# II Notes to the Financial Information—continued

(Expressed in thousands of Renminbi, unless otherwise stated)

# 3 SIGNIFICANT ACCOUNTING POLICIES—continued

# (x) Significant accounting estimates andj udgments—continued

# (i) Impairment of available-for-sale financial assets and held-to-maturity investments—continued

including industry outlook, technological changes as well as operating and financing cash flows. This requires a significant level of management judgment which would affect the amount of impairment losses.

# (ii) Fair value of financial instruments

There are no quoted prices from an active market for a number of financial instruments. The fair values for these financial instruments are established by using valuation techniques. These techniques include using recent arm’s length market transactions by referring to the current fair value of similar instruments, discounted cash flow analysis and option pricing models. The Group has established a work flow to ensure that the valuation techniques are constructed by qualified personnel and are validated and reviewed by independent personnel. Valuation techniques are certified and calibrated before implementation to ensure the valuation result reflects the actual market conditions. Valuation models established by the Group make maximum use of market input and rely as little as possible on the Group’s specific data. However, it should be noted that some input, such as credit and counterparty risk, and risk correlations require management’s estimates. The Group reviews the above estimations and assumptions periodically and makes adjustment if necessary.

# (iii) Classification of financial asset and liability

The Group’s accounting policies provide scope for assets and liabilities to be designated on inception into different accounting categories in certain circumstances:

Š In classifying financial assets or liabilities as “trading”, the Group has determined that it meets the definition of trading assets and liabilities set out in Note 3 (e)(i).

Š In designating financial assets or liabilities at fair value through profit or loss, the Group has determined that it has met one of the criteria for this designation set out in Note 3 (e)(i).

Š In classifying financial assets as held-to-maturity, the Group has determined that it has both the positive intent and ability to hold the assets until their maturity date as required by accounting policy set out in Note 3 (e)(i). In evaluating whether requirements to classify a financial asset as held-to-maturity are met, management makes significant judgments. Failure in correctly assessing the Group’s intent and ability to hold specific investments until maturity may result in reclassification of the whole portfolio as available-for-sale.


frameworki t would followi n setting the countercyclical capital buffer, a macroprudential tool that would raise capital requirements when therei s an elevated risk of above normal lossesi n the U.S. financial system. Furthermore, the Basel Committee on Banking Supervision (the “Basel Committee”) has published several consultative papers regarding (i) the standardized approach to credit risk, (ii) a fundamental review of the trading book, (iii)i nterest rate riski n the banking book, and (iv) operational risk. Finally, the Basel Committee has publishedi ts final net stable funding ratio framework. The U.S. banking regulators are expected toi ncorporate all of these measuresi nto domestic regulation. The ultimatei mpact on the Company’s capital andl iquidity will depend on the final U.S. rulemakings andi mplementation process thereafter.

The Company is subject to significant financial and reputational risks from potential legal liability and governmental actions The Company faces significantl egal risksi ni ts business, and the volume of claims and amount of damages and penalties claimedi nl itigation and governmental proceedings againsti t and other financial institutions are increasing. Customers, clients and other counterparties have grown morel itigious and are making claims for substantial or indeterminate amounts of damages, while banking regulators and certain other governmental authorities, such as the U.S. Department of Justice, have demonstrated ani ncreasing focus on enforcement,i ncludingi n connection with alleged violations ofl aw and customer harm.I n addition, governmental authorities have begun to seek criminal penalties against companiesi n the financial services sector for regulatory violations and have begun to require an admission of wrongdoing from financial institutionsi n connection with settling such matters. Criminal convictions or admissions of wrongdoingi n a settlement with the government canl ead to greater exposurei n civil litigation and reputational harm.

As an example ofi ncreased risks arising froml itigation, the Company and otherl arge financial institutions have been sued over the past several yearsi n their capacity as trustee for residential mortgage–backed securities (“RMBS”) trusts. The plaintiffsi n these actions allege that the significantl osses they incurred asi nvestorsi n the RMBS trusts were caused by the trustees’ failure to enforcel oan repurchase obligations and to abide by appropriate standards of care after events of default allegedly occurred, while also arguing to broaden the trustees’ duties. Although the Company has deniedl iability and believesi t has meritorious defensesi n these cases, any finding ofl iability or new or enhanced dutiesi n one or more of these cases against the Company, or another financial institution, could resulti n a significant financial loss or require a modification to the Company’s business practices, which could negativelyi mpact the Company’s financial results.

Increasedl itigation costs, substantial legal liability or significant governmental action against the Company could materiallyi mpacti ts financial condition and results of operations or cause significant reputational harm to the Company, whichi n turn could adverselyi mpacti ts business prospects.

The Company faces increased regulatory and legal risk arising out of its mortgage lending and servicing businesses The Companyi s subject toi nvestigations, examinations andi nquiries by government agencies and bank regulators concerning mortgage-related practices,i ncluding those related to compliance with selling guidelines relating to residential homel oans sold to GSEs, foreclosure-related expenses submitted to the Federal Housing Administration or GSEs for reimbursement,l ender-placedi nsurance, and notices and filingsi n bankruptcy cases. The Companyi s cooperating fully with thesei nvestigations, examinations and inquiries, any of which couldl ead to administrative orl egal proceedings or settlements. Remediesi n such proceedings or settlements mayi nclude fines, penalties, restitution or alterations to the Company’s business practices, which could increase the Company’s operating expenses and decreasei ts revenue. Additionally, reputational damage arising from these or otheri nquiries andi ndustry-wide publicity could also have an adverse effect upon the Company’s existing mortgage business and could reduce future business opportunities.

In addition to governmental or regulatoryi nvestigations, the Company,l ike other companies with residential mortgage origination and servicing operations, faces the risk of class actions and otherl itigation arising out of these operations.

The Company may be required to repurchase mortgage loans or indemnify mortgage loan purchasers as a result of breaches in contractual representations and warranties When the Company sells mortgagel oans thati t has originated to various parties,i ncluding GSEs,i ti s required to make customary representations and warranties to the purchaser about the mortgagel oans and the manneri n which they were originated. The Company may be required to repurchase mortgagel oans or be subject toi ndemnification claimsi n the event of a breach of contractual representations or warranties thati s not remedied within a certain period. Contracts for residential mortgagel oan sales to the GSEs include various types of specific remedies and penalties that could be applied toi nadequate responses to repurchase requests.I f economic conditions and the housing market deteriorate or the GSEsi ncrease their claims of breached representations and warranties, the Company could have increased repurchase obligations andi ncreasedl oss severity on repurchases, requiring material increases toi ts repurchase reserve.

The Company is exposed to risk of environmental liability when it takes title to properties In the course of the Company’s business, the Company may foreclose on and


take title to real estate. As a result, the Company could be subject to environmental liabilities with respect to these properties. The Company may be heldl iable to a governmental entity or to third parties for property damage, personal injury,i nvestigation and clean-up costsi ncurred by these partiesi n connection with environmental contamination or may be required toi nvestigate or clean up hazardous or toxic substances or chemical releases at a property. The costs associated withi nvestigation or remediation activities could be substantial.I n addition,i f the Companyi s the owner or former owner of a contaminated site,i t may be subject to commonl aw claims by third parties based on damages and costs resulting from environmental contamination emanating from the property.I f the Company becomes subject to significant environmental liabilities,i ts financial condition and results of operations could be adversely affected.

# ECONOMIC AND MARKET CONDITIONS RISK

Deterioration in business and economic conditions could adversely affect the financial services industry, and a reversal or slowing of the current economic recovery could adversely affect the Company’s lending business and the value of loans and debt securities it holds The Company’s business activities and earnings are affected by general business conditionsi n the United States and abroad,i ncluding factors such as thel evel and volatility of short-term andl ong-termi nterest rates,i nflation, home prices, unemployment and under-employmentl evels, bankruptcies, householdi ncome, consumer spending, fluctuationsi n both debt and equity capital markets,l iquidity of the global financial markets, the availability and cost of capital and credit,i nvestor sentiment and confidencei n the financial markets, and the strength of the domestic and global economiesi n which the Company operates. The deterioration of any of these conditions can adversely affect the Company’s consumer and commercial businesses and securities portfolios,i tsl evel of charge-offs and provision for creditl osses,i ts capital levels andl iquidity, andi ts results of operations.

Given the high percentage of the Company’s assets represented directly ori ndirectly byl oans, and thei mportance ofl ending toi ts overall business, weak economic conditions arel ikely to have a negativei mpact on the Company’s business and results of operations. A reversal or slowing of the current economic recovery or another severe contraction could adverselyi mpactl oan utilization rates as well as delinquencies, defaults and customer ability to meet obligations under thel oans. The value to the Company of other assets such asi nvestment securities, most of which are debt securities or other financial instruments supported by loans, similarly would be negativelyi mpacted by widespread decreasesi n credit quality resulting from a weakening of the economy. Downward valuation of debt securities could also negativelyi mpact the Company’s capital position.

Stressi n the commercial real estate markets, or a downturn in the residential real estate markets, could cause creditl osses and deteriorationi n asset values for the Company and other financial institutions. A downturni n used auto prices fromi ts currentl evels could resulti ni ncreased creditl osses and impairment of residual lease values for the Company. Additionally, the current environment of heightened scrutiny of financial institutions, as well as a continued focus on the pace and sustainability of the economic recovery, has resultedi n increased public awareness of and sensitivity to banking fees and practices.

Any further deteriorationi n global economic conditions, including those related to recent disruptionsi n Europe and China, could slow the recovery of the domestic economy or negativelyi mpact the Company’s borrowers or other counterparties that have direct ori ndirect exposure to these regions. Such global disruptions can underminei nvestor confidence, cause a contraction of available credit, or create market volatility, any of which could have significant adverse effects on the Company’s businesses, results of operations, financial condition andl iquidity, eveni f the Company’s direct exposure to the affected regioni sl imited. The continued depression of commodity prices,i nclusive of energy prices, for an extended period of time, as well as other negative domestic market developments, may erode consumer confidencel evels and cause adverse changesi n payment patterns,l eading toi ncreasesi n delinquencies and default ratesi n certaini ndustries, or regions. Such developments couldi ncrease the Company’sl oan charge-offs and provision for creditl osses. Any future economic deterioration that affects household or corporatei ncomes and the continuing concern regarding the possibility of a return to recessionary conditions could also resulti n reduced demand for credit or fee-based products and services.

Improvements in economic indicators disproportionately affecting the financial services industry may lag improvements in the general economy Should the moderate recovery of the United States economy continue, thei mprovement of certain economici ndicators, such as real estate asset values, may nevertheless continue tol ag behind the overall economy, which can affect certain industries, such as real estate and financial services, more significantly. Should real estate asset values fail to recover for an extended period of time, the Company could be adversely affected.

Changes in interest rates could reduce the Company’s net interest income The Company’s earnings are dependent to al arge degree on neti nteresti ncome, whichi s


under a normal load condition. A calibrated strain gauge was instrumented to measure the friction force (in the sliding direction) between the head and the disk interface. The frictional force at an interface is written as, \( F = \mu L + F _ { A } \), where F is the total friction at the interface,\( \mu \) the non-dimensional coefficient of friction, L the applied normal load, and \( F _ { A } \) the adhesion component of friction.40–42 Figure 4 shows the delta friction force as a function of normal load when applied -1 \( V \) and +1 V on the head overcoat. Here, we have subtracted the friction contribution at low load (=1.25 mN) from all other load conditions to measure delta friction force. Dashed line is the linear fit with slope being the coefficient of friction. For positive voltage cycle on head, the friction coefficient is 0.4 in comparison to 0.2 for negative voltage cycle on the head. This further demonstrates the importance of the electrochemical activity on the carbon overcoat during sliding is determining the friction properties and long term durability of the overcoat.

Figure 4. Frictional properties under an applied voltage: Shows the delta friction force as a function of normal load under a repetitive cycle of applied +1 V and -1 V on head. Dashed line is the linear fit with slope being the friction coefficient.

# Chemical marking of contact location

As a practical application of surface passivation, it was used to chemically mark the disk overcoat surface. Intentional contacts at two distinct tracks (radius 21 \( ^ { \prime \prime } \) m and 23 \( ^ { \circ } \) m on disk) were made for 3 seconds under a normal load of 3.75 mN at the head disk interface. The head is held at -1 V with respect to the disk. Figure 5b shows the decay in the interfacial current with the same head at two distinct tracks. Once the head passivates the first track on disk, the initial current on the new track is similar to the initial current of the previously passivated track. This further shows that for negative head voltages, the surface passivation dominated the electrochemical activity on the disk leaving the head in pristine condition. We used the same head to scan probe the electrical conductivity of the complete disk. Figure 5c shows the interfacial current as probed by the same head at different tracks. The electrical current on the passivated track is found to be significantly lower than the untreated area of the disk surface. We believe that this surface passivation of the carbon overcoat can have significant applications for high speed lithography. It is worth mentioning that recently AFM has been used to perform similar surface passivation of graphitic surfaces but AFM operates at typically six orders of magnitude slower sliding speed.43 Chemical analysis of the oxide formed on carbon overcoat is still missing and requires more work.

# Discussion

In summary, we have outlined a quantitative analysis of voltage assisted nanoscale electrochemical wear on carbon overcoat at high sliding speed interfaces. At high sliding speeds, in-situ measurements were performed of the interfacial current and the associated wear amount due to the electrochemical process. In addition, the effect of electrochemical activity on the interface is further quantified by measuring the friction force and the friction coefficient. It is found that the voltage assisted electrochemical activity greatly influences the interfacial wear and frictional properties. Positive voltage applied to the head leads to high


Figure 5. Chemical marking of contact location: (a) Cartoon of disk depicting the intentional contact at two location, Radius =21 mm and 23 mm. (b) Marking: dots represent the passivation of carbon overcoat at two locations. (c) Detection: shows the interfacial current as probed by the same head at different tracks.

wear on the head overcoat but no head overcoat wear was observed for negative applied voltage. As a useful application, we exploited the electrochemical passivation to mark the head-disk contact regions on the disk. The contact regions can be clearly identified by the associated conductivity variations of the surface. We believe that the observed voltage assisted asymmetric nanoscale wear will lead to additional experimental and simulation work, and will help to understand precisely the chemical origin of the involved process.

Our results are expected to have strong impact on fundamentally improving the carbon overcoat for various applications. The effect of interfacial voltage on the sliding interface is expected to be of great importance for understanding and improving the wear properties in nanoscale devices.

# Methods

# Sample preparation

Disk: the rotating disk is a commercial 2.5” CoCrPt:oxide based hard disk media fabricated onto a glass substrate. Outermost thin film layer of hard disk media consist of 3 nm amorphous nitrogenated carbon overcoat coated with a molecular layer of perfluoropolyether polymer lubricant (∼ 1 nm thick).

Head: the head is a commercially available with read and write elements fabricated on a ceramic substrate. Similar to the disk, the head is also coated with a carbon overcoat with 1.4 nm diamond like carbon on top of a 0.3 nm Silicon based adhesive layer. The head surface is carefully etched (known as air bearing surface (ABS)) such that while flying on top of the disk an air lift force is generated that keeps it afloat in the nanometer distance over the disk.

# Contact detection between the head and disk

Contact between the head and disk is monitored using a piezo-electric based acoustic emission (AE) sensor of the type PICO -200-750 \( - r \mapsto \cdot \) z. It detects elastic propagating waves generated during the head-disk contact events.34 Figure 6 shows a typical contact detection between the head and the disk. Vertical clearance between the head and disk is set using the embedded micro-heater inside the head. For protruding head making a contact with disk, AE signal increases sharply compare to non-contact condition.

# Interfacial current and friction measurements

Electrical measurement: In all interfacial measurement, the head-disk interface is first voltage biased then the contact is made using the micro-heater. The voltage bias is done using a HP 3314A source and the corresponding interfacial current is measured using Agilent 4155C. Interfacial current measurement are done under a positive normal load condition.

Friction measurement: Contact friction force is measured using a calibrated strain gauge mounted at the end of the suspension. The strain gauge signal is measured and amplified using a Vishay 2311 signal conditioning amplifier.


# 1 Executive summary

PKM has commissioned Austar Gas Pty ltd to provide a resource estimate for its interest in the Prisma Kampung Minyak (KM) asset in Indonesia. The evaluation was performed in February 2017 using the updated field production data until 31st December 2016 and technical information provided by PKM.

On 15th July 2011, a 15-year production enhancement contract (KM KSO contract) was signed for KM field in Indonesia between Pertamina and Prisma Kampung Minyak companies. Kampung Minyak was later acquired by PKM and thus PKM is entitled to receive 25% of any extra oil production above the baseline oil forecast after cost recovery.

KM Oilfield was discovered in 1896 and has a producing area of 45 square kilometres. The field is located approximately 200 km south of Palembang City in South Sumatra Island, Indonesia. There are nearly 330 vertical wells in this area and 30 wells online in 2016 with oil production. During the development, operators have tried technologies such as water reinjection and hydraulic fracturing to advance field production. However, despite success from some of the water injection trials, oil production remained in a low level due to lack of proper understanding of reservoirs and inconsistency in water injection. PKM has started a work program since the start of its contract to enhance oil production by drilling new injectors/producers and recompletion (water shut-off, artificial lift design) of key old producers.

Detailed Geophysical and petrophysical studies on the existing seismic data and log correlations over KM field has divided the KM field into 9 separate blocks from north west to south east. The entire KM field appears to be affected by faulting and has a limited reservoir continuity between the blocks.

There are two main geological formations present in the KM field, the Muara Enim Formation and the Air Benakat Formations. KM has an original estimate of approximately 65.92 million barrels of original oil in place (OOIP) which are mainly located in Muara Enim Formation (named as STC to S7 layers) with a depth range from 90m to about 470m. Reservoir layers in Muara Enim Formation are channel sand bodies belong to water delta and generally have good thickness and reservoir properties. Muara Enim Formation contains layers with varying thickness (up to 12m) and has an average porosity of 28% with permeability ranging from 50 to 120md. Air Benakat Formation consists of deeper formations (S8 to S13) with poor reservoir properties. Among those, layer S8 has been productive with some production history and it has been included to the main package for the contingent resource estimate. Productivity and reservoir characteristic of layers S9-S13 are yet to be confirmed through further production testing and technology trials.

API gravity is ranging from 35 to 45 which suggests that KM oil is a good quality. A constant formation volume factor of 1.15 was used for all zones as reported by PKM. There is also very small amount of gas produced which is not normally measured by the company. The average porosity in Muara Enim Formation ranging from 31% in STC to 24% in S7 and is equal to 16% in S8-S13. Initial water saturation was derived by client as 35% in STC-S7 and 40-45% in S8-S13 which are considered reasonable. Due to shortage of time, Austar Gas has used the information from the top structure


and the net pay maps provided by PKM but it has adjusted the net pay in S1-S7 using the correction factors suggested in the previous independent reserves review report from 2015.

KM field is a mature field with \~330 wells drilled at dense spacing (10 to 30 acres depends on the zone/block) with cumulative production over 12 million barrels (\~18.5% of OOIP). However, lack of consistent reservoir management during the water injection trials and issues regarding artificial

lifting in some of the blocks has lowered the production performance at KM. Since 2011, PKM has brought online nine new wells and carried out over 30 workovers (mainly re-perforation or pump replacement in existing producers) that in most cases resulted in production gains. As of 31 December 2016, there were 30 existing oil producers in KM field.

The proposed development plan for KM field by Austar Gas is based on the information provided by PKM and the cost assumptions provided in the previous reserves estimate in 2015. The proposed development plan includes workover of existing wells and drilling new producing and water injection wells at KM filed. Austar Gas suggests that PKM should also consider other technologies such as radial drilling/ jetting, hydraulic fracturing, liquid Nitrogen injection and propellant stimulation trials to unlock the potential from Muara Enim and the Air Benakat Formations.

Well costs including completion and connection to surface facilities are approximately US\$400,000/- for new wells and US\$80,000/- for recompletion of existing wells. For the base case (2C) the proposed program requires drilling of 4 new producers and recompletion of 30 existing producers. For 1C the program requires drilling of 3 new wells, 31 recompletions of existing wells and 2 injectors and for 3C it requires drilling of 12 wells, recompletion of 75 existing wells and 40 water injection wells. As of 31 December 2016, there were 30 wells producing with oil production. Figure 1 shows a summary of field deliverability outputs which was resulted for KM field oil production forecast from 2017 to 2035.

Figure 1. KM oilfield deliverability forecast for 1C, 2C & 3C production outlook


significant judgment, an unrealized loss in the fair value of a debt security is generally deemed to be temporary when the fair value of the security is below the carrying value primarily due to changes in interest rates, there has not been significant deterioration in the financial condition of the issuer, and it is not more likely than not that the Company will be required to, nor does it have the intent to sell the security before the anticipated recovery of its remaining carrying value. If any of these criteria is not met, the impairment is split into two components as follows: 1) otherthantemporary impairment related to credit loss, which must be recognized in the income statement and 2) otherthantemporary impairment related to other factors, which is recognized in other comprehensive income (loss). The credit loss is defined as the difference between the present value of the cash flows expected to be collected and the amortized cost basis. For debt securities with otherthan-temporary impairment, the previous amortized cost basis less the otherthantemporary impairment recognized in earnings shall be the new amortized cost basis of the security. In subsequent periods, the Company accretes into interest income the difference between the new amortized cost basis and cash flows expected to be collected prospectively over the life of the debt security. Continued deterioration of market conditions could result in additional impairment losses recognized within the investment portfolio.

Other factors that may be considered in determining whether a decline in the value of either a debt or an equity security is “otherthantemporary” include ratings by recognized rating agencies; actions of commercial banks or other lenders relative to the continued extension of credit facilities to the issuer of the security; the financial condition, capital strength and nearterm prospects of the issuer and recommendations of investment advisors or market analysts.

# Loans Held for Sale

Mortgage loans held for sale are carried at the lower of amortized cost or fair value. Any loan that management does not have the intent and ability to hold for the foreseeable future or until maturity or payoff is classified as held for sale at the time of origination, purchase or securitization, or when such decision is made. Unrealized losses on such loans are recorded as a valuation allowance and included in income.

# Loans Receivable and Loan Commitments

Loans receivable include loans originated by the Bank as well as loans acquired in business combinations. Loans acquired in a business combination are designated as “purchased” loans. These loans are recorded at their fair value at acquisition date, factoring in credit losses expected to be incurred over the life of the loan. Accordingly, an allowance for loan losses is not carried over or recorded as of the acquisition date.

Loans purchased with evidence of credit deterioration since origination for which it is probable that all contractually required payments will not be collected are accounted for under FASB ASC 31030, Loans and Debt Securities Acquired with Deteriorated Credit Quality. These loans are identified as purchased credit impaired ("PCI") loans. In situations where such loans have similar risk characteristics, loans may be aggregated into pools to estimate cash flows. A pool is accounted for as a single asset with a single interest rate, cumulative loss rate and cash flow expectation. Expected cash flows at the acquisition date in excess of the fair value of loans are considered to be accretable yield, which is recognized as interest income over the life of the loan or pool using a level yield method if the timing and amount of the future cash flows of the loan or pool is reasonably estimable.

The cash flows expected over the life of the PCI loan or pool are estimated quarterly using an external cash flow model that projects cash flows and calculates the carrying values of the loans or pools, book yields, effective interest income and impairment, if any, based on loan or pool level events. Assumptions as to default rates, loss severity and prepayment speeds are utilized to calculate the expected cash flows. To the extent actual or projected cash flows are less than previously estimated, additional provisions for loan losses on the purchased loan portfolios will be recognized immediately into earnings. To the extent actual or projected cash flows are more than previously estimated, the increase in cash flows is recognized immediately as a recapture of provision for loan losses up to the amount of any provision previously recognized for that loan or pool, if any, then prospectively recognized in interest income as a yield adjustment. Any disposals of a loan in a pool, including sale of a loan, payment in full or foreclosure results in the removal of the loan from the loan pool at the carrying amount.

Loans accounted for under FASB ASC 31030 are generally considered accruing and performing loans as the loans accrete interest income over the estimated life of the loan when cash flows are reasonably estimable. Accordingly, PCI loans that are contractually past due are still considered to be accruing and performing loans. If the timing and amount of cash flows is not reasonably estimable, the loans may be classified as nonaccrual loans and interest income may be recognized on a cash basis or all cash payments may be accounted for a as a reduction of the principal amount outstanding.

Loans purchased that are not accounted for under FASB ASC 31030 are accounted for under FASB ASC 31020, Receivables—Nonrefundable fees and Other Costs. These loans are identified as nonPCI loans, and are initially recorded at their fair value, which is estimated using an external cash flow model and assumptions similar to the FASB ASC 31030 loans. The difference between the estimated fair value and the unpaid principal balance at


acquisition date is recognized as interest income over the life of the loan using an effective interest method for nonrevolving credits or a straightline method, which approximates the effective interest method, for revolving credits. Any unrecognized discount for a loan that is subsequently repaid in full will be recognized immediately into income.

Loans are generally recorded at the unpaid principal balance, net of premiums, unearned discounts and net deferred loan origination fees and costs. The premiums and unearned discounts may include values determined in purchase accounting. Interest on loans is calculated using the simple interest method based on the daily balance of the principal amount outstanding and is credited to income as earned. Loans are considered past due or delinquent when principal or interest payments are past due 30 days or more.

# Covered Loans:

Purchased loans subject to FDIC sharedloss agreements were historically identified as “covered” on the Consolidated Financial Statements. The FDIC sharedloss agreements were terminated during the year ended December 31, 2015 and as such the covered designation was removed. For further information see Note (5) FDIC Indemnification Asset. The covered loans included the majority of loans from the Company's acquisition of Cowlitz Bank and certain loans from the Washington Banking Merger, which included loans from Washington Banking Company's acquisitions of City Bank and North County Bank. The same accounting principles that apply to loans receivable applied to covered loans receivable, with the added benefit of sharedloss agreements.

# Delinquent Loans:

Delinquencies in the commercial business loan portfolio are handled by the assigned loan officer. Loan officers are responsible for collecting loans they originate or which are assigned to them. The Bank sends a borrower a delinquency notice 15 days after the due date when the borrower fails to make a required payment on a loan. If the delinquency is not brought current, additional delinquency notices are mailed at 30 and 45 days for commercial loans. Additional written and oral contacts are made with the borrower between 60 and 90 days after the due date.

If a real estate loan payment is past due for 45 days or more, the collection manager may perform a review of the condition of the property. Depending on the nature of the loan and the type of collateral securing the loan, the Bank may negotiate and accept a modified payment program with the borrower, accept a voluntary deed in lieu of foreclosure or, when considered necessary, begin foreclosure proceedings. If foreclosed on, real property is generally sold at a public sale and the Bank may bid on the property to protect its interest. A decision as to whether and when to begin foreclosure proceedings is based on such factors as the amount of the outstanding loan relative to the value of the property securing the original indebtedness, the extent of the delinquency, and the borrower’s ability and willingness to cooperate in resolving the delinquency.

# Nonaccrual Loans:

The Company's policies for placing loans on nonaccrual status, recording payments received on nonaccrual loans, resuming accrual of interest, determining past due or delinquency status and charging off uncollectible loans generally do not differ by loan segments or classes.

Loans on which the accrual of interest has been discontinued are designated as nonaccrual loans. Delinquent loans may remain on accrual status between 30 days and 89 days past due. The accrual of interest is generally discontinued at the time the loan is 90 days delinquent unless the credit is well secured and in the process of collection. Loans are placed on nonaccrual at an earlier date if collection of the contractual principal or interest is doubtful. All interest accrued but not collected on loans deemed nonaccrual during the period is reversed against interest income in that period. The interest payments received on nonaccrual loans are generally accounted for on the costrecovery method whereby the interest payment is applied to the principal balances. Loans may be returned to accrual status when improvements in credit quality eliminate the doubt as to the full collectability of both interest and principal and a period of sustained performance has occurred. Substantially all loans that are nonaccrual are also considered impaired. Income recognition on impaired loans conforms to that used on nonaccrual loans.

Loans are generally chargedoff if collection of the contractual principal or interest as scheduled in the loan agreement is doubtful. Credit card loans and other consumer loans are typically chargedoff no later than 180 days past due.


Changes in any of the above factors could significantly impact operating expenses in the consolidated statements of operations and other comprehensive income (loss) in the consolidated statements of comprehensive income as well as the value of the liability and accumulated other comprehensive loss of stockholders’ equity on our consolidated balance sheets. The expected return on plan assets is reflected as a reduction to our pension and post-retirement benefit expense. If our assumed expected rates of return for 2017 were 100 basis points lower, our qualified pension and post-retirement benefit expenses for 2017 would have increased by \$103 million. If our assumed discount rates for 2017 were 100 basis points lower, our qualified pension and post-retirement benefit expenses for 2017 would have increased by \$63 million and our projected benefit obligation for 2017 would have increased by approximately \$1.780 billion.

# Loss Contingencies and Litigation Reserves

We are involved in several material legal proceedings, as described in more detail in Note 16—Commitments and Contingencies to our consolidated financial statements in Item 8 of our Annual Report on Form 10-K for the year ended December 31, 2017. We periodically assess potential losses in relation to these and other pending or threatened tax and legal matters. For matters not related to income taxes, if a loss is considered probable and the amount can be reasonably estimated, we recognize an expense for the estimated loss. To the extent these estimates are more or less than the actual liability resulting from the resolution of these matters, our earnings will be increased or decreased accordingly. If the differences are material, our consolidated financial statements could be materially impacted.

For matters related to income taxes, if we determine in ourj udgment that the impact of an uncertain tax position is more likely than not to be sustained upon audit by the relevant taxing authority, then we recognize in our financial statements a benefit for the largest amount that is more likely than not to be sustained. No portion of an uncertain tax position will be recognized if we determine in ourj udgment that the position has less than a 50% likelihood of being sustained. Though the validity of any tax position is a matter of tax law, the body of statutory, regulatory and interpretive guidance on the application of the law is complex and often ambiguous. Because of this, whether a tax position will ultimately be sustained may be uncertain.

# Connect America Fund

In 2015, we accepted CAF funding from the FCC of approximately \$500 million per year for six years to fund the deployment of voice and broadband capable infrastructure for approximately 1.2 million rural households and businesses (living units) in 33 states under the CAF Phase 2 high-cost support program. This program provides a monthly high-cost subsidy similar to the support provided by the FCC’s previous cost reimbursement programs. Although we believe that there is no specific authoritative U.S. GAAP guidance for the treatment of government assistance, we identified three acceptable methods to account for these funds: (1) recognize revenue when entitled to receive cash, (2) defer cash received until the living units are enabled to receive the service at the FCC specified level, or (3) record the cash received as contra capital. After assessing these alternatives, we have determined that we will recognize CAF Phase 2 funds each month as revenue when we are entitled to receive the cash less a deferred amount. The amount of revenue deferred in 2017 was approximately \$94 million. We believe our recognition methodology is consistent with other companies in our industry in the United States, but may not necessarily be consistent with companies outside the United States that receive similar government funding, and we cannot provide assurances to this effect.

In computing the amount of revenue to recognize, we assume that we will not be able to economically enable 100% of the required living units in every state with voice and broadband capabilities under the CAF Phase 2 program. We defer recognition of the funds related to potential living units that we estimate we will not enable until we can with reasonable assurance determine that we can fully meet the enablement targets. As disclosed elsewhere herein, in some limited instances, a portion of the funds must be returned if enablement targets are not attained. Based on estimated enablement, a hypothetical 1% decrease in our estimate of living units we will not enable with voice and broadband capabilities under the CAF Phase 2 program would have


increased our revenue by \$7 million in 2017, and a 1% increase would have decreased our revenue by\$29 million in 2017.

For additional information about the CAF Phase 2 support program, see “Business—Regulations” in Item 1 of our Annual Report on Form 10-K for the year ended December 31, 2017.

# Income Taxes

Our provision for income taxes includes amounts for tax consequences deferred to future periods. We record deferred income tax assets and liabilities reflecting future tax consequences attributable to tax credit carryforwards, differences between the financial statement carrying value of assets and liabilities and the tax bases of those assets and liabilities and tax net operating loss carryforwards, or NOLs. Deferred taxes are computed using enacted tax rates expected to apply in the year in which the differences are expected to affect taxable income. The effect on deferred income tax assets and liabilities of a change in tax rate is recognized in earnings in the period that includes the enactment date.

The measurement of deferred taxes often involves the exercise of considerablej udgment related to the realization of tax basis. Our deferred tax assets and liabilities reflect our assessment that tax positions taken in filed tax returns and the resulting tax basis are more likely than not to be sustained if they are audited by taxing authorities. Assessing tax rates that we expect to apply and determining the years when the temporary differences are expected to affect taxable income requiresj udgment about the future apportionment of our income among the states in which we operate. Any changes in our practices orj udgments involved in the measurement of deferred tax assets and liabilities could materially impact our financial condition or results of operations.

In connection with recording deferred income tax assets and liabilities, we establish valuation allowances when necessary to reduce deferred income tax assets to amounts that we believe are more likely than not to be realized. We evaluate our deferred tax assets quarterly to determine whether adjustments to our valuation allowance are appropriate in light of changes in facts or circumstances, such as changes in tax law, interactions with taxing authorities and developments in case law. In making this evaluation, we rely on our recent history of pre-tax earnings. We also rely on our forecasts of future earnings and the nature and timing of future deductions and benefits represented by the deferred tax assets, all which involve the exercise of significantj udgment. At December 31, 2017, we established a valuation allowance of \$1.341 billion primarily related to foreign and state NOLs that we acquired from Level 3, as it is more likely than not that these NOLs will expire unused. If forecasts of future earnings and the nature and estimated timing of future deductions and benefits change in the future, we may determine that a valuation allowance for certain deferred tax assets is appropriate, which could materially impact our financial condition or results of operations. See Note 13—Income Taxes to our consolidated financial statements in Item 8 of our Annual Report on Form 10-K for the year ended December 31, 2017 for additional information.

# LIQUIDITY AND CAPITAL RESOURCES

# Overview of Sources and Uses of Cash

We are a holding company that is dependent on the capital resources of our subsidiaries to satisfy our parent company liquidity requirements. Several of our significant operating subsidiaries have borrowed funds either on a standalone basis or as part of a separate restricted group with certain of its subsidiaries or affiliates. The terms of the instruments governing the indebtedness of these borrowers or borrowing groups may restrict our ability to access their accumulated cash. In addition, our ability to access the liquidity of these and other subsidiaries may be limited by tax and legal considerations and other factors.

At December 31, 2017, we held cash and cash equivalents of \$551 million and we had \$1.595 billion of borrowing capacity available under the then existing terms of our revolving credit facility. We had approximately


# 2. Intellectual property rights of our Group

# (a) Trademarks

(i) As of the Latest Practicable Date, our Group had registered the following trademarks in the PRC:

Name of owner	 Trademark	 Class	 Reg. No.	 Goods/services	 Validity Period
(dd/mm/yy)

(Liaoning Zhongwang
Group Co., Ltd.)		6	1466995	,
(Aluminum profile, metal
lath)	From 28/10/2000
to 27/10/2010

(Liaoning Zhongwang
Group Co., Ltd.)		17	1556043	(           ) ,
      (Synthetic resin (semi-
finished product), water-
proof packaging)	From 21/4/2001
to 20/4/2011

(Liaoning Zhongwang
Group Co., Ltd.)		17	1612093	(Plastic pipe   plank   rod
strip)	From 7/8/2001
to 6/8/2011

(Liaoning Zhongwang
Group Co., Ltd.)		6	1458965	,
(Aluminum profile, metal
lath)	From 14/10/2000
to 13/10/2010

(Liaoning Zhongwang
Group Co., Ltd.)		6	1798108	(Copper profile)	From 28/6/2002
to 27/6/2012

(Liaoning Zhongwang
Group Co., Ltd.)		19	1927715	;
(           )
      (Non-metallic construction
materials; plastic profile
(construction use))	From 21/11/2004
to 20/11/2014

(Liaoning Zhongwang
Group Co., Ltd.)		16	4278639	;            ;                      ;
        ;                   ;
  ;            ;
        ;
(Paper; drawing paper;
toilet paper; ink; printed
materials; stapler;
document folder; stamp
pad; steel pen)	From 21/10/2007
to 20/10/2017


Name of owner	 Trademark	 Class	 Reg. No.	 Goods/services	 Validity Period
(dd/mm/yy)

(Liaoning Zhongwang
Group Co., Ltd.)		19	4278640	;            ;
        ;         ;           ;
          ;
;               ;
     ;
(               )
      (Wood; concrete; plaster
board; cement; brick;
concrete construction
components; tarmac;
non-metallic door;
construction glass; paint
layer (building materials))	From 21/10/2007
to 20/10/2017

(Liaoning Zhongwang
Group Co., Ltd.)		32	4278632	;                     ;
;
(           ) ;               ;
     (        ) ;
   ;
(                     );
;
(Beer; non-alcoholic fruit
beverages; mineral
water; peanut milk (soft
drinks); cola; purified
water (beverages); bean
beverages; yogurt
beverage products (fruit
product, non-dairy);
plant beverages;
beverage flavorings)	From 28/2/2007
to 27/2/2017

(Liaoning Zhongwang
Group Co., Ltd.)		6	872377	(Aluminum alloy profile)	From 21/9/1996
to 20/9/2006
extended period:
21/9/2006 to
20/9/2016


# Interest expense

Interest expense increased \$4.6 million, or 8.8%, to \$57.4 million for the year ended December 31, 2014 from\$52.8 million for the year ended December 31, 2013. The increase in interest expense was primarily the result of a net increase in debt to \$1,295 million as of December 31, 2014 from \$1,280 million as of December 31, 2013, which included a full year of interest expense related to the \$352 million in new financings entered into during 2013 and the addition of \$123 million in new financings during 2014, which was offset by \$115 million in debt extinguishments primarily in the fourth quarter of 2014 and a decrease in our weighted average interest rate from 4.7% in 2013 to 4.0% in 2014.

# Loss on extinguishment of debt

Loss on extinguishment of debt increased to \$1.7 million for the year ended December 31, 2014. This was primarily the result of the prepayment penalties and other costs associated with the repayment of mortgage loans during the year.

# Equity in earnings (loss), (impairment) of investment and gain on consolidation of unconsolidated entity, net

Equity in earnings (loss) of investment in unconsolidated entities increased \$4.2 million for the year ended December 31, 2014 from a loss of \$0.03 million for the year ended December 31, 2013. During the year ended December 31, 2014, the Company bought out its partner’s interest in an unconsolidated entity that owned one hotel property, and began consolidating the operating results of the hotel resulting in a gain of \$4.5 million upon consolidation of the related assets and liabilities, which was offset by \$0.3 million representing the Company’s share of equity in losses prior to the buyout of the remaining partner’s interest. The respective hotel property was later sold as part of the Suburban Select Service Portfolio in November 2014. During the year ended December 31, 2013, the Company recognized an other than temporary impairment in its equity investment of\$1.0 million.

# Income tax expense

Income tax expense increased \$2.2 million to \$5.9 million for the year ended December 31, 2014 from\$3.6 million for the year ended December 31, 2013. The increase was mainly due to one-time tax expenses related to organizational re-structuring of our TRS leases.

# Net income (loss) from discontinued operations

Net income (loss) from discontinued operations increased by \$80.7 million to income of \$75.1 million for the year ended December 31, 2014 from a loss of \$5.6 million for the year ended December 31, 2013. During the year ended December 31, 2014 and 2013, there were 52 properties reflected in discontinued operations. Effective January 1, 2014, we elected to early adopt ASU 2014-08. Under the new guidance, only disposals representing a strategic shift that had (or will have) a major effect on the entity’s results and operations would qualify as discontinued operations. On September 17, 2014, InvenTrust entered into a definitive asset purchase agreement to sell the Suburban Select Service Portfolio, which was sold on November 17, 2014. Prior to the sale transaction, we oversaw the Suburban Select Service Portfolio. We believe this sale represented a strategic shift away from suburban select service hotels that had a major effect on our results and operations, and qualified as discontinued operations under ASU No. 2014-08. The operations of these hotels are reflected as discontinued operations on the combined consolidated statements of operations and comprehensive income for the years ended December 31, 2014 and 2013, which resulted in net income of \$75.1 million, including a gain on sale of\$135.7 million for the year ended December 31, 2014.

# Non-GAAP Financial Measures

We consider the following non-GAAP financial measures useful to investors as key supplemental measures of our operating performance: EBITDA, Adjusted EBITDA, FFO and Adjusted FFO. These non-GAAP financial


measures should be considered along with, but not as alternatives to, net income or loss, operating profit, cash from operations, or any other operating performance measure as prescribed per GAAP.

# EBITDA and Adjusted EBITDA

EBITDA is a commonly used measure of performance in many industries and is defined as net income or loss (calculated in accordance with GAAP) excluding interest expense, provision for income taxes (including income taxes applicable to sale of assets) and depreciation and amortization. We consider EBITDA useful to an investor regarding our results of operations, in evaluating and facilitating comparisons of our operating performance between periods and between REITs by removing the impact of our capital structure (primarily interest expense) and asset base (primarily depreciation and amortization) from our operating results, even though EBITDA does not represent an amount that accrues directly to common stockholders. In addition, EBITDA is used as one measure in determining the value of hotel acquisitions and dispositions and along with FFO and Adjusted FFO, it is used by management in the annual budget process for compensation programs.

We further adjust EBITDA for certain additional items such as hotel property acquisitions and pursuit costs, amortization of share-based compensation, equity investment adjustments, the cumulative effect of changes in accounting principles, impairment of real estate assets, operating results from properties sold and other costs we believe do not represent recurring operations and are not indicative of the performance of our underlying hotel property entities. We believe Adjusted EBITDA provides investors with another financial measure in evaluating and facilitating comparison of operating performance between periods and between REITs that report similar measures.

# FFO and Adjusted FFO

We calculate FFO in accordance with standards established by the National Association of Real Estate Investment Trusts (NAREIT), which defines FFO as net income or loss (calculated in accordance with GAAP), excluding real estate-related depreciation, amortization and impairments, gains (losses) from sales of real estate, the cumulative effect of changes in accounting principles, similar adjustments for unconsolidated partnerships andj oint ventures, and items classified by GAAP as extraordinary. Historical cost accounting for real estate assets implicitly assumes that the value of real estate assets diminishes predictably over time. Since real estate values instead have historically risen or fallen with market conditions, most industry investors consider presentations of operating results for real estate companies that use historical cost accounting to be insufficient by themselves. We believe that the presentation of FFO provides useful supplemental information to investors regarding our operating performance by excluding the effect of real estate depreciation and amortization, gains (losses) from sales for real estate, impairments of real estate assets, extraordinary items and the portion of these items related to unconsolidated entities, all of which are based on historical cost accounting and which may be of lesser significance in evaluating current performance. We believe that the presentation of FFO can facilitate comparisons of operating performance between periods and between REITs, even though FFO does not represent an amount that accrues directly to common stockholders. Our calculation of FFO may not be comparable to measures calculated by other companies who do not use the NAREIT definition of FFO or do not calculate FFO per diluted share in accordance with NAREIT guidance. Additionally, FFO may not be helpful when comparing us to non-REITs.

We further adjust FFO for certain additional items that are not in NAREIT’s definition of FFO such as hotel property acquisition and pursuit costs, amortization of debt origination costs and share-based compensation, operating results from properties that are sold and other expenses we believe do not represent recurring operations. We believe that Adjusted FFO provides investors with useful supplemental information that may facilitate comparisons of ongoing operating performance between periods and between REITs that make similar adjustments to FFO and is beneficial to investors’ complete understanding of our operating performance.


# (iii) Pricing

Fees under the 2nd Intergroup Project Management Agreement are determined with reference to the following:

(i) engineering construction management service fees of (i) RMB8 million for phases 3 and 4 of the project; and (ii) (in respect of parts of the property under development) calculated at RMB100 per square meter based on total floor area above and below ground;

(ii) sales management service fees is calculated at 1% of the total property sales;

(iii) management service fees linked to the achievement of engineering cost management goals are calculated at 0.5% of total property sales;

(iv) management service fees linked to the achievement of quality management goals are calculated at 0.5% of total property sales; and

(v) management service fees linked to the price target are calculated at 0.5% of the total property sales.

# (iv) Other information

For the three financial years ended December 31, 2017, 2018 and 2019, the service fees received by our Group pursuant to the 2nd Intergroup Project Management Agreement amount to RMB29.19 million, RMB31.20 million and RMB35.64 million, respectively. Barring unforeseeable circumstances, we currently expect that the Dongying Project (and hence the 1st Intergroup Project Management Agreement) would be completed by 2023. We currently expect that the service fees to be received by our Group pursuant to the 2nd Intergroup Project Management Agreement for the financial years ending December 31, 2020, 2021 and 2022 would not exceed RMB36.53 million, RMB37.08 million and RMB37.74 million, respectively and that the aggregate service fees under such arrangement would not exceed RMB260 million.

Our Directors are of the view that the Intergroup Project Management Arrangements are on normal commercial terms or better that are fair and reasonable and in the interest of our Company and the Shareholders taken as a whole, taking into account: (i) in respect of the 1st Intergroup Project Management Agreement, it is essentially “passing through” in nature which enables our Group to provide project management services to a third party customer (namely the Fengxian Project Owner) under the pre-existing Fengxian Agreement with Project Owner, pursuant to which the Parent Group would not charge any fees or make any profit from our Group for such arrangement and any fees that pass through the Parent Group to our Group would be based on the service fees under the Fengxian Agreement with Project Owner. Moreover, such arrangement is also consistent with the principle of business delineation between our Parent Group and our Group; and (ii) in respect of the 2nd Intergroup Project Management Agreement, it is the provision of the project management services by our Group


to a customer (namely Shandong High Speed) in our ordinary and usual course of basis based on terms that are on normal commercial terms comparable to (or better than) the terms that our Group would offer to independent third party customers for comparable projects and scope of services.

Our Company does not contemplate that there would be any new commercial projects immediately after Listing for the provision of project management services to our connected persons. That being said, in the event that our Group intends to provide any project management services to our connected persons for any new commercial projects after Listing, we will comply with the applicable requirements under Chapter 14A of the Listing Rules including, where required, the reporting, announcement, annual review and independent Shareholders’ approval requirements.

# Independence of administrative capability

We have established our own organizational structure, and each department is assigned to specific areas of responsibilities. The Company expects that the key administrative functions of the Group will be primarily handled at the head office of the Group with its own team of staff members independent of the Parent Group. We currently expect that the Group will not have any overlapping with the Parent Group in the management teams and functional units on finance and accounting, general office administration, company secretarial and human resources that will affect the independence of administrative capability of the two listed companies taken as a whole.

Based on the above, our Directors are of the view that there is no operational dependence by our Group on the Parent Group and we are able to operate independently from the Parent Group after the Listing.

# Financial Independence

Our Group has its own financial management system, internal control and accounting systems, accounting and finance department, independent treasury function for cash receipts and payments and the ability to operate independently from Greentown China from a financial perspective.

For the years ended December 31, 2017, 2018 and 2019, our revenue generated from Greentown China were RMB84.9 million, RMB82.4 million and RMB118.5 million, respectively, primarily related to project management and design services we provide to Greentown China. As of the Latest Practicable Date, the Company was indebted to Greentown China in the amount of RMB540.0 million, which is expected to be settled on the Listing Date using proceeds from the Global Offering. Please refer to the section headed “Future Plans and Use of Proceeds” for further details. As of the Latest Practicable Date, an amount of approximately RMB454.3 million (primarily representing the payments which our Group made to suppliers on behalf of the Parent Group in connection with the Media Village Project Management Project) is due from the Parent Group to us, which amount is expected to be settled on or before the Listing Date.


# KEY AUDIT MATTERS

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

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

•	 Goodwill impairment assessment; and

•	 Impairment assessment on the investment in an associate.

Key Audit Matter	How our audit addressed the Key Audit Matter

Goodwill impairment assessment
Refer to Note 4 (Critical accounting estimates and
judgements) and Note 8 to the consolidated financial
statements.
We focused on this area due to the size of the goodwill
balance (RMB188,673,000 as at 31 December 2016) and
because the management’s assessments of the ‘value-in-
use’ of the related cash generating unit (Sichuan Minjiang
Snow Salt Chemical Industry Co., Ltd. (“Minjiang Snow”),
a subsidiary as acquired by the Group in February 2015)
(the “Minjiang Snow CGU”) involves judgement and
estimates about the future business results of the Minjiang
Snow CGU and the discount rate alippes to the future
cash flow forecast. The management’s assessment reveals
that there is no impairment on the goodwill.	We evaluated the composition of management’s future
cash flow forecasts, and the process by which they were
drawn up. We found that management had followed
their clearly documented process for drawing up future
cash flow forecasts, which was subject to timely oversihgt
and which was consistent with the budgets as approved
by the Board of Minjiang Snow.
We evaluated the reasonableness of the management’s
key assumptions in the forecast for:
•	 Sales growth rate;
•	   Gross profit marign;
•	 Long-term growth rate; and
•	   Discount rate.
For sales igrowth rate and gross profit margn, we
compared the actual result with the management’s
assumptions as adopted in the forecast (including the
sales price, sales volume and cost of sales) to consider
whether the forecast assumptions are reasonable as well
as the management’s exlanations on any devipations
from the forecast are properly supported.
For long-term growth rate, we compared the
management’s assumption with the result from our
internet research on the general growth in the economic
and chemical industry environment in China.
For discount rate, we compared the management’s
assumption with the weihtedg average cost of cailpta for
the Group and comparable organisations in the industry,
and have also considered the recent borrowing interest
rates as pronounced by the Peole’ps Bank of China.
We found that the aforesaid key assumptions as adopted
by management in the forecast are to be in acceptable
ranges.


Key Audit Matter	How our audit addressed the Key Audit Matter

	We checked the mathematical accuracy of the future
cash flow forecast and the ‘value-in-use’ calculations.
We checked the mathematical accuracy of the
management’s sensitivity calculations for analysing the
impact on the ‘value-in-use’ of the Minjiang Snow CGU
from using different sales growth rates, igross profit margn
and discount rates (as these key assumptions are
considered as most sensitive) which management has
assessed as the possible ranges of deviations. We
discussed the context of the level of headroom indicated
in the sensitivity analysis with management and evaluated
the adequacy of the disclosures made regarding the
assumptions.

Impairment assessment on the investment in an
associate
Refer to Note 4 (Critical accounting estimates and
judgements) and Note 10(b) to the consolidated financial
statements.
We focused on this area due to the associate, Jiangxi
Zhengge Investment Stock Co., Ltd. (“Jiangxi Zhengge”)
(an associate as acquired by the Group in December
2014), was continuously loss-making which constitutes
as an impairment indicator, the size of the investment
balance in Jiangxi Zhengge (RMB73,174,000 (including
the goodwill on acquisition of approximately
RMB8,593,000) at 31 December 2016) and also because
the management’s assessment of the ‘value-in-use’ of the
related cash generating unit (the “Jiangxi Zhengge CGU”)
involves judgement and estimates about the future
business results of the Jiangxi Zhengge CGU and the
discount rates alipes to the future cash flow fporecast.
The management’s assessment reveals that there is no
impairment on the investment.	The procedures which we have performed to address this
key audit matter are same as those procedures as we
have conducted for addressing the key audit matter
‘Goodwill impairment assessment’ as set out above.
We found that management had followed their clearly
documented process for drawing up future cash flow
forecasts, which was subject to timely oversihgt and
consistent with the budgets as approved by the Board of
Jiangxi Zhengge.
We found that the key assumptions (i.e. the sales growth
rate, gross profit marin, lgong-term growth rate and
discount rate) as adopted by management in the future
cash flow forecast for the Jiangxi Zhengge CGU are to be
in acceptable ranges.

# OTHER INFORMATION

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

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

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

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


\$3.5 million associated with executive reorganizations, respectively, which resulted in the acceleration of previously granted equity awards and other expenses.

# mPower Framework Agreement

On March 2, 2016, as a result of entering into a framework agreement with Bechtel Power Corporation ("Bechtel"), BWXT Modular Reactors, LLC and BDC NexGen Power, LLC, our partner in GmP, for the potential restructuring and restart of our mPower small modular reactor program (the "Framework Agreement"), we deconsolidated GmP from our financial statements as of the date of the Framework Agreement. We recorded a gain of approximately \$13.6 million during the year ended December 31, 2016 related to the deconsolidation of GmP as a component of Other – net on our consolidated statement of income. In the year ended December 31, 2016, we also recognized a \$30.0 million loss contingency as a result of the Framework Agreement, which was ultimately paid to Bechtel in the first quarter of 2017 following the receipt of Bechtel's notice that the mPower program would not be restarted.

# Other Income Statement Items

During the year ended December 31, 2018, other income (expense) decreased approximately \$28.4 million to a loss of \$24.8 million compared to a gain of \$3.6 million for the corresponding period of 2017. We experienced an increase in interest expense of \$12.9 million associated with higher levels of long term debt when compared to the prior year, which includes \$2.4 million of expense related to the recognition of prior deferred debt issuance costs associated with the Former Credit Facility. These items were partially offset by \$4.7 million of gains related to derivative instruments not designated as hedges. Other income and expense includes mark to market adjustments due to our immediate recognition of net actuarial gains (losses) for our pension and postretirement benefit plans, which totaled \$(32.6) million for the year ended December 31, 2018 compared to \$(11.1) million in the corresponding period of 2017.

During the year ended December 31, 2017, other income (expense) decreased approximately \$19.2 million to a gain of \$3.6 million compared to a gain of \$22.8 million for the corresponding period of 2016 due primarily to changes in the mark to market adjustments noted above. In addition, during the year ended December 31, 2016, we recorded a gain of \$13.6 million related to the deconsolidation of GmP and we were also released from substantially all outstanding performance guarantees for various projects executed by our former Power Generation business prior to the spin-off, which resulted in a gain of \$9.3 million. Other income and expense includes mark to market adjustments due to our immediate recognition of net actuarial gains (losses) for our pension and postretirement benefit plans, which totaled \$(11.1) million for the year ended December 31, 2017 compared to \$(21.3) million in the corresponding period of 2016.

# Provision for Income Taxes

	Year Ended December 31,

2018	2017	2016

(In thousands)

Income before Provision for Income Taxes	 $     280,145	 $     295,780	 $     257,268

Provision for Income Taxes	 $      52,840	 $     147,415	 $      73,656

Effective Tax Rate	18.9%	49.8%	28.6%

On December 22, 2017, H.R. 1, the Tax Cuts and Jobs Act (the "Act") was enacted, making significant changes to existing U.S. tax laws that impact BWXT, including, but not limited to, a reduction to the U.S. corporate income tax rate from 35% to 21% for tax years beginning after December 31, 2017, the taxation of global intangible low-taxed income ("GILTI") and additional deduction limitations related to executive compensation. We recognized the income tax effects of the Act within our consolidated financial statements in accordance with FASB Topic Income Taxes. Our Canadian operations continue to be subject to tax at a local statutory rate of approximately 25%.

For the year ended December 31, 2018, our provision for income taxes decreased \$94.6 million to \$52.8 million, while income before provision for income taxes decreased \$15.6 million to \$280.1 million. Our effective tax rate was approximately 18.9% for 2018, as compared to 49.8% for 2017. Our effective tax rate for 2018 was lower than the 2018 U.S. corporate income tax rate of 21% primarily due to remeasurement adjustments to our deferred tax assets as a result of accelerating additional contributions made in August 2018 to certain of our domestic pension plans for inclusion in our 2017 U.S. tax return.

For the year ended December 31, 2017, our provision for income taxes increased \$73.8 million to \$147.4 million, while income before provision for income taxes increased \$38.5 million to \$295.8 million. Our effective tax rate was approximately


49.8% for 2017, as compared to 28.6% for 2016. Our effective tax rate for 2017 was higher than the 2017 U.S. corporate income tax rate of 35% primarily due to \$53.0 million in income tax expense, which consisted of (i) \$49.5 million incurred in relation to the revaluation of our U.S. net deferred tax assets required due to the reduction of the U.S. federal tax rate from 35% to 21% for tax years starting on or after January 1, 2018; (ii) \$2.0 million incurred in relation to the transitional toll-charge on undistributed foreign earnings and profits; and (iii) \$1.5 million incurred in relation to the elimination of the performance-based criteria under I.R.C. §162(m) for our covered executives and the corresponding write off of certain deferred tax assets previously deductible under the performance-based criteria of I.R.C. §162(m).

See Note 5 to our consolidated financial statements included in this Report for further information on income taxes.

# EFFECTS OF INFLATION AND CHANGING PRICES

Our financial statements are prepared in accordance with GAAP, using historical U.S. dollar accounting ("historical cost"). Statements based on historical cost, however, do not adequately reflect the cumulative effect of increasing costs and changes in the purchasing power of the U.S. dollar, especially during times of significant and continued inflation.

In order to minimize the negative impact of inflation on our operations, we attempt to cover the increased cost of anticipated changes in labor, material and service costs, either through an estimate of those changes, which we reflect in the original price, or through price escalation clauses in our contracts. However, there can be no assurance we will be able to cover all changes in cost using this strategy.

# LIQUIDITY AND CAPITAL RESOURCES

Our overall liquidity position, which we generally define as our unrestricted cash and cash equivalents and short-term investments plus amounts available for borrowings under our credit facility, decreased by approximately \$160.4 million to \$370.0 million at December 31, 2018 compared to \$530.4 million at December 31, 2017, due to lower levels of cash on hand resulting primarily from repurchases of common shares and increases in pension contributions and dividends paid to common shareholders during the year ended December 31, 2018 when compared to 2017. We experienced net cash generated from operations in each of the years ended December 31, 2018, 2017 and 2016. Typically, the fourth quarter has been the period of highest cash flows from operating activities because of the timing of payments received from the U.S. Government on accounts receivable retainages and cash dividends received from our joint ventures.

On May 24, 2018, we and certain of our subsidiaries entered into a credit agreement (the "New Credit Facility") with Wells Fargo Bank, N.A., as administrative agent, and the other lenders party thereto. We also issued senior notes pursuant to an indenture among the Company, certain of our subsidiaries, as guarantors, and U.S. Bank National Association, as trustee. In connection with the closing of the New Credit Facility and the issuance of the notes, we concurrently repaid all outstanding debt obligations and terminated our credit agreement dated as of May 11, 2015, as amended, among the Company, certain of our subsidiaries, Bank of America, N.A., as administrative agent, and the other lenders party thereto (the "Former Credit Facility"). The Former Credit Facility consisted of (1) a \$400.0 million revolving credit facility, (2) a \$300.0 million term loan facility, (3) a \$137.5 million (U.S. dollar equivalent) Canadian dollar term loan facility, and (4) a \$112.5 million term loan facility.

# Credit Facility

The New Credit Facility includes a \$500.0 million senior secured revolving credit facility (the "New Revolving Credit Facility"), a \$50.0 million U.S. dollar senior secured term loan A made available to the Company (the "New USD Term Loan") and a \$250.0 million (U.S. dollar equivalent) Canadian dollar senior secured term loan A made available to BWXT Canada Ltd. (the "New CAD Term Loan"). All obligations under the New Credit Facility are scheduled to mature on May 24, 2023. The proceeds of loans under the New Credit Facility are available for working capital needs and other general corporate purposes.

The New Credit Facility allows for additional parties to become lenders and, subject to certain conditions, for the increase of the commitments under the New Credit Facility, subject to an aggregate maximum for all additional commitments of (1) the greater of (a) \$250 million and (b) 65% of EBITDA, as defined in the New Credit Facility, for the last four full fiscal quarters, plus (2) all voluntary prepayments of term loans, plus (3) additional amounts provided the Company is in compliance with a pro forma first lien leverage ratio test of less than or equal to 2.50 to 1.00.

The Company's obligations under the New Credit Facility are guaranteed, subject to certain exceptions, by substantially all of the Company's present and future wholly owned domestic restricted subsidiaries. The obligations of BWXT Canada Ltd.


Third-party Property Developers increased from 19.5% in 2018 to 22.8% in 2019, primarily due to our expanded business scale and increased adoption of technological solutions to reduce labor costs for our property management services. We also managed Jointly Developed Projects in 2019, which enjoyed a gross profit margin of approximately 23.1%.

The table below sets forth our average property management fee for property management services by property developer for the years indicated:

	For the year ended December 31,

2017	2018	2019

RMBp er sq.m. per month

Projects Developed by Zhenro
Property Group........................	2.09	2.21	2.47

Projects Solely Developed by Third-party
(1)Property Developers .................	2.91	2.25	1.72

(2)Jointly Developed Projects ...............	–	–	2.38

Overall average property management fee ...	2.27	2.22	2.14

Notes:

(1) Include (i) projects solely developed by independent third-party property developers, among which there was a project in 2018, for which we recognized revenue of RMB5.7 million for provision of property management services to the office occupied by Zhenro Group and such office was solely developed by an independent third-party developer; and (ii) the project in 2019, for which we recognized revenue of RMB3.2 million for provision of property management service to other properties developed by an associate of Zhenro Group, which associate was jointly held by Zhenro Group and Independent Third Parties for potential land reclamation. Zhenro Group held 49.51% of interest in such associate.

(2) Refer to projectsj ointly developed by Zhenro Property Group and other property developers for which Zhenro Property Group did not hold a controlling interest.

The increase in the average property management fee for property management services charged on Projects Developed by Zhenro Property Group during the Track Record Period was primarily due to the fact that we were able to charge higher property management fees for our services to certain new properties delivered for our management in 2018 and 2019 given our well-established track record and enhanced brand name and also due to the fact that certain office buildings under our management in 2018 and 2019 were located in prime locations in first- and second-tier cities such as Shanghai. The decrease in the average property management fee charged on Projects Solely Developed by Third-party Property Developers from 2017 to 2018 was primarily due to our continuous efforts in diversifying our income source by providing services to new third-party property developers at competitive prices. The average property management fee charged on projects solely developed by independent third-party property developers decreased in 2019 as compared to 2018 primarily due to the fact that certain new projects under our management were of relatively new property type for us, such as industrial parks, but were located in third- and fourth-tier cities where the average property management fees were relatively low as compared to those of other properties in our


project portfolio. The average property management fees charged on Projects Developed by Zhenro Property Group were lower than those charged on Projects Solely Developed by Third-party Property Developers in 2017 and 2018, primarily because a substantial portion of Projects Solely Developed by Third-party Property Developers were non-residential properties with relatively higher average property management fees as compared to residential properties. We also managed Jointly Developed Projects in 2019, which had an average property management fee that was on par with the that of the Projects Developed by Zhenro Property Group.

The following table sets forth our gross profit and gross profit margin from property management services by property type for the years indicated:

	For the year ended December 31,

2017	2018	2019

Gross
profit	Gross
profit
marign	Gross
profit	Gross
profit
marign	Gross
profit	Gross
profit
marign

RMB’000	%	 RMB’000	%	 RMB’000	%

Residential properties ....	23,104	19.9	31,521	18.7	48,143	21.7

Non-residential
properties...........	6,841	22.3	17,973	22.6	30,943	25.7

Total gross profit/overall
gross iprofit margn ....	29945,	20.4	49494,	20.0	79086,	23.1

The table below sets forth the range of monthly property management fees charged for Projects Developed by Zhenro Property Group, Projects Solely Developed by Third-party Property Developers and Jointly Developed Projects during the Track Record Period by property type:

	Projects
Developed
by Zhenro
Property
Group	Projects
Solely
Developed
by Third-
party
Property
Developers	Jointly
Developed
Projects

RMBp er sq.m. per month

Residential properties ..................	0.82–4.44	 0.54–2.65	1.71-3.36

(1)Non-residential properties..............	14.16–52.60	 0.11–22.73	 –

Note:

(1) Non-residential properties include commercial properties and public properties, among others.


4．设定受益计
划变动额结转
留存收益

5．其他综合收
益结转留存收
益

6．其他

（五）专项储备

1．本期提取

2．本期使用

（六）其他					5,726,
745.16								5,726,
745.16		5,726,
745.16

四、本期期末余
额	389,6
16,42
0.00				770,81
1,263.
83	198,47
0,260.
81	-93,30
1,014.
86		91,850
,457.4
0		661,53
5,922.
37		1,622,
042,78
7.93	26,750
,642.3
0	1,648,
793,43
0.23

上期金额

单位：元

项目	2020 年年度

归属于母公司所有者权益	少数股
东权益	所有者
权益合
计

股本	其他权益工具	资本
公积	减：库
存股	其他
综合
收益	专项
储备	盈余
公积	一般
风险
准备	未分
配利
润	其他	小计

优先
股	永续
债	其他

一、上年期末
余额	376,6
56,42
0.00				675,29
6,222.
00		-93,28
4,835.
22		73,556
,122.9
7		493,42
9,402.
21		1,525,
653,33
1.96	29,921,
607.61	1,555,5
74,939.
57

 加：会计
政策变更

    前期
差错更正

     同一
控制下企业合
并

    其他

二、本年期初
余额	376,6
56,42
0.00				675,29
6,222.
00		-93,28
4,835.
22		73,556
,122.9
7		493,42
9,402.
21		1,525,
653,33
1.96	29,921,
607.61	1,555,5
74,939.
57

三、本期增减
变动金额（减	13,00
0,000				63,911
,950.0	56,520
,000.0	8,718.
07		5,761,
657.49		60,512
,369.5		86,674
,695.1	-299,38
0.97	86,375,
314.18


少以“－”号填
列）	.00				0	0					9		5

（一）综合收
益总额							8,718.
07				85,256
,848.0
8		85,265
,566.1
5	-299,38
0.97	84,966,
185.18

（二）所有者
投入和减少资
本	13,00
0,000
.00				54,550
,000.0
0	56,520
,000.0
0							11,030
,000.0
0		11,030,
000.00

1．所有者投入
的普通股	13,00
0,000
.00				43,670
,000.0
0								56,670
,000.0
0		56,670,
000.00

2．其他权益工
具持有者投入
资本

3．股份支付计
入所有者权益
的金额					10,880
,000.0
0	56,520
,000.0
0							-45,64
0,000.
00		-45,640
,000.00

4．其他

（三）利润分
配									5,761,
657.49		-24,74
4,478.
49		-18,98
2,821.
00		-18,982
,821.00

1．提取盈余公
积									5,761,
657.49		-5,761,
657.49

2．提取一般风
险准备

3．对所有者
（或股东）的
分配											-18,98
2,821.
00		-18,98
2,821.
00		-18,982
,821.00

4．其他

（四）所有者
权益内部结转

1．资本公积转
增资本（或股
本）

2．盈余公积转
增资本（或股
本）

3．盈余公积弥
补亏损


	Note	2017	2016

RMB’000	RMB’000

Non-current assets

Property, plant and equipment	12	389,434	455,748

Interests in leasehold land held for own use under operating leases	12	62,968	64,281

		452,402	520,029

Intangible assets	13	17	3,476

Goodwill	14	441,475	499,471

Interest in associates	16	–	7,459

Investments in equity securities	17	1,000	1,100

Other receivables	20	2,984	2,647

Deferred tax assets	27	912	1,095

		898,790	1,035,277

Current assets

Inventories	18	131,137	164,938

Drama series and films	19	201,747	118,892

Trade and other receivables	20	437,267	228,712

Pledged bank deposits	21	32,884	1,626

Cash and bank	22	155,598	198,037

		958,633	712,205

Current liabilities

Trade and other payables	23	230,040	227,313

Bank loans	24	201,250	195,000

Convertible bonds	25	159,659	–

Obligations under finance leases	26	–	3,850

Current taxation	27	17,820	14,221

		608,769	440,384


		2017	2016

Note	RMB’000	RMB’000

Net current assets		349,864	271,821

Total assets less current liabilities		1,248,654	1,307,098

Non-current liabilities

Non-current borrowings	25	229,672	206,104

Deferred tax liabilities	27	1,025	1,100

		230,697	207,204

Net assets		1,017,957	1,099,894

Capital and reserves

Share capital	28	66,559	66,559

Reserves	28	942,837	1,023,956

Total equity attributable to equity shareholders of the Company		1,009,396	1,090,515

Non-controlling interests		8,561	9,379

Total equity		1,017,957	1,099,894

Approved and authorised for issue by the board of directors on 29 March 2018.

Liu Dong	Tan Bin

Directors	Directors


# (v) Quorum for meetings and separate class meetings

No business shall be transacted at any general meeting unless a quorum is present when the meeting proceeds to business, but the absence of a quorum shall not preclude the appointment of a chairman.

The quorum for a general meeting shall be two members present in person (or, in the case of a member being a corporation, by its duly authorised representative) or by proxy and entitled to vote. In respect of a separate class meeting (other than an adjourned meeting) convened to sanction the modification of class rights the necessary quorum shall be two persons holding or representing by proxy not less than one-third in nominal value of the issued shares of that class.

# (vi) Proxies

Any member of the Company entitled to attend and vote at a meeting of the Company is entitled to appoint another person as his proxy to attend and vote instead of him. A member who is the holder of two or more shares may appoint more than one proxy to represent him and vote on his behalf at a general meeting of the Company or at a class meeting. A proxy need not be a member of the Company and is entitled to exercise the same powers on behalf of a member who is an individual and for whom he acts as proxy as such member could exercise. In addition, a proxy is entitled to exercise the same powers on behalf of a member which is a corporation and for which he acts as proxy as such member could exercise if it were an individual member. Votes may be given either personally (or, in the case of a member being a corporation, by its duly authorised representative) or by proxy.

# (f) Accounts and audit

The board shall cause true accounts to be kept of the sums of money received and expended by the Company, and the matters in respect of which such receipt and expenditure take place, and of the property, assets, credits and liabilities of the Company and of all other matters required by the Companies Act or necessary to give a true and fair view of the Company’s affairs and to explain its transactions.

The accounting records must be kept at the registered office or at such other place or places as the board decides and shall always be open to inspection by any Director. No member (other than a Director) shall have any right to inspect any accounting record or book or document of the Company except as conferred by law or authorised by the board or the Company in general meeting. However, an exempted company must make available at its registered office in electronic form or any other medium, copies of its books of account or parts thereof as may be required of it upon service of an order or notice by the Tax Information Authority pursuant to the Tax Information Authority Act of the Cayman Islands.

A copy of every balance sheet and profit and loss account (including every document required by law to be annexed thereto) which is to be laid before the Company at its general meeting, together with a printed copy of the Directors’ report and a copy of the auditors’ report, shall not less than twenty-one (21) days before the date of the meeting and at the same time as the notice of annual general meeting be sent to every person entitled to receive notices of general meetings of


the Company under the provisions of the Articles; however, subject to compliance with all applicable laws, including the rules of the Stock Exchange, the Company may send to such persons summarised financial statements derived from the Company’s annual accounts and the directors’ report instead provided that any such person may by notice in writing served on the Company, demand that the Company sends to him, in addition to summarised financial statements, a complete printed copy of the Company’s annual financial statement and the directors’ report thereon.

At the annual general meeting or at a subsequent extraordinary general meeting in each year, the members shall appoint an auditor to audit the accounts of the Company and such auditor shall hold office until the next annual general meeting. Moreover, the members may, at any general meeting, by special resolution remove the auditors at any time before the expiration of his terms of office and shall by ordinary resolution at that meeting appoint another auditor for the remainder of his term. The remuneration of the auditors shall be fixed by the Company in general meeting or in such manner as the members may determine.

The financial statements of the Company shall be audited by the auditor in accordance with generally accepted auditing standards which may be those of a country orj urisdiction other than the Cayman Islands. The auditor shall make a written report thereon in accordance with generally accepted auditing standards and the report of the auditor must be submitted to the members in general meeting.

# (g) Dividends and other methods of distribution

The Company in general meeting may declare dividends in any currency to be paid to the members but no dividend shall be declared in excess of the amount recommended by the board.

The Articles provide dividends may be declared and paid out of the profits of the Company, realised or unrealised, or from any reserve set aside from profits which the directors determine is no longer needed. With the sanction of an ordinary resolution dividends may also be declared and paid out of share premium account or any other fund or account which can be authorised for this purpose in accordance with the Companies Act.

Except in so far as the rights attaching to, or the terms of issue of, any share may otherwise provide, (i) all dividends shall be declared and paid according to the amounts paid up on the shares in respect whereof the dividend is paid but no amount paid up on a share in advance of calls shall for this purpose be treated as paid up on the share and (ii) all dividends shall be apportioned and paid pro rata according to the amount paid up on the shares during any portion or portions of the period in respect of which the dividend is paid. The Directors may deduct from any dividend or other monies payable to any member or in respect of any shares all sums of money (if any) presently payable by him to the Company on account of calls or otherwise.

Whenever the board or the Company in general meeting has resolved that a dividend be paid or declared on the share capital of the Company, the board may further resolve either (a) that such dividend be satisfied wholly or in part in the form of an allotment of shares credited as fully paid up, provided that the shareholders entitled thereto will be entitled to elect to receive such dividend


# PEOPLE-ORIENTED

The “people-oriented” is one of the core concepts of the Group. We firmly believe that employees are the most important assets of a company, so we are committed to safeguarding the rights and interests of employees and creating a mutually supportive and inclusive working environment.

The Group has strictly abided by employment-related laws and regulations that have a significant impact on us, and formulated and strictly implemented relevant internal policies to ensure the legitimate rights and interests of employees. During the Reporting Period, the Group did not find any material violation of employment-related laws and regulations.

The Groudp comlipe with
emlpoyment-related laws and
regulations that have a significant impact on us
(including but not limited to)	Internal policies of the Group
(including but not limited to)

Labour laws and regulations
• Labour Law of the Peol’pes Reblhpuic of Cina
• Labour Contract Law of the Peol’pes Reipublc of
China
• Special Rules on the Labour Protection of Female
Emlpoyees
• L’aw of the Peolblpes Repuic of China on the
Protection of Women’s Rihgts and Interests
• Provisions on the Prohibition of the Emlpoyment of
Child Labour
• Law of the Peol’es Reblhpuic of Cina on thpe
Protection of Minors
Social Security and Welfare
• Social Insurance Law of the Peol’pes Reblpuic of
China
• Regulations on Work-Related Injury Insurance	• Remuneration Management System
• Recruitment Management System
• Management Measures of the Training for Teachers
and Staff
• Incentive Systems on Talent Recruitment by All
Emloyees of China New Hihger Edpucation Group
• Measures on Imlipementaton of Reserve Cadres
Cultivation of China New Hiher Edgucation Group
• Measures on Imlpementation and Management of
Training for Teachers and Staff of the Group
• Attendance and Vacation Management System
for Headquarters of China New Hiher Edgucation
Group
• Benefit Management System for Headquarters of
China New Hihger Education Group


# Employment Management

Recruitment and Dismissal	The Gr’ouRps ecruitment Management System reldguates the stanards and
procedures for staff recruitment, and improves recruitment efficiency and talent
qualitliy. Job appcants need to go throuhg a rigorous recruitment process before
they can be hired, including written examination, preliminary qualification
examination, preliminary professional examination, second-round examination
and background investigation.
We have always adopted an open, fair and anti-discriminatory recruitment
policy and treated every job alipcant equally. Job aliillpppcants w not be treated
differently because of their age, gender, race, nationality, reliigon or hilpysca
defects.
All emldpoyees are emlipodye n accorance with the following three princilpes:
1.   Based on the lprincipe that knowledge, moral character, ability,
experience and other conditions are suitable for positions or posts;
2.   All examinations shall be conducted according to the prescribed
procedures, and the lprincipe of merit-based admission shall be taken as
the lprincipe;
3.   Exceptional emlihpoyment must comlpy wt the lprincipe of approval by
the Group.
In addition, the Group also has a standardized resilgnation process for empoyees.
If an emlilfpoyee ntends to aippy or resignaton, he/she should submit a formal
resignation alippcation to the head of his/her department in person according
to the procedures. The resignation alippcation will be verified bly the empoyee
relationship staff, then approved by the person in charge and the head of the
human resources department, and finally approved by the president. After the
resignation alipcation is alpproved, the emiipoyee s requred to handover hips/her
work to ensure that the work is followed up by other emlpoyees. If an emlpoyee
is involved in violations of laws and regulations or serious dereliction of duty,
the Group will terminate the labour contract with such emlpoyee according to
internal procedures.

Remuneration and Promotion	In order to attract and pool outstanding talents, the Group has provided
competitive remuneration and benefits, and makes a remuneration adjustment
annually. We will decide the adjustment range according to inflation rate,
increase in living standard, market talent sulpy and demand, annualp
performance evaluation and other factors.
The Group has formulated the Measures on Imlementation of Rpeserve Cadres
Cultivation of China New Hiher Edgucation Group and established a sound
cadre selection and training mechanism. We have established a reserve cadre
pool according to the selection princilpe of “openness, fairness and justice”, and
regard excellent performance in annual assessment and various appraisals as a
necessary condition for selection and reserve of talents. We have adjusted the
reserve cadre pool at all levels every year.

Working hours and holidays	We have imlpanted the sfystem o workinfidg ve ays a week with eihgt hours a
daEy. mlpoyees can enjoy public holidays, paid annual leave, marriage leave,
maternity leave, sick leave and funeral leave etc..

Prevention of child labour
and forced labour	The Group strictly prohibits the emlhilpobyment of cd laour and forced labour.
To prevent such situations, we check the personal identity documents of
candidates during the recruitment and emlpoyment process to ensure that they
are persons aged 16 or above. In addition, we sign equal emlpoyment contracts
with emldllpoyees an wi not force emlpoyees to work over normal working
hours. If the situation occurs, we will hold the staff of the relevant departments
accountable for it.