debtors that have similar loss patterns. The provision matrix is based on the provision rates, taking into account forward-looking information that is reasonable and supportable available without undue costs or effort. At every reporting date, the historical observed default rates are reassessed and changes in the forward-looking information are considered.

The provision of ECL is sensitive to changes in estimates. The information about the ECL and the Target Company’s trade receivables are disclosed in Notes 16 and 30(b).

(c) Allowance for inventories

Management carries out inventory review periodically, at least at the end of each Track Record Period and makes allowance for obsolete items. A considerable amount of judgement and estimates is required in determining such allowance. If conditions which have an impact on the net realisable value of inventories deteriorate, additional allowances may be required. Management reviews the inventory ageing analysis at the end of reporting period and identifies for slow-moving inventory that are no longer suitable for consumption and saleable. Management estimates the net realisable value for such inventories based primarily on the selling price of latest sales and current market conditions. When the inventories which have been impaired are sold subsequently, the provision of impairment loss will be reversed to the extent of impairment losses previously recognised in the profit or loss.

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5. Segment information

An operating segment is a component of the Target Company that is engaged in business activities from which the Target Company may earn revenue and incur expenses, and is defined on the basis of the internal management reporting information that is provided to and regularly reviewed by the directors of the Target Company, who is the chief operating decision maker, in order to allocate resources and assess performance of the segment. For the Track Record Period, the board of directors of the Target Company regularly reviewed revenue and operating results derived from the processing and sales of Silicon steel plates on an aggregate basis and considered it has only one single operating segment.

Geographical information

The principal place of the Target Company’s operation is mainly in the PRC. For the purpose of segment information disclosures under HKFRS 8, the Target Company regarded the PRC as its country of domicile.

As at 31 December 2018, 2019 and 2020, all non-current assets are located in the PRC. During the Track Record Period, all revenue by geographical location of customers, which is based on the principal place of the customers’ operation, is derived from the PRC.

Information about major customers

Revenue from customers contributing over 10% of the total revenue of the Target Company is as follows:

	Year	ended 31 December	ended 31 December
	2018	2019		2020
	RMB’000	RMB’000	RMB’000
Runtian (as defined in Note 16)	152,791	167,471		184,603
Customer A	N/A1	N/A1		85,572

1 Revenue from this customer contributing less than 10% of the total revenue during the years ended 31 December 2018 and 2019.

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6. Revenue

The Target Company’s revenue from contracts with customers within HKFRS 15 Revenue from Contracts with Customers (‘‘HKFRS 15’’) represents the processing and sales of Silicon steel plates, net of discounts and sales related taxes during the Track Record Period, which are recognised at a point in time.

Disaggregation of revenue by type of products during the Track Record Period are as follows:

Revenue from contract with customers within the scope of HKFRS 15, types of goods: 50W800 Silicon steel plates 50W600 Silicon steel plates 50W1000 Silicon steel plates Other Silicon steel plates	Year ended 31 December 2018 2019 2020 RMB’000 RMB’000 RMB’000 692,635 648,130 731,435 49,950 49,868 25,384 7,379 415 2,915 12,385 6,787 5,098 762,349 705,200 764,832	Year ended 31 December 2018 2019 2020 RMB’000 RMB’000 RMB’000 692,635 648,130 731,435 49,950 49,868 25,384 7,379 415 2,915 12,385 6,787 5,098 762,349 705,200 764,832
		764,832

The Target Company has applied the practical expedient in paragraph 121 of HKFRS 15 to its sale of Silicon steel plates such that the above information does not include information about revenue that the Target Company will be entitled to when it satisfies the remaining performance obligations that had an original expected duration of one year or less.

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7. Other income

Sales of scrap materials Bank interest income Amortisation of deferred income Government subsidies (note) Refund of land use tax Sundry	Year ended 31 December 2018 2019 2020 RMB’000 RMB’000 RMB’000 2,599 1,720 2,692 213 320 1,119 14 14 14 – 250 – 324 – – 134 122 – 3,284 2,426 3,825	Year ended 31 December 2018 2019 2020 RMB’000 RMB’000 RMB’000 2,599 1,720 2,692 213 320 1,119 14 14 14 – 250 – 324 – – 134 122 – 3,284 2,426 3,825
		3,825

Note: Amounts mainly represented the Target Company received unconditional subsidies from local government for the incentives on the operating business of the Target Company during the Track Record Period.

8. Other gains and losses, net

Reversal of impairment losses on property, plant and equipment Reversal of loss allowance of ECL on trade receivables Provision for ECL on other receivables Gain on disposal of property, plant and equipment Finance costs Interest on bank loans	Year ended 31 December 2018 2019 2020 RMB’000 RMB’000 RMB’000 – 70 – – – 65 – – (1) 54 – – 54 70 64 Year ended 31 December 2018 2019 2020 RMB’000 RMB’000 RMB’000 1,560 1,578 1,453

9. Finance costs

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10. Profit before income tax

Profit before income tax is arrived at after charging:

Auditor’s remuneration Cost of inventories sold Depreciation of property, plant and equipment Depreciation of right-of-use assets Expenses relating to short-term lease Employee benefits expenses Salaries and other allowances Retirement benefit scheme contributions	Year ended 31 December 2018 2019 2020 RMB’000 RMB’000 RMB’000 33 33 34 741,765 693,212 740,118 8,960 9,758 10,011 224 224 224 69 106 98 9,550 8,963 10,589 1,440 1,440 600

11. Income tax expense

Current tax: – PRC Enterprise Income Tax (‘‘PRC EIT’’) Deferred tax (Note 24) Income tax expense	Year ended 31 December 2018 2019 2020 RMB’000 RMB’000 RMB’000 – – – – 18 16 – 18 16	Year ended 31 December 2018 2019 2020 RMB’000 RMB’000 RMB’000 – – – – 18 16 – 18 16
		16

No PRC EIT has been provided for the Track Record Period as the Target Company has tax losses brought forward from previous years to offset the taxable profits during the Track Record Period.

No provision for taxation in Hong Kong has been made as the Target Company’s income neither arises in, nor is derived from, Hong Kong.

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The income tax expense for the Track Record Period can be reconciled to the profit before income tax as follows:

Profit before income tax Tax at the statutory tax rate of 25% Tax effect of income not taxable Tax effect of expenses not deductible Utilisation of tax losses previously not recognised Income tax expense	Year ended 31 December 2018 2019 2020 RMB’000 RMB’000 RMB’000 11,079 2,200 17,755 2,770 550 4,439 (3) (3) (338) 423 22 34 (3,190) (551) (4,119) – 18 16

12. Dividend

No dividend was paid or declared by the Target Company during the Track Record Period.

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13. Property, plant and equipment

Cost As at 1 January 2018 Additions Disposals Transfer As at 31 December 2018 and 1 January 2019 Additions As at 31 December 2019 and 2020 Accumulated depreciation and impairment As at 1 January 2018 Charge for the year Disposals As at 31 December 2018 and 1 January 2019 Reversal of impairment Charge for the year As at 31 December 2019 and 1 January 2020 Charge for the year As at 31 December 2020 Net carrying amount As at 31 December 2018 As at 31 December 2019 As at 31 December 2020	Buildings RMB’000 16,111 – (130) 1,172 17,153 – 17,153 7,909 836 (735) 8,010 (70) 918 8,858 918 9,776 9,143 8,295 7,377	Plant and machinery RMB’000 124,406 902 (1,743) 6,733 130,298 332 130,630 97,351 8,050 (915) 104,486 – 8,709 113,195 8,976 122,171 25,812 17,435 8,459	Motor vehicles RMB’000 814 321 (582) – 553 – 553 622 74 (553) 143 – 131 274 117 391 410 279 162	Furniture, fixtures and equipment RMB’000 257 – – – 257 – 257 245 – – 245 – – 245 – 245 12 12 12	CIP RMB’000 893 7,012 – (7,905) – – – – – – – – – – – – – – –	Total RMB’000 142,481 8,235 (2,455) –
						148,261 332
						148,593
						106,127 8,960 (2,203)
						112,884 (70) 9,758
						122,572 10,011
						132,583
						35,377
						26,021
						16,010

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As at 31 December 2018, 2019 and 2020, a property with net carrying amounts of approximately RMB9,143,000, RMB8,295,000 and RMB7,377,000 was pledged as security for the bank loans (Note 22) of the Target Company respectively.

14. Right-of-use assets

Cost As at 1 January 2018, 31 December 2018, 2019 and 2020 Accumulated depreciation As at 1 January 2018 Charge for the year As at 31 December 2018 and 1 January 2019 Charge for the year As at 31 December 2019 and 1 January 2020 Charge for the year As at 31 December 2020 Net carrying amount As at 31 December 2018 As at 31 December 2019 As at 31 December 2020	Land use right RMB’000 10,087
	2,298 224
	2,522 224
	2,746 224
	2,970
	7,565
	7,341
	7,117

As at 31 December 2018, 2019 and 2020, right-of-use assets with net carrying amounts of approximately RMB7,565,000, RMB7,341,000 and RMB7,117,000 were pledged as security for the bank loans (Note 22) of the Target Company respectively.

The balance of right-of-use assets represented as leasehold land in the PRC, which was a lump sum consideration paid by the Target Company to acquire a piece of leasehold land located at Zhejiang, the PRC. The land use rights are depreciated on the straight-line basis over the lease periods of approximately 45 years.

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15. Inventories

Raw materials Finished goods	As 2018 RMB’000 20,958 6,824 27,782	at 31 December 2019 2020 RMB’000 RMB’000 11,795 29,040 4,685 645 16,480 29,685	at 31 December 2019 2020 RMB’000 RMB’000 11,795 29,040 4,685 645 16,480 29,685
			29,685

1. Trade and bill receivables

Trade receivables Less: allowance for credit losses Trade receivables, net (Note (i)) Bill receivables at FVTOCI (Note (ii)) Total	As 2018 RMB’000 13,576 (76) 13,500 133,736 147,236	at 31 December 2019 2020 RMB’000 RMB’000 14,613 11,502 (76) (12) 14,537 11,490 72,188 70,550 86,725 82,040	at 31 December 2019 2020 RMB’000 RMB’000 14,613 11,502 (76) (12) 14,537 11,490 72,188 70,550 86,725 82,040
			11,490 70,550
			82,040

(i) Trade receivables

The Target Company generally allows an average credit period of 30 to 60 days to its trade customers. The Target Company did not hold any collateral as security or other credit enhancements over the trade receivables.

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The ageing analysis of the Target Company’s trade receivables based on the invoice date, net of ECL allowances, at the end of each reporting period is as follows:

0-30 days 31-60 days 61-90 days 91-180 days 181-365 days Over 365 days	As 2018 RMB’000 12,190 524 1 48 – 737 13,500	at 31 December 2019 2020 RMB’000 RMB’000 14,094 11,490 27 – – – – – 416 – – – 14,537 11,490	at 31 December 2019 2020 RMB’000 RMB’000 14,094 11,490 27 – – – – – 416 – – – 14,537 11,490
			11,490

The ageing analysis of the Target Company’s trade receivables based on the past due date, net of ECL allowances, is as follows:

Neither past due nor impaired 1-30 days past due 31-60 days past due 60-90 days past due 91-180 days past due 181-365 days past due Over 365 days past due	As 2018 RMB’000 12,190 524 1 48 – – 737 13,500	at 31 December 2019 2020 RMB’000 RMB’000 14,094 11,490 27 – – – – – 3 – 413 – – – 14,537 11,490	at 31 December 2019 2020 RMB’000 RMB’000 14,094 11,490 27 – – – – – 3 – 413 – – – 14,537 11,490
			11,490

Included in the above net trade receivables are amounts due from a related company, Zhejiang Runtian Magnetic Materials Co., Ltd.[#] （浙江潤天磁性材料有限公司）(‘‘Runtian’’) of approximately RMB2,896,000, RMB4,220,000 and nil as at 31 December 2018, 2019 and 2020 respectively, which is a subsidiary of one of the substantial shareholders of the Target Company, Tengy Group Limited[#] （天潔集團有限公司）(‘‘Tengy Group’’ or the ‘‘Vendor (as defined in this circular). The Vendor is a company established in the PRC with limited liability and is a substantial shareholder of the Company holding approximately 47.84% of

English name for identification purpose only

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the issued share capital of the Company as at the date of this circular. The balance is repayable on similar credit terms to those offered to the major customers of the Target Company.

The loss allowance of ECL on trade receivables as at 31 December 2018, 2019 and 2020 were approximately RMB76,000, RMB76,000 and RMB12,000 respectively. Further details are disclosed in Note 30(b).

(ii) Bills receivables at FVTOCI

Bills receivables of approximately RMB133,736,000, RMB72,188,000 and 70,550,000 as at 31 December 2018, 2019 and 2020 are held under a business model of collecting cash flows and endorsing to suppliers, and are classified as debt instruments at FVTOCI. As at 31 December 2018, 2019 and 2020, all the bills receivables were with a maturity period of less than one year from the end of the reporting period.

The ageing analysis of the Target Company’s bill receivables based on the bills’ issue date at the end of each reporting period is as follows:

0-30 days 31-60 days 61-90 days 91-180 days 181-365 days	As 2018 RMB’000 12,250 9,836 16,083 91,779 3,788 133,736	at 31 December 2019 2020 RMB’000 RMB’000 13,924 20,648 4,844 3,459 11,937 5,379 34,582 38,434 6,901 2,630 72,188 70,550	at 31 December 2019 2020 RMB’000 RMB’000 13,924 20,648 4,844 3,459 11,937 5,379 34,582 38,434 6,901 2,630 72,188 70,550
			70,550

As at 31 December 2018, 2019 and 2020, the Target Company endorsed certain bill receivables accepted by certain banks in the PRC (the ‘‘Endorsed Notes’’) to certain of its suppliers in order to settle the trade and other payables due to such suppliers and to its shareholders in related to the capital reduction (the ‘‘Endorsement’’). These Endorsed Notes had a maturity date of less than one year from the end of the reporting period. Subsequent to the Endorsement, the Target Company did not retain any rights on the use of the Endorsed Notes, including the sale, transfer or pledge of the Endorsed Notes to any other third parties. In accordance with the ‘‘Law of Negotiable Instruments’’ in the PRC, the holders of the Endorsed Notes have a right of recourse against the Target Company if the PRC banks default (the ‘‘Continuing Involvement’’).

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The total carrying amount of the Endorsed Notes of the Target Company as at 31 December 2018, 2019 and 2020 were approximately RMB158,184,000, RMB87,672,000 and RMB122,391,000 respectively. In the opinion of the directors of the Target Company, the Target Company has transferred substantially all the risks and rewards of ownership of certain Endorsed Notes accepted by large and reputable banks (the ‘‘Derecognised Notes’’) with the fair value of approximately RMB63,232,000, RMB58,057,000 and RMB94,566,000 as at 31 December 2018, 2019 and 2020 respectively. Accordingly, the Target Company has derecognised the full carrying amounts of these Derecognised Notes and the associated trade and other payables and amounts due to shareholders in relation to capital reduction.

The maximum exposure to loss from the Target Company’s Continuing Involvement in these Derecognised Notes and the undiscounted cash flows to repurchase these Derecognised Notes is equal to their carrying amount. In the opinion of the directors of the Target Company, the fair values of the Target Company’s Continuing Involvement in the Derecognised Notes are not significant.

The Target Company continued to recognise the full carrying amount of the remaining Endorsed Notes and the associated trade and other payables and amounts due to shareholders in relation to capital reduction settled with amounts of approximately RMB94,952,000, RMB29,615,000 and RMB27,825,000 as at 31 December 2018, 2019 and 2020 respectively, because the directors of the Target Company believe that the Target Company has retained substantial risks and rewards, which include default risks relating to such remaining Endorsed Notes.

During the Track Record Period, the Target Company has not recognised any gain or loss on the date of transfer of the Derecognised Notes. No gains or losses were recognised from the Continuing Involvement, both during the Track Record Period or cumulatively. The Endorsement has been made evenly throughout the Track Record Period.

As at 31 December 2018, 2019 and 2020, bill receivables of approximately RMB5,944,000, RMB26,047,000 and RMB12,533,000 respectively was pledged as security for the bills payables (Note 20) of the Target Company.

17. Deposits, prepayments and other receivables

Prepayments (Note) Deposits and other receivables Less: impairment loss	As 2018 RMB’000 18,042 5 – 18,047	at 31 December 2019 2020 RMB’000 RMB’000 26,515 26,309 145 21 – (1) 26,660 26,329	at 31 December 2019 2020 RMB’000 RMB’000 26,515 26,309 145 21 – (1) 26,660 26,329
			26,329

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Note: Included in prepayments are amounts prepaid for purchasing of raw materials of approximately RMB15,748,000, RMB24,528,000 and RMB23,840,000 as at 31 December 2018, 2019 and 2020 respectively to a related company, Hunan Valin Lianyuan Steel Sheet Co., Ltd.[#] （湖南華菱漣鋼薄板有限公 司）(‘‘Hunan Valin’’) and one of the shareholders of Hunan Valin, Lianyuan Iron & Steel Group Co., Ltd.[#] （漣源鋼鐵集團有限公司）(‘‘Lianyuan Group’’), which indirectly owned 12.06% equity interest of Hunan Valin as at the date of this circular, is also one of the substantial shareholders of the Target Company.

• English name for identification purpose only

Details of impairment assessment of deposits and other receivables are set out in Note 30(b).

18. Amounts due from/(to) shareholders

The amounts due from/(to) shareholders of the Target Company are unsecured, interest-free and repayable on demand.

19. Pledged bank deposits and bank balances and cash and other cash flow information

(a) Pledged bank deposits and bank balances and cash

As at 31 December 2018, 2019 and 2020, the Target Company’s pledged bank deposits amounted to approximately RMB17,478,000, RMB27,566,000 and RMB19,144,000 respectively were used to secure the bills payables (Note 20), amounted to nil, approximately RMB200,000 and RMB201,000 respectively were used to secure the bank loans (Note 22). Bank balances and cash comprise cash held by the Target Company with the original maturity of three months or less.

The Target Company’s pledged bank deposits and bank balances carry interests at market rate ranging as follows per annum:

	As at 31 December	As at 31 December
	2018	2019	2020
Pledged bank deposits	0.30%	0.35%	0.35%
	0.00% to	0.00% to	0.00% to
Bank balances	0.35%	0.35%	0.35%

As at 31 December 2018, 2019 and 2020, all bank balances and cash of the Target Company are denominated in RMB and kept in the PRC respectively. RMB is not freely convertible into other currencies and the remittance of funds out of the PRC is subject to exchange restrictions imposed by the PRC government.

Details of impairment assessment of pledged bank deposits and bank balances are set out in Note 30(b).

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(b) Reconciliation of liabilities from financing activities

The table below details changes in the Target Company’s liabilities from financing activities, including both cash and non-cash changes. Liabilities arising from financing activities are liabilities for which cash flows were, or future cash flows will be, classified in the Target Company’s statements of cash flows as cash flows from financing activities:

As at 1 January 2018 Changes from financing cash flows: Proceeds from bank loans Repayment of bank loans Interest paid Repayments to shareholders in relation to capital reduction Total changes from financing cash flows Other changes: Interest expense Advance to a shareholder under investing activities Endorsed Notes in relation to capital reduction (Note 25(ii)) Total other changes: As at 31 December 2018 and 1 January 2019	Bank loans RMB’000 (Note 22) 32,000 58,000 (64,000) (1,560) – (7,560) 1,560 – – 1,560 26,000	Amounts due (from)/to shareholders RMB’000 (Note 18) 3,200 – – – (30,000) (30,000) – (10,003) (7,670) (17,673) (44,473)	Total RMB’000 35,200
			58,000 (64,000) (1,560) (30,000)
			(37,560)
			1,560 (10,003) (7,670)
			(16,113)
			(18,473)

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Changes from financing cash flows: Proceeds from bank loans Repayment of bank loans Interest paid Repayments to shareholders in relation to capital reduction Total changes from financing cash flows Other changes: Interest expense Endorsed Notes in relation to capital reduction (Note 25(ii)) Distribution to shareholders for capital reduction (Note 25(ii)) Total other changes As at 31 December 2019 and 1 January 2020 Change from financing cash flows: Proceeds from bank loans Repayment of bank loans Interest paid Total changes from financing cash flows Other change: Interest expense As at 31 December 2020	Bank loans RMB’000 (Note 22) 26,000 (26,000) (1,578) – (1,578) 1,578 – – 1,578 26,000 26,000 (26,000) (1,453) (1,453) 1,453 26,000	Amounts due (from)/to shareholders RMB’000 (Note 18) – – – (27,500) (27,500) – (14,830) 100,000 85,170 13,197 – – – – – 13,197	Total RMB’000 26,000 (26,000) (1,578) (27,500)
			(29,078)
			1,578 (14,830) 100,000
			86,748
			39,197
			26,000 (26,000) (1,453)
			(1,453)
			1,453
			39,197

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20. Trade and bills payables

Trade payables (note (i)) Bills payables (note (ii))	As 2018 RMB’000 81,267 22,103 103,370	at 31 December 2019 2020 RMB’000 RMB’000 33,114 32,163 47,755 29,606 80,869 61,769	at 31 December 2019 2020 RMB’000 RMB’000 33,114 32,163 47,755 29,606 80,869 61,769
			61,769

Notes:

• (i) The ageing analysis of the Target Company’s trade payables based on the invoice date at the end of each reporting period is as follows:

0-30 days 31-60 days 61-90 days 90-180 days 180-365 days Over 365 days	As at 31 December 2018 2019 RMB’000 RMB’000 4,206 10,805 751 5,744 45,592 5,017 30,048 10,777 315 301 355 470 81,267 33,114	2020 RMB’000 4,941 6,493 4,709 12,163 3,485 372
		32,163

Included in trade payables are amounts payables for purchasing of raw materials of approximately RMB76,055,000, RMB25,161,000 and RMB22,405,000 as at 31 December 2018, 2019 and 2020 respectively to Hunan Valin, and nil, approximately RMB4,000 and nil as at 31 December 2018, 2019 and 2020 respectively to the Company.

(ii) All bills payables were aged within 180 days at the end of each reporting period and were secured by the pledged bank deposits amounted to approximately RMB17,478,000, RMB27,566,000 and RMB19,144,000 (Note 19) and bill receivables amounted to approximately RMB5,944,000, RMB26,047,000 and RMB12,533,000 (Note 16) as at 31 December 2018, 2019 and 2020 respectively.

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21. Contract liabilities and other payables and accruals

Contract liabilities (Note (i)) Other payables and accruals (Note (ii))	As 2018 RMB’000 4,069 17,209 21,278	at 31 December 2019 2020 RMB’000 RMB’000 6,775 18,863 18,286 18,823 25,061 37,686	at 31 December 2019 2020 RMB’000 RMB’000 6,775 18,863 18,286 18,823 25,061 37,686
			37,686

Notes:

(i) Movements in contract liabilities

At the beginning of the year Increase in contract liabilities as a result of receipt of customer deposits during the year Decrease in contract liabilities as a result of recognising revenue during the year that was previously included in the contract liabilities At the end of the year	Year ended 31 December 2018 2019 2020 RMB’000 RMB’000 RMB’000 8,647 4,069 6,775 290,252 303,746 382,256 (294,830) (301,040) (370,168) 4,069 6,775 18,863	Year ended 31 December 2018 2019 2020 RMB’000 RMB’000 RMB’000 8,647 4,069 6,775 290,252 303,746 382,256 (294,830) (301,040) (370,168) 4,069 6,775 18,863
		18,863

The Target Company receives deposits from customers when they entered into the Silicon steel plates sale agreements. The deposits are negotiated on a case by case basis with customers. These deposits are recognised as a contract liability until the revenue recognised exceeds the amount of the deposit.

Included in the contract liabilities of nil, nil and approximately RMB765,000 as at 31 December 2018, 2019 and 2020 respectively are amounts received from Runtian.

(ii) Included in the other payables of approximately RMB1,936,000, RMB2,811,000 and nil as at 31 December 2018, 2019 and 2020 respectively are amounts due to a related company, Hunan Liangang Logistics Co., Ltd.[#] （湖南漣鋼物流有限公司）(‘‘Liangang Logistics’’), which is an associate of Lianyuan Group, for receiving transportation services.

The remaining balances of other payables and accruals mainly comprises payables to transportation companies, payables to suppliers for acquisition of property, plant and equipment, accrued salaries, other tax payables and certain miscellaneous expenses payables.

English name for identification purpose only

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22. Bank loans

At 31 December 2018, 2019 and 2020, bank loans were classified as current liabilities which were repayable within one year from the end of the reporting period as follows:

Secured bank loans	As 2018 RMB’000 26,000	at 31 December 2019 2020 RMB’000 RMB’000 26,000 26,000

Details of interest rate and maturity of bank loans are as follows

Annual effective contractual interest rate (per annum) Maturity (Year)	As 2018 6.09% 2019	at 31 December 2019 2020 5.22% to 6.09% 6.09% 2020 2021

As at 31 December 2018, 2019 and 2020, bank loans of the Target Company were secured by a property with carrying amount of approximately RMB8,609,000, RMB7,813,000, and RMB7,017,000 (Note 13), land use right with net carrying amount of approximately RMB7,565,000, RMB7,341,000, and RMB7,117,000 (Note 14), and pledged bank deposits with amount of nil, approximately RMB200,000 and RMB201,000 (Note 19), respectively.

23. Deferred income

Net carrying amount at 1 January Amortisation for the year Net carrying amount at 31 December Less: current portion Non-current portion	As 2018 RMB’000 459 (14) 445 (14) 431	at 31 December 2019 2020 RMB’000 RMB’000 445 431 (14) (14) 431 417 (14) (14) 417 403	at 31 December 2019 2020 RMB’000 RMB’000 445 431 (14) (14) 431 417 (14) (14) 417 403
			417 (14)
			403

The Target Company received government subsidies for capital expenditure incurred for the plant and machinery. The amounts are deferred and amortised over the estimated useful lives of the respective assets.

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24. Deferred tax assets

Deferred tax assets recognised and the movements of the deferred tax assets during the Track Record Period are as follows:

Balance as at 1 January 2018, 31 December 2018 and 1 January 2019 Charged to profit or loss (Note 11) Balance as at 31 December 2019 and 1 January 2020 Charged to profit or loss (Note 11) Balance as at 31 December 2020	Credit loss allowance RMB’000 37 (18) 19 (16) 3

The Target Company has unused tax losses of approximately RMB27,737,000, RMB25,535,000 and RMB9,059,000 as at the year ended 31 December 2018, 2019 and 2020 respectively. No deferred tax assets were recognised as it is not predictable that future taxable profits against which the losses can be utilised will be available in the PRC. The tax losses will expire within 5 years from the year in which the losses were incurred. The abovementioned tax losses were brought forward from the year of 2015 and would be expired at the end of 2020.

There was no other significant unprovided deferred taxation for the Track Record Period and at the end of each reporting period.

25. Share capital

As at 1 January 2018, 31 December 2018, 1 January 2019 (note (i)) Capital reduction (Note (ii)) As at 31 December 2019 and 2020	RMB’000 200,000 (100,000) 100,000

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Notes:

• (i) The Target Company was established in the PRC on 31 August 2007. As at 1 January 2018, its registered and paid-up capital was RMB200,000,000.

• (ii) According to the resolution of shareholders’ meeting on 14 November 2018, the registered and paid-up capital of the Target Company has been proposed to be reduced the registered and paid-up capital by RMB100 million, representing 50% of existing registered capital of the Target Company. The Target Company endorsed certain Endorsed Notes of RMB7,670,000 and RMB14,830,000 to the shareholders during the years ended 31 December 2018 and 2019 respectively, and paid by cash of RMB30,000,000 and RMB27,500,000 to the shareholders during the years ended 31 December 2018 and 2019 respectively, and the rest of capital refund of RMB20,000,000 has been credited to the amounts due to shareholders as at 31 December 2019 and 2020. The Target Company went through the procedures under the Industrial and Commercial Registration at the relevant authorities in the PRC for the capital reduction on 14 May 2019.

26. Reserves

Details of the movements on the Target Company’s reserves are as set out in the statements of changes in equity.

27. Lease commitments

At the end of each reporting period, the Target Company had commitments for future minimum lease payments under non-cancellable leases which fall due as follows:

Within one year	As 2018 RMB’000 54	at 31 December 2019 2020 RMB’000 RMB’000 53 37

The Target Company is the lessee in respect of a number of staff dormitory. The leases run for an initial period of one year with options to renew the lease subject to all terms to be renegotiated. None of the leases include contingent rentals.

Lease commitments shown above only represent lease commitments of the Target Company for short-term leases.

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ACCOUNTANT’S REPORT OF THE TARGET COMPANY

APPENDIX II

28. Related party transactions

The Target Company had the following transactions with related parties in the normal course of its business and mutually agreed between both parties during the Track Record Period: -

Sales of Silicon steel plates to Runtian Purchases of raw materials from Hunan Valin Purchases of raw materials from the Company Transportation services from Lianyuan Logistics	Year ended 31 December 2018 2019 2020 RMB’000 RMB’000 RMB’000 152,791 167,471 184,603 628,614 602,995 681,116 – 86 – 16,814 8,587 2,651

The Target Company is significantly influenced by the PRC local government and operates in an economic environment currently predominated significantly influenced by the PRC local government (‘‘government-related entities’’).

In addition, 40% equity interest of the Target Company is held by Lianyuan Group, which is controlled by the PRC local government. For the purpose of the related party transactions disclosure, the Target Company has established procedures for determination, to the extent possible, of the identification of the ownership structure of its customers and suppliers as to whether they are government-related entities to ensure the adequacy of disclosure for all material related party transactions given that many government-related entities have multi-layered corporate structures and the ownership structures change over time as a result of transfers and privatisation programs.

The Target Company has transactions with other government‑related entities, including but not limited to purchases of raw materials, receipt of transportation services, lease of assets, use of public utilities, maintain most of its pledged bank deposits and bank balances in governmentrelated financial institutions while the lenders of Target Company’s loans are also governmentrelated financial institutions, associated with the respective interest income or interest expense incurred. These transactions are conducted in the ordinary course of the Target Company’s business on terms comparable to those with other entities that are not government‑related.

29. Capital Risk Management

The Target Company manages its capital to ensure that entities in the Target Company will be able to continue as a going concern while maximising the return to stakeholders through the optimisation of the debt and equity balance. The Target Company’s overall strategy remains unchanged throughout the Track Record Period, except for the capital reduction as disclosed in note 25.

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ACCOUNTANT’S REPORT OF THE TARGET COMPANY

APPENDIX II

The capital structure of the Target Company consists of equity, comprising share capital and reserves.

The management of the Target Company reviews the capital structure regularly. As part of this review, the management considers the cost and the risks associated with each class of the capital. Based on recommendations of the management, the Target Company will balance the overall capital structure through the payment of dividends and raising of new capital as well as the issue of debt.

30. Financial instruments

(a) Categories of financial instruments

Financial assets Bill receivables at FVTOCI Financial assets measured at amortised cost Trade receivables Deposits and other receivables Amounts due from shareholders Pledged bank deposits Bank balances and cash Financial liabilities Financial liabilities measured at amortised cost Trade and bills payables Other payable and accruals Amounts due to shareholders Bank loans	As 2018 RMB’000 133,736 13,500 5 44,473 17,478 16,102 91,558 225,294 103,370 17,209 – 26,000 146,579	at 31 December 2019 2020 RMB’000 RMB’000 72,188 70,550 14,537 11,490 145 20 – – 27,766 19,345 19,732 41,465 62,180 72,320 134,368 142,870 80,869 61,769 18,286 18,823 13,197 13,197 26,000 26,000 138,352 119,789	at 31 December 2019 2020 RMB’000 RMB’000 72,188 70,550 14,537 11,490 145 20 – – 27,766 19,345 19,732 41,465 62,180 72,320 134,368 142,870 80,869 61,769 18,286 18,823 13,197 13,197 26,000 26,000 138,352 119,789
			72,320
			142,870
			61,769 18,823 13,197 26,000
			119,789

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ACCOUNTANT’S REPORT OF THE TARGET COMPANY

APPENDIX II

(b) Financial risk management objectives and policies

The Target Company’s major financial instruments include trade and bill receivables, deposits and other receivables, amounts due from shareholders, pledged bank deposits, bank balances and cash, trade and bills payables, other payable and accruals, amounts due to shareholders and bank loans. Details of these financial instruments are disclosed in respective notes. The risks associated with certain of these financial instruments include credit risk and liquidity risk and the policies on how to mitigate these risks are set out below.

The management manages and monitors these exposures to ensure appropriate measures are implemented on a timely and effective manner.

Credit risk and impairment assessment

Risk management

Credit risk refers to the risk that the counterparty to a financial instrument would fail to discharge its obligation under the terms of the financial instrument and cause a financial loss to the Target Company. The Target Company’s exposure to credit risk mainly arises from granting credit to customers in the ordinary course of its operations and its investing activities. The carrying amounts of the financial assets represent the maximum exposure to credit risk.

Carrying amounts of the financial assets presented in statements of financial position are net of impairment losses, if any. The Target Company minimises its exposure to the credit risk by rigorously selecting the counterparties, performing ongoing credit evaluation on the financial conditions of its debtors and tightly monitoring the ageing of the receivables. Follow-up actions are taken in case of overdue balances.

The credit risk on pledged bank deposits and bank balances and cash is also limited because the Target Company’s pledged bank deposits and bank balances are all deposited with authorised financial institutions.

The Target Company trades only with recognised and creditworthy third parties. Before accepting any new customer, the Target Company assesses the potential customer’s credit quality and defines its credit limits based on historical credit records of these customers. The Target Company does not hold any material collateral over trade receivable balances during the Track Record Period.

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ACCOUNTANT’S REPORT OF THE TARGET COMPANY

APPENDIX II

Impairment of financial assets

Trade receivables arising from contracts with customers of the Target Company are subject to the ECL model, bill receivables at FVTOCI, deposits and other receivables, amounts due from shareholders, pledged bank deposits and bank balances and cash are also subject to the impairment requirements of HKFRS 9.

Trade receivables

For trade receivables, the Target Company uses nature of these debtors to assess the impairment because these customers consist of a large number of customers with common risk characteristics that are representative of the customers’ abilities to pay all amounts due in accordance with the contractual terms. The provision rates are estimated based on the Target Company’s historical settlement experience for each Target Company of debtors and historical recoverability rate, which reflect the credit risk of each Target Company of debtors with shared credit risk characteristics and are adjusted forward-looking information that is reasonable and supportable available without undue costs or effort. The grouping is regularly reviewed by management to ensure relevant information about specific debtors is updated. The Target Company has identified the gross domestic product in the PRC to be the most relevant factors, and accordingly adjusts the historical loss rates based on expected changes in these factors. On that basis, the loss allowance of ECL on trade receivables as at 31 December 2018, 2019 and 2020 were approximately RMB76,000, RMB76,000 and RMB12,000 respectively.

Bill receivables at FVTOCI

The Target Company’s bill receivables at FVTOCI are issued by banks with high credit ratings and therefore are considered to be low credit risk. During the Track Record Period, the directors of the Target Company consider that ECL on bill receivables at FVTOCI was insignificant.

Pledged bank deposits and bank balances

The Target Company’s exposure to credit risk arising from pledged bank deposits and bank balances is limited because the counterparties are banks and financial institutions with sound credit ratings, for which the directors of the Target Company’s considered to have low credit risk and as at 31 December 2018, 2019 and 2020, the identified ECL was immaterial.

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ACCOUNTANT’S REPORT OF THE TARGET COMPANY

APPENDIX II

Other financial assets at amortised cost

ECL for other financial assets at amortised cost, including deposits and other receivables and amounts due from shareholders, are assessed on 12m ECL basis as there had been no significant increase in credit risk since initial recognition.

In order to minimise the credit risk on deposits and other receivables and amounts due from shareholders, the management of the Target Company closely monitor the follow-up action taken to recover any receivable balances outstanding over 180 days. In addition, the Target Company monitors subsequent settlement of each of the receivables to ensure that adequate impairment losses are made for irrecoverable amounts. In addition, the Target Company performs impairment assessment under ECL model in accordance with HKFRS 9 on other balances individually. In this regard, the directors of the Target Company consider that the Target Company’s credit risk on the deposits and other receivables and amounts due from shareholders are immaterial.

Liquidity risk

In the management of the liquidity risk, the Target Company monitors and maintains a level of cash and cash equivalents deemed adequate by the management of the Target Company to finance the Target Company’s operations and mitigate the effects of fluctuations in cash flows.

All of the financial liabilities of the Company at the end of the reporting period are either repayable on demand or due within one year.

Interest rate risk

Interest rate risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market interest rates. The Target Company’s interest rate risk arises primarily from bank loans, pledged bank deposits and bank balances. Bank loans, pledged bank deposits and bank balances at variable rates and at fixed rates expose the Target Company to cash flow interest rate risk and fair value interest rate risk respectively. The Target Company does not use financial derivatives to hedge against the interest rate risk. The Target Company’s interest rate profile as monitored by management is set out in (i) below.

(i) Interest rate profile

The following table details the interest rate profile of the Target Company’s net borrowings (being interest-bearing financial liabilities less pledged bank deposits and bank balances) at the end of each reporting period.

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APPENDIX II

ACCOUNTANT’S REPORT OF THE TARGET COMPANY

	2018		2019		2020
	Effective		Effective		Effective
	interest rate		interest rate		interest rate
	per annum	Amount	per annum	Amount	per annum	Amount
	%	RMB’000	%	RMB’000	%	RMB’000
Variable rate of bank deposits
Pledged bank deposits	0.30%	17,478	0.35%	27,766	0.35%	19,345
Bank balances	0% – 0.35%	16,102	0% – 0.35%	19,732	0% – 0.35%	41,465
Total		33,580		47,498		60,810
Variable rate of bank loans
Bank loans	6.09%	(26,000)	5.22% – 6.09%	(26,000)	6.09%	(26,000)

(ii) Sensitivity analysis

At 31 December 2018, 2019 and 2020, it is estimated that a general increase/ decrease of 10 basis points in saving interest rates, with all other variables held constant, would have increased/decreased the Target Company’s profit after income tax by approximately RMB25,000, RMB36,000 and RMB46,000, respectively, while it is estimated that a general increase/decrease of 100 basis points in lending interest rates, with all other variables held constant, would have decreased/increased the Target Company’s profit after income tax by approximately RMB195,000, RMB195,000 and RMB195,000, respectively.

The sensitivity analysis above indicates the instantaneous change in the Target Company’s profit after income tax that would arise assuming that the change in interest rates had occurred at the end of the reporting period and had been applied to re-measure those financial instruments held by the Target Company which expose the Target Company to interest rate risk at the end of the reporting period. In respect of the exposure to cash flow interest rate risk arising from floating rate non-derivative instruments held by the Target Company at the end of the reporting period, the impact on the Target Company’s profit after income tax is estimated as an annualised impact on interest expense or income of such a change in interest rates.

(c) Fair values of financial instruments

As at 31 December 2018, 2019 and 2020, all financial instruments measured at amortised costs are carried at amounts not materially different from their fair value.

Bill receivables at FVTOCI is measured at fair value at the end of each reporting period. The directors of the Target Company are of the view that the fair value of bill receivables is close to its carrying amounts given all bill receivables will mature within one year.

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ACCOUNTANT’S REPORT OF THE TARGET COMPANY

APPENDIX II

The following table presents the carrying value of the Target Company’s financial instruments measured at fair value across the three levels of the fair value hierarchy defined in HKFRS 13 Fair Value Measurement with fair value of each financial instrument categorised in its entirety based on the lowest level of input that is significant to that fair value measurement. The levels are defined as follows:

Level 1: fair values measured using quoted prices (unadjusted) in active markets for identical 1 financial instruments.

Level 2: fair values measured using Level 2 inputs i.e. observable inputs which fail to meet Level 1, and not using significant unobservable inputs. Unobservable inputs are inputs for which market data are not available.

Level 3: fair values measured using significant unobservable input.

Fair value of the Target Company’s bill receivables at FVTOCI that are measured at fair value on a recurring basis

The Target Company’s bill receivables are measured at fair value at the end of each reporting period. The following table gives information about how the fair values of bill receivables are determined (in particular, the valuation technique(s) and inputs used).

				Fair value
Name	Fair value	as at 31 December		hierarchy	Valuation techniques and key input(s)
	2018	2019	2020
	RMB’000	RMB’000	RMB’000
Bill	133,736	72,188	70,550	Level 2	Based on discounted cash flow that
receivables					capture the present value of future
at FVTOCI					expected cash flows derived from the
					underlying assets

There were no transfers between level 1 and 3 and no transfers into or out of Level 2 during the year.

31. Event after the reporting period

There are no other material subsequent events undertaken by the Target Company after 31 December 2020.

32. Subsequent financial statements

No audited financial statements have been prepared by the Target Company in respect of any period subsequent to 31 December 2020 and up to the date of this report.

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UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

APPENDIX III

The following is the text of a report, prepared for the purpose of inclusion in this circular, received from the Company’s independent reporting accountants, Moore Stephens CPA Limited, Certified Public Accountants, Hong Kong.

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

1. Introduction

The following is the unaudited pro forma consolidated statement of assets and liabilities of the Enlarged Group (the ‘‘Unaudited Pro Forma Financial Information’’) which has been prepared in accordance with Paragraph 4.29 of the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited for the purpose of illustrating the effect of the proposed acquisition of 40% of the issued share capital of Zhejiang Tianjie Magnetic Materials Co., Ltd (the ‘‘Target Company’’) (the ‘‘Acquisition’’) by Zhejiang Tengy Environmental Technology Co., Ltd (the ‘‘Company’’) on the assets and liabilities of the Company and its subsidiaries (the ‘‘Group’’) as if the proposed Acquisition had been completed on 31 December 2020.

The Unaudited Pro Forma Financial Information is prepared based on (i) the audited consolidated statement of financial position of the Group as at 31 December 2020 which has been extracted from the published annual report of the Company for the year ended 31 December 2020 dated 28 April 2021; and (ii) the audited consolidated statement of financial position of the Target Company as at 31 December 2020 as extracted from the accountant’s report as set out in the Appendix II to this Circular, after making pro forma adjustments relating to the Acquisition that are (i) directly attributable; and (ii) factually supportable as if the Acquisition had been undertaken as at 31 December 2020.

The Unaudited Pro Forma Financial Information has been prepared by the directors of the Company (the ‘‘Directors’’) based on a number of assumptions, estimates and uncertainties for illustrative purposes only and because of its nature, it may not give a true picture of the assets and liabilities of the Enlarged Group. Accordingly, the Unaudited Pro Forma Financial Information does not purport to describe the assets and liabilities of the Enlarged Group that would have been attained had the Acquisition been completed as at 31 December 2020, nor purport to predict the future financial position of the Enlarged Group.

The Unaudited Pro Forma Financial Information of the Enlarged Group should be read in conjunction with the historical financial information of the Group as set out in the published annual report of the Company for the year ended 31 December 2020 and other financial information included elsewhere in this Circular.

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UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

APPENDIX III

1. Unaudited pro forma consolidated statement of assets and liabilities of the Enlarged Group as at 31 December 2020

Non-current assets Property, plant and equipment Right-of-use assets Intangible assets Deferred tax assets Investments in associates Pledged deposits Total non-current assets Current assets Inventories Trade and bills receivables Contract assets and contract costs Prepayments, deposits and other receivables Investments at fair value through profit or loss Pledged deposits Bank and cash balances Total current assets Current liabilities Trade and bills payables Contract liabilities Other payables and accruals Bank loans Tax payable Total current liabilities Net assets	Consolidated statement of assets and liabilities of the Group as at 31 December 2020 RMB’000 Note 1 72,320 41,039 1,046 56,045 75,499 6,615 252,564 226,636 791,571 72,889 29,616 13,464 9,283 104,548 1,248,007 265,819 247,049 95,358 122,809 9,532 740,567 760,004	Pro forma adjustments RMB’000 RMB’000 Note 2 Note 3 – – – – – – – – 68,000 1,300 – – 68,000 1,300 – – – – – – – – – – – – (10,000) – (10,000) – – – – – 58,000 1,300 – – – – 58,000 1,300 – –	Unaudited pro forma consolidated statement of assets and liabilities of the Group as at 31 December 2020 RMB’000 72,320 41,039 1,046 56,045 144,799 6,615
			321,864
			226,636 791,571 72,889 29,616 13,464 9,283 94,548
			1,238,007
			265,819 247,049 154,658 122,809 9,532
			799,867
			760,004

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UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

APPENDIX III

Notes:

1. The consolidated assets and liabilities of the Group as at 31 December 2020 are extracted from the Group’s audited consolidated statement of financial position as at 31 December 2020 as set out in the annual report of the Company for the year ended 31 December 2020 which was published on 28 April 2021.

2. The adjustments represent considerations paid by the Company with respect to the Acquisition. Pursuant to the Sale and Purchase Agreement (as defined in this Circular), 天潔集團有限公司 (transliteration purpose only, Tengy Group Limited), the Vendor (as defined in this Circular), being a controlling shareholder of the Company of which 47.84% equity interest is held by the Vendor, has conditionally agreed to sell the 40% equity interest of the Target Company to the Company. The total considerations of RMB68,000,000 for the Acquisition, as set out in the Sale and Purchase Agreement, will be satisfied by:

3. (i) RMB10,000,000 had already been paid by the Company in cash to the Vendor (as defined in this Circular) on 25 March 2021 as a refundable deposit for the Acquisition;

4. (ii) RMB20,000,000 shall be payable by the Company in cash to the Vendor (as defined in this Circular) within five Business Day (as defined in this Circular) after the Completion Date (as defined in this Circular); and

5. (iii) The remaining balance of RMB38,000,000 shall be payable by the Company in cash to the Vendor within one year after the Completion date.

Upon completion of the Acquisition, the Target Company will become an associate of the Group and be accounted for in the consolidated financial statements of the Group under the equity method of accounting in accordance with Hong Kong Accounting Standard (‘‘HKAS’’) 28 (2011) ‘‘Investments in Associates and Joint Ventures’’ issued by the Hong Kong Institute of Certified Public Accountants (‘‘HKICPA’’). Under the equity method, an investment in an associate is initially recognised at cost.

For the purpose of the preparation of the Unaudited Pro Forma Financial Information, the Directors have performed impairment assessment of investment in the Target Company in accordance with the Hong Kong Accounting Standard 36 ‘‘Impairment of Assets’’ (‘‘HKAS 36’’), which defines recoverable amount to be the higher of value in use and fair value less costs of disposal. Based on the valuation report set out in Appendix V to this Circular, the fair value of the 40% equity interest of the Target Company is estimated to be approximately RMB73,800,000 which is not less than its cost of investment. Based on this assessment, the Directors concluded that impairment of investment in the Target Company is not required to be made in the preparation of the Unaudited Pro Forma Financial Information.

The Directors confirmed that they will assess impairment of the investment in the Target Company in subsequent reporting periods in accordance with the requirements of HKAS 36 and will disclose in the Group’s annual report the basis and assumptions adopted for the impairment assessment in accordance with HKAS 36. Any changes to valuation methodology may lead to different conclusion of impairment assessment.

1. The adjustment represents the estimated transaction costs of approximately RMB1,300,000, including but not limited to legal and professional fees and other expense payable by the Group, directly attributable to the Acquisition.

2. No other adjustments have been made to the Unaudited Pro Forma Financial Information to reflect any trading results or other transaction of the Group and the Target Company entered subsequent to 31 December 2020.

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UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

APPENDIX III

(B) INDEPENDENT REPORTING ACCOUNTANT’S ASSURANCE REPORT ON THE COMPILATION OF PRO FORMA FINANCIAL INFORMATION

The following is the text of a report received from the reporting accountant, Moore Stephens CPA Limited, Certified Public Accountants, Hong Kong, in respect of the Group’s unaudited pro forma financial information for the purpose in this circular.

==> picture [111 x 77] intentionally omitted <==

INDEPENDENT REPORTING ACCOUNTANT’S ASSURANCE REPORT ON THE COMPILATION OF PRO FORMA FINANCIAL INFORMATION

TO THE DIRECTORS OF ZHEJIANG TENGY ENVIRONMENTAL TECHNOLOGY CO., LTD

We have completed our assurance engagement to report on the compilation of pro forma financial information of Zhejiang Tengy Environment Technology Co., Ltd. (the ‘‘Company’’) and its subsidiaries (collectively the ‘‘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 assets and liabilities as at 31 December 2020 and related notes as set out in Part A of Appendix III to the circular dated 29 June 2021 (the ‘‘Circular’’) issued by the Company. The applicable criteria on the basis of which the Directors have compiled the unaudited pro forma financial information are described in Part A of Appendix III to the Circular.

The unaudited pro forma financial information has been compiled by the Directors to illustrate the impact of the Group’s proposed acquisition of 40% of the entire issued share capital of Zhejiang Tianjie Magnetic Materials Co., Ltd. (the ‘‘Acquisition’’) on the Group’s financial position as at 31 December 2020 as if the Acquisition had taken place at 31 December 2020. As part of this process, information about the Group’s financial position as at 31 December 2020 has been extracted by the Directors from the Group’s audited consolidated statement of financial position as at 31 December 2020 as set out in the annual report of the Company for the year ended 31 December 2020 which was published on 28 April 2021.

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UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

APPENDIX III

Directors’ Responsibilities for the Unaudited Pro Forma Financial Information

The Directors are responsible for compiling the pro forma financial information in accordance with paragraph 4.29 of the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited (the ‘‘Listing Rules’’) and with reference to Accounting Guideline 7 ‘‘Preparation of Pro Forma Financial Information for Inclusion in Investment Circulars’’ (‘‘AG 7’’) issued by the Hong Kong Institute of Certified Public Accountants (‘‘HKICPA’’).

Our Independence and Quality Control

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

The 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’’ issued by the HKICPA 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 Accountant’s 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 (‘‘HKSAE’’) 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 accountant plans and performs 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.

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UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

APPENDIX III

For purpose of this engagement, we are not responsible for updating or reissuing any reports or opinions on any historical financial information used in compiling the pro forma financial information, nor have we, in the course of this engagement, performed an audit or review of the financial information used in compiling the unaudited pro forma financial information.

The purpose of unaudited pro forma financial information included in an investment circular is solely to illustrate the impact of a significant event or transaction on the unadjusted financial information of the Group as if the event had occurred or the transaction 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 events or transactions at 31 December 2020 would have been as presented.

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 forma financial information provide a reasonable basis for presenting the significant effects directly attributable to the event or transaction, 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 accountant’s judgement, having regard to the reporting accountant’s understanding of the nature of the Group, the event or transaction in respect of which the pro forma financial information has been compiled, and other relevant engagement circumstances.

The engagement also involves evaluating the overall presentation of the unaudited pro forma financial information.

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

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UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP

APPENDIX III

Opinion

In our opinion:

• a) the unaudited pro forma financial information has been properly compiled on the basis stated;

• b) such basis is consistent with the accounting policies of the Group; and

• c) the adjustments are appropriate for the purposes of the unaudited pro forma financial information as disclosed pursuant to paragraph 4.29(1) of the Listing Rules.

Moore Stephens CPA Limited

Certified Public Accountants

Ng Ngai Yan

Practising Certificate Number: P07422

Hong Kong, 29 June 2021

III – 7

MANAGEMENT DISCUSSION AND ANALYSIS ON THE TARGET COMPANY

APPENDIX IV

This discussion of the financial position and results of operations of the Target Company is based upon and should be read in conjunction with the Accountants’ Report on the Target Company set out in Appendix II to this circular.

Unless stated otherwise, terms used herein shall have the same meanings as those defined in the circular.

BUSINESS REVIEW

The Target Company is a company established in the PRC in August 2007 and is principally engaged in the processing and sale of magnetic materials and cold-rolled silicon steel plates, and the calendaring processing of steel and non-ferrous metals. The Target Company possesses two cold-rolled non-oriented electrical steel production lines, which comprise an advanced continuous decarburization annealing coating unit, with an annual production capacity of 200,000 tons. The Target Company uses the Lianyuan Steel’s cold-rolled silicon steel plates as raw materials, and achieves deep product processing through welding, degreasing, annealing, coating and other procedures. It is the first electrical steel production line built and developed by domestic private capital in the PRC.

The production of the Target Company has the characteristics of stable quality, a short production cycle, low energy consumption and a high level of automation control, and has achieved an advanced domestic level in the PRC. It has obtained the ISO9001 quality system certification and passed the Zhejiang provincial clean production inspection. The products as processed by the Target Company are mainly supplied to the end users directly, and are applied in high-efficiency and energy-saving motors, electrical vehicle motors, electrical tools, submersible pump motors, vacuum cleaner motors, and motors of home appliances such as air-conditioners and refrigerators. The Target Company has been constructing a new production plant for highgrade silicon steel, which is one of the essential raw materials for facilitating the generational upgrade of electrical products, enabling the Target Company to expand the variety of its product specification and meet the growing demand of the domestic market.

The following sets forth the management discussion and analysis of the Target Company for the years ended 31 December 2018, 2019 and 2020 respectively (collectively, the ‘‘Relevant Periods’’).

IV – 1

MANAGEMENT DISCUSSION AND ANALYSIS ON THE TARGET COMPANY

APPENDIX IV

The following sets forth the management discussion and analysis of the Target Company for the years ended 31 December 2018, 2019 and 2020 (collectively, the ‘‘Track Record Period’’).

FINANCIAL REVIEW

Revenue

The Target Company recorded revenue of approximately RMB762.3 million, RMB705.2 million and RMB764.8 million for the Track Record Period, respectively. The revenue of the Target Company is mainly derived from processing and sales of magnetic materials and coldrolled non-oriented silicon steel plates (‘‘Silicon steel plates’’).

The total revenue decreased from approximately RMB762.3 million to approximately RMB705.2 million from the year ended 31 December 2018 to the year ended 31 December 2019, respectively, while the total revenue for the year ended 31 December 2020 was increased to approximately RMB764.8 million. The fluctuation of the revenue was mainly due to the market price of the Silicon steel plates has decreased significantly for the year ended 31 December 2019 throughout the year, which was not controllable by the Target Company. Hence, the Target Company has simultaneously adjusted the average selling price of Silicon steel plates to the customers from approximately RMB4,600 per ton during the year ended 31 December 2018 to RMB4,300 per ton during the year ended 31 December 2019 and eventually rebounded to RMB4,400 per ton during the year ended 31 December 2020.

Cost of sales

The cost of sales mainly represents the deprecation charges on property, plant and equipment of approximately RMB8.8 million, RMB9.5 million and RMB9.7 million during the Track Record Period, respectively, and the cost of electricity of approximately RMB15.3 million, RMB17.5 million and RMB16.7 million during the Track Record Period, respectively, which were keeping at a stable level.

The costs of sales for the Track Record Period were approximately RMB741.8 million, RMB693.2 million and RMB740.1 million, respectively. Apart from the depreciation charges on property, plant and equipment and cost of electricity, the decrease in cost of sales from approximately RMB717.7 million for the year ended 31 December 2018 to approximately RMB666.2 million for the year ended 31 December 2019, while the cost of sales for the year ended 31 December 2020 was increased to approximately RMB713.7 million for the year ended 31 December 2020. The fluctuation of the cost of sales was mainly due to the procurement quantities of major raw material of silicon steel plates have decreased from approximately 170 thousand tones for the year ended 31 December 2018 to approximately 160 thousand tons for the year ended 31 December 2019 and increase to approximately 180 thousand tons for the year ended 31 December 2020, while the purchase price of the major raw material of Silicon steel plates remains steady during the Track Record Period.

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MANAGEMENT DISCUSSION AND ANALYSIS ON THE TARGET COMPANY

APPENDIX IV

Other income

Other income mainly refers to the sales of scrap materials. The Target Company recorded such other income of approximately RMB2.6 million, RMB1.7 million and RMB2.7 million during the Track Record Period, respectively.

Administrative and other operating expenses

Administrative and other operating expenses were mainly corporate social insurance, salaries and entertainment expenses. The Target Company recorded administrative and other operating expenses of approximately RMB7.3 million, RMB7.4 million and RMB6.4 million during the Track Record Period, respectively. The decrease in administrative and other operating expenses for the year ended 31 December 2019 to the year ended 31 December 2020 was mainly due to the local PRC government has announced the notice on the phased reduction and exemption of certain corporate social insurance of the Target Company, resulting from the outbreak of COVID19 pandemic that the Target Company is not required to pay certain corporate social insurance during the year ended 31 December 2020.

Selling and distribution expenses

The selling and distribution expenses mainly represents the out-bound transportation expense of approximately RMB3.1 million, RMB2.5 million and RMB2.2 million during the Track Record Period, respectively, and salaries of approximately RMB0.6 million, RMB0.6 million and RMB0.6 million during the Track Record Period, respectively.

The salaries remain steady during the Track Record Period, while the out-bound transportation expense has decreased from RMB3.1 million for the year ended 31 December 2018 to RMB2.5 million for the year ended 31 December 2019 and 2.2 million for the year ended 31 December 2020. It is mainly due to the management of the Target Company would like to be effectively lower the selling and distribution expenses of the Target Company, by considering the out-bound transportation expense to be borne by those new customers of the Target Company, whereas existing customers are still remain changed to the abovementioned arrangement. Hence, large portion of the new customers require to arrange the transportation services by themselves for delivering out the Silicon steel plates.

Finance costs

Finance costs represented interest expense on bank loans. The finance costs were keeping at a stable level of approximately RMB1.6 million, RMB1.6 million and RMB1.5 million during the Track Record Period, respectively.

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MANAGEMENT DISCUSSION AND ANALYSIS ON THE TARGET COMPANY

APPENDIX IV

Income tax expenses

No significant income tax expenses were recorded by the Target Company during the Track Record Period, resulted from the utilisation of tax losses brought forward from previous years. During the years ended 31 December 2019 and 2020, the Target Company has recorded income tax expenses amounting to approximately RMB0.02 million and RMB0.02 million, respectively. The income tax expenses were attributable to the deferred tax assets charge to profit or loss for both years.

Profit for the year

The Target Company recorded profit for the year of approximately RMB11.1 million, RMB2.2 million and RMB17.7 million during the Track Record Period, respectively.

The decrease in profit for the year by approximately RMB8.9 million from approximately RMB11.1 million for the year ended 31 December 2018 to approximately RMB2.2 million for the year ended 31 December 2019 was primarily due to the decrease in gross profit of approximately RMB12.0 million for the year ended 31 December 2019 and the increase in profit for the year by approximately RMB15.5 million from approximately RMB2.2 million for the year ended 31 December 2019 to approximately RMB17.7 million for the year ended 31 December 2020 was primarily due to the increase in gross profit of approximately RMB12.7 million for the year ended 31 December 2020 as well. Such fluctuation was mainly due to mainly due to the market price of the Silicon steel plates has been decreased significantly for the year ended 31 December 2019 throughout the year, which was not controllable by the Target Company. Hence, the Target Company has simultaneously adjusted the average selling price of Silicon steel plates from approximately RMB4,600 per ton during the year ended 31 December 2018 to RMB4,300 per ton during the year ended 31 December 2019 and eventually rebounded to RMB4,400 per ton during the year ended 31 December 2020.

Capital structure, liquidity and financial resources

During the Track Record Period, the Target Company mainly financed its operation by i) cash flow from operation during the Track Record Period and ii) bank loans and iii) amounts due to shareholders. As at 31 December 2018, 2019 and 2020, the bank balances and cash were approximately RMB16.1 million, RMB19.7 million, RMB41.5 million respectively, while the bank loans were approximately RMB26 million throughout three years and the amounts due to shareholders were nil, approximately RMB13.2 million and RMB13.2 million respectively.

The amounts due to shareholders were non-trade in nature, unsecured, interest-free and repayable on demand.

During the Track Record Period, the Target Company did not have any formal hedging policies and no financial instrument was used for hedging purpose.

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APPENDIX IV

As at 31 December 2018, 2019 and 2020, the Target Company’s gearing ratio, which was defined as total interest-bearing borrowings of bank loans and bill payables over total equity, were approximately 30%, 113% and 67%, respectively.

Borrowings

As at 31 December 2018, 2019 and 2020, the Target Company had interest-bearing borrowings of RMB26 million, RMB26 million, and RMB26 million, respectively, which were denominated in RMB and carried interest at floating rates and repayable within 1 year. There were no committed borrowing facilities of the Target Company and no seasonality in the Target Company’s bank borrowing requirements.

Cash and cash equivalents

As at 31 December 2018 2019 and 2020, the Target Company’s cash and cash equivalents were RMB16.1 million, RMB19.7 million and 41.5 million, which were denominated in RMB.

Funding and Treasury Policy

The capital expenditures and working capital of the Target Company are mainly funded by cash generated from its business operations, bank loans and other external borrowings. The management of the Target Company closely monitors its cash flow and debt positions in order to minimise financial risks and to ensure financial flexibility and adequate liquidity for the Target Company’s business operations and development plans. Cash balances are mostly maintained in the form of cash deposits with banks.

Pledge of assets

As at 31 December 2018, 2019 and 2020, the Target Company has pledged its property, right-of-use assets, bills receivables and pledged bank deposits for the bank loans and bill payables.

Contingent liabilities

As at 31 December 2018, 2019 and 2020, the Target Company did not have significant contingent liabilities.

Capital commitment

As at 31 December 2018, 2019 and 2020, the Target Company did not have significant capital commitment.

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MANAGEMENT DISCUSSION AND ANALYSIS ON THE TARGET COMPANY

APPENDIX IV

Foreign exchange exposure

During the Track Record Period, the Target Company was not exposed to any material foreign currency risk at most of its business transaction, assets and liabilities were denominated in RMB and the Target Company did not enter into any foreign exchange contract as hedging measures.

Employees and remuneration policies

During the Track Record Period, the Target Company employed average 115, 109, and 99 employees, respectively. Staff recruitment and promotion of the Target Company are primarily determined based on the employee’s experience, qualification and performance. The remuneration and staff benefit policies are fixed and are determined with reference to the competitive market salary levels. During the Track Record Period, the employee benefits expenses of the Target Company were approximately RMB11.0 million, RMB10.4 million and RMB11.2 million, respectively.

Material acquisitions and disposals of assets

The Target Company had no material acquisitions and disposals of assets during the Track Record Period.

Future Plans for Material Investments

In March 2021, the Target Company commenced the construction of a new production plant in Hunan for high-grade silicon steel, which is one of the essential raw materials for facilitating the generational upgrade of electrical products, enabling the Target Company to expand the variety of its product specification and meet the growing demand of the domestic market. The construction is expected to complete by the end of 2021 and the total investment amount is estimated to be approximately RMB100 million. The Target Company has invested approximately RMB42 million in the project, as funded by its internal resources. The Target Company plans to fund the remaining investment in the amount of approximately RMB58 million partly with its internal resources and partly with bank loans and other external borrowings.

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VALUATION REPORT ON THE TARGET COMPANY

APPENDIX V

The following is the text of a report dated 29 June 2021 prepared for the purpose of incorporation into this circular received from Masterpiece Valuation Advisory Limited in connection with its opinion on the market value of 40% equity interest in the Target Company as at 31 December 2020.

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The Board of Directors

Zhejiang Tengy Environmental Technology Co., Ltd

TENGY Industrial Park, Paitou Town, Zhuji City, Zhejiang Province, The PRC

Dear Sirs/Madams,

Re: Valuation of 40% Equity Interest of 浙江天潔磁性材料股份有限公司

In accordance with your instruction, Masterpiece Valuation Advisory Limited (‘‘Masterpiece’’ or ‘‘we’’) has conducted a fair value valuation in connection with the 40% equity interest of 浙江天潔磁性材料股份有限公司 (‘‘天磁’’ or the ‘‘Target Company’’) as of 31 December 2020 (the ‘‘Valuation Date’’). We understand that Zhejiang Tengy Environmental Technology Co., Ltd (the ‘‘Company’’, ‘‘Tengy’’ or ‘‘you’’) intends to acquire 40% shareholding of the Target Company (the ‘‘Proposed Acquisition’’).

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

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

This Report presents the summary of the business appraised, describes the basis of analysis and assumptions and explains the analysis methodology adopted in this appraisal process to calculate the value.

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APPENDIX V

BASIS OF ANALYSIS

We have appraised the fair value of 40% equity interest of the Target Company.

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

COMPANY BACKGROUND

The Target Company is principally engaged in production and processing of steel products in the People’s Republic of China (the ‘‘PRC’’).

We understand that the Company intends to acquire certain equity interest of the Target Company. As such, the Company would like to assess the fair value of the 40% equity interest of the Target Company as of the Valuation Date.

SCOPE OF WORK

In conducting this valuation exercise, we have

• Co-ordinated with the Company’s representatives to obtain the required information and documents for our valuation;

• Gathered the relevant information of the Target Company, including the legal documents, financial statements, etc. made available to us;

• Discussed with the Company and the Target Company to understand the history, business model, operations, business development plan, etc. of the Target Company for valuation purpose;

• Carried out researches in the sector concerned and collected relevant market data from reliable sources for analysis;

• Studied the information of the Target Company made available to us and considered the bases and assumptions of our conclusion of value;

• Selected an appropriate valuation method to analyze the market data and derived the estimated fair value of the Target Company; and

• Compiled this Report on the valuation, which outlines our findings, valuation methodologies and assumptions, and conclusion of value.

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APPENDIX V

When performing our valuation, all relevant information, documents, and other pertinent data concerning the assets, liabilities and contingent liabilities should have been provided to us. We relied on such data, records and documents in arriving at our opinion of values and had no reason to doubt the truth and accuracy of the information provided to us by the Company, the Target Company and their authorized representatives.

INDUSTRY OVERVIEW

PRC Economy

The PRC’s economy has grown significantly in the last decade. Nominal GDP in the PRC increased to RMB101,599 billion in 2020, with an average year-on-year real growth rate of approximately 5.7% from 2015 to 2020. Despite the impact of COVID-19, PRC’s economy quickly rebounded from the lockdown in February 2019, and most of the economic activities resumed full productivity by the third quarter of 2020. Since then, the economic activity has not been affected by the pandemic, unlike the rest of the world. According to International Monetary Fund’s forecast, PRC’s GDP is expected to grow at a CAGR of approximately 6.0% from 2020 to 2025 (source: https://www.imf.org/en/Publications/WEO/weo-database/2021/April).

With rapid globalisation and PRC’s rapid economic growth, PRC’s imports and exports are expected to grow at a CAGR of 5.8% and 7.9% respectively from 2016 to 2020, making PRC the world’s largest exporter and second largest importer in 2019. According to the Economist Intelligence Unit, PRC’s imports and exports are expected to grow at a CAGR of 6.9% and 5.8% respectively between 2020 and 2025 as the country faces a new international trade environment (source: https://www.researchandmarkets.com/reports/2123784/country_forecast_china_updater#src-pos-30). For population, PRC’s total population increases from approximately 1,371 million in 2016 to approximately 1,395 million in 2020, with a CAGR of 0.4% between 2016 and 2020, and PRC’s total population is expected to reach 1,406 million, with a compound annual growth rate of approximately 0.2% between 2020 and 2025.

PRC’s steel industry

PRC’s steel industry is growing in scale and has a high degree of regional concentration of production. The steel industry was one of the fastest growing industries in the world’s industrialisation process. Over the past 100 years, the steel industry has developed at a rapid pace, with unprecedented improvements in output value, product structure and industrial technology. In the 21st century, steel is still an irreplaceable raw material and an important indicator of a country’s comprehensive national strength and industrial level.

According to National Bureau of Statistics of China, steel production rose gradually from 2013 to 2016, declined in 2017 due to the national policy of ‘‘reducing-excess-capacity’’, and rose again gradually from 2018, reaching 1.20 billion tonnes in 2019, up 9.0% year-on-year. Steel production in 2020 was 1.32 billion tonnes, an increase of 9.5% year-on-year (source: https:// data.stats.gov.cn/search.htm?s=%E9%92%A2%E9%93%81).

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APPENDIX V

PRC’s steel production volume and growth rate

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

Volume (in million) Growth %
1,400 1,320 15
1,205
1,200 1,125 1,123 1,106
1,068 1,040 1,048 10
1,000
5
800
600
0
400
-5
200
0 -10
2013 2014 2015 2016 2017 2018 2019 2020
----- End of picture text -----

Source: National Bureau of Statistics

LIMITATIONS OF THE REPORT

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

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

We have assumed and relied upon, and have not independently verified the accuracy, completeness and adequacy of the information provided or otherwise made available to us or relied upon by us in the Report especially for the financial information of the Target Company as of 31 December 2018, 31 December 2019 and 31 December 2020 provided by the management of the Company, whether written or verbal, and no representation or warrant, expressed or implied, is made and no responsibility is accepted by us concerning the accuracy, completeness or adequacy of all such information.

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APPENDIX V

Moreover, our valuation has also relied upon other information obtained from public sources which we believe to be reliable. We accept no responsibility for accuracy and reliability of any information obtained from public sources.

The outbreak of COVID-19, as declared by the World Health Organization as a global pandemic on 11 March 2020, has been adversely affecting the global economy as well as the financial markets. As such, the subsequent impact due to COVID-19 has imposed an unprecedented set of circumstances on which to base a valuation judgement as of the Valuation Date. In particular, the increased volatilities in political, legal, fiscal, economic conditions and/or other market situations as a result of COVID-19 would bring higher uncertainties to the underlying assumptions. Consequently, higher degree of caution should be attached to our valuation than would normally be the case.

VALUATION ASSUMPTIONS OF BUSINESS ENTERPRISE VALUE ANALYSIS

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

• the economic outlook for the region operated by the Target Company and specific competitive environments affecting the industry;

• the business risks of the Target Company;

• the comparable companies are engaging in business operations similar to the Target Company;

• the experience of the management team of the Target Company and support from its shareholders; and

• the legal and regulatory issues of the industry in general.

A number of general assumptions have to be made in arriving at our value conclusion. The key assumptions adopted in this valuation include:

• There will be no material change in the existing political, legal, technological, fiscal or economic conditions, which might adversely affect the business of the Target Company; and

• We have assumed that there are no hidden or unexpected conditions associated with the assets valued that might adversely affect the reported values. Further, we assume no responsibility for changes in market conditions after the Valuation Date.

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APPENDIX V

VALUATION APPROACH

General Valuation Approaches

There are three generally accepted approaches to appraise the fair value of the equity value of the Target Company, namely Income Approach, Cost Approach and Market Approach. All three of them have been considered regarding the valuation of the Target Company:

Income Approach The income approach provides an indication of value based on the principle that an informed buyer would pay no more than the present value of anticipated future economic benefits generated by the subject asset.

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

Cost Approach

The cost approach considers the cost to reproduce or replace in new condition the assets appraised in accordance with current market prices for similar assets, with allowance for accrued depreciation arising from condition, utility, age, wear and tear, or obsolescence (physical, functional or economical) present, taking into consideration past and present maintenance policy and rebuilding history.

Market Approach

The market approach provides an indication of value by comparing the subject asset to similar assets that have been sold in the market, with appropriate adjustments for the differences between the subject asset and the assets that are considered to be comparable to the subject asset.

Under the market approach, the comparable company method computes a price multiple for publicly listed companies that are considered to be comparable to the subject asset and then applies the result to a base of the subject asset. The comparable transaction method computes a price multiple using recent sales and purchase transactions of assets that are considered to be comparable to the subject asset and then applies the result to a base of the subject asset.

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APPENDIX V

Selected Valuation Approach

Each of the abovementioned approaches is appropriate in one or more circumstances, and sometimes, two or more approaches may be used together. Whether to adopt a particular approach will be determined by the most commonly adopted practice in valuing business entities that are similar in nature. In this appraisal regarding the fair value of the equity value of the Target Company, we applied the Market Approach due to the following reasons:

• Cost Approach is not appropriate in current appraisal as it assumed the assets and liabilities of the Target Company are separable and can be sold separately. This methodology is more appropriate for the industry that their assets are highly liquid, like property development and financial institution. Thus, Cost Approach is not adopted in this valuation.

• Income Approach is also considered inappropriate as plenty of assumptions were involved in formulating the financial projection of the Target Company, and the assumptions might not be able to reflect the uncertainties in the future performance of the Target Company. While the COVID-19 outbreak has significant impact on the global economy in general and there is no widely accepted consensus on potential influence in the future available, the management considers that they cannot provide a precise and concrete financial projection on the business due to the evolving uncertainties of market environment. Given that improper assumptions will impose significant impact on the fair value, Income Approach is not adopted in this valuation.

• Fair value arrived from Market Approach reflects the market expectations over the corresponding industry as the price multiples of the comparable companies were arrived from market consensus. Since there are sufficient public companies in similar nature and business to that of the Target Company, their market values are good indicators of the industry. Therefore, Market Approach has been adopted in this valuation. Our valuation procedure under the guideline company method is illustrated as below.

Guideline Company Method

By adopting guideline company method, we have to select the appropriate comparable public companies. The selection of the comparable companies was based on the comparability of the overall industry sector. Although no two companies are ever exactly alike, behind the differences there are certain business universals such as required capital investment and overall perceived risks and uncertainties that guided the market in reaching the expected returns for companies with certain similar attributes.

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APPENDIX V

The comparable public companies are selected with reference to the following selection criteria:

• The primary business of the companies is production, processing, and sale of steel products;

• Over 50% of the revenue is derived from the production, processing, and sale of steel products;

• The principal business activities of the companies are mainly conducted in the PRC;

• The companies are listed in major exchange markets in the United States of America and Hong Kong;

• The companies are profit-making in the trailing 12-months (‘‘LTM’’) as of the Valuation Date; and

• The financial information of the companies is available to the public.

Details of the selected comparable companies are listed as follows:

					Revenue Contribution
			Listing		from Business
#	Company Name	Stock Code	Location	Business Description	Segment(s) (1)
1)	KangLi International	SEHK: 6890	Hong Kong	KangLi, together with its subsidiaries, manufactures and	Hard Steel Coil: 5.0%;
	Holdings Limited			sells galvanized steel products in the PRC, South	Unpainted Galvanised
	(‘‘KangLi’’)			Korea, and internationally. It operates in three	Steel Products:
				segments: hard steel coil, unpainted galvanised steel	60.1%; Painted
				products, and painted galvanised steel products.	Galvanised Steel
				KangLi sells its products to midstream steel product	Products: 34.9%
				processors for further processing; and home
				appliance manufacturers for use in the production of
				home appliances, such as refrigerators, washing
				machines, and ovens.
2)	Angang Steel Company	SEHK: 347	Hong Kong	Angang engages in the production, processing, and sale	Production and Sales of
	Limited			of steel products in the PRC. Its principal products	Steel Products:
	(‘‘Angang’’)			include hot rolled sheets, medium and thick plates,	100.0%
				cold rolled sheets, galvanized steel sheets, color
				coating plates, cold rolled silicon steel, heavy rails
				and sections, seamless steel pipes and wire rods,
				and other products. It also engages in ferrous metal
				smelting and steel pressing and processing activities.
				Its products are used in various industries, such as
				machinery, metallurgy, petroleum, chemical industry,
				coal, electricity, railway, shipbuilding, automobile,
				construction, home appliances, and aviation
				industries.

Source: publicly available information and annual reports of the comparable companies

(1) Based on financial data from FY2020 annual report.

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APPENDIX V

VALUATION REPORT ON THE TARGET COMPANY

					Revenue Contribution
			Listing		from Business
#	Company Name	Stock Code	Location	Business Description	Segment(s) (1)
3)	China Oriental Group	SEHK: 581	Hong Kong	China Oriental manufactures and sells iron and steel	Iron and Steel: 99.9%;
	Company Limited			products for downstream steel manufacturers in the	Real Estate: 0.1%
	(‘‘China			PRC. It offers H-section steel products for use in
	Oriental’’)			non-residential construction and infrastructure
				projects as structural supports; strips and strip
				products; cold rolled sheets for use in manufacturing
				home electric appliances, hardware, pipes, etc.;
				galvanized sheets for the production of civil-purpose
				sheets; billets for use as substrate in downstream
				steel products; and rebars for use in residential and
				non-residential projects, as well as provides casting
				products.
4)	Chongqing Iron &	SEHK: 1053	Hong Kong	Chongqing Iron & Steel, together with its subsidiaries,	Steel Manufacturing:
	Steel Company			processes, produces and sells steel plates, wire rods,	100.0%
	Limited			bar materials, and billets and thin plates in the
	(‘‘Chongqing Iron			PRC. It is also involved in the production and sale
	& Steel’’)			of coal chemical products, pig iron and grain slag,
				etc. Its products have applications in various
				industries, such as machinery, architecture,
				engineering, automobile, motorbike, shipbuilding,
				offshore oil, gas cylinder, boiler, and oil and gas
				pipelines.
5)	Da Ming International	SEHK: 1090	Hong Kong	Da Ming processes, distributes, and sells stainless steel	Manufacturing: 4.1%;
	Holdings Limited			and carbon steel products in the PRC and	Processing: 95.9%
	(‘‘Da Ming’’)			internationally. It offers high strength steel, wear-
				resistant steel, regular stainless steel, duel phase
				steel, heat-resistant steel, nickel based alloy, super
				austenitic-steel, and 6mo steel products. It is also
				involved in the purchase and sale of metal
				materials; and distribution and sale of fixed assets.
				It serves machineries, distributors, petrochemical,
				home hardware and appliances, automobile and
				transport, construction, renewable energy, and other
				industries.

Source: publicly available information and annual reports of the comparable companies

(1) Based on financial data from FY2020 annual report.

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VALUATION REPORT ON THE TARGET COMPANY

					Revenue Contribution
			Listing		from Business
#	Company Name	Stock Code	Location	Business Description	Segment(s) (1)
6)	Maanshan Iron & Steel	SEHK: 323	Hong Kong	Maanshan manufactures and sells iron and steel	Production & Sale of
	Company Limited			products, and related by-products in the PRC and	Iron & Steel
	(‘‘Maanshan’’)			internationally. It offers hot-rolled and cold rolled,	Products & Related
				and galvanized and color coated strips; ship plates,	By-Products: 100.0%
				container use strips, electric steel, pipe steel, etc.;
				H-beam, angle, and channel sections; cold-heading
				wire rods; and train wheels for wagon cars. It also
				provides railway wheel and tire, bearing, spring,
				gear, tool and die, ring, high grade cold heading,
				non-quenched and tempered, anchor chain, roller,
				and alloy structural steel, as well as alloy tube
				billet, steel for heavy castings and forgings, and
				other series.
7)	Mayer Holdings	SEHK: 1116	Hong Kong	Mayer engages in the processing, manufacture, and sale	Sales of Steel Pipes,
	Limited (‘‘Mayer’’)			of steel pipes, steel sheets, and other products made	Steel Sheets and
				of steel in the PRC. It provides its products under	Other Steel Products:
				the MAYER brand. It also offers urban renewal	92.3%; Urban
				project planning and consulting, business and	Renewal Projects
				economic consulting, and real estate development	Planning and
				services. It also exports its products.	Consulting: 7.7%

Source: publicly available information and annual reports of the comparable companies

(1) Based on financial data from FY2020 annual report.

The comparable companies are identified from public market based on the aforesaid criteria. As over 50% of revenue of the above comparable companies are generated from production, processing, and sale of steel products, these comparable companies, together with the Target Company, are similarly subject to fluctuations in the economy and performance of the steel industry, among other factors. We consider that the Target Group and the comparable companies share similar business characteristics with similar risks and returns. Therefore, the comparable companies are regarded as exhaustive and representative in deriving pricing multiples samples in terms of their business natures.

After selecting the abovementioned comparable companies, we have to determine the appropriate valuation multiples for the valuation of the Target Company. In order to reflect the latest financial performance of the Target Company, it is considered that the suitable multiple in this valuation is the trailing price-to-earnings ratio (the ‘‘Trailing P/E Ratio’’), which is defined as the current market price to trailing 12-month net profit attributable to owners of the Target Company up to the Valuation Date.

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VALUATION REPORT ON THE TARGET COMPANY

We have also considered other common pricing multiples, such as price-to-book ratio and price-to-sales ratio. The price-to-book ratio is considered not appropriate for this valuation because book value captures only the tangible assets of a company. A company’s intangible assets as well as company-specific competencies and advantages are not captured in the price-to-book ratio. The price-to-sale ratio is not selected in this valuation because it ignores the cost structure and hence the profitability of a company. Therefore, Trailing P/E Ratio is considered appropriate and adopted in this valuation.

The process of computing the valuation multiple in this Valuation consists of the following two procedures:

• Determination of the market capitalization of each comparable company. The market capitalization is computed by multiplying the share price by the number of outstanding ordinary shares as of the Valuation Date.

• Determination of the Trailing Twelve Months (‘‘LTM’’) historical net income of each comparable company as at the Valuation Date. This measurement represents the denominator of the multiple.

The P/E multiples, along with the market capitalization of the following comparable companies as of the Valuation Date, are listed in the below table:

		Market
		Capitalization
		as of
		31 December	LTM Net	Trailing P/E	Trailing P/E
No	Company Name	2020	Income	before LoMD	after LoMD
		(RMB Million)(1)	(RMB Million)(2)
1	KangLi International Holdings Limited	403	23	17.5	13.9
2	Angang Steel Company Limited	27,898	1,390	20.1	15.9
3	China Oriental Group Company Limited	6,457	2,319	2.8	2.2
4	Chongqing Iron & Steel Company	12,714	576	22.1	17.5
	Limited
5	Da Ming International Holdings Limited	2,453	187	13.1	10.4
6	Maanshan Iron & Steel Company Limited	13,876	1,221	11.4	9.0
7	Mayer Holdings Limited	391	2	172.9	137.3
	Median(3)				13.9
	Maximum				137.3
	Minimum				2.2
	Lack of Marketability Discount				20.6%
	(‘‘LOMD’’)(4)

V – 11

VALUATION REPORT ON THE TARGET COMPANY

APPENDIX V

Notes:

• (1) Data sourced from publicly available information. The equity value of the comparable companies is computed based on the market capitalization of the companies as of 31 December 2020.

• (2) Data sourced from publicly available information. Net income of the comparable companies is based on the trailing twelve months financial data of the comparable companies available as of 31 December 2020.

• (3) Median and average share the same role in understanding the central tendency of a sets of numbers. Median, which would not be affected by extreme values, is regarded a better mid-point measure for skewed number distributions. Hence, median is adopted to derive the result, which we consider to be a more reasonable approach to prevent the outliners from distorting the result.

(4) Marketability Discount

Lack of Marketability Discount (‘‘LOMD’’) reflects the fact that there is no ready market for shares in a closely held company. Ownership interests in closely held companies are typically not readily marketable compared to similar interests in publicly listed companies. Therefore, a share of stock in a privately held company is usually worth less than an otherwise comparable share in a publicly listed company.

The P/E multiple adopted in the valuation was calculated from public listed companies, which represents marketable ownership interest. Fair value calculated using such P/E multiple, therefore, represents the marketable interest. Thus, LOMD was adopted to adjust such marketable interest fair value to nonmarketable interest fair value.

The report ‘‘Stout Restricted Stock Study Companion Guide (2020 edition)’’ by Stout Risius Ross, LLC, a reputable research company, suggested a marketability discount is 20.6%. A marketability discount of 20.6% is considered appropriate and suitable for this valuation as we understand that the Target Company is a privately held companies (source:https://www.bvresources.com/docs/default-source/free-downloads/restrictedstock-study-stout-companion-guide.pdf?sfvrsn=b0ebc8b2_4).

The value of non-marketable interest can be calculated from marketable interest using the following formula:

Fair Value of Non-Marketable Interest = Fair Value of Marketable Interest x (1- LOMD)

Valuation Result

Guideline Company Method

LTM Profit before taxation of the Target Company (1) Less: Applicable corporate tax (2) LTM Normalized Net Profit of the Target Company Adjusted Median P/E Multiple (3) Estimated 100% Equity Value of the Target Company Estimated 40% Equity Value of the Target Company (184,620 x 40%) Rounded value	RMB’000 17,755 (4,439)
	13,316 13.9x
	184,620
	73,848 73,800

V – 12

VALUATION REPORT ON THE TARGET COMPANY

APPENDIX V

Notes:

• (1) The financial data for the period 1 January 2020 to 31 December 2020, is based on the audited financial statements for the year ended 31 December 2020 of the Target Company.

• (2) The corporate tax rate of 25% in the PRC was applied so as to derive the normalized net profit of the Target Company.

• (3) Selected P/E Multiple is based on the median P/E multiple computed through Guideline Company Method.

• (4) Figures may not exactly add up due to rounding.

CONCLUSION OF VALUE

Based on our investigation and analysis method employed, it is our opinion that the fair value of the 40% equity interest of the Target Company as of the Valuation Date is RMB73,800,000.

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

We hereby certify that we have neither present nor prospective interests in Zhejiang Tengy Environmental Technology Co., Ltd nor the value reported.

Yours faithfully, For and on behalf of

Masterpiece Valuation Advisory Limited

Oswald W Y Au

MHKIS (GP) AAPI MSc (RE) Registered Professional Surveyor (GP) Managing Director

Analyzed and Reported by:

Benjamin Xu

CFA, FRM

Assistant Manager

Note: Mr. Oswald W Y Au is a member of Hong Kong Institute of Surveyors (General Practice), Associate Member of Australian Property Institute and a Registered Professional Surveyor (General Practice) registered with Surveyors Registration Board. He has over 10 years’ experience in financial valuation and property valuation in Hong Kong, the PRC, the U.S. and Asia Pacific region.

V – 13

VALUATION REPORT ON THE TARGET COMPANY

APPENDIX V

APPENDIX – GENERAL LIMITATIONS AND CONDITIONS

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

• All data, including historical financial data, which we relied upon in reaching opinions and conclusions or set forth in the Report are true and accurate to our best knowledge. Whilst reasonable care has been taken to ensure that the information contained in the Report is accurate, we cannot guarantee its accuracy and we assume no liability for the truth or accuracy of any data, opinions, or estimates furnished by or sourced from any third parties which we have used in connection with the Report.

• We also assume no responsibilities in the accuracy of any legal matters. In particular, we have not carried out any investigation on the title of or any encumbrances or any interest claimed or claimable against the property appraised. Unless otherwise stated in the Report, we have assumed that the owner’s interest is valid, the titles are good and marketable, and there are no encumbrances that cannot be identified through normal processes.

• We have not verified particulars of property, including their areas, sizes, dimensions, and descriptions, which we have used or have referred to in connection with the preparation of this Report, unless otherwise stated in this Report. Any information regarding areas, sizes, dimensions, and descriptions of property mentioned in this Report are for identification purposes only, and no one should use such information in any conveyance or other legal document. Any plans or graphical illustrations presented in this Report are intended only for facilitating the visualization of the property and its surroundings and such plans or graphical illustrations should not be regarded as a survey or a scale for size.

• The value opinion presented in this Report is based on the prevailing or then prevailing economic conditions and on the purchasing power of the currency stated in the Report as of the date of analysis. The date of value on which the conclusions and opinions expressed apply is stated in this Report.

• This Report has been prepared solely for the use or uses stated. Except for extraction of or reference to the Report by the Company, its financial advisor and/or its independent financial advisor for their respective work in relation to the Proposed Acquisition, it is not intended for any other use or purpose or use by any third parties. We hereby disclaim that we are not liable for any damages and/or loss arisen in connection with any such unintended use.

V – 14

VALUATION REPORT ON THE TARGET COMPANY

APPENDIX V

• Prior written consent must be obtained from Masterpiece Valuation Advisory Limited for publication of this Report. Except for disclosure in the Circular in relation to the Proposed Acquisition, no part of this Report (including without limitation any conclusion, the identity of any individuals signing or associated with this Report or the firms/companies with which they are connected, or any reference to the professional associations or organisations with which they are affiliated or the designations awarded by those organisations) shall be disclosed, disseminated or divulged to third parties by any means of publications such as prospectus, advertising materials, public relations, news.

• No environmental impact study has been carried out, unless otherwise stated in this Report. We assume all applicable laws and governmental regulations are being complied with unless otherwise stated in this Report. We have also assumed responsible ownership and that all necessary licenses, consents, or other approval from the relevant authority or private organisations have been or to be obtained or renewed for any use that is relevant to value analysis in this Report.

• Unless otherwise stated in this Report, the value estimate set out in this Report excludes the impact of presence of any harmful substances such as asbestos, ureaformaldehyde foam insulation, other chemicals, toxic wastes, or other potentially hazardous materials or of structural damage or environmental contamination. For purposes of evaluating potential structural and/or environmental defects, where their existence could have a material impact on value of the property, we would recommend that advices from the relevant experts, such as a qualified structural engineer and/or industrial hygienist, should be sought.

V – 15

GENERAL INFORMATION

APPENDIX VI

1. RESPONSIBILITY STATEMENT

This circular, for which the Directors collectively and individually accept full responsibility, includes particulars given in compliance with the Listing Rules for the 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, not misleading or deceptive, and there are no other matters the omission of which would make any statement herein or this circular misleading.

2. DISCLOSURE OF INTERESTS

(a) Interests of Directors and chief executive of the Company

As at the Latest Practicable Date, the interests or short positions of the Directors 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 were 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 they were taken or deemed to have under such provisions of the SFO), or which were recorded in the register required to be kept by the Company under Section 352 of the SFO, or which were required, pursuant to the Model Code for Securities Transactions by Directors adopted by the Company (‘‘Model Code’’), to be notified to the Company and the Stock Exchange, were as follows:

1. Long position in respect of domestic shares of the Company (‘‘Domestic Shares’’) as at the Latest Practicable Date:

			Approximate
			% of total	Approximate
		Number of	issued	% of
	Capacity/	Domestic	Domestic	Company’s
Name of Director	Nature of interest	Shares	Shares	share capital
Mr. Bian Yu	Beneficial owner	13,671,000	13.67	10.13
	Interest in a controlled	64,579,500	64.58	47.84
	corporation (Note 1)
Mr. Bian Jianguang	Beneficial owner	6,843,000	6.84	5.07
	Interest in a controlled	64,579,500	64.58	47.84
	corporation (Note 1)
Mr. Bian Weican	Beneficial owner	1,851,000	1.85	1.37
Ms. Bian Shu	Beneficial owner	3,933,000	3.93	2.91
	Interest in a controlled	64,579,500	64.58	47.84
	corporation (Note 1)

VI – 1

GENERAL INFORMATION

APPENDIX VI

			Approximate
			% of total	Approximate
		Number of	issued	% of
	Capacity/	Domestic	Domestic	Company’s
Name of Director	Nature of interest	Shares	Shares	share capital
Mr. Chen Jiancheng	Beneficial owner	1,851,000	1.85	1.37

Notes:

1. According to the disclosure of interest filings, these 64,579,500 domestic shares in the Company are beneficially owned by TGL which is in turn approximately 64.08% owned by Mr. Bian Yu, approximately 22.81% owned by Mr. Bian Jianguang and approximately 13.11% owned by Ms. Bian Shu. Pursuant to Part XV of the SFO, Mr. Bian Yu, Mr. Bian Jianguang and Ms. Bian Shu are deemed to be interested in TGL’s interest in the Company.

Save as disclosed above, none of the Directors or chief executives of the Company had, as at the Latest Practicable Date, any interests or short positions 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 would 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 or short positions which they were taken or deemed to have under such provisions of the SFO), or which were recorded in the register required 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.

VI – 2

GENERAL INFORMATION

APPENDIX VI

(b) Interests of Substantial Shareholders

As at the Latest Practicable Date, so far as is known to the Directors or chief executive of the Company, each of the following persons and entities (other than a Director or chief executive of the Company) had or was deemed to have interests or short positions in the Shares or underlying Shares of the Company as recorded in the register required to be kept by the Company under section 336 of the SFO:

1. Long position in respect of Domestic Shares as at 31 December 2019:

			Approximate
			% of total	Approximate
		Number of	issued	% of
	Capacity/	Domestic	Domestic	Company’s
Name	Nature of interest	Shares	Shares	share capital
TGL (Note 1)	Beneficial owner	64,579,500	64.58	47.84
Ms. Bao Guo	Family interest of spouse	78,250,500	78.25	57.66
(Note 2)
Ms. Xu You	Family interest of spouse	71,422,500	71.42	52.91
(Note 3)
Mr. Zhang Yuan Yuan	Family interest of spouse	68,512,500	68.51	50.75
(Note 4)

Notes:

1. TGL is directly interested in approximately 34.20% in the Company.

2. Ms. Bao Guo, the spouse of Mr. Bian Yu, is deemed to be interested in Mr. Bian Yu’s interests in the Company by virtue of the SFO.

3. Ms. Xu You, the spouse of Mr. Bian Jianguang, is deemed to be interested in Mr. Bian Jianguang’s interests in the Company by virtue of the SFO.

4. Mr. Zhang Yuan Yuan, the spouse of Ms. Bian Shu, is deemed to be interested in Ms. Bian Shu’s interests in the Company by virtue of the SFO.

VI – 3

GENERAL INFORMATION

APPENDIX VI

1. Long position in respect of H Shares of the Company (‘‘H Shares’’) as at 31 December 2019:

Name	Capacity/	Number of H	Approximate	Approximate
	Nature of interest	Shares	% of total	% of
			issued	Company’s
			H Shares	share capital
Shou Erjun	Beneficial owner	6,000,000	17.14	4.44
Hong Kong	Beneficial owner	5,504,400	15.73	4.08
Joint Financial
Investment Ltd
Zhao Kaiyuan	Interest in a controlled	5,504,400	15.73	4.08
(Note 5)	corporation

Notes:

1. Mr. Zhao Kaiyuan, the controlling shareholder of Hong Kong Joint Financial Investment Ltd, is deemed to be interested in Hong Kong Joint Financial Investment Ltd’s interests in the Company by virtue of the SFO.

Save as disclosed above, as at the Latest Practicable Date, the Company has not been notified by any person or entity who had or was deemed to have interests or short positions in the shares or underlying shares of the Company.

3. DIRECTORS’ SERVICE CONTRACTS

As at the Latest Practicable Date, all Directors have entered into letters of appointment or service contracts with the Company. None of the Directors had entered, or proposed to enter into a service contract with any member of the Group which does not expire or is not determinable by the Group within one year without payment of compensation, other than statutory compensation.

VI – 4

GENERAL INFORMATION

APPENDIX VI

4. DIRECTORS’ INTERESTS IN THE GROUP’S ASSETS OR CONTRACTS OR ARRANGEMENT SIGNIFICANT TO THE GROUP

As at the Latest Practicable Date:

• (a) Save for (i) the Acquisition pursuant to the Agreement entered into between the Company and TGL; and (ii) the acquisition of equipment pursuant to the equipment purchase agreement (the ‘‘Tianjie General Machinery Agreement I’’) dated 27 January 2021 entered into between the Company and 浙江天潔通用機械有限公司 (Zhejiang Tianjie General Machinery Co., Ltd.*, ‘‘Tianjie General Machinery’’), a wholly-owned subsidiary of TGL, further details of which are set out in the announcement of the Company dated 27 January 2021, which Mr. Bian Yu, Mr. Bian Jianguang and Ms. Bian Shu are interested in by virtue of their shareholding in TGL, none of the Directors had any interest, direct or indirect, in any assets which had 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; and

• (b) save for (i) the continuing connected transactions pursuant to the agreement entered into between the Company and 浙江天潔新材料有限公司 (Zhejiang Tianjie New Material Co., Ltd.*) in relation to the provision of processing services of rock wool to the Company dated 1 April 2020 (the ‘‘Tianjie New Material Agreement’’), further details of which are set out in the announcement of the Company dated 1 April 2020, which Mr. Bian Yu, Mr. Bian Jianguang, Ms. Bian Shu and Mr. Zhu Xianbo are materially interested in; and (ii) the continuing connected transactions pursuant to the agreement entered into between the Company and Tianjie General Machinery in relation to the provision of services of processing mechanical parts and semi-finished products of environmental protection equipment to the Company dated 4 January 2021 (the ‘‘Tianjie General Machinery Agreement II’’), further details of which are set out in the announcement of the Company dated 4 January 2021, which Mr. Bian Yu, Mr. Bian Jianguang and Ms. Bian Shu are materially interested in, none of the Directors was materially interested in any contract or arrangement entered into by any member of the Group which was subsisting as at the Latest Practicable Date and was significant in relation to the business of the Group.

5. DIRECTORS’ INTERESTS IN COMPETING BUSINESS

As at the Latest Practicable Date, none of the Directors or their respective associates had any direct or indirect interest in a business which competes or may compete with the business of the Group.

VI – 5

GENERAL INFORMATION

APPENDIX VI

6. MATERIAL ADVERSE CHANGE

As at the Latest Practicable Date, the Directors are not aware of any 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 Company were made up.

7. LITIGATION

As at the Latest Practicable Date, neither the Company nor any of its subsidiaries was involved in any litigation or arbitration of material importance and no litigation or claim of material importance was known to the Directors to be pending or threatened against the Company or any of its subsidiaries.

8. MATERIAL CONTRACTS

Save for (i) the Agreement; and (ii) the agreement dated 1 June 2020 entered into between the Company and 浙江天潔新能源股份有限公司 (Zhejiang Tianjie New Energy Co., Ltd., ‘‘Tianjie New Energy’’), pursuant to which the Company agreed to acquire from Tianjie New Energy 49% equity interest in 內蒙古國電和潔風能有限公司 (Inner Mongolia Guodian Hejie Wind Energy Co., Ltd.) for a total consideration of RMB73,500,000 (subject to downward adjustment) in cash, further details of which are set out in the circular of the Company dated 26 June 2020 (the ‘‘Tianjie New Energy Agreement’’), no contract (not being contract in the ordinary course of business), which is or may be material, has been entered into by the Company or any of its subsidiaries within the two years immediately preceding the Latest Practicable Date.

9. QUALIFICATIONS AND CONSENTS OF EXPERTS

The following are the qualifications of the experts who had given its opinion and advice which are contained in this circular:

Name Qualification

Moore Stephens CPA Limited Certified Public Accountants Rainbow Capital A licensed corporation under the SFO to carry out Type 1 (dealing in securities) and Type 6 (advising on corporate finance) regulated activities as defined under the SFO

• Masterpiece Valuation Advisory Independent Qualified Valuer Limited

• (a) as at the Latest Practicable Date, each of the experts above had no shareholding in any member of the Group or the right (whether legally enforceable or not) to subscribe for or to nominate persons to subscribe for securities in any member of the Group;

VI – 6

GENERAL INFORMATION

APPENDIX VI

• (b) each of the experts above has given and has not withdrawn its written consent to the issue of this circular with the inclusion of its letter and/or reports and references to its name in the form and context in which they are included;

• (c) as at the Latest Practicable Date, each of the experts above did not have any direct or indirect interest in any assets which have been, since 31 December 2020 (being the date to which the latest published audited accounts of the Company were made up), acquired or disposed of by or leased to or were proposed to be acquired or disposed of by or leased to any member of the Enlarged Group; and

• (d) each of (i) the letter from Rainbow Capital; (ii) the accountants’ report of the Target Company set out in Appendix II; (iii) the report from Moore Stephens CPA Limited on the unaudited pro forma financial information of the Enlarged Group set out in Appendix III; and (iv) the valuation report on the Target Company from Masterpiece Valuation Advisory Limited set out in Appendix V, is given as of the date of this circular for incorporation herein.

10. GENERAL

• (a) the joint company secretaries of the Company are Mr. Wong Hon Kit and Ms. Shen Qiong. Mr. Wong Hon Kit is currently a member of the Hong Kong Institute of Certified Public Accountants;

• (b) the registered office of the Company is at TENGY Industrial Park, Paitou Town, Zhuji City, Zhejiang Province, The PRC;

• (c) the Hong Kong principal office of the Company is at Room 1201, 12th Floor, Chung Ying Building, 20 Connaught Road West, Sheung Wan, Hong Kong;

• (d) the address of the Company’s H share registrar in Hong Kong is Tricor Investor Services Limited at Level 54, Hopewell Centre, 183 Queen’s Road East, Hong Kong; and

• (e) in the event of inconsistency, the English language text of this circular shall prevail over the Chinese language text.

VI – 7

GENERAL INFORMATION

APPENDIX VI

11. DOCUMENTS AVAILABLE FOR INSPECTION

Copies of the following documents will be available for inspection at the office of the Company at Room 1201, 12th Floor, Chung Ying Building, 20 Connaught Road West, Sheung Wan, Hong Kong, during normal business hours from 9:30 a.m. to 5:00 p.m. on any weekday, except public holidays from the date of this circular up to and including the date of the EGM (being not less than 14 days):

• (a) the Agreement;

• (b) the Tianjie New Energy Agreement;

• (c) the Tianjie General Machinery Agreement I;

• (d) the Tianjie General Machinery Agreement II;

• (e) the Tianjie New Material Agreement;

• (f) the articles of association of the Company;

• (g) the annual reports of the Company for each of the three years ended 31 December 2018, 2019 and 2020;

• (h) the letters of appointment or service contracts entered into between the Company and the Directors;

• (i) the letter from the Board to the Shareholders, the text of which is set out from pages 4 to 13 of this circular;

• (j) the letter from the Independent Board Committee, the text of which is set out in the section headed ‘‘Letter from the Independent Board Committee’’ of this circular;

• (k) the letter from the Independent Financial Adviser, the text of which is set out in the section headed ‘‘Letter from the Independent Financial Adviser’’ of this circular;

• (l) the accountants’ report on the financial information of the Target Company for each of the three years ended 31 December 2020, the text of which is set out in Appendix II to this circular;

• (m) the report from Moore Stephens CPA Limited on the unaudited pro forma financial information of the Enlarged Group, the text of which is set out in Appendix III to this circular;

• (n) the valuation report on the Target Company issued by Masterpiece Valuation Advisory Limited as set out in Appendix V to this circular;

• (o) the letters of consent from the experts referred to under the section headed ‘‘Qualifications and Consents of Experts’’ in this appendix; and

• (p) this circular.

VI – 8

NOTICE OF EGM

�������������� Zhejiang Tengy Environmental Technology Co., Ltd

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

(Stock Code: 1527)

NOTICE IS HEREBY GIVEN that an extraordinary general meeting (the ‘‘EGM’’) of Zhejiang Tengy Environmental Technology Co., Ltd (the ‘‘Company’’) will be held at the Company’s conference room, TENGY Industrial Park, Paitou Town, Zhuji City, Zhejiang Province, the People’s Republic of China (the ‘‘PRC’’) on Friday, 30 July 2021 at 10:00 a.m. for the purposes of considering and, if thought fit, passing with or without amendments the following resolution:

ORDINARY RESOLUTION

‘‘THAT:

• (A) the agreement dated 8 June 2021 entered into between the Company as purchaser and 天潔集團有限公司 (for transliteration purpose only, Tengy Group Limited) as vendor in relation to the acquisition of 40% equity interest of 浙江天潔磁性材料股份有限公 司 (for transliteration purpose only, Zhejiang Tianjie Magnetic Materials Co., Ltd.) for the total consolidation of RMB68,000,000 upon and subject to the terms and conditions as set out therein (the ‘‘Agreement’’) (a copy of which is tabled at the meeting and marked ‘‘A’’ and initialed by the chairman of the meeting for identification purpose) and the transactions contemplated thereunder and the implementation thereof be and are hereby approved, confirmed and ratified; and

• (B) any one or more director(s) of the Company be and is (are) hereby authorised for and on behalf of the Company to execute all such other documents, instruments and agreements and to do all such acts or things deemed by him/her to be incidental to, ancillary to or in connection with the matters contemplated in the Agreement and the transactions contemplated thereunder and the implementation thereof.’’

By order of the Board

Zhejiang Tengy Environmental Technology Co., Ltd

BIAN Yu

Chairman

Zhuji City, Zhejiang Province, the PRC, 29 June 2021

EGM – 1

NOTICE OF EGM

Notes:

• (i) A member of the Company (‘‘Member’’) entitled to attend and vote at the Meeting is entitled to appoint a proxy or proxies to attend and vote in his stead. A proxy need not be a Member. A form of proxy for use at the Meeting is enclosed herewith. In the case of joint holders of any domestic share(s) (‘‘Domestic Share(s)’’) or H share(s) (‘‘H Share(s)’’) of the Company (collectively, ‘‘Share(s)’’), only the person whose name appears first in the register of members shall be entitled to receive this notice, to attend and exercise all the voting powers attached to such Share(s) at the Meeting, and this notice shall be deemed to be given to all joint holders of such Share(s).

• (ii) To be valid, the form of proxy together with any power of attorney or other authority (if any) under which it is signed or a notarially certified copy of that power of attorney or authority must be deposited with the Company’s H share registrar, Tricor Investor Services Limited, at Level 54, Hopewell Centre, 183 Queen’s Road East, Hong Kong, and in case of holders of domestic shares of the Company, to the Company’s mailing address at TENGY Industrial Park, Paitou Town, Zhuji City, Zhejiang Province, the PRC, not later than 24 hours before the time appointed for holding the Meeting or any adjournment thereof or the time appointed for passing the resolution. Delivery of the form of proxy shall not preclude a Member from attending and voting in person at the Meeting and, in such event, the instrument appointing a proxy shall be deemed to be revoked.

• (iii) The H Share register of members of the Company in Hong Kong will be closed from Tuesday, 27 July 2021 to Friday, 30 July 2021, both days inclusive, during which period no transfer of H shares of the Company will be effected. For the identification of Shareholders eligible to attend and vote at the Meeting, all transfer documents accompanied by the relevant share certificates must be lodged with the Company’s H share registrar, Tricor Investor Services Limited, at Level 54, Hopewell Centre, 183 Queen’s Road East, Hong Kong not later than 4:30 p.m. on Monday, 26 July 2021.

As at the date of this notice, the executive directors of the Company are Mr. BIAN Yu, Mr. BIAN Weican and Ms. BIAN Shu; the non-executive directors of the Company are Mr. BIAN Jianguang, Mr. CHEN Jiancheng and Mr. ZHU Xian Bo; and the independent non-executive directors of the Company are Mr. ZHANG Bing, Mr. FUNG Kui Kei and Mr. LI Jiannan.

EGM – 2