Reinventing Ourselves Touching Lives

Reinventing Ourselves Touching Lives Hyflux Ltd Annual Report 2007 Contents 03 Message from Group CEO, President and Managing Director 06 Our Global Presence 08 About Hyflux 10 Board of Directors 14 Corporate Senior Management 16 Business Units Senior Management 18 Financial Highlights & Review 24 Corporate Social Responsibility 25 The Year in Review 28 Human Capital 30 Awards & Accolades 32 Our Water Business 38 Our Industrial Manufacturing Processes Business 40 Our Specialty Materials Business 42 Our Energy Business 46 Our Research & Development

Financial Report 2007 49 Directors’ Report 55 Statement by Directors 56 Independent Auditors’ Report 57 Consolidated Income Statement 58 Balance Sheets 60 Statements of Changes in Equity 63 Consolidated Cash Flow Statement 67 Notes to the Financial Statements 131 Corporate Governance Statement 141 Supplementary Information 143 Statistics of Shareholdings 144 Substantial Shareholders 145 Notice of Annual General Meeting 149 Notice of Books Closure Proxy form Corporate Information

Cover Image (from left to right) Top Row: Freddy Ong (Facilities, Security & Administration), Fadelah Ibrahim (Membrane Production). Middle Row:Joseph Almaraj (Technology, Non-Water), Benedict Lim (Finance), Gerald Manceau (O&M), Tracy Chia (EPC). Bottom Row: Gursharon Kaur (Human Resources), Esther New (CEO Office). OUR VISION OUR VALUES

To be the leading company that Boldness the world seeks for innovative and Dare to dream, dare to do and dare effective environmental solutions. to excel. OUR MISSION Entrepreneurship Nurture the entrepreneurial spirit, To provide efficient and cost- embrace challenge and master change. effective solutions to meet our Satisfaction clients’ needs through innovation Exceed internal and external customer and technological advancement. satisfaction, take pride in work and deliver excellence.

Testimony Be the face behind the brand, excel in business conduct and embrace best practices in corporate governance.

Reinventing Ourselves Touching Lives Hyflux LtdAnnual Report 2007 1 Reinventing Ourselves Touching Lives

Since we started our business 19 years ago, we have evolved from selling water treatment systems, to building NEWater plants, raw water treatment plants, and seawater desalination plants, to providing a complete suite of turnkey project solutions.

We have also reinvented ourselves. In new ventures like our energy business, we tap on the experience we have gained from our membrane-based solutions for our water business.

Through our integrated solutions, our products and services, we touch the lives of many people, customers and stakeholders, directly and indirectly, in both emerging and mature markets.

2 Hyflux LtdAnnual Report 2007 Reinventing Ourselves Touching Lives Message from Group CEO, President and Managing Director

“We have to make visible the Hyflux values not seen by others so that we can attract and retain the best people to join us, and deliver what we promise to our shareholders. We will keep pushing the boundary and stretching our limits as we reinvent ourselves to become a global player.”

Reinventing Ourselves The year 2007 was an exciting year for Hyflux as we laid the essential building blocks in human capital, technology platforms and effective capital structures to manage anticipated higher growth. We built on the momentum gained in 2006 in our water and oil recycling businesses, as well as our asset-light strategy. We are glad that we have created significant milestones in these areas in 2007.

Thank you for staying with us on this journey as we grew from a modest three-staff company in 1989 to what we are today with over 1,000 staff. Hyflux was the first water company listed in Singapore in January 2001 with a market capitalisation of just over S$50 million. We have since grown more than 30 times. We remain committed to growing shareholder value. In December 2007, we listed the first pure play business trust - Hyflux Water Trust - to focus on water projects, with an initial portfolio of 13 China projects. We are glad to share with shareholders that Hyflux Water Trust has been nominated for the 2008 Global Water Intelligence Deal of the Year.

Our business environment remains very positive especially in water. To date, we have a robust pipeline of about 40 plants.

With the rapid industrialisation of Asia and the Middle East and North Africa (MENA) region and growing awareness to handle environment issues, we are well positioned for further growth. I am pleased that several new colleagues have joined our management team in the last year bringing their depth and experience to fuel our growth. More importantly, they share my vision and passion for Hyflux and are committed to bring Hyflux to greater heights.

Message from Group CEO, President and Managing Director Hyflux LtdAnnual Report 2007 3 In strengthening initiatives in our oil recycling business launched in 2006, we have since collaborated and “Our order book has doubled formed joint ventures with major players in Singapore, to S$863 million in 2007 China, Saudi Arabia, and Vietnam. and the Group has long-term We will continue to set new benchmarks as we expand in our four business pillars: water, industrial operation and maintenance manufacturing processes, specialty materials and energy. As we enlarge our overseas footprints, we will contracts that generate continue to try out new things and new ways of doing things, with the same energy, nimbleness and passion. recurring income for the next We have to make visible the Hyflux values not seen 25 to 30 years.” by others so that we can attract and retain the best people to join us, and deliver what we promise to our shareholders. We will keep pushing the boundary and government placing more emphasis in building water stretching our limits as we reinvent ourselves to become treatment plants throughout the cities. a global player. Since our early pioneering efforts in the China municipal Financial Performance market in 2004, we have today more than 30 projects, 2007 saw the progressive reaping of the fruits of our covering wastewater treatment and water recycling labour planted in 2006. We fulfilled our commitment across China. In line with today’s trend of government of unlocking the value of our water assets with the utilities seeking design-build-operate as well as design- divestment of the SingSpring desalination plant in the build-finance-operate expertise, we are well positioned beginning of the year and the launch of our Hyflux Water to provide our integrated environmental solutions from Trust in year-end. membrane technology to EPC to financing to installation to operation for the burgeoning China market. Our revenue in 2007 jumped by 35% to S$192.8 million with net earnings of S$32.9 million, compared to On the industrial front, we have also been active in the S$142.4 million in revenue with net earnings of S$15.5 biotechnology, chemical, electronics, petrochemical, million in 2006. and pharmaceutical sectors in 26 provinces for more than 12 years, serving some 500 clients. In addition Operating expenses – personnel and development costs to having two L-lactic acid manufacturing facilities in – in 2007 increased in line with our growth. We will China, we are also building used oil recycling centres in continue to invest in human capital which is necessary the country. to support the Group’s expansion plans as well as research and development activities. While we seek We will continue to expand our presence and success in aggressive growth, we practise prudent spending across China, where we have made a name for ourselves. the company amidst increasing costs of goods and fierce competition around the world. Revenue from Middle East & North Africa (MENA) and other regions contributed 12% of the Group’s revenue, Our order book has doubled to S$863 million in close to a two-fold increase from 2006. We expect 2007 and the Group has long-term operation and strong growth from this region. We entered into a joint maintenance contracts that will generate recurring venture (jointly with Malakoff Berhad) with Algerian income for the next 25 to 30 years. Energy Company to design, develop, finance, construct, operate and maintain a seawater desalination plant of Pushing Boundaries 200,000 m3/day at Tlemcen, Algeria for a period of 25 Our municipal sales increased by 96% to S$89 million years, making this the largest plant to date for Hyflux. in 2007 compared to S$45.3 million in 2006. We This project achieved financial close in January 2008. also registered steady growth in the industrial sector with revenue of S$102.3 million in 2007 compared to Success in our Energy Business Pillar S$90.1 million in 2006. China continues to be the key Leveraging on the success of our membrane growth driver, contributing 81% of the total revenue as technologies, 2007 was a year of building a strong compared to 74% in the previous year, with the Chinese foundation for our used oil recycling business.

4 Hyflux LtdAnnual Report 2007 Reinventing Ourselves Touching Lives We will leverage on our technology applications, human talent and financial capabilities, and build long-term shareholder value to drive sustainable growth in our key markets to give us the competitive edge.

Touching Lives At Hyflux, we persist with our ideas and aspirations. The spirit of Hyflux goes beyond the conventional as we have demonstrated over the years. But, what sets us apart is our passion. We always do things with passion.

Even as we grow regionally, we remain rooted in our core values as we continue to touch the lives of the millions of people across the globe directly and indirectly benefiting from the solutions we provide.

Your Partnership is Paramount We are optimistic about the overall environment on the water, wastewater and used oil recovery sectors in China, India, South East Asia and the MENA region as countries are increasingly seeking solutions to address their environmental and water issues.

Our established track record, know-how and differentiated capabilities and your partnership will provide us with a strong platform to continue our growth We forged a collaboration with BP International Ltd in the municipal and industrial sectors. and the Dalian Institute of Chemical Physics to jointly develop and commercialise the use of zeolite dewatering I would like to express my heartfelt appreciation to membranes in the production of biofuels. each of you – our shareholders, directors, partners and customers. I would also like to thank Mr Rajnish Together with Saudi Economic Development Company Gopinath, who served as Executive Director with Hyflux (SEDCO) and Lube Oil Re-refining Co (LUBREC), we in 2006. We are proposing a final exempt (one-tier) invested S$45 million in a 24,000 tonnes/year used oil dividend of 1.89 cents per share. recycling plant in Jeddah, Saudi Arabia. This marks the first membrane-based oil recycling plant in Saudi Arabia To our Hyflux staff, I thank each one of you for your that treats used oil from power, petrochemical, marine dedication and for living out the Hyflux spirit. Your zeal and automotive industries to recover high grade base oil. and contributions will be the foundation upon which we We expect to deliver revenue from this joint venture will achieve our vision of becoming the leading company in 2008. that the world looks to for innovative and effective environmental solutions. An additional joint venture was formed with Success Blossom Environment Vietnam Joint Stock Company of Vietnam, amounting to more than S$14 million worth of Olivia Lum Ooi Lin oil recycling projects. Group CEO, President and Managing Director Research and Development As a technology company, research and development will continue to play a significant role as we strive towards more commercialisation of technologies, bringing new environmental solutions to meet customers’ needs. We will seek strategic alliances that will complement our technologies and know-how to make our solutions more affordable and efficient.

Message from Group CEO, President and Managing Director Hyflux LtdAnnual Report 2007 5 Our Global Presence

Water Industrial Manufacturing Processes Specialty Materials Energy Water Project Partners / JVs Industrial Manufacturing Processes Project Partners / JVs Specialty Materials Project Partners / JVs Energy Project Partners / JVs

Singapore Offices: Malaysia Office: China Offices: Algeria Office: Headquarters @ Hyflux B11-LG-2, Block B, 99 Ju Li Road Rue HALES Said Building Megan, Corporate Park, Zhangjiang High-Tech Park No. 47, La Redoute, 202 Kallang Bahru Jalan 1/125E, Taman Desa Pudong Area Property 33, No. 21 Singapore 339339 Petaling, 57100 Shanghai 201203 PRC Municipality of EL Mouradia Kuala Lumpur Algiers 5 Changi South 1517 Central Plaza Singapore 486793 188 Jiefangbei Road Heping District Tianjin 300042 PRC

6 Hyflux LtdAnnual Report 2007 Reinventing Ourselves Touching Lives Hyflux’s humble beginnings can be traced back to nearly two decades ago. Today, we have evolved into a leading player in the global arena, providing novel environmental solutions using membrane technology. We have international operations and projects in Singapore and Southeast Asia, China, India, as well as in the Middle East and North Africa regions.

Not to scale.

Dubai Office: India Office: The Netherlands Office: PO box 261475 Unit 7A & 7B Lage Djik 29B Office No. LB10 106 Doshi Towers 5705 BX Helmond Jebel Ali 156 Poonamallee High Road PO Box 2128 Dubai, U.A.E Kilpauk Chennai 600010 5700 DA Helmond India The Netherlands

Global Presence Hyflux LtdAnnual Report 2007 7 About Hyflux

“Hyflux’s fundamentals remain strong…the company is making good progress on its oil recycling venture in Saudi Arabia and that it is optimistic on China, where it had been awarded 20 municipal water treatment plant projects and is developing another 30 municipal and industrial projects.”

– The Business Times, 16 May 2007

8 Hyflux LtdAnnual Report 2007 Water. Industrial Manufacturing Processes. Specialty Materials. Energy.

These are just some of the many areas in which Hyflux In 2001, Hyflux became the first water treatment has a strong presence. specialist to be listed on the Singapore Stock Exchange. In 2007, we marked another first on the Singapore Headquartered in Singapore, Hyflux’s expertise in Stock Exchange by listing the Hyflux Water Trust (HWT) harnessing membrane technologies has gained on the mainboard. HWT is the first pure-play global international recognition as Asia’s leading company to water trust to be listed in Asia. It offers investors a provide innovative and effective environmental solutions financial platform to invest in water infrastructure assets to the world. We continue to establish our footprints in China, India, the MENA region, and other high-growth globally, in addition to our operations and projects markets globally. spanning across China, India, the Middle East and North Africa region as well as Singapore and Southeast Asia. Hyflux’s strength as a membrane technology company has enabled it to identify niche applications in several Founded in 1989 by Ms Olivia Lum Ooi Lin, Group CEO, sectors other than water – moving into the fields of President and Managing Director, Hyflux has grown from clean energy in environmental applications such as a fledging company into what it is today. Hyflux initially the recycling of used oil, processing of bioethanol as started as Hydrochem (S) Pte Ltd to sell water treatment well as in the production of bio-based materials, such systems with a modest start-up capital of S$20,000 and as lactic acid. three staff, including Olivia herself. Hyflux will continue to capitalise on the global market As a leading integrated solutions provider, we offer growth in offering environmental solutions in the four services that cover the whole spectrum of research business pillars, through R&D, technologies, human and development, process design and development, capital, technical know-how and strategic partnerships. manufacturing and systems assembly, engineering, procurement and construction (EPC), and financing, operation and maintenance of a wide range of water treatment and liquid separation projects.

About Hyflux Hyflux LtdAnnual Report 2007 9 Board of Directors

PROFESSOR GAY CHEE CHEONG TEO KIANG KOK OLIVIA LEE JOO HAI CHRISTOPHER RAJ MITTA TAN TECK MENG Non-Executive Non-Executive LUM OOI LIN Non-Executive MURUGASU Non-Executive Non-Executive Independent Non-Independent Group CEO, Independent Non-Executive Independent Independent Director Director President and Director Non-Independent Director Director Managing Director Director

10 Hyflux LtdAnnual Report 2007 Reinventing Ourselves Touching Lives Olivia Lum OOI LIN Teo Kiang Kok Group CEO, President and Managing Director Non-Executive Non-Independent Director Ms Lum started corporate life as a chemist with Glaxo Mr Teo has been a Non-Executive Non-Independent Pharmaceutical and left in 1989 to start up Hydrochem Director of Hyflux Ltd since December 2000. He is (S) Pte Ltd, the precursor to Hyflux Ltd. also a member of the company’s Nominating, Audit, Remuneration, Risk Management and Executive Managing the Group for 19 years now, Ms Lum is the Committees. driving force behind Hyflux’s growth and business expansion, responsible for policy and strategy A lawyer with more than 20 years, Mr Teo is a senior formulation and corporate direction. partner of Shook Lin & Bok, a firm of advocates and solicitors. He is currently the finance partner and head A former Nominated Member of Parliament, Ms Lum of corporate finance and China practice groups in Shook holds several positions in the public service. Presently, Lin & Bok. His main areas of practice are corporate she sits on the board of a number of companies. She finance, international finance and securities. He has is a Member of the NUS Board of Trustees and serves advised listed companies extensively on corporate law as a Director for Singapore Exchange Ltd, Temasek and compliance requirements. Life Sciences Laboratory Limited as well as National University Health System. In addition to her Mr Teo serves on the boards of a number of other commitments in Hyflux, Ms Lum is also the President companies including Memtech International Limited, of the Singapore Water Association as well as a member Jadason Enterprises Ltd, Ocean Sky International Ltd of Singapore-Tianjin Economic & Trade Council, and Unisteel Technology Limited. Singapore-Liaoning Economic & Trade Council, and Singapore-Jiangsu Cooperation Council. Mr Teo holds an Honours degree in Law from the University of Hull and is a Barrister-at-Law from Among the many accolades Ms Lum has received for Lincoln’s Inn. her entrepreneurial achievements are: the Winner of the Regional Growth Award by Nihon Keizai Shimbun at Lee Joo Hai the 11th Nikkei Asia Prize 2006, and most recently the Non-Executive Independent Director Rising Asia - The Next 10 Years Award by the Singapore Mr Lee has been a Non-Executive Independent Director Institute of International Affairs (SIIA) and AXN ASIA. of Hyflux Ltd since December 2000. He is also the She was also awarded Asiamoney’s Corporate Executive Chairman of the Audit Committee and a member of of the Year 2005 in Singapore. the Nominating, Remuneration, Risk Management and Executive Committees. Ms Lum holds an Honours degree in Science from the National University of Singapore. Mr Lee is a CPA and a member of both the Institute of Certified Public Accountants of Singapore and the Institute of Chartered Accountants in England and Wales. He is currently a partner in a public accounting firm in Singapore and has more than 20 years of experience in accounting and auditing.

Board of Directors Hyflux LtdAnnual Report 2007 11 Mr Lee also sits on the board of other listed companies, Mr Gay holds Honours degrees in Electronics including Lung Kee (Bermuda) Holdings Ltd and Engineering from the Royal Military College of Science, Unisteel Technology Limited. Shrivenham United Kingdom, and in Economics from University of London. He also has a Masters of Gay Chee Cheong Business Administration from the National University Non-Executive Independent Director of Singapore. Mr Gay has been a Non-Executive Independent Director of Hyflux Ltd since August 2001. He is also Christopher Murugasu the Chairman of the Remuneration and Nominating Non-Executive Non-Independent Director Committees and a member of the Audit and Executive Mr Murugasu has been a Non-Executive Non- Committees. He also serves on the Boards of Raffles Independent Director of Hyflux Ltd since February 2005. Education Corporation Limited and Midas Holdings Limited. Mr Murugasu is also the Chairman of the Risk Management Committee and a member of the Mr Gay co-founded and was the CEO of 2G Capital Remuneration Committee. Private Limited, a private investment company investing in equities and private companies in the Asia Pacific Previously Senior Vice President for Corporate Services economies. The company was awarded Highest Net at Hyflux Ltd, he was responsible for the Group’s human Profit in 2006 and Net Profit Excellence in 2007 in the resources, procurement and general administration annual SME 500 ranking. functions. Prior to joining Hyflux, Mr Murugasu had accumulated over 15 years of experience in the public Mr Gay was the Group Executive Director of JIT sector as well as with a foreign bank. Electronics Pte Ltd for four years responsible for corporate development, business strategy and He holds an Honours degree in Computing Science investments of the JIT Group. He established operational from Imperial College, United Kingdom, and a Master’s subsidiaries in Singapore, China and Hungary and degree from the London School of Economics, United served concurrently as their respective Managing Kingdom. Directors. He initiated and was responsible for the public listing of JIT Electronics in November 1997 and the Raj Mitta subsequent merger of JIT with Flextronics International Non-Executive Independent Director valued at $1.16 billion in August 2000. Mr Raj Mitta has been a Non-Executive Independent Director of Hyflux since April 2007. He is also a member Mr Gay was awarded the Singapore Armed Forces of the Risk Management Committee. Overseas Training Award (Graduating) and attended the Royal Military Academy (RMA), Sandhurst and the Mr Mitta is currently the Chairman of Essential Royal Military College of Science, Shrivenham, United Value Associates Pte Ltd, a boutique high-powered Kingdom. At RMA, Sandhurst, Mr Gay won the Nigeria consultancy firm, providing hands-on personal Prize for Best Overseas Student Officer and at the counselling on issues of managing change and strategic Singapore Command and Staff College, the Top implementation with the result of driving lasting change Student Prize. in organisations and developing high growth businesses with quality governance and sustainability.

12 Hyflux LtdAnnual Report 2007 Reinventing Ourselves Touching Lives Mr Mitta has advised some of the world’s best consumer University. He chairs the Singapore National Council goods and customer-intensive companies, technology- for Pacific Economic Cooperation (SINCPEC), K K intensive corporations and regional governments. His Women & Children Hospital’s Medifund Committee and client list includes multinationals like PepsiCo, Gillette, the Advisory Committee of Meridian Junior College. In Kelloggs, and the Governments of Singapore, Malaysia, October 2007, he was appointed as a Council Member Indonesia, Philippines, Australia and India. He has also of the Accounting Standard Council. worked with regional conglomerates like Hutchisons (HK), Jardines (HK), Bakrie Group (Indonesia), Reliance Professor Tan also sits on the board of a number (India), Amex, Citicorp, British Airways and telecom of companies including: Singapore Reinsurance operators like Optus, Orange, Singapore Telecom and Corporation Limited; Kim Eng Holdings Limited; Deutsche Telekom. Singapore Shipping Corporation Ltd; k1 Ventures Ltd; Raffles Education Corporation; and Oriental Century Prior to his experience of over 14 years in consulting, Limited. Mr Mitta worked in senior marketing roles with Pepsico (US and Cyprus) and Mars Inc. (UK). Professor Tan has a Bachelor of Accountancy (BAcc) Degree from the University of Singapore and a Masters Mr Mitta is a seasoned negotiator and deal maker with of Commerce (MCom) (Honours) from the University of well developed cross cultural sensitivity developed New South Wales in Australia. In 1996, he was awarded through living and working across diverse countries and an Honorary PhD by Liaoning University (China). In consulting with an expansive list of clients. His main 1997, he became the first Singaporean to garner the areas of professional interest is in strategy development (US-based) Wilford L. White Award. and value extraction through enhancing marketing and sales effectiveness, the competitive repositioning of He holds Fellowships in the Institute of Certified Public brands/services and issues relating to managing change Accountants of Singapore (FCPA), Australian Society within organisations. of CPAs (FCPA), Institute of Chartered Secretaries and Administrators (FCIS), and Chartered Management Mr Mitta holds a Bachelors degree in Chemical Institute, UK (FCMI). Engineering from the University of Bombay, India and a Masters in Business Administration from the Indian Institute of Management, Ahmedabad.

Professor Tan Teck Meng Non-Executive Independent Director Professor Tan has been a Non-Executive Independent Director of Hyflux Ltd since April 2007. He is also a member of Audit and Remuneration Committees.

Professor Tan is currently Professor of Accounting in the School of Accountancy at Singapore Management

Board of Directors Hyflux LtdAnnual Report 2007 13 Corporate Senior Management

CHO WEE PENG LIM LAI CHING SAM ONG ENG KEANG OLIVIA FOO HEE KIANG FONG CHUN HOE Senior Vice President, Senior Vice President, Group Deputy CEO LUM OOI LIN Senior Advisor Group Executive Group Treasurer & Group Financial & Chief Financial Officer Group CEO, Vice President & Investment Director Controller President and Chief Technology Managing Officer Director

14 Hyflux LtdAnnual Report 2007 Reinventing Ourselves Touching Lives FREDDY SOON GU JIA LONG YANG AI CHIAN HOE KUM YOKE LESLIE CHAPPLE JENNIFER HOALIM HOCK CHOONG Senior Advisor Senior Vice President, Advisor Group Technology General Manager, Senior Vice President, Legal & Company Director Head of Membrane Group Communications Secretary Production & Relations

Corporate Senior Management Hyflux LtdAnnual Report 2007 15 Business Units Senior Management

GIREESH BHAT KANG THIAN JIAN POH TECK HEOK BENJAMIN ALLAN YEOW KOK KON General Manager, Managing Director, Managing Director, TAN ENG SENG TOH KHOON WAI General Manager, Head of India Head of Electrical, Head of Oil Recycling Managing Director, General Manager, Head of Specialised Industrial Products Instrumentation & Business Head of MENA Head of Southeast Industrial Products Control and System Asia Industrial Manufacturing Products

16 Hyflux LtdAnnual Report 2007 Reinventing Ourselves Touching Lives PETER WU GE WEN YUE SAUD SIDDIQUE GRACE GOH WONG KHAI THEEN GOH ENG KWANG SIU KIN Managing Director, CEO, Hyflux Water BEE KHENG Managing Director, Managing Director, Managing Director, Head of China Trust Management Chief Financial Officer, Head of EPC Infrastructure & EPC Head of China Industrial Products Pte Ltd Chief Investment Officer (Asia) Structured Projects & Company Secretary, Hyflux Water Trust Management Pte Ltd

Business Units Senior Management Hyflux LtdAnnual Report 2007 17 Group Revenue by Country

157.0 160 140Financial Highlights 120 & Review 104.8 100

80 72.9 73.5 Key Financial Data SGD million 60 48.4

S$’ 000 32.1 FY2003 34.0 FY2004 FY2005 FY2006 FY2007 40 27.0 24.0 23.0 10.6 12.8 Revenue20 9.1 6.781,172 88,655 131,504 142,379 192,786 0.7 Profit Before Tax and 0 Minority InterestsFY03 FY04 19,941 FY0528,844 50,374FY06 20,178 FY07 38,693 Minority Interests 246 1,772 2,910 (116) 3,696 Profit Attributable to Shareholders 19,510 26,104 46,393 15,473 32,949 Singapore

Shareholders’China Equity 85,479 112,647 189,563 199,601 238,772 Total Assets Others 115,854 300,131 401,087 443,398 563,781 Net Assets 85,479 112,647 197,286 218,066 247,067

Net Asset Value per share (cents) 27.35 35.68 38.30 38.43 45.70 Earnings per share (cents) 5.08 5.55 9.24 3.00 6.32 Dividend per share (cents) 0.70 1.27 1.35 1.35 1.89

Return on Revenue (%) 24.0% 29.4% 35.3% 10.9% 17.1% Return on Equity (%) 22.8% 23.2% 24.5% 7.8% 13.7%

GROUP REVENUE BY COUNTRY

160 157.0

140

120 104.8 100

80 72.9 73.5 SGD million 60 48.4

40 32.1 34.0 27.0 24.0 23.0 20 12.8 9.1 6.7 10.6 0.7 0 FY03 FY04 FY05 FY06 FY07

Singapore China Others

18 Hyflux LtdAnnual Report 2007 Reinventing Ourselves Touching Lives PROFIT ATTRIBUTABLE TO SHAREHOLDERS EARNINGS PER SHARE

50,000 46,393 10.00 9.24 45,000 9.00 40,000 8.00 35,000 32,949 7.00 6.32 5.55 30,000 26,104 6.00 5.08 25,000 5.00 19,510

SGD'000 20,000 4.00 15,473 S$ Cents 3.00 15,000 3.00 10,000 2.00 5,000 1.00 0 0.00 FY03FY04 FY05 FY06 FY07 FY03 FY04 FY05 FY06 FY07

RETURN ON EQUITY NET ASSET VALUE PER SHARE

24.5% 25.0% 22.8% 23.2% 50.00 45.70 45.00 38.30 38.43 20.0% 40.00 35.68 35.00 15.0% 13.7% 30.00 27.35 25.00 10.0% 20.00 7.8% S$ Cents 15.00 5.0% 10.00 5.00 0.0% 0.00 FY03FY04 FY05 FY06 FY07 FY03 FY04 FY05 FY06 FY07

Financial REVIEW

S$’mil FY2007 FY2006 Increase

Revenue 192.8 142.4 35% Operating Profit 35.4 22.0 61% Profit before tax 38.7 20.2 92% PATMI 32.9 15.5 112% EPS - basic 6.32 cents 3.00 cents 111% Net Debt-to-Equity Ratio 0.32 0.43

Financial Review & Highlights Hyflux LtdAnnual Report 2007 19 (a) Overview For 2007, net profit for the Group increased by 112% to S$32.9 million. Basic earnings per share have increased by 111% to 6.32 cents.

(b) Revenue The Group’s revenue increased by 35% to S$192.8 million for the year ended 31 December 2007, compared to S$142.4 million for the previous year.

Municipal sales were higher by 96% to S$89.0 million for this financial year from S$45.3 million for the previous year mainly due to higher municipal revenue from China and the Middle East and North Africa (“MENA”).

Industrial sales were higher by 14% to S$102.3 million from S$90.1 million, mainly contributed by our strong China industrial sector.

GROUP REVENUE BY SEGMENT/COUNTRY

Others Others 1% 5%

Municipal Municipal 46% 32%

FY2007 FY2006

Industrial Industrial 53% 63%

China continued to be the main revenue driver, contributing 81% of total revenue for the year as compared to 74% in the previous year. MENA accounted for 12% of total revenue in this financial year as compared to 7% in the previous year.

The fundamentals of environmental and water industries remain favorable and the Group is expected to benefit from these strong industry fundamentals. The Group will continue to leverage on our proprietary membrane technologies and integrated environmental solutions to focus on our growth plan in target markets such as China, India and the MENA.

20 Hyflux LtdAnnual Report 2007 Reinventing Ourselves Touching Lives GROUP REVENUE BY SEGMENT/COUNTRY

MENA/Others MENA/Others 12% 7%

Singapore Singapore 7% 19%

FY2007 FY2006

China China 81% 74%

China remains to be a significant market for the Group. Our established track record, know-how and differentiated capabilities provide us with a strong platform to continue our growth in this key market. To date in China, we see a steady pipeline of 31 municipal projects which comprise a total of 39 water treatment plants in China. In addition, the Group has long-term operation and maintenance contracts which will generate recurring income for the next 25-30 years.

In the MENA region, the Group has achieved financial close for the seawater desalination plant project in Tlemcen, establishing our footprint in this region. The Engineering, Procurement and Construction (“EPC’) works estimated at US$213 million (approximately S$304 million) will be undertaken by wholly owned subsidiaries of the Group. The construction of the Project is expected to complete within 24 months from financial close.

The orders from the Industrial sector remain robust and provide steady revenue contribution to the Group. Our used-oil recycling projects in China, Saudi Arabia and Vietnam continue to make good progress.

Our technology and research and development activities will continue to play a significant role in our overall business strategy and innovation efforts.

The Group delivers another milestone through the launch of the Hyflux Water Trust (“HWT”). With HWT, the Group will be able to continuously enhance shareholder value through our growing pipeline and portfolio of water projects.

Financial Review & Highlights Hyflux LtdAnnual Report 2007 21 Costs and Expenses Raw materials and consumables increased by 36% to S$106.0 million from S$77.8 million in line with the sales volume.

Personnel expenses increased by 54% to S$30.7 million from S$20.0 million for the previous year as the Group continues to invest in human capital which is necessary to support the Group’s expansion plans and research and development activities.

In February 2007, the Group recorded a S$8.2 million gain on partial sale of its 50% joint venture, SingSpring Pte Ltd (“SingSpring”) which owns a seawater desalination plant. Subsequent to the divestment, the Group holds 30% interest in the desalination plant via SingSpring Trust. As a result, the investment is classified as investment in associates as at 31 December 2007.

The finance income decreased mainly due to the decrease in interest income earned. The fair value loss on derivative financial instruments arose mainly from the transfer of approximately S$3.2 million of the hedging reserve to the profit and loss account upon the divestment of SingSpring in February 2007.

For the year ended 31 December 2007, the Group recognized a negative goodwill amounting to approximately S$2.6 million arising from acquisition of a business.

Foreign exchange gain in 2007 was mainly due to the translation of a loan facility denominated in US dollar as a result of the weakening US dollar.

The effective tax rate of the Group of approximately 5% was lower than the statutory tax rate due to tax exemptions on certain income for the year and tax incentives enjoyed by certain entities of the Group.

Overall, the net impact of the above resulted in profit after tax and minority interests for the Group of S$32.9 million for the financial year ended 31 December 2007.

Earnings Per Share The increase in basic earnings per share and fully diluted earnings per share as compared to the previous year was due to the higher profit for the financial year ended 31 December 2007.

Balance Sheets Review The Group’s shareholders’ equity increased from S$199.6 million in 2006 to S$239.8 million in 2007. The increase was mainly attributable to the profits for the year. This was partly offset by a total dividend payout of S$7.0 million in 2007.

Non-current assets decreased from S$249.3 million as at 31 December 2006 to S$224.2 million as at 31 December 2007. This was mainly due to the divestment of the SingSpring desalination plant in February 2007 and the sale of the Group’s 13 plants in China to Hyflux Water Trust in December 2007. These have resulted in a decrease in financial and lease receivables of S$147.4 million. The decrease in financial and lease receivables was offset by an increase in investment in associates of S$93.1 million, mainly due to the Group’s new investment in Hyflux Water

22 Hyflux LtdAnnual Report 2007 Reinventing Ourselves Touching Lives Trust in December 2007 representing 31.5% investment, as well as the reclassification of the Group’s investment in the SingSpring plant from a joint venture to an associate in February 2007. In addition, book value of property, plant and equipment increased by S$29.2 million mainly due to the expansion of overseas operations.

Non-current liabilities increased to S$196.3 million as at 31 December 2007 from S$119.5 million as at 31 December 2006. The increase was mainly due to the additional drawdown of bank loans during the financial year to support the Group’s expansion.

Cashflow and Liquidity The Group’s cash position was S$121.0 million, up by S$65.2 million compared to 2006. In 2007, the Group generated cash from its operations of S$77.8 million mainly due to improvement in working capital.

Cash used in investing activities for this financial year was mainly on the acquisition of property, plant and equipment and investments in subsidiaries and associates.

The increase in cash generated from financing activities as compared to the previous year was due to the additional bank loan drawn down.

Note: Certain comparative figures have been restated to reflect the adoption of new and revised accounting standards.

Financial Review & Highlights Hyflux LtdAnnual Report 2007 23 Corporate Social Responsibility

Corporate citizenship is one of Hyflux’s core values We also believe in the importance of providing because we believe in making a distinctive contribution inspiration and encouragement to budding to society, academic, industry and business entrepreneurs and leaders. In line with this, Hyflux’s communities. Group CEO, President and Managing Director, Ms Olivia Lum Ooi Lin, together with her management members We focus on three Es: take time off from their schedule to participate in public • Environment and Water speaking engagements or sharing sessions. These sessions focus on topics relating to entrepreneurship • Education and Community and leadership. We also continue to host representatives • Entrepreneurship from local and overseas academic institutions at our SingSpring plant and corporate headquarters. We work closely with major industry players such as the Singapore Water Association (SWA), International Desalination Association, International Water Association and PUB in promoting environmental awareness and solutions in appropriate platforms locally and overseas.

In reaching out to the less fortunate in Singapore, we support a number of charitable organisations and fund- raising events. Some of these beneficiaries include: Community Chest, Singapore Red Cross Society, Club Rainbow, President’s Charity Challenge as well as National Day Parade.

“Hyflux’s support in a series of educational and community performances on water conservation “Their (the physically challenged) smiles creates a big impact on the awareness and gratitude shown on their faces alone and the acknowledgement on this are worth waking up early that morning...” - Allan Toh Khoon Wai, General Manager, environmental issue…On the whole, Head of Southeast Asia Industrial Products we are very glad that we have joined (participant of the HeartStrings Walk Hyflux in this process of educating the organised by the Community Chest) youths on a very important message.” - Benny Lim, Artistic Director of The Fun Stage Limited “During my visit to (SingSpring Desalination Plant), I found high “Thank you Hyflux for your contribution technology being used to produce to ecological civilisation and world desalination water with efficient harmony.” energy consumption.” - Mr Zhao Yang, Secretary of Tangshan - Dr Mohammed Saeed Al Kindi, Minister of Municipal Party Committee Environment & Water, United Arab Emirates

24 Hyflux LtdAnnual Report 2007 Reinventing Ourselves Touching Lives The Year in Review

February Successful completion of the restructuring and divestment of Hyflux’s equity interest in SingSpring Pte Ltd to CitySpring Infrastructure Trust.

March Hyflux clinched seven water treatment projects in China – Jiangsu, Jiangxi, Heibei provinces and Tianjin city – worth S$115 million, with a daily capacity of 290,000 m3.

Hyflux and Malakoff Berhad entered into a joint venture agreement with the Algerian Energy Company (the government company handling power and water privatisation exercise in Algeria) to form a project January company to design, develop, finance, construct, Hyflux teamed up with Marmon Water LLC - one of operate and maintain a seawater desalination plant of the world’s largest manufacturers of residential and 200,000 m³/day at Tlemcen, Algeria for a period of commercial water treatment systems – to establish two 25 years. joint ventures (JVs) and licensing agreements on water treatment products. With a joint investment sum of S$80 million, the two JVs (R&D and manufacturing JVs) will focus on developing innovative and affordable products and technologies for both residential and commercial applications, and the manufacturing of residential water treatment and filtration products for worldwide markets respectively.

The Year in Review Hyflux LtdAnnual Report 2007 25 April Hyflux re-configured the water treatment plant for ISK Singapore Pte Ltd’s titanium dioxide plant at Tuas to supply deionised water from the intake of NEWater. The works include a five-year operations and maintenance contract.

May Hyflux formed a joint venture with Saudi Economic July Development Company (SEDCO) and Lube Oil Re- Hyflux held a groundbreaking ceremony for the second refining Co (LUBREC) to jointly invest S$45 million to wastewater treatment plant (with a daily capacity of build and own a used oil recycling plant in Jeddah, 50,000m3) in Beichen Science and Technology Park in Saudi Arabia. This will be the first membrane-based Tianjin. oil recycling plant in Saudi Arabia that treats used oil from the power, petrochemical, marine and automotive industries to recover high grade base oil. August Hyflux secured about S$59 million worth of water June treatment projects in China in Hebei and Jiangsu Hyflux was awarded two water treatment projects in provinces. The plants collectively can supply a daily 3 China – Shandong Province and Tianjin City – worth capacity of 180,000m . about S$46 million, with a daily capacity of 130,000m3.

26 Hyflux LtdAnnual Report 2007 Reinventing Ourselves Touching Lives recycling plant near Hanoi, capital of Vietnam which will engage in the collection, treatment and recovery of used oil into high grade base oil for sale in Vietnam and other export markets such as Laos and Cambodia.

November Hyflux secured about RMB 291 million (approximately S$ 57.3 million) worth of water projects in China’s Shandong and Jiangsu provinces. The five plants collectively can supply a daily capacity of 130,000 m3.

September Hyflux participated in the 10th China International Membrane and Water Treatment Technology and Equipment Exhibition held in the Wuhan International Exhibition Centre in China. The exhibition was strongly supported by China’s Ministry of Science and Technology, Ministry of Water Resources, Ministry of December Construction and the State Environmental Protection Hyflux successfully launched the first pure-play global Administration. water trust, listed on a securities exchange in Asia. It offers investors an opportunity to invest in water- related infrastructure assets in China, India, Middle October East and North Africa region and other high-growth Hyflux, BP International Ltd and the Dalian Institute of markets globally. Chemical Physics will jointly develop and commercialise the use of zeolite dewatering membranes in the production of biofuels.

Hyflux entered into a joint venture agreement with Success Blossom Environment Vietnam Joint Stock Company to invest US$10.5 million (approximately S$14.5 million) to build a state-of-the-art used oil

Hyflux LtdAnnual Report 2007 27 Human Capital

“We are a melting pot of talent and expertise working together to build Hyflux further. Every bright idea and contribution counts. No one should be left out so long as one has the passion and the perseverance to want to succeed.”

- Olivia Lum Ooi Lin, Group CEO, President and Managing Director workforce & business growth

200 192.80 1400

180 1228 1200 160 142.40 1000 140 131.50

120 T 797 800 otal Headcount 100 88.70 682 81.20 600

Revenue (S$Million) 80 514 495 60 45.30 400 352 40 200 20

0 0 2002 2003 2004 2005 2006 2007

Revenue

Workforce

28 Hyflux LtdAnnual Report 2007 Reinventing Ourselves Touching Lives From left to right: Susan Lee (Assistant Vice President, Human Resources), Joyce Ong (Vice President, Finance), Linden Ng (Vice President, Internal Controls & Compliance), Dan Tan (Vice President, Treasury & Investor Relations), Nah Tien Liang (Vice President, Investment), Doreen Houghton (Vice President, Purchasing & Logistics), Peggy Lim (Vice President, Legal) and Kelly Leong (Vice President, Finance).

At Hyflux, we are committed to attracting, developing and retaining the best talent to propel our growth and development. Over the past few years, our workforce has expanded in tandem with our increased operations. In 2007, our total headcount stands at 1,228 – a 54% jump from 797 in 2006.

Hyflux will continue to work on strengthening our presence in the growth economies of China, India, the Middle East and North Africa as well as Singapore and Southeast Asia. We are currently building up our teams worldwide to manage, execute, and take on more projects. educational qualification educational qualification (as at 31 dec 2006) (as at 31 dec 2007)

PhDPhD PhDPhD 3%3% MastersMasters 2%2% MastersMasters 9%9% 5%5% BelowBelow Dip Dip 23%23%

BelowBelow Dip Dip DegreeDegree DegreeDegree 52%52% 25%25% 33%33%

DiplomDiplomaa DiplomDiplomaa 11%11% 37%37%

Employees are our biggest and most important asset. As Hyflux continues to flex our wings overseas, we will ensure that people with the relevant competencies will assume greater responsibilities to support our global operations.

Our Human Capital Hyflux LtdAnnual Report 2007 29 Awards & Accolades

Technological innovation Global Water Awards 2006 - Distinction Award for Desalination Plant of the Year In 2006, the SingSpring Desalination Plant was awarded Frost and Sullivan – Technology Innovation of the Year the Distinction Award 2007, Desalination Technologies (Asia Pacific) Award for Desalination Plant of the Year at the Global Hyflux garnered this prestigious award for the Water Awards given by Global Water intelligence, UK, an superior development of our pioneering KristalTM international recognition of the contribution made by the membrane technology. This award further augments SingSpring plant to the advancement of the desalination our technological standing as a leading company that industry. The judges’ verdict: “The Tuas plant is a brilliant specialises in membrane technology. work of engineering which has challenged the global perception that desalination is a high cost source of water.”

International Aquatech Innovation Awards 2006, Category Winner Hyflux CEPAration, one of Hyflux’s joint ventures in Europe, was the winner for the Water Treatment/Point Frost and Sullivan – Technology Innovation of the Year of Use category, for its InoCEPTM Award 2007, Residential Water Treatment Equipment ceramic membrane. Selected by an Market (Southeast Asia) international jury of experts, InoCEPTM won amidst strong Hyflux was recognised for our unique development of competition from Europe, North America and Asia for its the Aquavate ‘air-to-water’ technology which has been originality, practicality (technical, economical, feasibility) commercialised into a lifestyle consumer product known and sustainability (environment, security, energy and TM as dragon-fly that provides drinking water from the air, efficiency). treated by our proprietary filtration technology. Business Excellence Global Water Awards 2006 – SIAS Investors’ Choice Awards – Water Company of Most Transparent Company Award 2004, 2005, the Year 2006 & 2007 Hyflux won the For four consecutive years, Hyflux was honoured at the highest honour in Securities Investors Association of Singapore (SIAS) the Global Water annual Investors’ Choice Awards 2007 for achieving a Awards as Water high level of corporate governance and transparency to Company of the enable investors to make informed decisions on their Year. This award, investments. given by Global Water Intelligence, UK, recognised the significant contribution of Hyflux to the private water industry. The judges’ verdict: “Hyflux has brought a professionalism and entrepreneurial spirit to the water industry which sets a new standard for competitors worldwide.”

30 Hyflux LtdAnnual Report 2007 Reinventing Ourselves Touching Lives Forbes Asia – Best under Singapore Business Awards – Enterprise Award 2003 a Billion 2005 & 2006 Hyflux was accorded the Enterprise Award 2003 at The For two consecutive Singapore Business Awards presented by The Business years, Hyflux made it Times and DHL. among Forbes Asia’s top 200 small & midsize companies. Forbes Asia’s annual “Best under a Billion” selection showcases the region’s most dynamic publicly traded firms with sales under US$1 billion a year with a track record of sustained growth and profitability.

Fastest Growing 50 – Fastest Growing 50 Certification Awards 2005 Hyflux was saluted as one of the 50 fastest growing companies in Singapore at the Fastest Growing 50 Asiamoney – Best Small Company in Singapore 2002 Certification Awards 50, ranked by DP Information Hyflux was named Best Small Company in Singapore Group, and supported by Ernst & Young, IE Singapore, 2002 by Asiamoney, a Euromoney institutional and SPRING Singapore. investment company.

Euromoney – Water Deal Community of the Year 2003 (Asia Pacific) Friend of the Arts Award 2007 The project financing Hyflux received the Friend of the Arts Award given by for the SingSpring the National Arts Council in 2007 in recognition of our Desalination Plant was contributions towards the promotion, organisation, and named the Asia Pacific participation of artistic activities. Water Deal of the Year 2003 by Euromoney Project Finance Magazine.

Awards & Accolades Hyflux LtdAnnual Report 2007 31 Our Water Business

“Hyflux has brought a professional and entrepreneurial spirit to the water industry which sets a new standard for competitors worldwide.”

- Judges’ verdict for Hyflux being honoured as the Water Company of the Year in the Global Water Awards 2006

32 Hyflux LtdAnnual Report 2007 Reinventing Ourselves Touching Lives As a technology company, Hyflux value- Hyflux – An integrated one-stop solutions adds to the entire water value chain with provider for water-related challenges In Singapore, Hyflux is a key player, supporting our technological expertise, in areas the government’s plan to ensure a diversified and ranging from water and wastewater sustainable supply of water for the country. Hyflux is treating some 35% of Singapore’s current water needs treatment and recycling to seawater through landmark projects secured with the Public desalination. Utilities Board (PUB) namely, two NEWater plants at Bedok and Seletar, the raw water treatment plant Our beginnings in the water business can be traced at Chestnut Avenue Waterworks and the SingSpring back to our early days of supplying equipment to smaller Desalination Plant in Tuas. plants to achieving a breakthrough in securing projects to install NEWater plants to building desalination plants SingSpring Desalination Plant, Singapore to the listing of our pure-play water business trust. For Singapore’s first public private partnership, PUB awarded Hyflux the project to build, own and operate Today, as an integrated one-stop solutions provider, we (BOO) Singapore’s first seawater desalination plant in are a partner of choice for design-and-build projects Tuas. The S$200 million plant was completed in 2005, for turnkey plants and treatment systems in countries some three months ahead of schedule. It now supplies such as China, Southeast Asia and in the MENA region. some 136,380 m3/day of desalinated water to meet Backed by a well-rounded range of R&D, in-house approximately 10% of Singapore’s water needs. EPC expertise, capital and financing capabilities, and engineering track, we have a robust pipeline of about 40 plants. Water will continue to remain a focal point for us and the numerous people whose lives have been touched by our technology.

Research Design Manufacturing Overall Operations Systems & & of Project & Assembly Development Development Components Management Maintenance

Our full suite of expertise

Our Water Business Hyflux LtdAnnual Report 2007 33 The judges’ verdict: “The Tuas plant is a brilliant work of engineering which has challenged the global perception that desalination is a high cost source of water.”

The SingSpring Desalination Plant uses advanced cost-and-energy-efficient reverse osmosis (RO) technology and was the largest membrane-based seawater desalination plant in the world at the time of its completion. It also has the largest single-RO trains in the world. The BOO project was financed by a consortium of five international banks, led by DBS Bank. The financing was awarded the Euromoney Asia Pacific Water Deal of the Year in 2003.

In 2006, the SingSpring Desalination Plant was awarded the Distinction Award for Desalination Plant of the Year at the Global Water Awards given by Global Water intelligence UK, a peer recognition of the contribution made by SingSpring Desalination Plant to the advancement of the desalination industry internationally. phase capacity of 100,000m3/day and a second phase 3 We hosted more than 1,600 visitors at our SingSpring capacity of 150,000m /day, employs Hyflux’s proprietary Desalination Plant in 2007, a 15% increase from ultra-filtration technology. When completed, it will supply 2006. Among the distinguished guests were United desalinated water to the district of Dagang in Tianjin for Arab Emirates Minister of Environment & Water, an initial period of 30 years. Dr Mohammed Saeed Al Kindi; US Ambassador to Singapore, Mrs Patricia L. Herbold; Minister-President, Seawater Desalination Plant, Algeria State of Bavaria, Germany, Dr Edmund Stoiber; Marking a significant breakthrough in the MENA market, Australian Capital Territory Electricity & Water (ACTEW) Hyflux was awarded the contract by Algeria Energy Chief Minister, Jon Stanhope; and many high ranking Company to design, develop, finance, construct, operate Chinese officials. and maintain a 200,000 m³/day seawater desalination plant at Tlemcen, Algeria in October 2006. Seawater Desalination Plant, China Marking our first entry into China’s municipal market The plant will supply desalinated water to L’Algerienne in 2004, Hyflux is building one of the country’s largest Des Eaux, the state-owned national water entity of seawater desalination plants in Tianjin. The S$155 Algeria and Sonatrach SPA, the national oil company of million membrane-based desalination plant, with first- Algeria for a period of 25 years. The total project cost is estimated at S$380 million and Hyflux is undertaking the engineering, procurement and construction (EPC) works for S$328 million. This is the largest seawater desalination project undertaken by the Group. In January 2008, Hyflux achieved financial close of this project following successful project financing from Banque Nationale d’Algerie.

34 Hyflux LtdAnnual Report 2007 Reinventing Ourselves Touching Lives Our lifestyle filtration products Besides serving the industrial and commercial markets worldwide, our technologies have led to the development of a comprehensive range of lifestyle filtration products:

eLife Water Tap Hyflux Central Water Filtration System eLife Shower Filter A point-of-entry product, the Hyflux Central Water Our eLife range of products utilise a unique element Filtration System offers filtered water in the homes conversion technology consisting of high energy with little or no drop in water pressure with much magnetizers and active energy rocks. Water that convenience. passes through these materials becomes “activated” with smaller water molecules. Drinking activated water Gurgle F38 improves energy levels and enhances mental alertness. This award-winning lifestyle home This technology is also extended to the development of filtration product effectively removes eLife Shower Filter, that reduces chlorine and hydrates turbidity and retains essential minerals, skin and hair. making it a healthy drink all year round. dragon-fly Hyflux Reverse Osmosis Drinking Water System Unlike other water dispensers, our proprietary This state-of-the-art filter will improve the quality of water technology extracts drinking water from wells or municipal water supplies. These units from the atmosphere and keeps the reduce substances such as chlorine, sediment, nitrates, water fresh by continual re-circulation lead, cysts and detergents. through Hyflux’s advanced membrane technology and ultra-violet (UV) Pitcher P18 purification. Hyflux Pitcher P18 provides the simplest and most popular way of filtering drinking water. Complete with K18 Track Membrane Filter 3-stage filtration, it effectively removes contaminants, Hyflux’s K18 Track heavy metals and reduces chlorine and turbidity. Membrane filter is a revolutionary product that solves worldwide water problem. Hyflux Water Softener Improving the water quality from various Hard water can cause build up on water sources, it offers filtered water without glassware and damage due to scale use of elaborate and expensive water in pipes and appliances. This water treatment systems. It is the preferred choice softener is an effective and cost-saving for humanitarian purposes, disaster relief solution to hard water problem. and crisis operations.

Disclaimer: The information is meant for general information purposes only. It is not to be construed as implying any representation and/or warranty of any kind, whether expressed or implied, including without limitation, warranties of accuracy of information, warranties of merchantability, fitness for a particular purpose or performance of any products listed herein. Hyflux Ltd hereby disclaims to the fullest extent allowable by law, all responsibility for loss, damage, injury, claim or liability of any kind arising from or in connection with (a) any errors or omissions including but not limited to technical inaccuracies and typographical errors; or (b) the reader’s use of the information.

Our Water Business Hyflux LtdAnnual Report 2007 35 “Combining Hyflux’s and Marmon’s strong international capabilities and respective technical strengths is a great strategic match…”

- Mr John Goody, President of Marmon Water LLC

Our Collaboration with Marmon A strategic partner for Hyflux is Marmon Water LLC, one of the world’s largest manufacturers of residential and commercial water treatment systems. In 2007, Hyflux teamed up with Marmon Water to set up a joint R&D Centre in Singapore and a manufacturing facility for consumer products in China. Under the joint venture, Hyflux and Marmon will jointly develop new products to provide clean, filtered and conditioned water for Asian homes. In addition, the partnership with Marmon will allow us to manufacture residential water treatment and filtration products for worldwide markets.

Hyflux Water Trust As Hyflux moves into our next chapter of growth, we sponsored the establishment of the first pure-play global water business trust listed on a securities exchange, the Hyflux Water Trust (HWT). HWT provides investors with an opportunity to invest in water-related infrastructure assets in China, India, the Middle East and North Africa region, and other high-growth markets globally.

HWT is a business trust sponsored by Hyflux and managed by Hyflux Water Trust Management Pte Ltd, a wholly-owned subsidiary of Hyflux.

HWT was listed on the Main Board of SGX on 3 December 2007, raising S$234 million from an Initial Public Offering (IPO). A number of well- known institutional investors subscribed into the IPO, including Fidelity Investments Management (Hong Kong) Limited as a cornerstone investor. Hyflux retains a 31.5% stake in HWT.

From left to right: Michael Repasky (Product Manager, Hyflux Marmon), Steve Dakolios (Vice President & General Manager, Hyflux Marmon).

36 Hyflux LtdAnnual Report 2007 A Portfolio of High Quality Assets demand for waste water treatment. Construction HWT’s initial portfolio consists of 13 plants, comprising of the expansion plant is expected to begin in the three water treatment plants (WTPs), eight wastewater second quarter of 2008, and operation is expected to treatment plants (WWTPs) and two water recycling commence in mid 2009. plants (WRPs), giving a total design capacity of 445,000m3/day. These plants are strategically located Synergistic Business Models of Hyflux and in high growth, coastal provinces in China. The plants HWT – Together, A Strong Future operate under long-term concession agreements, giving The establishment of HWT is an important part of them exclusive rights to provide water-related services Hyflux’s asset-light strategy, allowing Hyflux to recycle to industrial and municipal users in their respective our capital and to expand and develop our business. concession areas. These assets in HWT’s initial portfolio HWT provides us with an additional avenue of generate cash flows which will provide long-term, regular investment as it enables HWT to access our Hyflux’s and predictable distribution to unit holders. established network, market reach and experience, know-how and membrane technologies. Well Positioned for Growth In addition to providing long-term regular and The overall outlook on the global water sector, and the predictable cash flow for unit holders, HWT is also well market fundamentals of China’s water sector, remain positioned to grow its portfolio of assets by making yield- very strong. The synergistic business models ensure accretive investments. Pursuant to a ROFOAR Deed, that Hyflux and HWT remain at the forefront to capitalise HWT has certain rights of first offer and first refusal to on market opportunities, and to participate in the purchase from Hyflux, existing and future water-related exciting growth of the global and water sectors in China. infrastructure assets subject to satisfaction of the terms and conditions under the ROFOAR Deed. The pipeline of assets currently comprises over 20 water plants with total design capacity in excess of 760,000m3/day.

From left to right (HWT): Wong Heng Hwie (Vice President, Finance), Daniel Yeung (Vice President, Investment), Joscelyn Tan (Vice President, Legal).

In addition, HWT may also seek to acquire water- related infrastructure assets from third parties, as well as expanding its existing assets. As an example, in the first month after its IPO, HWT secured a project to the value of RMB 50 million to expand the Waste Water Treatment Plant in the Yangzhou Industrial Park, China. The expansion is required to meet growing industrial

Hyflux LtdAnnual Report 2007 37 Our Industrial Manufacturing Processes Business

Hyflux’s proprietary membrane system has replaced many traditional stream separation methods for partners in various industries. It addresses the challenges which conventional treatment methods are unable to overcome.

38 Hyflux LtdAnnual Report 2007 Reinventing Ourselves Touching Lives In the field of industrial in the expanding industry. Our clients hail from the biopharmaceutical, food, water treatment, chemical fibre manufacturing processes, Hyflux’s and electronic wastewater industries. membrane systems are used by We also have an established presence in Europe companies in the management through our subsidiary, Hyflux CEPAration BV, formed through a joint venture with CEPAration BV, a spin-off of wastewater treatment, clean from the Netherlands Organization for Applied Scientific water requirements, process Research (TNO). stream separation, concentration, and purification. Our technology is applicable to industries dealing with petrochemicals, chemicals, textiles, biotechnology, pharmaceutical products, foods, fermentation, paper pulp and electronics.

In China, our subsidiaries, Hydrochem Engineering (Shanghai) Co. Ltd. and Hyflux Filtech Shanghai Co. Ltd., are responsible for the development of our industrial manufacturing processing business and have been active in these industries, serving some 500 clients

From left to right: Dr Shieh Jyh-Jeng (Vice President, Research), Dr Venkidachalam (Vice President, Development & Technology).

Hyflux LtdAnnual Report 2007 39 Our Specialty Materials Business

Hyflux’s proprietary advanced membrane technology ensures that the lactic acid is entirely free of reducing sugars and of a high L(+) purity level, utilising more environmentally-friendly processing techniques.

40 Hyflux LtdAnnual Report 2007 Reinventing Ourselves Touching Lives Specialty Materials is a new pillar of growth for Hyflux. With our membrane technology, we develop and commercialise polymers and specialty materials (Lactic Acid and Polylactic Acid) from natural resources like corn and sugarcane. These polymers are widely used in cosmetics, pharmaceuticals, Unlike traditional methods, our breakthrough processing food and beverages, textiles, food techniques produce high quality products with less packaging, and fibre industries. energy consumption. Moving into this emerging field of material science highlights our company’s commitment Hyflux’s first joint venture company to design and build in addressing global environmental issues and in a L-lactic acid production facility in China is Sinolac promoting environmental sustainability. (Huludao) Biotech Co., Ltd. Planned in anticipation of increased demand in polylactic acid in the near future, the Sinolac plant (20,000 tonnes/year capacity) has successfully begun operations in late 2007 and has obtained Halal and Kosher certifications. Following this success, Hyflux entered into a subsequent joint venture, namely Ningxia Hypow Bio-technology Co., Ltd to build another L-lactic acid plant in China with an even larger capacity of 30,000 tonnes/year.

Our Specialty Materials Business Hyflux LtdAnnual Report 2007 41 Our Energy Business

Hyflux’s proprietary technology gives high recovery efficiencies and high product quality. This is critical given the world’s insatiable hunger for energy and the escalating price of crude oil.

42 Hyflux LtdAnnual Report 2007 Reinventing Ourselves Touching Lives Many industrial processing including Leveraging on our success in the water business, we entered the energy business in 2006 through the those in the marine, petrochemical, formation of Eflux Singapore Pte Ltd, our wholly owned power, automobile, construction and subsidiary. Using our cutting-edge technologies, Hyflux airlines generate large quantities of aims to provide a total solution for used oil management, through recycling of used oil while ensuring minimal used oil, which is considered as toxic environmental impact, optimising societal benefits and industrial material. Yet, such used oil stakeholder interests. contains more than 80% of base oil A joint venture – Eflux SK Pte Ltd – was formed with that can be recovered as a high value SK Oilchem Management Pte Ltd to collect, recycle and resource. treat waste oil in Singapore using our Hyflux Advanced Membrane System (HAMS). HAMS can recycle used oil into high commercial base oil of which the product quality is comparable to that of virgin base oil. The plant started operations in end 2006. Eflux SK has the licence

Our Energy Business Hyflux LtdAnnual Report 2007 43 Clean Energy Projected growth 2006 - 2016 ($US Billions)

Biofuels $80.9 $20.5 2006 2016 Wind $60.8 Power $17.9 Solar Power $69.3 $15.6

Fuel $15.6 Cells $1.4

$0 $25 $50 $75 $100 $125 $150 $175 $200 $225

TOTAL $226.5 $55.4

Source: Clean Edge, 2007 from the Singapore National Environment Agency (NEA) to collect and treat used oil using the HAMS. On an average, Singapore attracts some 140,000 vessel calls annually, which provides a strong base for the provision of oil recycling service. This reinforces our commitment in protecting the environment while enhancing stakeholder value.

More used oil recycling plants were built in 2007 We formed a joint venture with Saudi Economic Development Company (SEDCO) and Lube Oil Re- refining Co (LUBREC) to jointly invest S$45 million to build and own a used-oil recycling plant in Jeddah, Saudi Arabia.

This became the first membrane-based oil recycling plant in Saudi Arabia and will treat and recover used oil from the power, petrochemical and automotive industries. With the high oil prices and acute lube oil 12,000 tonnes of feed used oil per year, and recover into deficit in the Middle East and North Africa (MENA) high grade base oil for sale in Vietnam and other export region, we are strategically poised to harness the vast markets like Laos and Cambodia. market potential. Saudi Arabia is one of the largest (per capita) consumers of lubricants. In 2006, its population Hyflux will also be looking at other countries such as of 24 million consumed some 350,000 metric tonnes of China and India where the demand for high grade lubricants. lube oil is increasing. The supply of base oil has been aggravated further by the closure of several base In Vietnam, Hyflux entered into a joint venture with oil refineries worldwide. The scarcity of base oil has Success Blossom Environment Vietnam Joint Stock continuously driven up oil prices. Company to invest close to US$10.5m (approximately S$15 million) to build a state-of-the-art used oil recycling plant near Hanoi. The plant can collect and treat up to

44 Hyflux LtdAnnual Report 2007 According to market reports Clean Energy Trends 2007 and Biofuel Market Worldwide (2006), global markets for biofuels are projected to grow to US$80.9 billion (approximately S$112.4 billion) by 2016. By 2020, the estimated global demand of bioethanol is estimated to reach 120,000 million litres.

Our success in lube oil was also mirrored in the field of biofuels. We collaborated with BP International Ltd and the Dalian Institute of Chemical Physics (DICP) to jointly develop and commericialise the use of zeolite dewatering membranes in the production of biofuels.

Zeolite membrane technology has proven to be especially cost-effective in the dewatering process and offers significant energy savings when compared with conventional processes. Our From left to right: Lim Choon Noi (General Manager, Oil Recycling Business), Dr Tan Yi (Vice President, Technology Development), Willy Yeo (Assistant Vice first project would involve the dewatering of President, CEO Office). bioethanol using zeolite membranes.

Hyflux LtdAnnual Report 2007 45 Our Research & Development

Hyflux is a leading technology company that is fully committed to developing new technology applications and intellectual property as our long-term competitive advantage.

46 Hyflux LtdAnnual Report 2007 Reinventing Ourselves Touching Lives In 2004, we launched our membrane and materials wastewater treatment, chemical/oil, technology centre - the largest in Asia, outside Japan, biopharmaceutical/life sciences, metal/surface to spearhead development in cutting-edge membrane engineering, food & beverage/sugar, industrial technology and environmental engineering solutions. chemicals recycling, milk & diary. We maintain more than 10 research and development laboratories in Singapore, including a knowledge centre, • FerroCepTM Stainless Steel MF Tubular an innovative process development centre, a materials Membranes and membrane products development centre as well as It is the membrane of choice for handling difficult advanced machining, prototyping and industrial design industrial streams with high viscosity and solid functions to support the Hyflux’s status as a leading contents under extreme conditions. Most ideal for provider of environmental solutions. Our R&D teams various fermentation broths like amino acids, have been trained in the design and development of antibiotics, vitamins and clarification of other state-of-the-art membranes. Several patent applications hydrolytes and plant extracts. have been filed and publications have been presented at international conferences. In addition, our R&D • KristalTM UF/MF Polymer Hollow Fibre efforts have led to the commercialisation of our range Membranes of environmentally–friendly membrane products and It ensures consistent and strict filtrations, resulting systems. A huge variety of products are presently under in a robust membrane process with higher permeate market tests. quality; higher permeate flux; higher throughput, and higher system recovery. To tap expertise outside Hyflux, we collaborate with world-renowned research institutions and companies • PoroCepTM Polypropylene Hollow Fibre to develop and enhance our research programmes, expand areas of membrane applications, improve Membranes existing technologies and processes as well as This membrane is the preferred choice for commercialise novel technologies. Partners include the microfiltration, where both performance and cost are National University of Singapore, CEPAration BV (a spin- critical. It combines higher particle retention with off from leading Dutch technology institute, Netherlands higher flux, excellent permeate quality and minimal Organization for Applied Scientific Research), Marmon pressure drop in a small compact design. Water LLC (North America’s largest manufacturer of residential and commercial water treatment systems) • Hyflux Advanced Membrane System (HAMS) and the Dalian Institute of Chemical Physics. Our proprietary Hyflux Advanced Membrane System (HAMS) has been developed as a “green” solution Hyflux Membrane Applications and is adopted to recover base oil from used oil. Our R&D efforts have led to the commercialisation of a It is able to substantially reduce energy consumption range of environmentally-friendly membrane products generated during the treatment process and yet treat and systems. recycled used oil into high-grade commercial base oil suitable for sale. • InoCEPTM Ceramic Hollow Fibre Membranes The award-winning InoCEPTM is able to tolerate high temperatures and extreme pH conditions as well as high solids content, making it ideal for waste/

Our Research & Development Hyflux LtdAnnual Report 2007 47 Financial Report 2007

48 Hyflux LtdAnnual Report 2007 Hyflux Ltd and its Subsidiaries DIRECTORS’ REPORT Financial year ended 31 December 2007

The directors are pleased to present their report to the members together with the audited consolidated financial statements of Hyflux Ltd (the “Company”) and its subsidiaries (collectively, the “Group”) and the balance sheet and statement of changes in equity of the Company for the financial year ended 31 December 2007.

Directors The directors of the Company in office at the date of this report are:

Lum Ooi Lin Group CEO, President and Managing Director Teo Kiang Kok Lee Joo Hai Gay Chee Cheong Christopher Murugasu Raj Mitta (appointed on 28 April 2007) Professor Tan Teck Meng (appointed on 28 April 2007)

Professor Tan Teck Meng and Raj Mitta are due for retirement in accordance with Article 88 of the Company’s Articles of Association, and being eligible, have agreed to stand for re-election. In accordance with Article 89 of the Company’s Articles of Association, Lee Joo Hai and Gay Chee Cheong are due for retirement, and, being eligible, have agreed to stand for re-election.

Arrangements to enable directors to acquire shares or debentures Except for share options granted under the Hyflux Employees’ Share Option Scheme as described below, neither at the end of nor at any time during the financial year was the Company a party to any arrangement whose objects are, or one of whose object is, to enable the directors of the Company to acquire benefits by means of the acquisition of shares or debentures of the Company or any other body corporate.

Reinventing Ourselves Touching Lives Hyflux LtdAnnual Report 2007 49 Hyflux Ltd and its Subsidiaries DIRECTORS’ REPORT Financial year ended 31 December 2007

Directors’ interests in shares or debentures The following directors, who held office at the end of the financial year, had, according to the register of directors’ shareholdings required to be kept under Section 164 of the Singapore Companies Act, Cap. 50, an interest in shares and share options of the Company and related corporations (other than wholly-owned subsidiaries) as stated below:

Direct interest Deemed interest As at As at 1.1.2007 1.1.2007 or date of As at or date of As at Name of director appointment 31.12.2007 appointment 31.12.2007

Ordinary shares of the Company

Lum Ooi Lin 154,609,141 124,984,141 22,500,000 52,500,000

Gay Chee Cheong 450,000 450,000 – –

Christopher Murugasu 469,375 469,375 120,000 120,000

Professor Tan Teck Meng – 10,000 – 51,000

Share options of the Company

Lum Ooi Lin 5,625,000 5,250,000 – –

Teo Kiang Kok 250,000 250,000 – –

Lee Joo Hai 250,000 250,000 – –

Gay Chee Cheong 200,000 200,000 – –

Christopher Murugasu 360,937 360,937 – –

There was no change in any of the abovementioned interests between the end of the financial year and 21 January 2008.

By virtue of Section 7 of the Singapore Companies Act, Cap. 50, Ms Lum Ooi Lin is deemed to have an interest in the shares held by the Company in all its subsidiaries.

Except as disclosed in this report, no director who held office at the end of the financial year had interests in shares, share options, warrants or debentures of the Company, or of related corporations, either at the beginning of the financial year, or date of appointment if later, or at the end of the financial year.

Directors’ contractual benefits Since the end of the previous financial year, no director of the Company has received or become entitled to receive a benefit by reason of a contract made by the Company or a related corporation with the director, or with a firm of which the director is a member, or with a company in which the director has a substantial financial interest, except as disclosed in the accompanying financial statements and in this report, and except that Ms Lum Ooi Lin has an employment relationship with a subsidiary, and has received remuneration in that capacity.

50 Hyflux LtdAnnual Report 2007 Reinventing Ourselves Touching Lives Hyflux Ltd and its Subsidiaries DIRECTORS’ REPORT Financial year ended 31 December 2007

Options and warrants

(a) employees’ Share Option Scheme:

The Hyflux Employees’ Share Option Scheme (the “Scheme”) was approved by the members of the Company at an Extraordinary General Meeting held on 27 September 2001. The Scheme provides an opportunity for employees and directors of the Company and its subsidiaries, other than substantial shareholders of the Company, to participate in the equity of the Company.

On 24 November 2003, the members of the Company approved a modification to the Scheme which allowed Ms Lum Ooi Lin, Group CEO, President and Managing Director, a substantial shareholder of the Company, to participate in the Scheme. The maximum entitlement of Ms Lum Ooi Lin is 10% of the total number of shares which may be issued by the Company under the Scheme.

The Scheme is administered by a committee (the “Committee”) comprising four directors. It shall continue to be in force at the discretion of the Committee for a period of 10 years from 27 September 2001. However, the period may be extended with the approval of members at a general meeting of the Company and of any relevant authorities which may then be required.

Details of the options to subscribe for ordinary shares of the Company granted to directors of the Company pursuant to the Scheme are as follows: Aggregate options Options granted (including Aggregate options Aggregrate granted bonus issue) since exercised since options during the commencement of commencement of outstanding as financial the Scheme to end of the Scheme to end of at end of name of Director year financial year financial year financial year

Lum Ooi Lin – 6,375,000 (1,125,000) 5,250,000

Teo Kiang Kok – 250,000 – 250,000

Lee Joo Hai – 250,000 – 250,000

Gay Chee Cheong – 200,000 – 200,000

Christopher Murugasu – 862,500 (501,563) 360,937

Total – 7,937,500 (1,626,563) 6,310,937

Except as disclosed in this report, since the commencement of the Scheme to the end of the financial year:

• No options have been granted to the controlling shareholders of the Company and their associates;

• No participant has received 5% or more of the options available under the Scheme;

• No options have been granted to directors and employees of the holding company and its subsidiaries;

• No options that entitle the holder to participate, by virtue of the options, in any share issue of any other corporation have been granted; and

• The excercise price of the options is set at the market price, as defined in the Scheme, at the time of grant. No options have been granted at a discount.

Reinventing Ourselves Touching Lives Hyflux LtdAnnual Report 2007 51 period E xercisable 23.05.2008 - 27.09.2011 25.09.2008 - 27.09.2011 05.04.2008 - 27.09.2011 08.06.2006 - 27.09.2011 28.03.2007 - 27.09.2011 18.10.2007 - 27.09.2011 07.12.2007 - 27.09.2011 01.06.2006 - 27.09.2011 08.07.2003 - 27.09.2011 01.08.2003 - 27.09.2011 16.09.2003 - 27.09.2011 07.01.2004 - 27.09.2011 07.04.2004 - 27.09.2011 16.10.2004 - 27.09.2011 08.12.2004 - 27.09.2011 29.12.2004 - 27.09.2011 14.05.2005 - 27.09.2011 07.02.2006 - 27.09.2011 03.05.2006 - 27.09.2011 09.05.2006 - 27.09.2011 08.04.2003 - 27.09.2011 13.05.2003 - 27.09.2011 28.03.2003 - 27.09.2011 11.01.2003 - 27.09.2011 15.10.2002 - 27.09.2011 S $ price 2.6080 2.7920 2.6240 2.6507 2.6620 2.3620 2.3720 2.5493 0.5664 0.5888 0.4869 0.5995 0.7253 1.0581 1.0197 1.0627 0.9600 1.8600 2.3227 2.3067 0.5401 0.5504 0.5436 0.4123 0.2688

5 6 1 4 2 1 1 5 4 3 9 2 1 1 1 1 1 2 1 42 16 65 15 39 55 283 as at 31.12.2007

– 750 875 750 1,125 8,750 45,000 45,000 26,906 980,000 730,000 193,500 149,750 731,500 445,500 240,000 180,000 488,562 3,430,000 1,848,000 1,600,000 3,056,000 1,050,000 2,585,000 4,500,000 22,336,968 at 31.12.2007

td a n d i t s S ubsi ar ies – – – – – Options b alance as n o. of holders e xercise (30,000) (94,000) (18,000) (10,000) (34,000) (12,000) Hyf l ux L (222,000) (100,000) (114,000) (234,000) (190,000) (213,000) (188,000) (279,000) (525,000) (164,000) (120,000) (640,000) (120,000) exercised (4,495,500) (1,188,500) DIRECTORS’ REPORT Financial year ended 31 December 2007

– – – – – – – – – – – – – – – (500) (1,250) Options (26,750) (15,500) forfeited (200,000) (240,000) (360,000) (100,000) (310,000) (183,500) (1,437,500)

– – – – – – – – – – – – – – – – – – – – – – Options granted 970,000 3,430,000 5,580,000 1,180,000

– – – 45,000 75,000 94,500 18,750 18,750 60,906 12,750 235,125 190,875 433,250 337,750 625,000 360,000 300,000 2,430,000 1,800,000 3,480,000 1,010,500 1,575,000 3,408,500 4,500,000 1,678,312 at 1.1.2007 22,689,968 25.09.2007 23.05.2007 28.03.2006 18.10.2006 07.12.2006 05.04.2007 08.06.2005 01.08.2002 16.09.2002 07.01.2003 07.04.2003 16.10.2003 08.12.2003 29.12.2003 14.05.2004 07.02.2005 03.05.2005 09.05.2005 01.06.2005 13.05.2002 08.07.2002 At the end of the financial year, details of all the options granted under Scheme on unissued ordinary shares Company were as follows: At the end of financial year, Date of grant b alance as of options 08.04.2002 15.10.2001 28.03.2002 11.01.2002

n t s (c o ’ d ) Op t i o ns a n d Warra (a) E mployees’ S hare Option cheme (cont’d)

52 Hyflux LtdAnnual Report 2007 Reinventing Ourselves Touching Lives Hyflux Ltd and its Subsidiaries DIRECTORS’ REPORT Financial year ended 31 December 2007

Options and warrants (cont’d)

(b) warrants:

On 23 November 2004, the Company entered into a Warrant Subscription Agreement with Istithmar PJSC (“Istithmar”), a company incorporated in Dubai, United Arab Emirates, in which Istithmar is entitled to subscribe for equity shares equal to 10% of the diluted share capital of the Company as adjusted under the terms of the Warrant Subscription Agreement. This was approved by the shareholders of the Company on 8 April 2005 at an Extraordinary General Meeting.

Pursuant to an agreement with Istithmar as announced on 18 March 2006, Istithmar’s entitlement to the warrant subscription was reduced from 10% to 7.5% of the diluted share capital of the Company on the date in which the warrants are exercised, subject to terms of the Warrant Subscription Agreement.

The exercise price is equivalent to the higher of (a) S$1.95 and (b) the lower of 70% of the volume-weighted average price for trades in the Company’s shares done on Singapore Exchange on the market day immediately preceding the exercise date or in the 30 calendar day period immediately preceding the exercise date.

The exercise period is from April 2008 to April 2010.

Except as disclosed above, no other options or warrants to take up unissued shares of the Company or its subsidiaries were granted and no other shares were issued by virtue of the exercise of options or warrants to take up unissued shares of the Company or its subsidiaries.

Audit committee The Audit Committee (“AC”) comprises the following members at the date of this report:

Mr Lee Joo Hai (Chairman) Mr Teo Kiang Kok Mr Gay Chee Cheong Professor Tan Teck Meng

The members of the AC, collectively, backed with legal, accounting, financial management expertise or business experience are qualified to discharge the AC’s responsibilities.

The primary functions of the AC are as follows:

(a) assist the Board in discharging its statutory responsibilities on financial and accounting matters;

(b) review the financial and operating results and accounting policies of the Group;

(c) review significant financial reporting issues and judgements relating to financial statements for each financial year, quarterly and annual results announcement before submission to the Board for approval;

(d) review the adequacy of the Company’s internal control (financial and operational) and risk management policies and systems established by the management;

(e) review the audit plans and reports of the external and internal auditors and consider the effectiveness of the actions taken by management on the auditors’ recommendations;

(f) appraise and report to our Board on the audits undertaken by the external and internal auditors, the adequacy of the disclosure of information, and the appropriateness and quality of the system of management and internal controls; and

(g) review the independence of external auditors annually and consider the appointment or re-appointment of external auditors and matters relating to the resignation or removal of the auditors and approve the remuneration and terms of engagement of the external auditors.

Reinventing Ourselves Touching Lives Hyflux LtdAnnual Report 2007 53 Hyflux Ltd and its Subsidiaries DIRECTORS’ REPORT Financial year ended 31 December 2007

Audit committee (CONT’D)

The AC held four meetings during the year. The AC has reviewed the non-audit services provided by the external auditors, including the fees paid for these services during the year, and is satisfied that the nature and extent of such services would not affect the independence of the external auditors. The AC has also reviewed the services provided by the Independent Directors’ firms and is satisfied that the provision of such services did not affect their independence.

The AC has full access to the external auditors and will hold meetings with them at least once a year without the presence of Management. The AC has authority to access all personnel, records, and other information to enable it to properly discharge its function. It has full authority and discretion to invite any Director or executive officer to attend its meetings.

The Audit Committee has recommended to the Board of Directors the nomination of Messrs KPMG in place of Messrs Ernst & Young as external auditors of the Company at the forthcoming Annual General Meeting.

On behalf of the board of directors,

Lum Ooi Lin Group CEO, President and Managing Director

Teo Kiang Kok Director

Singapore 14 March 2008

54 Hyflux LtdAnnual Report 2007 Reinventing Ourselves Touching Lives Hyflux Ltd and its Subsidiaries STATEMENT BY DIRECTORS

We, Lum Ooi Lin and Teo Kiang Kok, being two of the directors of Hyflux Ltd, do hereby state that, in the opinion of the directors,

(i) the accompanying balance sheets, consolidated income statement, statements of changes in equity and consolidated cash flow statement together with notes thereto are drawn up so as to give a true and fair view of the state of affairs of the Group and of the Company as at 31 December 2007, and the results of the business, changes in equity and cash flows of the Group and the changes in equity of the Company for the financial year then ended, and

(ii) at the date of this statement, there are reasonable grounds to believe that the Company will be able to pay its debts as and when they fall due.

On behalf of the board of directors:

Lum Ooi Lin Group CEO, President and Managing Director

Teo Kiang Kok Director

Singapore 14 March 2008

Reinventing Ourselves Touching Lives Hyflux LtdAnnual Report 2007 55 Hyflux Ltd and its Subsidiaries INDEPENDENT AUDITORS’ REPORT To the Members of Hyflux Ltd

We have audited the accompanying financial statements of Hyflux Ltd (the “Company”) and its subsidiaries (collectively, the “Group”) set out on pages 57 to 130, which comprise the balance sheets of the Group and the Company as at 31 December 2007, the statements of changes in equity of the Group and the Company, the income statement and cash flow statement of the Group for the year then ended, and a summary of significant accounting policies and other explanatory notes.

Directors’ responsibility for the financial statements The Company’s directors are responsible for the preparation and fair presentation of these financial statements in accordance with the provisions of the Singapore Companies Act, Cap. 50 (the “Act”) and Singapore Financial Reporting Standards. This responsibility includes: designing, implementing and maintaining internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error; selecting and applying appropriate accounting policies; and making accounting estimates that are reasonable in the circumstances.

Auditors’ responsibility Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with Singapore Standards on Auditing. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance whether the financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor’s judgement, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by directors, as well as evaluating the overall presentation of the financial statements.

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

Opinion In our opinion,

(i) the consolidated financial statements of the Group and the balance sheet and statement of changes in equity of the Company are properly drawn up in accordance with the provisions of the Act and Singapore Financial Reporting Standards so as to give a true and fair view of the state of affairs of the Group and of the Company as at 31 December 2007 and the results, changes in equity and cash flows of the Group and the changes in equity of the Company for the year ended on that date; and

(ii) the accounting and other records required by the Act to be kept by the Company and by those subsidiaries incorporated in Singapore of which we are the auditors have been properly kept in accordance with the provisions of the Act.

ERNST & YOUNG Certified Public Accountants

Singapore 14 March 2008

56 Hyflux LtdAnnual Report 2007 Reinventing Ourselves Touching Lives Hyflux Ltd and its Subsidiaries CONSOLIDATED INCOME STATEMENT for the financial year ended 31 December 2007

Notes 2007 2006 s$’000 s$’000 (Restated)

Revenue 3 192,786 142,379

Other income/(expenses) - net 4 108 (314) Raw materials and consumables (105,998) (77,767) Personnel expenses 5 (30,721) (20,042) Cost of share-based payment 5 (3,131) (3,150) Depreciation and amortisation (7,198) (4,969) Net (loss)/gain on sale of property, plant and equipment (4) 52 Gain on sale of a subsidiary and an associate – 1,655 Gain on sale of partial interest in a joint venture 8,185 – Finance income 6 2,548 5,534 Finance expenses 7 (8,878) (9,078) Fair value (loss)/gain on derivative financial instruments (3,532) 115 Share of profit/(loss) of associates 1,277 (910) Other operating expenses 8 (9,369) (17,166) Negative goodwill on acquisitions of subsidiaries/businesses 2,620 3,839

Profit before taxation 38,693 20,178 Tax expense 9 (2,048) (4,821)

Profit for the year 36,645 15,357

Attributable to: Shareholders of the Company 32,949 15,473 Minority interests 3,696 (116)

36,645 15,357

Earnings per share (cents) 10 - Basic 6.32 3.00 - Fully diluted 6.23 2.97

The accompanying accounting policies and explanatory notes form an integral part of the financial statements.

Reinventing Ourselves Touching Lives Hyflux LtdAnnual Report 2007 57 Hyflux Ltd and its Subsidiaries BALANCE SHEETS as at 31 December 2007

Group Company notes 2007 2006 2007 2006 s$’000 s$’000 s$’000 s$’000 (Restated)

Non-current assets

Property, plant and equipment 11 62,573 33,403 7,612 4,347 Investment property 12 2,373 2,502 – – Intangible assets 13 40,499 38,982 4,182 3,408 Investments in subsidiaries 14 – – 134,377 104,654 Investments in joint venture 15 – – 1,125 20,000 Investments in associates 16 100,064 6,962 12,277 – Long-term investments 17 7,917 5,997 899 899 Financial and lease receivables 18 9,570 156,990 – – Other receivables 22 – 3,979 – – Due from related parties (non-trade) 22 – – 18,833 14,515 Deferred tax assets 29 1,218 505 – –

Total non-current assets 224,214 249,320 179,305 147,823

Current assets

Gross amount due for contract work 19 93,257 48,907 9,527 14,031 Inventories 20 20,641 11,193 17,498 8,506 Trade receivables 21 46,110 30,734 1,148 1,165 Financial and lease receivables 18 187 757 – – Other receivables and deposits 22 31,740 20,059 3,377 1,842 Prepayments 6,582 5,571 1,327 1,608 Due from related parties (trade) 21 15,216 15,741 22,673 15,929 Due from related parties (non-trade) 22 4,787 1,433 155,412 31,145 Short-term loans 23 – 98 – – Derivative financial instruments 36 – 3,758 – 228 Cash and fixed deposits 24 121,047 55,827 6,074 4,694

Total current assets 339,567 194,078 217,036 79,148

58 Hyflux LtdAnnual Report 2007 Reinventing Ourselves Touching Lives Hyflux Ltd and its Subsidiaries BALANCE SHEETS (CONT’D) as at 31 December 2007

Group Company 2007 2006 2007 2006 notes s$’000 s$’000 s$’000 s$’000 (Restated)

Current liabilities

Derivative financial instruments 36 – 4,995 – – Trade payables 25 55,022 35,277 1,172 1,012 Other payables and accruals 26 17,747 13,884 3,216 2,030 Progress payments from customers 25 25,989 3,358 2,080 2,062 Interest-bearing loans and borrowings 27 5,245 33,663 5,000 30,902 Finance lease liabilities 28 104 244 – – Deferred income 14,281 12,196 88 – Due to related parties (trade) 25 – – 845 30 Due to related parties (non-trade) 26 1,796 1,273 36,741 9,952 Tax payable 202 973 – –

Total current liabilities 120,386 105,863 49,142 45,988

Net current assets 219,181 88,215 167,894 33,160

Non-current liabilities

Interest-bearing loans and borrowings 27 193,266 115,001 190,596 36,518 Finance lease liabilities 28 187 332 – – Deferred tax liabilities 29 2,875 4,136 159 159

Total non-current liabilities 196,328 119,469 190,755 36,677

Net assets 247,067 218,066 156,444 144,306

Equity attributable to shareholders of the Company

Share capital 30 95,820 91,142 95,820 91,142 Capital reserves 31 1,064 987 – – Foreign currency translation reserve (1,815) (4,550) – – Hedging reserve 32 (4,222) (7,839) – 563 Employee share option reserve 30 9,419 6,288 9,419 6,288 Revenue reserve 139,506 113,573 51,205 46,313

239,772 199,601 156,444 144,306 Minority interests 7,295 18,465 – –

Total equity 247,067 218,066 156,444 144,306

The accompanying accounting policies and explanatory notes form an integral part of the financial statements.

Reinventing Ourselves Touching Lives Hyflux LtdAnnual Report 2007 59 77 Total equity 3,617 2,768 6,385 4,678 3,131 (1,569) (7,016) 36,645 43,030 (14,899) 219,635 218,066 247,067

– – – – – 33 33 (88) 7,295 3,696 3,729 18,553 18,465 (14,899) interests m inority – 77 Total 3,617 2,735 6,352 4,678 3,131 (1,481) (7,016) 32,949 39,301 199,601 239,772 201,082

– – – – – – – (1,481) (7,016) reserve 32,949 32,949 Revenue 113,573 139,506 115,054 – – – – – – – – – – share 6,288 3,131 9,419 6,288 option reserve

e mployee – – – – – – – – 3,617 3,617 3,617 (4,222) (7,839) (7,839) reserve Hedging – – – – – – – – 2,735 2,735 2,735 (1,815) (4,550) (4,550) reserve currency translation td a n d i t s S ubsi ar ies Attributable to equity holders of the C ompany – – – – – – – – – – 77 987 987 1,064 Hyf l ux L reserves

f oreign – – – – – – – – – – s hare c apital for the financial year ended 31 December 2007 4,678 capital s $’000 s $’000 s $’000 s $’000 s $’000 s $’000 s $’000 s $’000 s $’000 91,142 95,820 91,142 STATEMENTS OF C H ANGES IN EQUITY STATEMENTS maturity of financial instruments Employees’ Share Option Scheme Adoption of INT FRS 112 As restated Recognised in income statement on Foreign currency translation differences N et income recognised directly in equity Profit for the year recognised income for the year Total Issue of shares for cash under Cost of share-based payment to capital reserve Transfer Acquisition of a subsidiary Dividends At 31.12.2007 At 1.1.2007 The accompanying accounting policies and explanatory notes form an integral part of the financial statements.

g roup – 2007

60 Hyflux LtdAnnual Report 2007 Reinventing Ourselves Touching Lives

– – Total (696) equity 3,007 3,150 7,114 7,079 (4,224) (4,920) (3,044) (6,963) 15,357 10,437 218,066 197,286

– – – – (291) (291) (116) (407) 7,723 7,114 7,079 (3,044) 18,465 interests m inority – – – – Total (696) 3,007 3,150 (3,933) (4,629) (6,963) 15,473 10,844 189,563 199,601

– – – – – – – – – (6,963) reserve 15,473 15,473 Revenue 105,063 113,573 – – – – – – – – – – 286 share 2,852 3,150 6,288 option reserve

e mployee – – – – – – – – – (696) (696) (696) (7,143) (7,839) reserve Hedging – – – – – – – – – (617) (3,933) (3,933) (3,933) (4,550) reserve currency translation td a n d i t s S ubsi ar ies Attributable to equity holders of the C ompany – – – – – – – – – – – – 987 987 Hyf l ux L reserves – – – – – – – – – – – (286) for the financial year ended 31 December 2007 capital 62,693 (62,407)

f oreign – – – – – – – – – – share s hare c apital 3,007 i ssued capital s $’000 s $’000 s $’000 s $’000 s $’000 s $’000 s $’000 s $’000 s $’000 s $’000 25,728 91,142 62,407 STATEMENTS OF C H ANGES IN EQUITY (CONT’D) STATEMENTS financial instruments (expense) for the year Act 2005 Employees’ Share Option Scheme due to disposal of a subsidiary At 1.1.2006 Net fair value loss on derivative Foreign currency translation differences N et expense recognised directly in equity Profit for the year recognised income/ Total Effects of Companies (Amendment) Issue of shares for cash under Cost of share-based payment Acquisition of a subsidiary Reduction of minority interests Capital contribution by minority interests Dividends At 31.12.2006 The accompanying accounting policies and explanatory notes form an integral part of the financial statements.

g roup – 2006 (Restated) F

Reinventing Ourselves Touching Lives Hyflux LtdAnnual Report 2007 61

– – 184 184 (563) (563) Total 3,007 3,150 4,678 3,131 (3,294) (3,110) (6,963) (7,016) 11,908 11,345 148,222 144,306 144,306 156,444 – – – – – – – – – (3,294) (3,294) (6,963) (7,016) reserve 56,570 46,313 11,908 11,908 46,313 51,205 Revenue

– – – – – – – – – – – – 286 share 3,150 6,288 3,131 2,852 9,419 6,288 option reserve e mployee – – – – – – – – – – 184 184 184 563 379 563 (563) (563) (563) reserve Hedging

– – – – – – – – – – – – – – – – (286) 62,693 (62,407) premium

– – – – – – – – – – – – s hare s hare 3,007 4,678 capital s $’000 s $’000 s $’000 s $’000 s $’000 s $’000 62,407 91,142 25,728 95,820 91,142 td a n d i t s S ubsi ar ies Hyf l ux L for the financial year ended 31 December 2007 STATEMENTS OF C H ANGES IN EQUITY (CONT’D) STATEMENTS Net fair value gain on derivative financial instruments N et income recognised directly in equity Loss for the year Cost of share-based payment Dividends Total recognised income/(expense) for the year Total Effects of Companies (Amendment) Act 2005 Issue of shares for cash under Employees’ Share Option Scheme At 31.12.2006 Recognised in income statement on maturity of financial instruments N et expense recognised directly in equity Profit for the year recognised income/(expense) for the year Total Issue of shares for cash under Employees’ Share Option Scheme Cost of share-based payment Dividends C ompany – 2006 At 1.1.2006 At 31.12.2007 At 1.1.2007 The accompanying accounting policies and explanatory notes form an integral part of the financial statements.

c ompany – 2007 E

62 Hyflux LtdAnnual Report 2007 Reinventing Ourselves Touching Lives Hyflux Ltd and its Subsidiaries CONSOLIDATED CASH FLOW STATEMENT for the financial year ended 31 December 2007

2007 2006 s$’000 s$’000 (Restated)

Cash flows from operating activities: Profit before taxation 38,693 20,178 Adjustments: Cost of share-based payment 3,131 3,150 Fair value loss/(gain) on derivative financial instruments 3,532 (115) Gain on sale of partial interest in a joint venture (8,185) – Gain on sale of a subsidiary and an associate – (1,655) Net loss/(gain) on sale of property, plant and equipment 4 (52) Share of (profit)/loss of associates (1,277) 910 Depreciation and amortisation 7,198 4,969 Finance expenses 8,878 9,078 Finance income (2,548) (5,534) Negative goodwill on acquisitions of subsidiaries/businesses (2,620) (3,839) Impairment of trade and other receivables 45 1,433 Provision for inventory obsolescence and inventory written down 657 1,252 Goodwill arising from acquisition of interests from minority interests written-off 242 – Exchange differences 1,139 (5,355)

Operating cash flows before working capital changes 48,889 24,420

Working capital changes: Inventories (10,105) (1,118) Gross amount due for contract work (44,834) (10,096) Trade receivables (12,925) (620) Financial and lease receivables 65,261 (29,435) Other receivables, deposits and prepayments (13,572) 4,858 Due from related parties (2,153) 11,753 Trade payables 20,165 (25,440) Other payables and accruals 4,341 338 Progress payments from customers 22,631 (5,042) Deferred income 2,084 (21) Derivative financial instruments 111 166

Total working capital changes 31,004 (54,657)

Cash generated from/(used in) operating activities 79,893 (30,237) Tax paid (2,138) (1,582)

Net cash from/(used in) operating activities 77,755 (31,819)

Reinventing Ourselves Touching Lives Hyflux LtdAnnual Report 2007 63 Hyflux Ltd and its Subsidiaries CONSOLIDATED CASH FLOW STATEMENT (CONt’D) for the financial year ended 31 December 2007

2007 2006 s$’000 s$’000 (Restated)

Cash flows from investing activities: Purchase of property, plant and equipment (30,393) (19,040) Acquisition of intangible assets (278) (11,000) Acquisitions of subsidiaries/businesses, net of cash acquired (Note A) (36,012) (10,871) Cash outflow from sales of a subsidiary and an associate (Note B) – (4,521) Sale of a joint venture, net of cash disposed (Note C) 16,059 – Proceeds from sale of property, plant and equipment 78 129 Long-term investments (1,919) – Short-term investments – 2,000 Acquisition of associates (91,875) (4,309) Interest received 2,047 1,649

Net cash used in investing activities (142,293) (45,963)

Cash flows from financing activities: Proceeds from issuance of new shares under Employees’ Share Option Scheme 4,678 3,007 Proceeds from borrowings (net) 140,759 39,276 Repayment of lease liabilities (286) (10) Interest paid (8,878) (9,078) Interest received from derivatives 501 3,886 Minority shareholders’ contribution – 7,079 Payments of dividends (7,016) (6,963)

Net cash from financing activities 129,758 37,197

Net increase/(decrease) in cash and cash equivalents 65,220 (40,585) Cash and cash equivalents at beginning of the financial year 55,827 96,412

Cash and cash equivalents at end of the financial year (Note 24) 121,047 55,827

64 Hyflux LtdAnnual Report 2007 Reinventing Ourselves Touching Lives Hyflux Ltd and its Subsidiaries CONSOLIDATED CASH FLOW STATEMENT (CONt’D) for the financial year ended 31 December 2007

Note A

The fair value of the identifiable assets and liabilities of subsidiaries/businesses acquired were as follows:

2007 2006 s$’000 s$’000

Cash 4,594 3,332 Current assets 36,231 14,073 Non-current assets 24,228 37,730 Current liabilities (9,516) (26,057) Non-current liabilities (12,553) (6,834) Minority interests – (7,114)

Fair value of net assets acquired 42,984 15,130 Positive goodwill 242 3,969 Negative goodwill (2,620) (3,839)

Purchase consideration 40,606 15,260 Less: Deposits paid – (1,057) Less: Cash of subsidiaries acquired (4,594) (3,332)

Net cash outflow on acquisitions of subsidiaries/businesses 36,012 10,871

Note B

The values of assets and liabilities of a subsidiary and an associate disposed were as follows:

2007 2006 s$’000 s$’000

Current assets – 23,505 Non-current assets – 7,218 Current liabilities – (17,128) Non-current liabilities – (5) Minority interests – (3,044)

Net assets disposed – 10,546 Gain on sale of a subsidiary and an associate – 1,655 Professional fee incurred – 104

Cash proceeds from sale – 12,305 Less: Cash in subsidiary and associate – (16,722) Less: Professional fees incurred – (104)

Net cash outflow on disposal of a subsidiary and an associate – (4,521)

Reinventing Ourselves Touching Lives Hyflux LtdAnnual Report 2007 65 Hyflux Ltd and its Subsidiaries CONSOLIDATED CASH FLOW STATEMENT (CONt’D) for the financial year ended 31 December 2007

Note C

The value of assets and liabilities of joint venture disposed were as follows:

2007 2006 s$’000 s$’000

Current assets 4,248 – Non-current assets 39,667 – Current liabilities (2,827) – Non-current liabilities (31,699) –

Net assets sold 9,389 – Gain on partial disposal 8,185 – Professional fees incurred 143 –

Cash proceeds from sale 17,717 – Less: Professional fees incurred (143) – Less: Cash in a joint venture (1,515) –

Cash inflow on partial sale of interest in a joint venture 16,059 –

The accompanying accounting policies and explanatory notes form an integral part of the financial statements.

66 Hyflux LtdAnnual Report 2007 Reinventing Ourselves Touching Lives Hyflux Ltd and its Subsidiaries NOTES TO THE FINANCIAL STATEMENTS 31 December 2007

1. cORporate information

Hyflux Ltd (the “Company”) is a limited liability company, which is incorporated and domiciled in the Republic of Singapore, and publicly traded on the Singapore Exchange.

The registered office and principal place of business of the Company is located at Hyflux Building, 202 Kallang Bahru, Singapore 339339.

The principal activities of the Company are investment holding and manufacturing of membrane systems.

The principal activities of its subsidiaries comprise of the following:

• Water - Seawater desalination, raw water purification, wastewater cleaning, water recycling, water reclamation and ultra pure water production for municipal and industrial clients as well as home consumer filtration and purification products;

- Design, build and sale of water treatment plants, wastewater treatment plants and water recycling plants under concession arrangements;

• Industrial Manufacturing Processes - Separation, concentration and purification treatments for manufacturing process streams;

• Speciality Materials - Development and commercialisation of specialty materials utilising membrane technology, such as lactic acid from natural renewable resources like corn and sugar cane; and

• Energy - Development of membrane applications in resource recovery, waste recycling and energy reclamation such as used oil recovery and recycling.

There have been no significant changes in the nature of these activities during the financial year.

2. summary of significant accounting policies

2.1 bAsis of preparation

The consolidated financial statements of the Group and the balance sheet and statement of changes in equity of the Company have been prepared in accordance with Singapore Financial Reporting Standards (“FRS”).

The financial statements have been prepared on a historical cost basis except as disclosed in the accounting policies below.

The financial statements are presented in Singapore Dollars (“S$”) and all values are rounded to the nearest thousand (“S$’000”) except when otherwise indicated.

Reinventing Ourselves Touching Lives Hyflux LtdAnnual Report 2007 67 Hyflux Ltd and its Subsidiaries NOTES TO THE FINANCIAL STATEMENTS 31 December 2007

2. summary of significant accounting policies (CONT’D)

2.2 cHAnges in accounting policies

The accounting policies have been consistently applied by the Group and the Company and are consistent with those used in the previous financial year, except for the changes in accounting policies discussed below:

(a) Adoption of new and revised FRS

On 1 January 2007, the Group and the Company adopted the following standards effective for annual financial periods beginning on or after 1 January 2007:

(i) Amendments to FRS 1, Presentation of financial statements (Capital disclosures)

The amendments to FRS 1 require the Group to make new disclosures to enable users of the financial statements to evaluate the Group’s objectives, policies and processes for managing capital.

The required disclosures have been made accordingly in Note 37 of the financial statements.

(ii) FRS 40 Investment Property

Previously, the Group had accounted for its investment properties under FRS 16 Property, Plant and Equipment. Under FRS 16, property, plant and equipment are recorded at cost less accumulated depreciation and accumulated impairment losses. FRS 40 requires investment properties which represent the Group’s interests in leasehold buildings that are held for long term rental yields and/or capital appreciation to be classified and accounted for as investment properties. FRS 40 also requires companies to measure investment properties using either the fair value or cost method. The Group has elected to measure investment properties under the cost method. Investment properties are stated at cost less accumulated depreciation and accumulated impairment losses.

The adoption of FRS 40 does not have any significant impact on these financial statements.

(iii) FRS 107 Financial Instruments: Disclosures

FRS 107 introduces new disclosures to improve the information about financial instruments. It requires the disclosure of qualitative and quantitative information about exposure to risks arising from financial instruments, including specified minimum disclosures about credit risk, liquidity risk and market risk.

The required disclosures have been made accordingly in Notes 35 and 36 of the financial statements.

68 Hyflux LtdAnnual Report 2007 Reinventing Ourselves Touching Lives Hyflux Ltd and its Subsidiaries NOTES TO THE FINANCIAL STATEMENTS 31 December 2007

2. summary of significant accounting policies (CONT’D)

2.2 cHAnges in accounting policies (cont’d)

(b) fRS and INT FRS not yet effective

At the date of authorisation of these financial statements, the following FRS and INT FRS were issued but not yet effective: Effective date (annual periods beginning on or after)

INT FRS 111 Group and Treasury Share Transactions 1 March 2007 INT FRS 112 Service Concession Arrangements 1 January 2008 FRS 23 Amendment to FRS 23, Borrowing costs 1 January 2009 FRS 108 Operating Segments 1 January 2009

The Group has early adopted INT FRS 112. The effect of the change in this accounting policy is disclosed in Note 2.2(c).

The directors expect that the adoption of the other pronouncements above will have no material impact to the financial statements in the period of initial application.

FRS 108 requires the Group to disclose segment information based on the information reviewed by the Group’s chief operating decision maker. The impact of this standard on the other segment disclosures is still to be determined. As this is a disclosure standard, it will have no impact on the financial position or financial performance of the Group when implemented in 2009.

FRS 23 Borrowing costs has been revised to require capitalisation of borrowing costs when such costs relate to a qualifying asset. A qualifying asset is an asset that necessarily takes a substantial period of time to get ready for its intended use or sale. In accordance with the transitional requirements in the Standard, the Group will adopt this as a prospective change. Accordingly, borrowing costs will be capitalised on qualifying assets with a commencement date after 1 January 2009. No changes will be made for borrowing costs incurred to this date that have been expensed.

On 1 January 2007, the Group and the Company adopted INT FRS 112 Service Concession Arrangements which is effective for annual financial periods beginning on or after 1 January 2008:

INT FRS 112 requires the recognition of construction revenue and the corresponding financial receivable and/or intangible asset for public-to-private service concession arrangement if:

• the party that grants the service arrangement (the “grantor”) controls or regulates what services the entity (the “operator”) must provide with the infrastructure asset, to whom it must provide them, and at what price; and

• the grantor controls, through ownership, beneficial entitlement or otherwise, any significant residual interest in the infrastructure asset at the end of the term of the arrangement.

Reinventing Ourselves Touching Lives Hyflux LtdAnnual Report 2007 69 Hyflux Ltd and its Subsidiaries NOTES TO THE FINANCIAL STATEMENTS 31 December 2007

2. summary of significant accounting policies (CONT’D)

2.2 cHAnges in accounting policies (cont’d)

(i) Recognition of financial receivables

The Group recognises a financial receivable if it has a contractual right under the concession agreements to receive a fixed and determinable amount of payments during the Concession Period irrespective of the usage of the plants. The financial receivable is measured on initial recognition at its fair value. Subsequent to initial recognition, the financial receivable is measured at amortised cost using the effective interest method.

When the Group receives a payment during the Concession Period, it will apportion such payment between (i) a repayment of the financial receivable (if any), which will be used to reduce the carrying amount of the financial receivable on the balance sheet, (ii) interest income, which will be recognised as finance income in its income statement and (iii) revenue from operating the plants in its income statement.

(ii) Recognition of intangible assets

The Group recognises an intangible asset if it does not have any contractual right under the concession agreements to receive a fixed and determinable amount of payments during the Concession Period. The intangible asset is recognised to the extent that the Group has a right to charge fees for the usage of the plants and is amortised over the Concession Period from commencement of the operations of the plants.

The change in accounting policy is applied retrospectively. The financial effects of adoption to the balance sheet and income statement items are as follows: 2007 2006 s$’000 s$’000

Consolidated balance sheet Increase/(decrease) in:

Property, plant and equipment (7,954) (13,003) Financial and lease receivables 9,757 15,653 Intangible assets (267) – Gross amounts due for contract work 2,838 (1,817) Other payables and accruals – 2,403 Foreign currency translation reserve * (1) Revenue reserve 3,143 (1,481) Minority interests – (88)

consolidated income statement Increase/(decrease) in:

Revenue 19,070 12,542 Raw materials and consumables 15,234 13,435 Finance income (136) * Finance expense 743 – Personnel expenses 4 389 Depreciation and amortisation (206) 16 Other operating expenses 16 271

* Balance less than S$1,000.

70 Hyflux LtdAnnual Report 2007 Reinventing Ourselves Touching Lives Hyflux Ltd and its Subsidiaries NOTES TO THE FINANCIAL STATEMENTS 31 December 2007

2. summary of significant accounting policies (CONT’D)

2.3 significant accounting estimates and judgements

The preparation of the Group’s financial statements requires management to make judgements, estimates and assumptions that affect the reported amounts of revenue, expenses, assets and liabilities, and the disclosure of contingent liabilities at the reporting date. However, uncertainty about these assumptions and estimates could result in outcomes that could require a material adjustment to the carrying amount of the asset or liability affected in the future.

(i) Useful lives of plant and equipment

The cost of plant and equipment is depreciated on a straight-line basis over the asset’s useful lives. Management estimates the useful lives of these plant and equipment to be within 1 to 10 years. Changes in the expected level of usage and technological developments could impact the economic useful lives and the residual values of these assets, therefore future depreciation charges could be revised. The carrying amount of the Group’s plant and equipment at 31 December 2007 is disclosed in Note 11 of the financial statements.

(ii) Impairment of non-financial assets

The Group assesses whether there are any indicators of impairment for all non-financial assets at each reporting date. Goodwill is tested for impairment annually and at other times when such indicators exist. Other non-financial assets are tested for impairment when there are indicators that the carrying amounts may not be recoverable.

When value in use calculations are undertaken, management must estimate the expected future cash flows from the asset or cash-generating unit and choose a suitable discount rate in order to calculate the present value of those cash flows. Further details of the key assumptions applied in the impairment assessment of goodwill, are given in Note 13 of the financial statements.

(iii) Impairment of loans and receivables

The Group assesses at each balance sheet date whether there is any objective evidence that a financial asset is impaired. To determine whether there is objective evidence of impairment, the Group considers factors such as the probability of insolvency or significant financial difficulties of the debtor and default or significant delay in payments.

Where there is objective evidence of impairment, the amount and timing of future cash flows are estimated based on historical loss experience for assets with similar credit risk characteristics. The carrying amount of the Group’s loans and receivables at the balance sheet date is disclosed in Note 21 of the financial statements.

(iv) Income taxes

The Group has exposure to income taxes in numerous jurisdictions. Significant assumption is required in determining the provision for income taxes. There are certain transactions and computations for which the ultimate tax determination is uncertain during the ordinary course of business. The Group recognises liabilities for expected tax issues based on estimates of whether additional taxes will be due. Where the final tax outcome of these matters is different from the amounts that were initially recognised, such differences will impact the income tax and deferred tax provisions in the period in which such determination is made. The carrying amount of the Group’s income tax payables and deferred tax liabilities is disclosed in the balance sheet.

Reinventing Ourselves Touching Lives Hyflux LtdAnnual Report 2007 71 Hyflux Ltd and its Subsidiaries NOTES TO THE FINANCIAL STATEMENTS 31 December 2007

2. summary of significant accounting policies (CONT’D)

2.3 significant accounting estimates and judgements (cont’d)

(v) Impairment of available-for-sale investments

The Group follows the guidance of FRS 39 in determining whether available-for-sale investments are considered impaired. The Group evaluates, among other factors, the duration and extent to which the fair value of an investment is less than its costs, the financial health of and the near-term business outlook of the investee, including factors such as industry and sector performance, changes in technology and operational and financing cashflow.

(vi) Development costs

Development costs are capitalised in accordance with the accounting policy in Note 2.12(b)(i). Initial capitalisation of costs is based on management’s judgement that technological and economical feasibility is confirmed, usually when a product development project has reached a defined milestone according to an established project management model. The carrying amount of development costs capitalised at the balance sheet date is disclosed in Note 13 of the financial statements.

(vii) Construction contracts

The Group recognises contract revenue by reference to the stage of completion of the contract activity at the balance sheet date, when the outcome of a construction contract can be estimated reliably. The stage of completion is measured by reference to the proportion that contract costs incurred for work performed to date bear to the estimated total contract costs. Significant assumptions are required to estimate the total contract costs and the recoverable variation works that will affect the stage of completion. The estimates are made based on past experience and knowledge of the project engineers. The carrying amounts of assets and liabilities arising from construction contracts at the balance sheet date are disclosed in Note 19 of the financial statements.

(viii) Service concession agreements

The revenue for the construction services provided under the concession agreements and the corresponding financial receivables and/or intangible assets arising are recognised based on the percentage of completion method during the construction phase.

The percentage of completion method during the construction phase is measured by reference to the construction costs incurred to-date to the estimated total construction costs. Significant judgement is required in determining the stage of completion, the extent of the construction costs incurred and the estimated total construction costs.

Judgement is also exercised in determining the fair values of the financial receivables. Discount rates, estimates of future cash flows and other factors are used in the valuation process. The assumptions used and estimates made can materially affect the fair value estimates.

72 Hyflux LtdAnnual Report 2007 Reinventing Ourselves Touching Lives Hyflux Ltd and its Subsidiaries NOTES TO THE FINANCIAL STATEMENTS 31 December 2007

2. summary of significant accounting policies (CONT’D)

2.4 fOReign currency

Transactions in foreign currencies are measured in the respective functional currencies of the Company and its subsidiaries and are recorded on initial recognition in the functional currencies at exchange rates approximating those ruling at the transaction dates. Monetary assets and liabilities denominated in foreign currencies are translated at the rate of exchange ruling at the balance sheet date. Non-monetary items that are measured in terms of historical cost in a foreign currency are translated using the exchange rates as at the dates of the initial transactions. Non-monetary items measured at fair value in a foreign currency are translated using the exchange rates at the date when the fair value was determined.

Exchange differences arising on the settlement of monetary items or on translating monetary items at the balance sheet date are recognised in the income statement except for exchange differences arising on monetary items that form part of the Group’s net investment in foreign subsidiaries, which are recognised initially in equity as foreign currency translation reserve in the consolidated balance sheet and recognised in the consolidated income statement on disposal of the subsidiary.

On consolidation, the assets and liabilities of foreign operations are translated into S$ at the rate of exchange ruling at the balance sheet date and their income statements are translated at the weighted average exchange rates for the year. The exchange differences arising on the translation are taken directly to a separate component of equity as foreign currency translation reserve. On disposal of a foreign operation, the deferred cumulative amount recognised in equity relating to that particular foreign operation is recognised in the income statement.

The foreign currency translation reserve represents exchange differences arising from the translation of the financial statements of foreign operations whose functional currencies are different from those of the Group’s presentation currency.

2.5 subsidiaries

A subsidiary is an entity over which the Group has the power to govern the financial and operating policies so as to obtain benefits from its activities.

In the Company’s separate financial statements, investments in subsidiaries are accounted for at cost less accumulated impairment losses.

2.6 Associates

An associate is an entity, not being a subsidiary or a joint venture, in which the Group has significant influence. The associate is equity accounted for from the date the Group obtains significant influence until the date the Group ceases to have significant influence over the associate.

The Group’s investments in associates are accounted for using the equity method. Under the equity method, the investment in associate is measured in the balance sheet at cost plus post-acquisition changes in the Group’s share of net assets of the associate. Goodwill relating to an associate is included in the carrying amount of the investment. Any excess of the Group’s share of the net fair value of the associate’s identifiable asset, liabilities and contingent liabilities over the cost of the investment is deducted from the carrying amount of the investment and is recognised as income as part of the Group’s share of profit or loss of the associate in the period in which the investment is acquired.

Reinventing Ourselves Touching Lives Hyflux LtdAnnual Report 2007 73 Hyflux Ltd and its Subsidiaries NOTES TO THE FINANCIAL STATEMENTS 31 December 2007

2. summary of significant accounting policies (CONT’D)

2.6 Associates (cont’d)

When the Group’s share of losses in an associate equals or exceeds its interest in the associate, the Group does not recognise further losses, unless it has incurred obligations or made payments on behalf of the associate.

The financial statements of the associate are prepared as of the same reporting date as the Company. Where necessary, adjustments are made to bring the accounting policies into line with those of the Group.

In the Company’s separate financial statements, investments in associates are accounted for at cost less accumulated impairment losses.

2.7 jOint ventures

A joint venture is a contractual arrangement whereby two or more parties undertake an economic activity that is subject to joint control, where the strategic financial and operating decisions relating to the activity require the unanimous consent of the parties sharing control. The Group recognised its interest in the joint ventures using proportionate consolidation. The Group combines its share of each of the assets, liabilities, income and expenses of the joint ventures with the similar items, line by line, in its consolidated financial statements. The financial statements of the joint ventures are prepared for the same reporting year as the Group. Consistent accounting policies are applied for like transactions and events in similar circumstances.

The joint ventures are proportionately consolidated until the date on which the Group ceases to have joint control over joint ventures.

In the Company’s separate financial statements, interests in joint ventures are accounted for at cost less accumulated impairment losses.

2.8 bAsis of consolidation

The consolidated financial statements comprise the financial statements of the Company and its subsidiaries as at the balance sheet date. The financial statements of the subsidiaries used in the preparation of the consolidated financial statements are prepared for the same reporting date as the Company. Consistent accounting policies are applied to like transactions and events in similar circumstances.

All intra-group balances, income and expenses and unrealised gains and losses resulting from intra-group transactions are eliminated in full.

Acquisitions of subsidiaries are accounted for by applying the purchase method. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date. Adjustments to those fair values relating to previously held interests are treated as a revaluation and recognised in equity. Any excess of the cost of business combination over the Group’s share in the net fair value of the acquired subsidiary’s identifiable assets, liabilities and contingent liabilities is recorded as goodwill on the balance sheet. The accounting policy for goodwill is set out in Note 2.12(a). Any excess of the Group’s share in the net fair value of the acquired subsidiary’s identifiable assets, liabilities and contingent liabilities over the cost of business combination is recognised as income in the income statement on the date of acquisition.

Subsidiaries are consolidated from the date of acquisition, being the date on which the Group obtains control, and continue to be consolidated until the date that such control ceases.

74 Hyflux LtdAnnual Report 2007 Reinventing Ourselves Touching Lives Hyflux Ltd and its Subsidiaries NOTES TO THE FINANCIAL STATEMENTS 31 December 2007

2. summary of significant accounting policies (CONT’D)

2.9 Transaction with minority interests

Minority interests represent the portion of profit or loss and net assets in subsidiaries not held by the Group and are presented separately in the consolidated income statement and within equity in the consolidated balance sheet, separately from parent shareholders’ equity. Transactions with minority interests are accounted for as transactions with parties external to the Group. Disposals to minority interests result in gain and loss for the Group that are recognised in the income statement. Purchases from minority interests result in goodwill being the difference between any consideration paid and the Group’s incremental share of the carrying value of identifiable net assets of the subsidiary.

2.10 Property, plant and equipment

All items of property, plant and equipment are initially recorded at cost. The cost of an item of property, plant and equipment is recognised as an asset if, and only if, it is probable that future economic benefits associated with the item will flow to the Group and the cost of the item can be measured reliably.

Subsequent to recognition, property, plant and equipment are measured at cost less accumulated depreciation and accumulated impairment losses.

Depreciation is computed on a straight-line basis over the estimated useful lives of the assets as follows:

Plant and machinery – 4 – 10 years Motor vehicles – 4 – 5 years Computers – 1 – 5 years Office equipment – 4 – 5 years Leasehold properties and improvements – 5 years or over the lease period Furniture and fittings – 4 to 5 years Renovation – 4 to 5 years

Assets under construction included in property, plant and equipment are not depreciated as these assets are not yet available for use.

The carrying values of property, plant and equipment are reviewed for impairment when events or changes in circumstances indicate that the carrying value may not be recoverable.

The residual value, useful life and depreciation method are reviewed at each financial year-end to ensure that the amount, method and period of depreciation are consistent with previous estimates and the expected pattern of consumption of the future economic benefits embodied in the items of property, plant and equipment.

An item of property, plant and equipment is derecognised upon disposal or when no future economic benefits are expected from its use or disposal. Any gain or loss on derecognition of the asset is included in the income statement in the year the asset is derecognised.

Reinventing Ourselves Touching Lives Hyflux LtdAnnual Report 2007 75 Hyflux Ltd and its Subsidiaries NOTES TO THE FINANCIAL STATEMENTS 31 December 2007

2. summary of significant accounting policies (CONT’D)

2.11 Investment property

Investment property is initially recorded at cost. Subsequent to recognition, investment property is stated at cost less accumulated depreciation and any accumulated impairment losses. Depreciation is computed utilising the straight-line method to write off the cost of leasehold properties over their estimated useful lives. The estimated useful life is over the lease period of the investment property.

Investment property is derecognised when either it has been disposed of or when the investment property is permanently withdrawn from use and no future economic benefit is expected from its disposal. Any gains or losses on the retirement or disposal of an investment property are recognised in the income statement in the year of retirement or disposal. Transfers are made to or from investment property only when there is a change in use.

2.12 Intangible assets

(a) goodwill

Goodwill acquired in a business combination is initially measured at cost. Following initial recognition, goodwill is measured at cost less accumulated impairment losses. Goodwill is reviewed for impairment annually or more frequently if events and circumstances indicate that the carrying value may be impaired.

For the purpose of impairment testing, goodwill acquired is allocated to each of the Group’s cash-generating units that are expected to benefit from the synergies of the combination.

The cash-generating unit to which goodwill has been allocated is tested for impairment annually and whenever there is an indication that the cash-generating unit may be impaired, by comparing the carrying amount of the cash-generating unit, including the allocated goodwill, with the recoverable amount of the cash-generating unit. Where the recoverable amount of the cash-generating unit is less than the carrying amount, an impairment loss is recognised in the income statement. Impairment losses recognised for goodwill are not reversed in subsequent periods.

Where goodwill forms part of a cash-generating unit and part of the operation within that cash-generating unit is disposed of, the goodwill associated with the operation disposed of is included in the carrying amount of the operation when determining the gain or loss on disposal of the operation. Goodwill disposed of in this circumstance is measured based on the relative fair values of the operations disposed of and the portion of the cash-generating unit retained.

Goodwill and fair value adjustments arising on the acquisition of foreign operations on or after 1 January 2005 are treated as assets and liabilities of the foreign operations and are recorded in the functional currency of the foreign operations and translated in accordance with the accounting policy set out in Note 2.4.

Goodwill and fair value adjustments which arose on acquisitions of foreign operations before 1 January 2005 are deemed to be assets and liabilities of the Company and are recorded in S$ at the rates prevailing at the date of acquisition.

76 Hyflux LtdAnnual Report 2007 Reinventing Ourselves Touching Lives Hyflux Ltd and its Subsidiaries NOTES TO THE FINANCIAL STATEMENTS 31 December 2007

2. summary of significant accounting policies (CONT’D)

2.12 Intangible assets (cont’d)

(b) Other intangible assets

Intangible assets acquired separately or generated internally are measured initially at cost. The cost of intangible assets acquired in a business combination is their fair value as at the date of acquisition. Following initial acquisition, intangible assets are measured at cost less any accumulated amortisation and accumulated impairment losses.

Intangible assets with finite useful lives are amortised over the estimated useful lives and assessed for impairment whenever there is an indication that the intangible asset may be impaired. The amortisation period and the amortisation method are reviewed at least at each financial year-end.

(i) Research and development costs

Expenditure on research activities, undertaken with the prospect of gaining new scientific or technical knowledge and understanding, is recognised in the income statement as an expense when it is incurred.

Development activities involve a plan or design for the production of new or substantially improved products and processes. Development expenditure is capitalised when the Group can demonstrate the technical feasibility of completing the intangible asset so that it will be available for use or sale, its intention to complete and its ability to use or sell the asset, how the asset will generate future economic benefits, the availability of resources to complete and the ability to measure reliably the expenditure during the development.

The carrying value of development costs is reviewed for impairment annually when the asset is not yet in use or more frequently when an indication of impairment arises during the reporting year. Upon completion, the development costs is amortised on a straight-line basis over the estimated useful life which normally does not exceed 15 years.

(ii) Intellectual property rights

The initial cost of acquiring intellectual property rights is capitalised and amortised on a straight-line basis over the period of their expected benefits, which normally does not exceed 10 years.

(iii) Licensing fees

The initial cost of acquiring licenses is capitalised and amortised on a straight-line basis over the period of the licensing agreements of between 10 and 20 years.

Reinventing Ourselves Touching Lives Hyflux LtdAnnual Report 2007 77 Hyflux Ltd and its Subsidiaries NOTES TO THE FINANCIAL STATEMENTS 31 December 2007

2. summary of significant accounting policies (CONT’D)

2.13 Impairment of non-financial assets

The Group assesses at each reporting date whether there is an indication that an asset may be impaired. If any such indication exists, or when annual impairment testing for an asset (i.e. an intangible asset with an indefinite useful life, an intangible asset not yet available for use, or goodwill acquired in a business combination) is required, the Group makes an estimate of the asset’s recoverable amount.

An asset’s recoverable amount is the higher of an asset’s or cash-generating unit’s fair value less costs to sell and its value in use and is determined for an individual asset, unless the asset does not generate cash inflows that are largely independent of those from other assets or Groups of assets. In assessing value in use, the estimated future cash flows are discounted to their present value. Where the carrying amount of an asset exceeds its recoverable amount, the asset is considered impaired and is written down to its recoverable amount. Impairment losses of continuing operations are recognised in the income statement.

An assessment is made at each reporting date as to whether there is any indication that previously recognised impairment losses recognised for an asset other than goodwill may no longer exist or may have decreased. A previously recognised impairment loss is reversed only if there has been a change in the estimates used to determine the asset’s recoverable amount since the last impairment loss was recognised. If that is the case, the carrying amount of the asset is increased to its recoverable amount. That increased amount cannot exceed the carrying amount that would have been determined, net of depreciation, had no impairment loss been recognised for the asset in prior years. Reversal of an impairment loss is recognised in the income statement.

2.14 Financial assets

Financial assets are recognised on the balance sheet when, and only when, the Group becomes a party to the contractual provisions of the financial instrument.

When financial assets are recognised initially, they are measured at fair value, plus, in the case of financial assets not at fair value through profit or loss, directly attributable transaction costs.

A financial asset is derecognised where the contractual right to receive cash flows from the asset has expired. On derecognition of a financial asset in its entirety, the difference between the carrying amount and the sum of the consideration received and any cumulative gain or loss that has been recognised directly in equity is recognised in the income statement.

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

(a) Loans and receivables

Non-derivative financial assets with fixed or determinable payments that are not quoted in an active market are classified as loans and receivables. Subsequent to initial recognition, loans and receivables are measured at amortised cost using the effective interest method. Gains and losses are recognised in the income statement when the loans and receivables are recognised or impaired, and through the amortisation process.

78 Hyflux LtdAnnual Report 2007 Reinventing Ourselves Touching Lives Hyflux Ltd and its Subsidiaries NOTES TO THE FINANCIAL STATEMENTS 31 December 2007

2. summary of significant accounting policies (CONT’D)

2.14 Financial assets (cont’d)

(b) Available-for-sale financial assets

Available-for-sale financial assets are financial assets that are not classified in any of the other categories.

The Group has investments in equity instruments that do not have a quoted market price in an active market and whose fair value cannot be reliably measured. These investments are measured and carried at cost less accumulated impairment losses.

2.15 Cash and cash equivalents

Cash and cash equivalents comprise cash on hand, fixed deposits, and short-term, highly liquid investments that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value. These also include bank overdrafts that form an integral part of the Group’s cash management.

2.16 Impairment of financial assets

The Group assesses at each balance sheet date whether there is any objective evidence that a financial asset or group of financial assets is impaired.

a) Assets carried at amortised cost

If there is objective evidence that an impairment loss on financial assets carried at amortised cost has been incurred, the amount of the loss is measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows discounted at the financial asset’s original effective interest rate. The carrying amount of the asset is reduced through the use of an allowance account. The impairment loss is recognised in the income statement.

When the asset becomes uncollectible, the carrying amount of impaired financial assets is reduced directly or if an amount was charged to the allowance account, the amounts charged to the allowance account are written off against the carrying value of the financial asset.

To determine whether there is objective evidence that an impairment loss on financial assets has been incurred, the Group considers factors such as the probability of insolvency or significant financial difficulties of the debtor and default or significant delay in payments.

If in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognised, the previously recognised impairment loss is reversed. Any subsequent reversal of an impairment loss is recognised in the income statement, to the extent that the carrying value of the asset does not exceed its amortised cost at the reversal date.

Reinventing Ourselves Touching Lives Hyflux LtdAnnual Report 2007 79 Hyflux Ltd and its Subsidiaries NOTES TO THE FINANCIAL STATEMENTS 31 December 2007

2. summary of significant accounting policies (CONT’D)

2.16 Impairment of financial assets (cont’d)

(b) Available-for-sale financial assets

Significant or prolonged decline in fair value below cost, significant financial difficulties of the issueror obligor, and the disappearance of an active trading market are considerations to determine whether there is objective evidence that investment securities classified as available-for-sale financial assets are impaired.

If an available-for-sale financial asset is impaired, an amount comprising the difference between its cost (net of any principal payment and amortisation) and its current fair value, less any impairment loss previously recognised in the income statement, is transferred from equity to the income statement. Reversals of impairment loss in respect of equity instruments are not recognised in the income statement. Reversals of impairment losses on debt instruments are reversed through the income statement, if the increase in fair value of the instrument can be objectively related to an event occurring after the impairment loss was recognised in the income statement.

2.17 Construction contracts

When the outcome of a construction contract can be estimated reliably, contract revenue and contract costs are recognised as revenue and expenses respectively by reference to the stage of completion of the contract activity at the balance sheet date (“percentage-of-completion method”). When the outcome of a construction contract cannot be estimated reliably, contract revenue is recognised to the extent of contract costs incurred that are likely to be recoverable. When it is probable that total contract costs will exceed total contract revenue, the expected loss is recognised as an expense immediately.

Contract revenue comprises the initial amount of revenue agreed in the contract and variations in the contract work and claims that can be measured reliably. A variation or a claim is recognised as contract revenue when it is probable that the customer will approve the variation or negotiations have reached an advanced stage such that it is probable that the customer will accept the claim.

The stage of completion is measured by reference to the contract costs incurred to date to the estimated total costs for the contract. Costs incurred during the financial year in connection with future activity on a contract are excluded from costs incurred to date when determining the stage of completion of a contract. Such costs are shown as construction contract work-in-progress on the balance sheet unless it is not probable that such contract costs are recoverable from the customers, in which case, such costs are recognised as an expense immediately.

At the balance sheet date, the aggregated costs incurred plus recognised profit (less recognised loss) on each contract is compared against the progress billings. Where costs incurred plus the recognised profits (less recognised losses) exceed progress billings, the balance is presented as “Gross amount due for contract work”. Where progress billings exceed costs incurred plus recognised profits (less recognised losses), the balance is presented as due to customers on construction contracts within “Trade and other payables”.

Progress billings not yet paid by customers and retentions and advances received are presented as “Progress payments from customers”.

80 Hyflux LtdAnnual Report 2007 Reinventing Ourselves Touching Lives Hyflux Ltd and its Subsidiaries NOTES TO THE FINANCIAL STATEMENTS 31 December 2007

2. summary of significant accounting policies (CONT’D)

2.18 Inventories

Inventories are stated at the lower of cost and net realisable value.

Costs incurred in bringing the inventories to their present location and condition are accounted for as follows:

• Raw materials – purchase costs on a first-in, first-out basis;

• Finished goods and work-in-progress – costs of direct materials and labour and a proportion of manufacturing overheads based on normal operating capacity.

2.19 Financial liabilities

Financial liabilities are recognised on the balance sheet when, and only when, the Group becomes a party to the contractual provisions of the financial instrument.

Financial liabilities are recognised initially at fair value, plus, in the case of financial liabilities other than derivatives, directly attributable transaction costs.

Subsequent to initial recognition, all financial liabilities are measured at amortised cost using the effective interest method, except for derivatives, which are measured at fair value.

A financial liability is derecognised when the obligation under the liability is extinguished. For financial liabilities other than derivatives, gains and losses are recognised in the income statement when the liabilities are derecognised or impaired, and through the amortisation process. Any gains or losses arising from changes in fair value of derivatives are recognised in the income statement. Net gains or losses on derivatives include exchange differences.

2.20 Borrowing costs

Borrowing costs are recognised in the income statement as incurred except to the extent that they are capitalised. Borrowing costs are capitalised if they are directly attributable to the acquisition, construction or production of a qualifying asset. Capitalisation of borrowing costs commences when the activities to prepare the asset for its intended use or sale are in progress and the expenditures and borrowing costs are incurred. Borrowing costs are capitalised until the assets are ready for their intended use or sale.

2.21 Provisions

Provisions are recognised when the Group has a present obligation as a result of a past event, it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and the amount of the obligation can be estimated reliably.

Provisions are reviewed at each balance sheet date and adjusted to reflect the current best estimate. If it is no longer probable that an outflow of resources embodying economic benefits will be required to settle the obligation, the provision is reversed.

Reinventing Ourselves Touching Lives Hyflux LtdAnnual Report 2007 81 Hyflux Ltd and its Subsidiaries NOTES TO THE FINANCIAL STATEMENTS 31 December 2007

2. summary of significant accounting policies (CONT’D)

2.22 Employee benefits

(a) Defined contribution plans

The Group participates in the national pension schemes as defined by the laws of the countries in which it has operations. In particular, the Singapore companies in the Group make contributions to the Central Provident Fund scheme in Singapore, a defined contribution pension scheme. Contributions to national pension schemes are recognised as an expense in the period in which the related service is performed.

(b) employee leave entitlement

Employee entitlements to annual leave are recognised as a liability when they accrue to employees. The estimated liability for leave is recognised for services rendered by employees up to balance sheet date.

Employees of the Group receive remuneration in the form of share options as consideration for services rendered. The cost of these equity-settled transactions with employees is measured by reference to the fair value of the options at the date on which the options are granted. This cost is recognised in the income statement, with a corresponding increase in the employee share option reserve, over the vesting period. The cumulative expense recognised at each reporting date until the vesting date reflects the extent to which the vesting period has expired and the Group’s best estimate of the number of options that will ultimately vest. The charge or credit to the income statement for a period represents the movement in cumulative expense recognised as at the beginning and end of that period.

No expense is recognised for options that do not ultimately vest, except for options where vesting is conditional upon a market condition which are treated as vesting irrespective of whether or not the market condition is satisfied, provided that all other performance and/or service conditions are satisfied. The employee share option reserve is transferred to retain earnings upon expiry of the share options. When the options are exercised, the employee share option reserve is transferred to share capital as new shares are issued.

2.23 Leases

(a) As lessee

Finance leases, which transfer to the Group substantially all the risks and rewards incidental to ownership of the leased item, are capitalised at the inception of the lease at the fair value of the leased asset or, if lower, at the present value of the minimum lease payments. Any initial direct costs are also added to the amount capitalised. Lease payments are apportioned between the finance charges and reduction of the lease liability so as to achieve a constant rate of interest on the remaining balance of the liability. Finance charges are charged to the income statement. Contingent rents, if any, are charged as expenses in the periods in which they are incurred.

Capitalised leased assets are depreciated over the shorter of the estimated useful life of the asset and the lease term, if there is no reasonable certainty that the Group will obtain ownership by the end of the lease term.

Leased assets in which the Group does not assume the risks and rewards of ownership are classified as operating leases. Operating lease payments are recognised as an expense in the income statement on a straight-line basis over the lease term. The aggregate benefit of incentives provided by the lessor is recognised as a reduction of rental expense over the lease term on a straight-line basis.

82 Hyflux LtdAnnual Report 2007 Reinventing Ourselves Touching Lives Hyflux Ltd and its Subsidiaries NOTES TO THE FINANCIAL STATEMENTS 31 December 2007

2. summary of significant accounting policies (CONT’D)

2.23 Leases (cont’d)

(b) As lessor

Leases where the Group retains substantially all the risks and rewards of ownership of the asset are classified as operating leases. Initial direct costs incurred in negotiating an operating lease are added to the carrying amount of the leased asset and recognised over the lease term on the same bases as rental income.

Leases where the Group transfer substantially all the risks and rewards of ownership of the leased asset to the lessee are classified as finance leases.

Lease receivables are apportioned between the finance lease income and reduction of the lease receivable so as to achieve a constant rate of interest on the remaining balance of the asset. Finance lease income is recognised in the income statement.

2.24 Revenue

Revenue is recognised to the extent that it is probable that the economic benefits will flow to the Group and the revenue can be reliably measured. Revenue is measured at the fair value of the consideration received or receivable.

(a) contract revenue

Revenue is recognised using the percentage-of-completion method. The stage of completion measured by relevance to, where appropriate, the contract value of work performed to date (based on project milestones) to estimated total contract value or the proportion that contract costs incurred for work performed to-date bear to the estimated total contract costs. Where the contract outcome cannot be measured reliably, revenue is recognised only to the extent of contract costs incurred that are recoverable.

(b) Operating and maintenance income

Revenue is recognised upon rendering of services.

Accounting policy for recognising finance lease income is stated in Note 2.23.

(d) sale of goods

Revenue is recognised upon the transfer of significant risks and rewards of ownership of the goods to the customer, which generally coincides with delivery and acceptance of the goods sold. Revenue is not recognised to the extent where there are significant uncertainties regarding recovery of the consideration due, associated costs or the possible return of goods.

Reinventing Ourselves Touching Lives Hyflux LtdAnnual Report 2007 83 Hyflux Ltd and its Subsidiaries NOTES TO THE FINANCIAL STATEMENTS 31 December 2007

2. summary of significant accounting policies (CONT’D)

2.24 Revenue (cont’d)

(e) Licence fee

Licence fees collected for the use of an enterprise’s assets are recognised in accordance with the substance of the agreement. This is usually on a straight-line basis over the life of the agreement. When the Group has fulfilled all obligations under the license fee agreement, the license fees collected will be recognised in full immediately.

In instances whereby licence fee will be received is contingent on the occurrence of a future event, the revenue is recognised only when it is probable that the licence fee will be received, which is normally when the event has occurred.

(f) finance income

Accounting policy for recognising finance income is stated in Note 2.2(c)(i).

(g) Rental income

Rental income arising on investment property is accounted for on a straight-line basis over the lease period.

(h) interest income

Interest income is recognised as interest accrues (using the effective interest method).

2.25 Income taxes

(a) current tax

Current tax assets and liabilities for the current and prior periods are measured at the amount expected to be recovered from or paid to the taxation authorities. The tax rates and tax laws used to compute the amount are those that are enacted or substantively enacted by the balance sheet date. Current taxes are recognised in the income statement.

(b) Deferred tax

Deferred income tax is provided using the liability method on temporary differences at the balance sheet date between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes.

84 Hyflux LtdAnnual Report 2007 Reinventing Ourselves Touching Lives Hyflux Ltd and its Subsidiaries NOTES TO THE FINANCIAL STATEMENTS 31 December 2007

2. summary of significant accounting policies (CONT’D)

2.25 Income taxes (cont’d)

(b) Deferred tax (cont’d)

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

• Where the deferred tax liability arises from the initial recognition of goodwill or of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss;

• In respect of taxable temporary differences associated with investments in subsidiaries, associates and interests in joint ventures, where the timing of the reversal of the temporary differences can be controlled and it is probable that the temporary differences will not reverse in the foreseeable future; and

• In respect of deductible temporary differences and carry-forward of unused tax credits and unused tax losses, to the extent that it is probable that taxable profit will be available against which the deductible temporary differences, and the carry-forward of unused tax credits and unused tax losses can be utilised.

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

Deferred income tax assets and liabilities are measured at the tax rates that are expected to apply to the year when the asset is realised or the liability is settled, based on tax rates (and tax laws) that have been enacted or substantively enacted at the balance sheet date.

Deferred taxes are recognised in the income statement.

Revenues, expenses and assets are recognised net of the amount of sales tax except:

• Where the sales tax incurred on a purchase of assets or services is not recoverable from the taxation authority, in which case the sales tax is recognised as part of the cost of acquisition of the asset or as part of the expense item as applicable; and

• Receivables and payables that are stated with the amount of sales tax included.

The net amount of sales tax recoverable from, or payable to, the taxation authority is included as part of receivables or payables in the balance sheet.

2.26 Derivative financial instruments and hedging activities

A derivative financial instruments is initially recognised at fair value on the date of the contract is entered into and are subsequently remeasured at fair value. Derivative financial instruments are carried as assets when the fair value is positive and as liabilities when the fair value is negative.

Any gains or losses arising from changes in fair value on derivative financial instruments that do not qualify for hedge accounting are taken to the income statement.

Reinventing Ourselves Touching Lives Hyflux LtdAnnual Report 2007 85 Hyflux Ltd and its Subsidiaries NOTES TO THE FINANCIAL STATEMENTS 31 December 2007

2. summary of significant accounting policies (CONT’D)

2.27 Government grants

Government grants are recognised at their fair value where there is reasonable assurance that the grant will be received and all attaching conditions will be complied with. Where the grant relates to an asset, the fair value is recognised as deferred capital grant on the balance sheet and is amortised to the income statement over the expected useful life of the relevant asset by equal annual instalments.

When the grant relates to an expense item, it is recognised in the income statement over the period necessary to match them on a systematic basis to the costs that it is intended to compensate. Grants related to income is presented as a credit in the income statement, either separately or under a general heading such as “Other income”.

2.28 Segment reporting

A business segment is a distinguishable component of the Group that is engaged in providing products or services that are subject to risks and returns that are different from those of other business segments. A geographical segment is a distinguishable component of the Group that is engaged in providing products or services within a particular economic environment and that is subject to risks and returns that are different from those of components operating in other economic environments.

2.29 Share capital and share issue expense

Proceeds from issuance of ordinary shares are recognised as share capital in equity. Incremental costs directly attributable to the issuance of ordinary shares are deducted against share capital.

2.30 Contingencies

A contingent liability or asset is a possible obligation or asset that arises from past events and whose existence will be confirmed only by the occurrence or non-occurrence of uncertain future event(s) not wholly within the control of the Group.

Contingent liabilities and assets are not recognised on the balance sheet of the Group.

3. Revenue group 2007 2006 s$’000 s$’000 (Restated)

Revenue from construction contracts and service concession arrangements 181,906 110,619 Operating and maintenance income 6,562 7,929 Finance lease income 1,630 11,695 Sale of goods 1,264 5,369 Licence fee 37 6,443 Finance income 1,387 324

192,786 142,379

86 Hyflux LtdAnnual Report 2007 Reinventing Ourselves Touching Lives Hyflux Ltd and its Subsidiaries NOTES TO THE FINANCIAL STATEMENTS 31 December 2007

4. Other income/(expenses) – net group 2007 2006 s$’000 s$’000

Rental income : - Investment property (Note 12) 228 228 - Others 56 127

284 355 Net foreign exchange loss arising from derivative financial instruments (6) (283) Goodwill arising from acquisition of interests from minority interests written off (242) – Others 72 (386)

108 (314)

5. employees compensation group 2007 2006 s$’000 s$’000 (Restated)

Wages, salaries and bonuses 23,165 15,031 Pension contributions 2,419 1,881 Other personnel expenses 5,137 3,130

Total personnel expenses 30,721 20,042 Cost of share-based payments 3,131 3,150

33,852 23,192

Details of the key management personnel compensation included in the employees compensation are as follows:

Directors’ fees 457 305 Short-term employee benefits 2,286 1,958 Cost of share-based payments 1,600 1,436

Total compensation for key management personnel 4,343 3,699

Comprise amounts payable to: - Directors of the Company 2,057 1,967 - Other key management personnel 2,286 1,732

4,343 3,699

The remuneration of key management personnel is determined by the Remuneration Committee having regard to the performance of individuals and market trends.

Reinventing Ourselves Touching Lives Hyflux LtdAnnual Report 2007 87 Hyflux Ltd and its Subsidiaries NOTES TO THE FINANCIAL STATEMENTS 31 December 2007

6. finance income

group 2007 2006 s$’000 s$’000

Interest income from: - loans and receivables 2,548 5,534

7. finance expenses

group 2007 2006 s$’000 s$’000

Interest expense on: - bank loans 8,092 9,558 - obligation under finance lease 27 4

8,119 9,562 Amortised interest on loans and receivables 1,697 – Less: Interest expense capitalise in plant and equipment (Note 11) (938) (484)

Finance expenses recognised in the income statement 8,878 9,078

8. Other operating expenses

The following items have been included in arriving at other operating expenses:

group 2007 2006 s$’000 s$’000 (Restated)

Crediting/(charging):

Non-audit fees paid to auditors of the Company (156) (165) Provision for inventory obsolescence (378) – Inventory written down (279) (1,252) Impairment of financial assets - trade receivables (Note 21) (1,022) (197) - other receivables (Note 22) – (1,236) Reversal of impairment of trade receivables (Note 21) 977 – Foreign exchange gain/(loss) - net 8,805 (2,530)

88 Hyflux LtdAnnual Report 2007 Reinventing Ourselves Touching Lives Hyflux Ltd and its Subsidiaries NOTES TO THE FINANCIAL STATEMENTS 31 December 2007

9. Tax expense

(a) major components of income tax expense

The major components of income tax expense for the years ended 31 December 2007 and 2006 are:

(i) Income statement:

group 2007 2006 s$’000 s$’000

Current income tax - current income taxation 1,065 1,345 - (over)/under provision in respect of previous years (242) 55

823 1,400 Deferred income tax - originated and reversal of temporary differences 1,587 335 - effect of reduction in tax rate (362) – - underprovision in respect of previous years – 3,086

1,225 3,421

Income tax expense recognised in the income statement 2,048 4,821

(ii) Statement of changes in equity:

Net change in hedging reserve for derivative financial instruments designated as hedging instruments in cash flow hedges:

- commodity swaps – (706) - interest rate swaps – 999 Fair value adjustments on acquisition of subsidiaries – (809)

Income tax expense reported in equity – (516)

Reinventing Ourselves Touching Lives Hyflux LtdAnnual Report 2007 89 Hyflux Ltd and its Subsidiaries NOTES TO THE FINANCIAL STATEMENTS 31 December 2007

9. Tax expense (cont’d)

(b) Relationship between tax expense and profit before taxation

A reconciliation between tax expense and profit before taxation multiplied by the applicable corporate tax rate for the years ended 31 December 2007 and 2006 is as follows:

group 2007 2006 s$’000 s$’000

Profit before taxation 38,693 20,178

Tax at the domestic rates applicable to profits in the countries where the Group operates (1) 9,170 5,201 Adjustments: Non-deductible expenses 2,028 948 Income not subject to taxation (6,222) (2,273) Effect of reduction in tax rate (362) – Effect of partial tax exemption and tax relief (5,874) (3,600) Deferred tax assets not recognised (Note 29) 3,550 1,404 (Over)/under provision in respect of previous years (242) 3,141

Income tax expense recognised in the income statement 2,048 4,821

(1) The reconciliation is prepared by aggregating separate reconciliations for each national jurisdiction.

The corporate income tax rate applicable to Singapore companies of the Group was reduced to 18% for the Year of Assessment 2008 onwards from 20% for the Year of Assessment 2007.

The Company has been granted Pioneer Status in respect of production and sale of membrane systems. Accordingly, the Company enjoys for a period of seven years, commencing from 1 September 2001, tax exemption on income arising from sale of membrane systems subject to the terms and conditions of the Pioneer Status.

In accordance with the “Income Tax Law of the People’s Republic of China for Enterprises with Foreign Investment and Foreign Enterprises”, Hyflux Filtech (Shanghai) Co., Ltd, Hyflux Unitech (Shanghai) Co., Ltd and Hyflux NewSpring Construction (Shanghai) Co., Ltd are entitled to full exemption from Enterprise Income Tax (“EIT”) for the first two years and a 50% reduction in EIT for the next three years, commencing from the first profitable year after offsetting all tax losses carried forward from the previous five years. Hyflux Filtech (Shanghai) Co., Ltd is in its fourth profitable year after offsetting all accumulated losses. Accordingly, 50% of EIT is payable for the current year. Hyflux Unitech (Shanghai) Co., Ltd is in its first profitable year after offsetting all accumulated losses. Accordingly, its profit is exempted from EIT in the current financial year. Hyflux NewSpring Construction (Shanghai) Co., Ltd is in its second profitable year after offsetting all accumulated losses. Accordingly, its profit is exempted from EIT in the current financial year.

90 Hyflux LtdAnnual Report 2007 Reinventing Ourselves Touching Lives Hyflux Ltd and its Subsidiaries NOTES TO THE FINANCIAL STATEMENTS 31 December 2007

9. Tax expense (cont’d)

(b) Relationship between tax expense and profit before taxation (cont’d)

In addition, Hydrochem Engineering (Shanghai) Co., Ltd has been granted “Hi-Tech Incentive” for a period of five years commencing from 2006 to 2010. Under this incentive, the Company is refunded 2.1% of the income tax by the Pudong New District Treasury Authority.

Subsidiaries incorporated in the British Virgin Islands (“BVI”) are exempted from all income taxes in BVI in accordance with local tax laws.

10. eARnings per share

Basic earnings per share amounts are calculated by dividing profit for the year attributable to shareholders of the Company by the weighted average number of ordinary shares outstanding during the financial year.

Diluted earnings per share amounts are calculated by dividing profit for the year attributable to shareholders of the Company by the weighted average number of ordinary shares outstanding during the financial year plus the weighted average number of ordinary shares that would be issued on the conversion of all the dilutive potential ordinary shares into ordinary shares.

The following table reflects the income statement and share data used in the computation of basic and diluted earnings per share for the years ended 31 December:

group 2007 2006

Profit net of tax attributable to shareholders of the Company used in computation of basic and diluted earnings per share (S$’000) 32,949 15,473

Weighted average number of ordinary shares for basic earnings per share computation 521,256,402 516,507,735 Dilutive effect of share options 7,695,573 5,002,528

Weighted average number of ordinary shares adjusted for the effect of dilution 528,951,975 521,510,263

Nil (2006: 2,550,000) share options granted to employees under the existing employee share option plans have not been included in the calculation of diluted earnings per share because they are anti-dilutive for the current and previous financial years.

Warrants granted to a shareholder, details of which are disclosed in Note 30(b), have not been included in the calculation of diluted earnings per share because the dilutive effect of the warrants could not be reliably estimated.

Reinventing Ourselves Touching Lives Hyflux LtdAnnual Report 2007 91

– – – 16 62 (77) 155 795 (795) (276) (717) (370) (846) Total 3,296 9,322 2,928 4,796 (1,440) (3,348) (3,348) 20,870 10,039 12,598 13,428 12,598 16,661 23,369 21,052 46,001 35,116 79,234 46,001 62,573 26,717 62,336 33,403 (12,987) (22,908)

– – – – – – – – – – – – – – – – – – – – – 5 18 627 627 (925) 3,772 (3,854) (4,585) 16,088 15,795 15,719 26,865 15,795 26,865 27,819 15,795 (12,024) in-progress

c onstruction-

- – – – – – – – – – – – – 9 8 (9) 33 (16) 119 549 982 649 525 982 (128) 2,181 4,654 1,523 5,170 8,743 5,170 1,523 1,523 4,654 5,170 3,647 13,937 11,756 Renovation

– – – – – – – 1 2 5 2 1 (3) (7) 24 84 95 20 49 (32) (28) (73) 320 482 179 256 241 744 291 744 256 256 693 482 179 744 488 1,013 and fittings

1 – – – 1 – 6 2 (1) (7) 16 22 396 123 665 342 466 607 383 466 (409) (963) (717) (846) (605) 3,955 4,755 4,320 8,471 4,755 1,296 7,806 7,303 1,059 9,066 4,289 (3,348) (3,348) Leasehold improvements properties and f urniture

8 – – – – – – – – (5) 98 12 27 (28) (14) (19) (25) (52) (78) (10) 176 704 869 204 345 344 738 869 869 704 579 Office 1,056 1,163 1,448 1,794 1,448 1,163 1,448 equipment

5 8 8 – – – – – – – – 2 (8) 59 18 36 (23) (14) (29) (44) 471 813 903 3,154 2,751 1,859 2,350 3,697 2,051 5,712 3,697 2,558 2,350 2,350 2,751 1,859 3,697 1,347

8 – – – – – – – – – (7) 16 39 (29) 664 328 156 470 219 595 (304) (174) (339) (299) 1,771 2,185 1,294 1,467 2,700 3,051 2,700 1,280 1,467 1,467 2,185 1,294 2,700 1,233 vehicles c omputers

– – – – – – – – 30 65 (77) (38) (32) (67) 578 (141) 1,936 3,854 1,197 7,514 7,552 3,962 5,667 1,958 2,348 3,053 5,667 5,667 7,552 3,962 6,025 s $’000 s $’000 s $’000 s $’000 s $’000 s $’000 s $’000 s $’000 s $’000 11,692 17,010 18,391 11,692 10,877 11,692 (17,283) p lant and m otor machinery Acquisition of subsidiaries Reclassification Net exchange differences Net exchange differences Net exchange differences Net exchange differences Reclassification Charge for the year Disposals Disposals At 31.12.2007 At 1.1.2006 (restated) Adoption of INT FRS 112 Adoption of FRS 40 At 1.1.2006 (restated) Acquisition of subsidiaries Reclassification At 31.12.2006 (restated) Adoption of FRS 40 Adoption of INT FRS 112 Charge for the year Additions Disposals At 1.1.2007 (restated) Additions Disposals Acquisition of subsidiaries At 31.12.2007 At 31.12.2006 (restated) At 31.12.2006 At 1.1.2007 (restated) At 31.12.2007 At 1.1.2006 Adoption of FRS 40 At 1.1.2006 At 31.12.2006 Adoption of FRS 40 At 31.12.2006 (restated) y, p la n t a d equipmen p ro pe rt y,

G roup C ost

N et carrying amount

Accumulated depreciation

11.

92 Hyflux LtdAnnual Report 2007 Reinventing Ourselves Touching Lives – – 632 (150) (660) (150) Total 3,715 3,398 6,963 5,121 2,134 2,616 1,196 3,812 7,612 4,347 11,424

– – – – – – – 88 88 786 207 993 993 (660) 3,609 (3,854) in-progress

– – – – – 4 1 1 2 3 12 10 26 16 23 15 and fittings

f urniture c onstruction- – – – – 97 198 688 169 886 680 777 177 954 101 109 1,055

– – – – – – – – – – – – 150 150 (150) (150) vehicle c omputers

– – – 531 985 1,890 1,321 2,349 3,854 4,239 9,414 1,304 1,835 2,820 6,594 2,404

– – – – – – 1 2 2 96 96 97 19 21 76 94 Office p lant and otor m equipment m achinery td a n d i t s S ubsi ar ies 31 December 2007

– – – – – – 1 1 11 13 14 733 733 744 730 732 Hyf l ux L Leasehold improvements

s $’000 s $’000 s $’000 $’000 s s $’000 s $’000 s $’000 s $’000

NOTES TO T H E FINANCIA L STATEMENTS y, p la n t a d equipmen (c o ’ ) p ro pe rt y,

Disposals Additions At 1.1.2006 Additions Disposals Reclassification At 31.12.2006 and 1.1.2007 At 31.12.2007 At 1.1.2006 Charge for the year Disposals At 31.12.2006 and 1.1.2007 Charge for the year At 31.12.2007 At 31.12.2007 At 31.12.2006

Accumulated depreciation

N et carrying amount Included in construction-in-progress is interest capitalised during the year amounting to S$938,000 (2006: S$484,000). Assets held under finance leases The carrying amount of plant and equipment held under finance leases as at 31 December 2007 was S$357,000 (2006: S$605,000). 11. C ompany C ost

Reinventing Ourselves Touching Lives Hyflux LtdAnnual Report 2007 93 Hyflux Ltd and its Subsidiaries NOTES TO THE FINANCIAL STATEMENTS 31 December 2007

12. investment property Group s$’000

Cost: At 1.1.2006 – Adoption of FRS 40 3,348

At 1.1.2006 (restated), 31.12.2006 and 31.12.2007 3,348

Accumulated depreciation: At 1.1.2006 – Adoption of FRS 40 717

At 1.1.2006 (restated) 717 Charge for the year 129

At 31.12.2006 (restated) 846 Charge for the year 129

At 31.12.2007 975

Net carrying amount: At 31.12.2007 2,373

At 31.12.2006 2,502

Group 2007 2006 s$’000 s$’000 (Restated)

Credited/(charged) to income statement:

Rental income from investment property 228 228 Direct operating expenses arising from investment property (59) (59)

The fair value of the investment property at 31 December 2007 is approximating S$3,115,000.

94 Hyflux LtdAnnual Report 2007 Reinventing Ourselves Touching Lives Hyflux Ltd and its Subsidiaries NOTES TO THE FINANCIAL STATEMENTS 31 December 2007

13. intangible assets Intellectual goodwill on property Development Licensing concession consolidation rights costs fees rights Total s$’000 s$’000 s$’000 s$’000 s$’000 s$’000

Group

Cost At 1.1.2006 223 2,561 17,406 3,591 – 23,781 Additions – 103 5,183 2,358 4,506 12,150 Acquisition of subsidiaries 4,065 2,403 – – 1,898 8,366 Disposals – – (98) (193) – (291) Net exchange differences – (385) (7) (8) – (400)

At 31.12.2006 and 1.1.2007 4,288 4,682 22,484 5,748 6,404 43,606 Additions – 49 9,419 746 – 10,214 Acquisition of businesses – – – – 3,559 3,559 Disposals – (16) (142) (1,022) (9,963) (11,143) Net exchange differences – 77 4 – – 81

At 31.12.2007 4,288 4,792 31,765 5,472 – 46,317

Accumulated amortisation At 1.1.2006 – 592 1,321 819 – 2,732 Amortisation – 47 1,652 213 – 1,912 Disposals – – (10) – – (10) Net exchange differences – – (8) (2) – (10)

At 31.12.2006 and 1.1.2007 – 639 2,955 1,030 – 4,624 Amortisation – 51 1,557 357 308 2,273 Disposals – – (77) (697) (308) (1,082) Net exchange differences – – 3 – – 3

At 31.12.2007 – 690 4,438 690 – 5,818

net carrying amount At 31.12.2007 4,288 4,102 27,327 4,782 – 40,499

At 31.12.2006 4,288 4,043 19,529 4,718 6,404 38,982

Reinventing Ourselves Touching Lives Hyflux LtdAnnual Report 2007 95 Hyflux Ltd and its Subsidiaries NOTES TO THE FINANCIAL STATEMENTS 31 December 2007

13. intangible assets (cont’d)

Intellectual property Development Licensing rights costs fees Total s$’000 s$’000 s$’000 s$’000

Company

Cost At 1.1.2006 1,711 259 – 1,970 Additions 51 – 1,479 1,530

At 31.12.2006 and 1.1.2007 1,762 259 1,479 3,500 Additions 17 8 888 913

At 31.12.2007 1,779 267 2,367 4,413

Accumulated amortisation At 1.1.2006 19 30 – 49 Amortisation 13 26 4 43

At 31.12.2006 and 1.1.2007 32 56 4 92 Amortisation 15 26 98 139

At 31.12.2007 47 82 102 231

Net carrying amount At 31.12.2007 1,732 185 2,265 4,182

At 31.12.2006 1,730 203 1,475 3,408

Impairment testing of goodwill

Goodwill is allocated to the Group’s cash-generating units (CGUs) identified according to country of operation and business segment.

A segment-level summary of the goodwill allocation is presented below:

Industrial Others Total s$’000 s$’000 s$’000

Singapore 1,525 360 1,885 Netherlands 2,403 – 2,403

3,928 360 4,288

96 Hyflux LtdAnnual Report 2007 Reinventing Ourselves Touching Lives Hyflux Ltd and its Subsidiaries NOTES TO THE FINANCIAL STATEMENTS 31 December 2007

13. intangible assets (cont’d)

The recoverable amount of CGU is determined based on value-in-use calculations. The calculations use cash flow projections based on financial budgets approved by management covering a five-year period.

The assumptions used for the analysis of each CGU within the business segment are consistent with the industry forecast and the discount rates used of 8% are pre-tax and reflect specific risks relating to the relevant segments.

14. investments in subsidiaries Company 2007 2006 s$’000 s$’000

Unquoted equity shares, at cost 113,106 82,470 Loans due from subsidiaries 24,509 25,422

137,615 107,892 Impairment losses (3,238) (3,238)

Carrying amount of investments 134,377 104,654

The directors have determined that the loans due from subsidiaries form part of the Company’s investment and are therefore included in the cost of investments in subsidiaries. These loans are unsecured and non-interest bearing. They have no fixed repayment terms and are repayable only when cash flows of the subsidiaries permit. Accordingly, the fair values are not determinable as the timing of the future cash flows arising from the loans cannot be estimated reliably.

Details of the significant subsidiaries are as follows:

Country of incorporation effective equity and place of interest held by name of Companies principal activities business the Group 2007 2006 % % Held by the Company

Hydrochem (S) Pte Ltd Engineering, procurement, Singapore 100 100 construction (“EPC”), installation, testing, commissioning, operation and maintenance of liquid treatment plants

Hydrochem Engineering Provision of management services Singapore 100 100 (S) Pte Ltd and supply of fabricated components

Hyflux Engineering Pte Ltd Operation and maintenance of liquid Singapore 100 100 treatment plants and sale of treated liquids

Hyflux International Ltd(1) Investment holding British Virgin 100 100 Islands

Reinventing Ourselves Touching Lives Hyflux LtdAnnual Report 2007 97 Hyflux Ltd and its Subsidiaries NOTES TO THE FINANCIAL STATEMENTS 31 December 2007

14. investments in subsidiaries (cont’d) Country of incorporation effective equity and place of interest held by name of Companies principal activities business the Group 2007 2006 % % Held by the Company (cont’d)

Hyflux Lifestyle Products (S) Research, development, manufacture, Singapore – 100 Pte Ltd(7) marketing and distribution of consumer lifestyle products and merchandise

Hyflux Aquosus (Singapore) Manufacture and sale of consumer Singapore – 100 Pte Ltd(7) products

Hyflux Filtech (Singapore) Investment holding Singapore 71 71 Pte Ltd

Hyflux NewSpring EPC, installation, testing, commissioning, People’s 100 100 Construction Engineering operation and maintenance of liquid and Republic of (Shanghai) Co., Ltd(2) non-liquid treatment plants China

Hyflux IP Resource Pte Ltd Investment holding Singapore 100 100

SinoSpring Utility Ltd(1)(8) Investment holding British Virgin 100 80 Islands

Eflux Singapore Pte Ltd Collection, processing, recycling, Singapore 100 100 purification and sale of spent/ solvent products

Hyflux Consumer Products Investment holding Singapore 100 100 Pte Ltd(7)

Hyflux Water Projects Ltd Investment holding British Virgin 100 – Islands

Spring China Utility Ltd(1) Investment holding British Virgin 100 – Islands

New Spring Utility Pte Ltd Investment holding Singapore 100 –

Held through subsidiaries

Hydrochem Engineering EPC, installation, testing, and People’s 100 100 (Shanghai) Co., Ltd(4) commissioning of industrial liquid Republic of separation and treatment systems China

Hyflux Filtech Shanghai EPC, installation, testing, commissioning People’s 71 71 Co., Ltd(2) of industrial liquid separation and Republic of treatment systems China

Eflux SK Pte Ltd Manufacture and blending of Singapore 51 51 lubricating oil

98 Hyflux LtdAnnual Report 2007 Reinventing Ourselves Touching Lives Hyflux Ltd and its Subsidiaries NOTES TO THE FINANCIAL STATEMENTS 31 December 2007

CEPAration B.V(5) Manufacturing, developing and trading Netherlands 51 51 of ceramic hollow membranes

CEPAration N.V(5) Manufacturing, developing and trading Netherlands 51 51 of ceramic hollow membranes

Hyflux Utility Ltd(1) (8) Investment holding British Virgin – 80 Islands

Hyflux NewSpring Development and operation of water People’s – 80 (Nan Tong) Co., Ltd(8) treatment plant and sale of treated water Republic of China

Hyflux NewSpring Development and operation of water People’s – 80 (Dafeng) Co., Ltd(8) treatment plant and sale of treated water Republic of China

Hyflux NewSpring Development and operation of water People’s – 80 (Liao Yang) Co., Ltd(8) treatment plant and sale of treated water Republic of China

Tianjin Dagang NewSpring Development and operation of seawater People’s 100 76 Co., Ltd(3) treatment plant and sale of treated water Republic of China

Hyflux NewSpring Development and operation of water People’s – 80 (Wuxi) Co., Ltd(8) treatment plant and sale of treated water Republic of China

Hyflux NewSpring Development and operation of water People’s – 80 (Tian Tai) Co., Ltd(8) treatment plant and sale of treated water Republic of China

Hyflux NewSpring Development and operation of water People’s – 80 (Changshu) Co., Ltd(8) treatment plant and sale of treated water Republic of China

Hyflux Aquosus (Singapore) Manufacture and sale of consumer Singapore 100 – Pte Ltd(7) products

Hyflux Lifestyle Products (S) Research, development, manufacture, Singapore 100 – Pte Ltd(7) marketing and distribution of consumer lifestyle products and merchandise

Reinventing Ourselves Touching Lives Hyflux LtdAnnual Report 2007 99 Hyflux Ltd and its Subsidiaries NOTES TO THE FINANCIAL STATEMENTS 31 December 2007

Hyflux NewSpring Development and operation of water People’s – 80 (Taizhou) Co., Ltd(8) treatment plant and sale of treated water Republic of China

Hyflux NewSpring Development and operation of water People’s – 76 (Yangzhou) Co., Ltd(8) treatment plant and sale of treated water Republic of China

Hyflux Newspring (GuanYun) Development and operation of water People’s 100 – WTP Co., Ltd(6) treatment plant and sale of treated water Republic of China

Hyflux Newspring (Funing) Development and operation of water People’s 100 – Co., Ltd(6) treatment plant and sale of treated water Republic of China

Hyflux Newspring (Guan Yun) Development and operation of waste water People’s 100 – WWTP Co., Ltd(6) treatment plant and sale of treated water Republic of China

Hyflux Newspring (Leping) Development and operation of water People’s 100 – Co., Ltd(6) treatment plant and sale of treated water Republic of China

Hyflux Newspring (Dezhou) Development and operation of water People’s 100 – Co., Ltd(3) treatment plant and sale of treated water Republic of China

The subsidiaries incorporated in Singapore are audited by Ernst & Young, Singapore.

(1) Not required to be audited by the law of the country of incorporation.

(2) Audited by Shu Lun Pan Certified Public Accountants Co., Ltd, PRC.

(3) Audited by Tianjing GuangXing Cai Certified Public Accountants, PRC. In 2006, Tianjin Dagang NewSpring Co., Ltd was 95% owned by SinoSpring Utility Ltd, which was 80% owned by the Company. During the financial year, minority shareholders of Tianjin Dagang NewSpring Co., Ltd exited and SinoSpring Utility Ltd transferred its equity interest in Tianjin Dagang NewSpring Co., Ltd to Spring China Utility Ltd, a wholly owned subsidiary of the Company.

(4) Audited by Shanghai Hddy Certified Public Accountants Co., Ltd, PRC.

(5) Audited by overseas affiliates of Ernst & Young.

(6) Not required to be audited by the law of the country of incorporation for the current financial year.

(7) During the financial year, the Company transferred its 100% equity interest in Hyflux Lifestyle Products (S) Pte Ltd and Hyflux Aquosus (Singapore) Pte Ltd to a subsidiary, Hyflux Consumer Products Pte Ltd.

(8) During the financial year, SinoSpring Utility Ltd disposed 13 China plants held by Hyflux Utility Ltd and its subsidiaries to Hyflux Water Trust in December 2007. Subsequent to this disposal, SinoSpring Utility Ltd became a wholly-owned subsidiary of Hyflux Ltd after the Company acquired the 20% interests held by its minority shareholder.

100 Hyflux LtdAnnual Report 2007 Reinventing Ourselves Touching Lives Hyflux Ltd and its Subsidiaries NOTES TO THE FINANCIAL STATEMENTS 31 December 2007

15. investments in joint venture company 2007 2006 s$’000 s$’000

Unquoted equity shares, at cost 1,125 20,000

Details of the significant joint ventures are as follows:

country of incorporation effective equity and place of interest held by name of Companies principal activities business the Group 2007 2006 % % Held by the Company

SingSpring Pte Ltd(1) Operation of seawater desalination Singapore – 50 plant and sale of treated water

Hyflux Marmon Research and development Singapore 50 – Development Pte Ltd(2)

(1) During the financial year, the Company divested 20% of its interests in SingSpring Pte Ltd in February 2007. As a result, this investment was reclassified from a joint venture to an associate (Note 16).

(2) During the financial year, the Company acquired 50% of the issued share capital of a newly incorporated company, Hyflux Marmon Development Pte Ltd.

The aggregate amounts of each of current assets, non-current assets, current liabilities, non-current liabilities, income and expenses related to the Group’s interests in the joint ventures are as follows:

group 2007 2006 s$’000 s$’000

Assets and liabilities: Current assets 419 11,376 Non-current assets 456 99,254

Total assets 875 110,630

Current liabilities (106) (8,473) Non-current liabilities – (98,461)

Total liabilities (106) (106,934)

Income and expenses: Income 37 15,293

Expenses (399) (11,852)

Reinventing Ourselves Touching Lives Hyflux LtdAnnual Report 2007 101 Hyflux Ltd and its Subsidiaries NOTES TO THE FINANCIAL STATEMENTS 31 December 2007

16. investments in associates group Company 2007 2006 2007 2006 s$’000 s$’000 s$’000 s$’000

Shares, at cost 99,313 7,150 12,277 – Share of post-acquisition reserves, including translation differences 751 (188) – –

Carrying amount of investments 100,064 6,962 12,277 –

Fair value of investment in an associate for which there is published price quotation 76,545 – – –

Goodwill amounting to S$1,800,000 (2006: Nil) is included in the carrying amount of investments in associates.

Details of the significant associates are as follows:

Country of incorporation effective equity and place of interest held by name of Companies principal activities business the Group 2007 2006 % % Held by the Company

SingSpring Trust(4) Operation of seawater desalination Singapore 30.0 – plants and sale of treated water

Held though subsidiaries

Beijing Shouren Water Development, manufacture and sale of People’s 18.5 18.5 Engineering Co., Ltd(1) manufactured equipment and parts of Republic of liquid separation and treatment systems. China Provision of technical and consultancy services

New Spring (Huludao) Development and operation of seawater People’s 49.0 39.2 Co., Ltd(3) desalination plant and sale of treated Republic of water China

Ningxia Hypow Manufacturing and marketing of L-lactic People’s 25.0 25.0 Bio-Technology Co., Ltd(7) acid and L-lactic acid products Republic of China

Hyflux Water Trust(2) Business Trust Singapore 31.5 –

Lube Oil Re-fining Co., Collection of used oil, processing, Kingdom of 41.5 – LLC (“LUBREC”)(5) recycling and/or purification of used Saudi Arabia lube oil and sale of processed oil

Marmon Hyflux Investment Investment holding Singapore 49.0 – Pte Ltd(6)

102 Hyflux LtdAnnual Report 2007 Reinventing Ourselves Touching Lives Hyflux Ltd and its Subsidiaries NOTES TO THE FINANCIAL STATEMENTS 31 December 2007

16. investments in associates (cont’d)

(1) Audited by Beijing Huatong Certified Public Accountants Co., Ltd, PRC.

(2) During the financial year, a wholly-owned subsidiary of the Company acquired 31.5% of the issued share capital of Hyflux Water Trust for a cash consideration of approximately S$73.7 million.

(3) Audited by Liao Ning Zhong Zhi Certified Public Accountants Co., Ltd. In 2006, New Spring (Huludao) Co., Ltd was 49% owned by SinoSpring Utility Ltd, which was 80% owned by the Company. During the financial year, SinoSpring Utility Ltd transferred its 49% equity interest in New Spring (Huludao) Co., Ltd to Spring China Utility Ltd, a wholly owned subsidiary of the company.

(4) During the financial year, the Company’s interests in SingSpring Pte Ltd was reduced from 50% to 30% in February 2007. As a result, this investment was reclassified from a joint venture to an associate (Note 15). In addition, this investment in associate was pledged to the associate’s principal bank for banking facilities granted to the associate.

(5) The Company’s wholly-owned subsidiary, Eflux Singapore Pte Ltd acquired 41.5% of the issued capital of LUBREC for a cash consideration of approximately S$10.8 million in August 2007.

(6) During the financial year, the Company acquired 49% of the issued share capital of a newly incorporated company, Marmon Hyflux Investment Pte Ltd.

(7) Audited by Beijing Wulian Fang Yuan Public Accountants Co., Ltd, PRC.

The summarised financial information of the associates are as follows:

Group 2007 2006 s$’000 s$’000

Assets and liabilities: Current assets 59,491 21,506 Non-current assets 126,457 2,501

Total assets 185,948 24,007

Current liabilities (17,945) (960) Non-current liabilities (61,050) –

Total liabilities (78,995) (960)

Results: Revenue 10,258 210

Profit/(loss) for the year 1,277 (125)

17. Long-term investments

group Company 2007 2006 2007 2006 s$’000 s$’000 s$’000 s$’000

Available-for-sale financial assets:

Unquoted equity shares, at cost 7,917 5,997 899 899

Reinventing Ourselves Touching Lives Hyflux LtdAnnual Report 2007 103 Hyflux Ltd and its Subsidiaries NOTES TO THE FINANCIAL STATEMENTS 31 December 2007

18. financial and lease receivables

The Group has concession arrangements with the various governing bodies or agencies of the government of the People’s Republic of China (the “grantors”) to supply treated water from water treatment plants, and operate wastewater treatment plants and water recycling plants. Under the concession arrangements, the Group will construct and/or operate the plants for Concession Periods of between 20 to 30 years and transfer the plants to the grantors at the end of the Concession Periods. Such concession arrangements fall within the scope of INT FRS 112. The Group has previously accounted for these arrangements as finance lease in accordance with INT FRS 104. On adoption of INT FRS 112, certain water purchase agreements and water treatment concessions are now recognised as financial receivables in accordance with Note 2.2(c)(i) instead of finance lease arrangement. Under INT FRS 112, the revenue for the construction services provided under the arrangements and the corresponding financial receivables and/or intangible assets arising are recognised based on the percentage of completion method during the construction phase.

group 2007 2006 s$’000 s$’000 (Restated)

Financial receivables 9,757 57,736 Lease receivables – 100,011

Total financial and lease receivables 9,757 157,747 Less: Current portion (187) (757)

9,570 156,990

Future minimum lease receivable under finance leases together with the present value of the net minimum lease receivable were as follows: Group 2007 2006 s$’000 s$’000 (Restated)

Minimum lease receivable: Not later than one year – 11,822 Later than one year but not later than five years – 47,322 Later than five years – 165,126

Total minimum lease receivable – 224,270 Less: Future finance income – (153,032)

Present value of minimum lease receivable – 71,238 Unguaranteed residual value – 28,773

Net investment in finance lease – 100,011

Present value of the finance lease receivable was analysed as follows:

Not later than one year – 757 Later than one year but not later than five years – 4,451 Later than five year – 66,030

Present value of minimum lease receivable – 71,238

104 Hyflux LtdAnnual Report 2007 Reinventing Ourselves Touching Lives Hyflux Ltd and its Subsidiaries NOTES TO THE FINANCIAL STATEMENTS 31 December 2007

19. gROss amount due for contract work group Company 2007 2006 2007 2006 s$’000 s$’000 s$’000 s$’000 (Restated)

Aggregate amount of costs incurred and recognised profits to date 169,474 98,075 14,038 20,960 Less: Progress billings (76,217) (49,168) (4,511) (6,929)

Gross amounts due from customers for contract work 93,257 48,907 9,527 14,031

20. inventories group Company 2007 2006 2007 2006 s$’000 s$’000 s$’000 s$’000

Raw materials 14,570 6,368 12,924 3,954 Work-in-progress 3,955 1,003 2,860 898 Finished goods 2,116 3,822 1,714 3,654

Total inventories at lower of cost and net realisable value 20,641 11,193 17,498 8,506

During the financial year, the Group has provided for inventories obsolescence of $378,000 (2006: Nil) and has written down inventories of S$279,000 (2006: S$1,252,000), which are recognised as an expense in the income statement.

21. Trade receivables and amountS due from related parties

group Company 2007 2006 2007 2006 s$’000 s$’000 s$’000 s$’000

Trade receivables: - third parties 46,110 30,734 1,148 1,165 Due from related parties (trade): - subsidiaries – – 22,673 15,929 - joint venture – 1,348 – – - associates 15,216 14,393 – –

15,216 15,741 22,673 15,929

Trade receivables and amounts due from related parties 61,326 46,475 23,821 17,094 Add: - Financial and lease receivables (Note 18) 9,757 157,747 – – - Other receivables and deposits and non-trade amounts due from related parties (Note 22) 36,527 25,471 177,622 47,502 - Short-term loans (Note 23) – 98 – – - Cash and fixed deposits (Note 24) 121,047 55,827 6,074 4,694

Total loans and receivables 228,657 285,618 207,517 69,290

Included in the trade receivables from external parties for the Group are notes receivable of S$4,372,000 (2006: S$2,814,000) which are non-interest bearing and relate to bank documents secured from customers for settlement of payment within the next six months.

Reinventing Ourselves Touching Lives Hyflux LtdAnnual Report 2007 105 Hyflux Ltd and its Subsidiaries NOTES TO THE FINANCIAL STATEMENTS 31 December 2007

21. Trade receivables and amounts due from related parties (cont’d)

Trade receivables are non-interest bearing and are generally on 30 to 90 days’ terms. They are recognised at their original invoice amounts which represents their fair values on initial recognition.

The significant foreign currencies which the trade receivables and amounts due from related parties are denominated in at 31 December are as follows: group Company 2007 2006 2007 2006 s$’000 s$’000 s$’000 s$’000

US Dollars 18,604 30,055 10,616 3,886 RMB 32,924 7,058 – –

Receivables that are past due but not impaired

The Group has trade receivables amounting to S$27,895,000 (2006: S$9,650,000) that are past due at the balance sheet date but not impaired. These receivables are unsecured and the analysis of their aging at the balance sheet date is as follows: Group 2007 2006 s$’000 s$’000

Trade receivables past due: - Lesser than 60 days 5,062 2,209 - 61 to 120 days 7,192 3,229 - More than 120 days 15,731 4,212

27,985 9,650

Receivables that are impaired

The Group’s trade receivables that are impaired at the balance sheet date and the movement of the allowance accounts used to record the impairment are as follows: group collectively impaired 2007 2006 s$’000 s$’000

Trade receivables - nominal amounts 2,405 2,515 Less: Allowance for impairment (1,902) (2,009)

503 506

Movements in allowance accounts: At 1 January 2,009 1,812 Charge for the year 1,022 197 Written off (105) – Written back (977) – Exchange differences (47) –

At 31 December 1,902 2,009

106 Hyflux LtdAnnual Report 2007 Reinventing Ourselves Touching Lives Hyflux Ltd and its Subsidiaries NOTES TO THE FINANCIAL STATEMENTS 31 December 2007

22. Other receivables and deposits and non-trade amounts due from related parties

group Company 2007 2006 2007 2006 s$’000 s$’000 s$’000 s$’000

current Other receivables and deposits: - third parties 24,812 13,080 3,353 1,816 - staff advances 680 104 21 23 - deposits 6,248 6,875 3 3

31,740 20,059 3,377 1,842

Due from related parties (non-trade): - subsidiaries – – 152,505 30,734 - joint venture 11 1,333 – 411 - associates 4,776 100 2,907 –

4,787 1,433 155,412 31,145 non-current Other receivables: - third parties – 3,979 – –

Due from related parties (non-trade): - subsidiaries – – 18,833 11,766 - joint venture – – – 2,749

– – 18,833 14,515

Other receivables and deposits and non-trade amounts due from related parties 36,527 25,471 177,622 47,502

Other receivables are unsecured, non-interest bearing and repayable on demand.

The current non-trade amounts due from subsidiaries are unsecured, non-interest bearing and are expected to be repaid within the next 12 months except for a receivable which bears interest at rates ranging from 4.15% to 5.79% (2006: 4.15% to 5.79%) per annum.

The current non-trade amounts due from joint ventures and associates are unsecured, non-interest bearing and expected to be repaid within the next 12 months.

The non-trade non-current amounts due from subsidiaries and joint venture are unsecured, non-interest bearing and not expected to be repaid within the next 12 months.

Reinventing Ourselves Touching Lives Hyflux LtdAnnual Report 2007 107 Hyflux Ltd and its Subsidiaries NOTES TO THE FINANCIAL STATEMENTS 31 December 2007

22. Other receivables and deposits and non-trade amounts due from related parties (cont’d)

The significant foreign currencies which the other receivables and deposits and non-trade amounts due from related parties are denominated in at 31 December are as follows:

group Company 2007 2006 2007 2006 s$’000 s$’000 s$’000 s$’000

US Dollars 1,517 7,002 108,864 11,758 RMB 12,081 4,843 – 3 Euro 847 3,959 3,057 91

At the balance sheet date, the Group has provided an allowance of S$1,658,000 (2006: S$1,725,000) for the impairment of unsecured receivables with a nominal amount of S$1,658,000 (2006: S$1,725,000).

23. sHORT-term loans

These loans were unsecured, bore interest ranging from 4.0% to 7.0% per annum and were repaid in full during the financial year.

24. cAsh and fixed deposits

group Company 2007 2006 2007 2006 s$’000 s$’000 s$’000 s$’000

Cash at banks and on hand 50,076 40,594 3,175 311 Fixed deposits 70,971 15,233 2,899 4,383

121,047 55,827 6,074 4,694

Cash at banks earns interest at floating rates based on daily bank deposit rates ranging from 0.9 % to 3.9% (2006: 1.0% to 5.0%) per annum. Fixed deposits are made for varying periods of between one day to three months depending on the immediate cash requirements of the Group and earn interests at rates ranging from 0.3% to 5.2% (2006: 1.5% to 6.0%) per annum with maturities within the next 12 months.

As at 31 December 2007, the Company had approximately available undrawn committed borrowing facilities of S$14,800,000 (2006: S$175,600,000) in respect of which all conditions prevalent had been met.

The significant foreign currencies which the cash and fixed deposits are denominated in at 31 December are as follows:

group Company 2007 2006 2007 2006 s$’000 s$’000 s$’000 s$’000

US Dollars 20,325 16,420 2,331 1,781 RMB 29,196 22,693 – –

108 Hyflux LtdAnnual Report 2007 Reinventing Ourselves Touching Lives Hyflux Ltd and its Subsidiaries NOTES TO THE FINANCIAL STATEMENTS 31 December 2007

25. Trade payables and amounts due to related parties

group Company 2007 2006 2007 2006 s$’000 s$’000 s$’000 s$’000

Trade payables: - third parties 55,022 35,277 1,172 1,012 Due to related parties (trade): - subsidiaries – – 845 30

Trade payables and amounts due to related parties 55,022 35,277 2,017 1,042 Add: - Other payables and accruals and non-trade amount due to related parties (Note 26) 19,543 15,157 39,957 11,982 - Progress payments from customers 25,989 3,358 2,080 2,062 - Interest-bearing loans and borrowings (Note 27) 198,511 148,664 195,596 67,420 - Finance lease liabilities (Note 28) 291 576 – –

Total financial liabilities carried at amortised cost 299,356 203,032 239,650 82,506

Trade payables are normally settled on 30 to 60-day terms.

The trade amounts due to related parties are unsecured, non-interest bearing and are repayable on demand.

The significant foreign currencies which the trade payables and amounts due to related parties are denominated in at 31 December are as follows: Group Company 2007 2006 2007 2006 s$’000 s$’000 s$’000 s$’000

US Dollars – – 27 28 RMB 37,570 20,494 – – Euro 228 193 – –

Reinventing Ourselves Touching Lives Hyflux LtdAnnual Report 2007 109 Hyflux Ltd and its Subsidiaries NOTES TO THE FINANCIAL STATEMENTS 31 December 2007

26. Other payables and accruals and non-trade amounts due to related parties

group Company 2007 2006 2007 2006 s$’000 s$’000 s$’000 s$’000 (Restated)

Other payables and accruals: - payables 10,071 5,178 2,917 1,737 - accrued operating expenses 7,676 8,706 299 293

17,747 13,884 3,216 2,030

Due to related parties (non-trade): - subsidiaries – – 36,741 9,851 - joint venture – 1,273 – 101 - associates 1,796 – – –

1,796 1,273 36,741 9,952

Other payables and accruals and non-trade amounts due to related parties 19,543 15,157 39,957 11,982

Other payables are normally settled on an average term of two to three months.

The non-trade amounts due to related parties are unsecured, non-interest bearing and are repayable on demand.

The significant foreign currencies which the other payables and accruals and non-trade amounts due to related parties are denominated in at 31 December are as follows:

group Company 2007 2006 2007 2006 s$’000 s$’000 s$’000 s$’000

US Dollars 2,532 3,350 10,915 5,871 RMB 6,349 3,877 2,833 1,767

110 Hyflux LtdAnnual Report 2007 Reinventing Ourselves Touching Lives Hyflux Ltd and its Subsidiaries NOTES TO THE FINANCIAL STATEMENTS 31 December 2007

27. interest-bearing loans and borrowings

weighted average effective interest G group C company rate p.a. maturities 2007 2006 2007 2006 % s$’000 s$’000 s$’000 s$’000

Current S$ bank loan 3.76 2008 5,245 30,902 5,000 30,902 Euro bank loans – – – 778 – – Share of a joint venture’s bank loan – – – 1,983 – –

5,245 33,663 5,000 30,902

Non-current S$ bank loans 3.17 2011 12,000 15,000 12,000 15,000 US$ bank loans 6.22 2011 178,596 21,518 178,596 21,518 Euro bank loans 4.71 2017 2,670 2,394 – – Share of a joint venture’s bank loan – – – 76,089 – –

193,266 115,001 190,596 36,518

198,511 148,664 195,596 67,420

(i) S$ bank loan (current)

The interest on this S$ bank loan is based on floating interest rates (inclusive of an applicable margin), unsecured and fully repayable by March 2008.

(ii) S$ bank loans (non-current)

The interest on these bank loans are based in the floating applicable interest rates of the respective currencies borrowed, inclusive of a margin, unsecured and fully repayable in 2011.

Certain subsidiaries in the Group have provided corporate guarantees to the financial institutions for the loans extended to the Company.

(iii) Share of a joint venture’s bank loan

During the financial year, the Company divested its interest in this joint venture. In 2006, the loan bears floating interest at rates ranging from 4.52% to 4.6% per annum, including margin. The Group has swapped the floating rates with a fixed rate of 4.6%, including margin, using an interest rate swap.

Reinventing Ourselves Touching Lives Hyflux LtdAnnual Report 2007 111 Hyflux Ltd and its Subsidiaries NOTES TO THE FINANCIAL STATEMENTS 31 December 2007

27. interest-bearing loans and borrowings (cont’d)

(iii) Share of a joint venture’s bank loan (cont’d)

The loan is secured by a charge on all present and future assets and intellectual property of a joint venture in the Group and a mortgage on the land where the desalination plant of the joint venture is located. In addition, the shareholders of the joint venture (including the Company) have also pledged all the issued ordinary shares in the joint venture to the principal banks as security for the loan.

(iv) Euro bank loans

One of the Euro bank loan is secured by a lien over the inventory and receivables of a subsidiary and partially guaranteed by a director of the subsidiary and a financial institution.

(v) US$ bank loan

The interest on this bank loan is based on the floating applicable interest rates of the respective currencies borrowed, inclusive of a margin, unsecured and fully repayable in 2011.

Certain subsidiaries in the Group have provided corporate guarantees to the financial institutions for the loans extended to the Company.

28. finance lease liabilities

The Group has finance leases for certain items of plant and equipment (Note 11). These leases have terms of renewal but no purchase options and escalation clauses. There are no restrictions placed upon the Group by entering into these leases. Renewals are at the option of the specific entity that holds the lease. The average discount rate implicit in the leases is 6.5% (2006: 7.2%) per annum.

Future minimum lease payments under finance leases together with the present value of the net minimum lease payments are as follows:

group minimum present minimum present lease value of lease value of payments payments payments payments 2007 2007 2006 2006 s$’000 s$’000 s$’000 s$’000

Not later than one year 135 104 267 244 Later than one year but not later than five years 200 187 381 332

335 291 648 576 Less: Amounts representing finance charges (44) – (72) –

Present value of minimum lease payments 291 291 576 576

112 Hyflux LtdAnnual Report 2007 Reinventing Ourselves Touching Lives Hyflux Ltd and its Subsidiaries NOTES TO THE FINANCIAL STATEMENTS 31 December 2007

29. Deferred tax

Deferred income tax as at 31 December relates to the following:

Group Company consolidated Consolidated balance sheet income statement balance sheet 2007 2006 2007 2006 2007 2006 s$’000 s$’000 s$’000 s$’000 s$’000 s$’000

Deferred tax liabilities Differences in depreciation for tax purposes (1,285) (2,517) 679 2,517 (95) (95) Intangible assets (1,590) (1,103) 1,241 1,103 (64) (64) Fair value adjustment on derivative financial instruments – 293 – – – – Fair value adjustments on acquisition of subsidiaries – (809) – – – –

(2,875) (4,136) (159) (159)

Deferred tax assets Fair value adjustments on acquisition of subsidiaries – 306 – – – – Unutilised tax losses 1,200 199 (695) (199) – – Other items 18 – – – – –

1,218 505 – –

Deferred tax expense 1,225 3,421

Unrecognised tax losses and capital allowances

The Group has tax losses and capital allowances of approximately S$28,990,000 (2006: S$9,187,000) and S$1,569,000 (2006: S$279,000) respectively that are available for offset against future taxable profits of the companies in which the losses arose for which no deferred tax asset is recognised due to uncertainty of its recoverability. The Company has tax losses and capital allowances of approximately S$1,262,000 (2006: Nil) and S$3,938,000 (2006: S$1,562,000) respectively.

The use of these tax losses and capital allowances is subject to the agreement of the tax authorities and compliance with certain provisions of the tax legislation of the respective countries in which the companies operate.

Reinventing Ourselves Touching Lives Hyflux LtdAnnual Report 2007 113 Hyflux Ltd and its Subsidiaries NOTES TO THE FINANCIAL STATEMENTS 31 December 2007

29. Deferred tax (cont’d)

Unrecognised temporary differences relating to investments in subsidiaries, associates and joint venture

As at 31 December 2007, there was no recognition of deferred tax liability (2006: Nil) for taxes that would be payable on the unremitted earnings of certain of the Company’s subsidiaries, associates or joint venture, as:

• The Company has determined that undistributed profits of its subsidiaries will not be distributed in the foreseeable future;

• The Company have agreements with its associates that the profits of the associate will not be distributed until it obtains the consent of the Company. The Company does not foresee giving such consent in the foreseeable future; and

• The joint venture of the Company cannot distribute its profits until it obtains the consent of both the venturers. The Company does not foresee giving such consent in the foreseeable future.

30. sHARe capital and employee share option reserve

group and Company 2007 2006 no. of shares no. of shares share Capital ‘000 s$’000 ‘000 s$’000

At 1 January 518,885 91,142 514,557 25,728

Exercise of employee share options 4,495 4,678 4,328 3,007

Transfer of share premium reserve to share capital – – – 62,407

At 31 December 523,380 95,820 518,885 91,142

The holders of ordinary shares are entitled to receive dividends as and when declared by the Company. All ordinary shares carry one vote per share without restrictions.

In accordance with the Companies (Amendment) Act 2005, on 30 January 2006, the shares of the Company ceased to have a par value and the amount standing in the share premium reserve became part of the Company’s share capital.

The Company has an employee share option scheme under which options to subscribe for the Company’s ordinary shares have been granted to employees of the Group.

Employee Share Option Reserve

Employee share option reserve represents the equity-settled share options granted to employees (Note 30(a)). The reserve is made up of the cumulative value of services received from employees recorded over the vesting period commencing from the grant date of equity-settled share options, and is reduced by the expiry or exercise of the share options.

114 Hyflux LtdAnnual Report 2007 Reinventing Ourselves Touching Lives Hyflux Ltd and its Subsidiaries NOTES TO THE FINANCIAL STATEMENTS 31 December 2007

30. sHARe capital and employee share option reserve (cont’d)

(a) employee Share Option Scheme

The Scheme is administered by a committee (“the Committee”) comprising four directors. It shall continue to be in force at the discretion of the Committee for a period of 10 years from 27 September 2001. However, the period may be extended with the approval of members at a general meeting of the Company and of any relevant authorities which may then be required. The contractual life of the option is ten years and there are no cash settlement alternatives.

The fair value of equity share options as at the date of grant is estimated by an external valuer using the Trinomial Option Pricing Module, taking into account the terms and conditions upon which the options were granted. The inputs to the model used for the years ended 31 December 2007 and 31 December 2006 are described below.

Discrete dividend payments are based on historical and forecasted dividend trend which range from S$0.004 to S$0.014 (2006: S$0.004 to S$0.014). The expected volatility of 36.09% to 37.93% (2006: 32.79% to 34.87%) reflects the assumption that the historical volatility is indicative of future trends, which may also not necessarily be the actual outcome. Risk-free rate refers to the annual yield at date of grant of options, of a Singapore Government Securities Bond with comparable maturity based on the Singapore Sovereign yield curves. It ranges from 2.27% to 2.53% (2006: 2.87% to 2.95%). The expected life of the options of 92 days (2006: 92 days) is based on historical data and is not necessarily indicative of exercise patterns that may occur. Share price of underlying shares are based on the last traded price as at the date of grant option. No other features of the option grant were incorporated into the measurement of fair value.

Reinventing Ourselves Touching Lives Hyflux LtdAnnual Report 2007 115 period 23.05.2008 - 27.09.2011 25.09.2008 - 27.09.2011 05.04.2008 - 27.09.2011 18.10.2007 - 27.09.2011 07.12.2007 - 27.09.2011 08.06.2006 - 27.09.2011 28.03.2007 - 27.09.2011 03.05.2006 - 27.09.2011 09.05.2006 - 27.09.2011 01.06.2006 - 27.09.2011 14.05.2005 - 27.09.2011 07.02.2006 - 27.09.2011 08.12.2004 - 27.09.2011 29.12.2004 - 27.09.2011 16.10.2004 - 27.09.2011 07.04.2004 - 27.09.2011 07.01.2004 - 27.09.2011 16.09.2003 - 27.09.2011 01.08.2003 - 27.09.2011 13.05.2003 - 27.09.2011 08.07.2003 - 27.09.2011 08.04.2003 - 27.09.2011 11.01.2003 - 27.09.2011 28.03.2003 - 27.09.2011 15.10.2002 - 27.09.2011 S $ price 2.6080 2.7920 2.6240 2.3620 2.3720 2.6507 2.6620 2.3227 2.3067 2.5493 0.9600 1.8600 1.0197 1.0627 1.0581 0.7253 0.5995 0.4869 0.5888 0.5504 0.5664 0.5401 0.4123 0.5436 0.2688

5 6 4 1 1 1 2 1 2 9 3 4 5 1 1 1 1 1 2 42 65 16 39 15 55 283 as at 31.12.2007

– 875 750 750 1,125 8,750 45,000 45,000 26,906 980,000 730,000 180,000 445,500 240,000 731,500 149,750 193,500 488,562 3,430,000 3,056,000 1,848,000 1,600,000 4,500,000 2,585,000 1,050,000 22,336,968 at 31.12.2007

– – – – – td a n d i t s S ubsi ar ies Options b alance as n o. of holders e xercise e xercisable (30,000) (18,000) (94,000) (34,000) (10,000) (12,000) 31 December 2007 exercised (114,000) (222,000) (100,000) (640,000) (120,000) (164,000) (120,000) (525,000) (279,000) (188,000) (213,000) (190,000) (234,000) (4,495,500) (1,188,500) Hyf l ux L

– – – – – – – – – – – – – – – (500) Options (1,250) forfeited (15,500) (26,750) (200,000) (240,000) (310,000) (360,000) (100,000) (183,500) (1,437,500)

– – – – – – – – – – – – – – – – – – – – – – NOTES TO T H E FINANCIA L STATEMENTS Options granted 970,000 3,430,000 5,580,000 1,180,000

– – – 75,000 45,000 18,750 94,500 60,906 18,750 12,750 300,000 625,000 360,000 337,750 433,250 190,875 235,125 3,480,000 2,430,000 1,800,000 4,500,000 3,408,500 1,575,000 1,010,500 1,678,312 at 1.1.2007 22,689,968 25.09.2007 23.05.2007 07.12.2006 05.04.2007 28.03.2006 18.10.2006 09.05.2005 01.06.2005 08.06.2005 07.02.2005 03.05.2005 29.12.2003 14.05.2004 08.12.2003 16.10.2003 07.04.2003 07.01.2003 16.09.2002 08.07.2002 01.08.2002 13.05.2002 28.03.2002 08.04.2002 15.10.2001 11.01.2002 Date of grant b alance as of options At the end of the financial year, details of all the options granted under Scheme on unissued ordinary shares Company were as follows: At the end of financial year, (a) e mployee S hare Option cheme (cont’d) 30. a n d emp lo yee s har e o p t i r ese ve (c ’ ) sHAR e c a pi tal

116 Hyflux LtdAnnual Report 2007 Reinventing Ourselves Touching Lives Hyflux Ltd and its Subsidiaries NOTES TO THE FINANCIAL STATEMENTS 31 December 2007

30. sHARe capital and employee share option reserve (cont’d)

(a) employee Share Option Scheme (cont’d)

Details of the options to subscribe for ordinary shares of the Company granted to directors of the Company pursuant to the Hyflux Employees’ Share Option Scheme:

Aggregate options granted (including Aggregate options bonus issue) since exercised since Options commencement commencement Aggregate options granted of the Scheme of the Scheme outstanding as during the to end of to end of at end of name of director financial year financial year financial year financial year

Lum Ooi Lin – 6,375,000 (1,125,000) 5,250,000 Teo Kiang Kok – 250,000 – 250,000 Lee Joo Hai – 250,000 – 250,000 Gay Chee Cheong – 200,000 – 200,000 Christopher Murugasu – 862,500 (501,563) 360,937

Total – 7,937,500 (1,626,563) 6,310,937

(b) warrants

On 23 November 2004, the Company entered into a Warrant Subscription Agreement with Istithmar PJSC (“Istithmar”), a company incorporated in Dubai, United Arab Emirates and a shareholder of the Company, in which Istithmar is entitled to subscribe for equity shares equal to 10% of the diluted share capital of the Company as adjusted under the terms of the Warrant Subscription Agreement. This was approved by the shareholders of the Company on 8 April 2005 at an Extraordinary General Meeting.

The exercise period is from April 2008 to April 2010.

Reinventing Ourselves Touching Lives Hyflux LtdAnnual Report 2007 117 Hyflux Ltd and its Subsidiaries NOTES TO THE FINANCIAL STATEMENTS 31 December 2007

31. cApital reserves

Capital reserves comprise the following:-

(i) Capital gain for the Group wherein the Group’s portion of contribution of share capital for a subsidiary was paid on behalf by a minority interest.

(ii) Statutory reserve fund

In accordance with the Foreign Enterprise Law applicable to the subsidiary in the People’s Republic of China (“PRC”), the subsidiary is required to make appropriation to a Statutory Reserve Fund (“SRF”). At least 10% of the statutory after tax profits as determined in accordance with the applicable PRC accounting standards and regulations must be allocated to the SRF until the cumulative total of the SRF reaches 50% of the subsidiary’s registered capital. Subject to approval from the relevant PRC authorities, the SRF may be used to offset any accumulated losses or increase the registered capital of the subsidiary. The SRF is not available for dividend distribution to shareholders.

32. Hedging reserve

Hedging reserve represents the Group’s share of the hedging reserve of a joint venture in 2006.

During the financial year, the Group divested 20% of its interest in the joint venture and as a result, this investment was reclassified from a joint venture to an associate. An amount of S$4,180,000 transferred from the hedging reserve to the income statement represented the Group’s share of the net loss on the hedging instruments.

33. cOmmitments and contingencies

(i) Operating lease commitments

The Group has various operating lease agreements for offices and rental of land. Most leases contain renewable options. Some of the leases contain escalation clauses. Lease terms do not contain restrictions on the Group’s activities concerning dividends, additional debt or further leasing.

Minimum lease payments recognised as an expense in the income statement for the financial year ended 31 December 2007 amounted to S$2,689,000 (2006: S$2,285,000).

Future minimum rental payable under non-cancellable leases as at balance sheet date are as follows:

group 2007 2006 s$’000 s$’000

Not later than one year 2,370 2,309 Later than one year but not later than five years 8,616 8,155 Later than five years 19,030 20,076

30,016 30,540

118 Hyflux LtdAnnual Report 2007 Reinventing Ourselves Touching Lives Hyflux Ltd and its Subsidiaries NOTES TO THE FINANCIAL STATEMENTS 31 December 2007

33. cOmmitments and contingencies (cont’d)

(ii) Capital commitments

As at 31 December 2007, the Group has outstanding commitments in respect of uncalled capital of approximately US$70,000,000 (2006: US$38,000,000) in joint ventures and associates.

(iii) Guarantees

The Group has provided the following guarantees at the balance sheet date:

– It has provided bankers’ guarantees to customers and suppliers amounting to S$16,000,000 (2006: S$17,000,000).

– It has provided security bonds amounting to S$1,280,000 (2006: S$870,000) to the Controller of Immigration in relation to the employment of foreign workers.

The Company has given formal undertakings to provide financial support to certain subsidiaries with deficit shareholders’ funds for at least the next twelve months from the balance sheet date.

34. Related party disclosures

An entity or individual is considered a related party of the Group for the purposes of the financial statements if:

(i) it possesses the ability (directly or indirectly) to control or exercise significant influence over the operating and financial decisions of the group or vice versa; or

(ii) it is subject to common control or common significant influence.

In addition to the related party information disclosed elsewhere in the financial statements, the following significant transactions between the Group and related parties took place on terms agreed between the parties during the financial year: group 2007 2006 s$’000 s$’000

Revenue from manufacturing and construction contracts Investee company – 8,316 Associates 45,214 –

Revenue from maintenance contracts Joint venture – 2,522 Associates 904 –

Revenue from licensing contract Associate – 4,860

Management fees received from associates 1,000 –

Rental income received from Associates 334 – Joint venture 24 –

Professional service paid to firms related to a director 69 52

Reinventing Ourselves Touching Lives Hyflux LtdAnnual Report 2007 119 Hyflux Ltd and its Subsidiaries NOTES TO THE FINANCIAL STATEMENTS 31 December 2007

35. financial risk management objectives and policies

Risk management is integral to the whole business of the Group. The Group has a system of controls in place to create an acceptable balance between cost of risks occurring and the cost of managing the risks. The management continually monitors the Group’s risk management process to ensure that an appropriate balance between risk and control is achieved. Risk management policies and systems are reviewed regularly to reflect changes in market conditions and the Group’s activities.

The Risk Management Committee oversees how management monitors compliance with the Group’s risk management policies and procedures and reviews the adequacy of the risk management framework in relation to the risks faced by the Group.

The following sections provide details regarding the Group’s and Company’s exposure to the above-mentioned financial risks and the objectives, policies and processes for the management of these risks.

(a) credit risk

Credit risk is the risk of loss that may arise on outstanding financial instruments should a counterparty default on its obligations. The Group’s and the Company’s exposure to credit risk arises primarily from trade and other receivables.

The Group has a credit policy in place which establishes credit evaluations for all customers and monitors their balances on an ongoing basis.

The Group establishes an allowance for impairment that represents its estimate of incurred losses in respect of trade and other receivables. The main components of this allowance are a specific loss component that relates to individually significant exposures and a collective loss component established for groups of similar assets in respect of losses that have been incurred but not yet identified. The collective loss allowance is determined based on historical date of payment statistics for similar financial assets.

The allowance account in respect of trade and other receivables is used to record impairment losses when the Group is satisfied that no recovery of the amount owing is possible. At that point, the financial asset is considered irrecoverable and the amount charged to the allowance account is written off against the carrying amount of the impaired financial asset.

120 Hyflux LtdAnnual Report 2007 Reinventing Ourselves Touching Lives Hyflux Ltd and its Subsidiaries NOTES TO THE FINANCIAL STATEMENTS 31 December 2007

35. financial risk management objectives and policies (cont’d)

(a) credit risk (cont’d)

Credit risk concentration profile

The credit risk concentration profile of the Group’s trade receivables at the balance sheet date is as follows:

Group 2007 2006 s$’000 % of total s$’000 % of total

by country: Singapore 6,363 14 6,276 20 People’s Republic of China 37,824 82 24,254 79 Other countries 1,923 4 204 1

46,110 100 30,734 100

by industry sectors: Municipal 18,453 40 1,575 5 Industrial 21,392 46 25,150 82 Others 6,265 14 4,009 13

46,110 100 30,734 100

At the balance sheet date, approximately 82% (2006: 79%) of the Group’s trade receivables were due from the Municipal and Industrial business segments located in the People’s Republic of China.

Financial assets that are neither past due nor impaired

Trade and other receivables that are neither past due nor impaired are creditworthy debtors with good payment record with the Group. Cash and short-term deposits, that are neither past due nor impaired are placed with or entered into with reputable financial institutions or companies with high credit ratings and no history of default.

Financial assets that are either past due or impaired

Information regarding financial assets that are either past due or impaired is disclosed in Note 21 of the financial statements.

Reinventing Ourselves Touching Lives Hyflux LtdAnnual Report 2007 121 Hyflux Ltd and its Subsidiaries NOTES TO THE FINANCIAL STATEMENTS 31 December 2007

35. financial risk management objectives and policies (cont’d)

(b) Liquidity risk

Liquidity risk is the risk that the Group or the Company will encounter difficulty in meeting financial obligations due to shortage of funds. The Group’s and the Company’s exposure to liquidity risk arises primarily from the timing of the maturities of financial assets and liabilities. The Group monitors its liquidity risk and maintains a level of cash and cash equivalent demand adequate for management to finance the Group’s operations and to migitate the effects of fluctuation in cash flows. For long-term projects which require long-term funding, the Group may arrange project financing or other long-term financing programme as appropriately.

At the balance sheet date, approximately 3% (2006: 23%) of the Group’s loans and borrowings (Note 27) will mature in less than one year based on the carrying amount reflected in the financial statements. 3% (2006: 46%) of the Company’s loans and borrowings will mature in less than one year at the balance sheet date.

The table below summarises the maturity profile of the Group’s and the Company’s financial liabilities at the balance sheet date based on contractual undiscounted payments.

2007 2006 1 year or 1 to 5 Over 5 1 year or 1 to 5 Over 5 less years years Total less years years Total s$’000 s$’000 s$’000 s$’000 s$’000 s$’000 s$’000 s$’000 Group Derivative financial instruments – – – – 4,995 – – 4,995 Trade payables 55,022 – – 55,022 35,277 – – 35,277 Other payables and accruals 17,747 – – 17,747 13,884 – – 13,884 Progress payments from customers 25,989 – – 25,989 3,358 – – 3,358 Interest-bearing loans and borrowings 5,245 193,266 – 198,511 33,663 51,317 63,684 148,664 Finance lease liabilities 104 187 – 291 244 332 – 576

104,107 193,453 – 297,560 91,421 51,649 63,684 206,754

Company Trade payables 1,172 – – 1,172 1,012 – – 1,012 Other payables and accruals 3,216 – – 3,216 2,030 – – 2,030 Progress payments from customers 2,080 – – 2,080 2,062 – – 2,062 Interest-bearings loans and borrowings 5,000 190,596 – 195,596 30,902 36,518 – 67,420

11,468 190,596 – 202,064 36,006 36,518 – 72,524

122 Hyflux LtdAnnual Report 2007 Reinventing Ourselves Touching Lives Hyflux Ltd and its Subsidiaries NOTES TO THE FINANCIAL STATEMENTS 31 December 2007

35. financial risk management objectives and policies (cont’d)

Interest rate risk is the risk that the fair value or future cash flows of the Group’s and the Company’s financial instruments will fluctuate because of changes in market interest rates. The Group’s and the Company’s exposure to interest rate risk arises primarily from their loans and borrowings and interest-bearing loans given to related parties.

Sensitivity analysis for interest rate risk

At the balance sheet date, if S$ and US$ interest rates had been 75 (2006: 75) basis points lower/higher with all other variables held constant, the Group’s profit net of tax would have been higher/lower by S$1,379,000 (2006: S$252,000), arising mainly as a result of lower/higher interest expense on floating rate loans and borrowings, and the Group’s other reserve in equity would have been S$ Nil (2006: S$232,000) higher/lower, arising mainly as a result of an increase/decrease in the fair value of derivatives classified as available-for-sale.

(d) foreign currency risk

The Group is exposed to foreign currency risk on sales, purchases and borrowings that are denominated in a currency other than the respective functional currencies of the Group entities. The currencies giving rise to this risk are primarily US dollar and Chinese Renminbi.

The Group monitors its exposure in respect of trade receivables, trade payables and borrowings denominated in foreign currencies, as well as forecast sales and purchases over the following 12 months. The Group, when necessary, uses forward exchange contracts to hedge its foreign currency risk.

Approximately 98% (2006: 76%) of the Group’s sales are denominated in foreign currencies whilst almost 89% (2006: 72%) of costs are denominated in the respective functional currencies of the Group’s entities. The Group’s trade receivable and trade payable balances at the balance sheet date have similar exposures.

In respect of other monetary assets and liabilities held in currencies other than the US dollar, the Group ensures that the net exposure is kept to an acceptable level.

The Group and the Company also hold cash and short-term deposits denominated in foreign currencies for working capital purposes. At the balance sheet date, such foreign currency balances (mainly in US$ and RMB) amount to S$49,521,000 (2006: S$39,113,000) and S$2,331,000 (2006: S$1,781,000) for the Group and the Company respectively.

Reinventing Ourselves Touching Lives Hyflux LtdAnnual Report 2007 123 Hyflux Ltd and its Subsidiaries NOTES TO THE FINANCIAL STATEMENTS 31 December 2007

35. financial risk management objectives and policies (cont’d)

(d) foreign currency risk (cont’d)

Sensitivity analysis for foreign currency risk

A 3% strengthening of Singapore dollar against the following currencies at the reporting date would increase/ (decrease) equity and profit by the amount shown below. This analysis assumes that all other variables remain constant. Profit net of tax Equity 2007 2006 2007 2006 s$’000 s$’000 s$’000 s$’000

US Dollars (3,149) 858 – – RMB 2,948 662 – –

A 3% weakening of Singapore dollar against the above currencies would have had the equal but opposite effect on the above currencies to the amounts shown above, on the basis that all other variables remain constant.

(e) market price risk

Market price risk does not have a significant impact to the Group as the Group does not have interest in quoted securities.

36. financial instruments

(a) Derivative financial instruments and hedging activities

Derivative financial instruments included in the balance sheets at 31 December are as follows:

Group Company 2007 2006 2007 2006 s$’000 s$’000 s$’000 s$’000

Current assets: Interest rate swaps – 228 – 228 Commodity swaps – 3,530 – –

– 3,758 – 228

Current liabilities: Interest rate swaps – (4,995) – –

Cashflow hedges

As at 31 December 2006, the Group held 5 financial derivatives, namely 2 interest rate swaps and3 commodity swaps. These swaps were designated as hedges of expected future interest and utilities expenses where the Group’s 50% joint venture company and the Company had firm commitments. The interest rate swaps were being used to hedge the interest rate risks of the existing bank loans of the Group’s 50% joint venture company and the Company. The commodity swaps were used to hedge the fuel price risk that directly impacts the Group’s 50% joint venture company’s existing commitment under an energy supply contract.

124 Hyflux LtdAnnual Report 2007 Reinventing Ourselves Touching Lives Hyflux Ltd and its Subsidiaries NOTES TO THE FINANCIAL STATEMENTS 31 December 2007

36. financial instruments (cont’d)

(a) Derivative financial instruments and hedging activities (cont’d)

The terms of these swaps have been negotiated to match the terms of the commitments.

The cash flow hedge of the expected future interest expense was assessed to be highly effective anda fair value gain of S$581,000 for the financial year ended 31 December 2006, with a related deferred tax charge of S$101,000 relating to the hedging instruments is included in the hedging reserve.

During the financial year, the Group divested its interest in this joint venture.

(b) fair value of financial instruments

The fair value of financial assets and liabilities by classes that are not carried at fair value and whose carrying amounts are not reasonable approximation of fair value are as follows :

group Company 2007 2006 2007 2006 s$’000 S$’000 S$’000 S$’000 carrying fair carrying fair carrying fair carrying fair amount value amount value amount value amount value s$’000 s$’000 s$’000 s$’000 s$’000 s$’000 s$’000 s$’000

financial assets: Unquoted equity shares, at cost (Note 17) 7,917 – 5,997 (1) 899 (1) 899 (1) Lease receivables (Note 18) – – 100,011 253,043 – – – – Other receivables from third parties (Note 22) – – 3,979 (2) – – – – Due from subsidiaries (Note 22) – – – – 18,833 (2) 11,766 (2) Due from a joint venture (Note 22) – – – – – – 2,749 (2)

financial liabilities: Finance lease liabilities (Note 28) 187 200 332 381 – – – –

(1) These equity instruments represent ordinary shares in companies that are not quoted on any market and do not have any comparable industry peer that is listed. In addition, the variability in the range of reasonable fair value estimates derived from valuation techniques is significant. As such, these equity instruments are carried at cost at balance sheet date. The Group does not intend to dispose of these investments in the foreseeable future.

(2) The fair value of other receivables from third parties, amounts due from subsidiaries and amounts due from a joint venture are not determinable as the timing of the future cash flows arising from these receivables cannot be estimated reliably.

Reinventing Ourselves Touching Lives Hyflux LtdAnnual Report 2007 125 Hyflux Ltd and its Subsidiaries NOTES TO THE FINANCIAL STATEMENTS 31 December 2007

36. financial instruments (cont’d)

(b) fair value of financial instruments (cont’d)

Determination of fair value

Lease receivables (Note 18)

The fair value of finance lease receivable has been determined using discounted cash flows. Where repayment terms are not fixed, future cash flows are projected based on management’s best estimates. The discount rate used is the current risk-free adjusted by market risk premium for similar type of arrangement.

Financial assets and liabilities (Notes 18, 21, 22, 24, 25 and 26) Non-current loans and borrowings at floating rate (Note 27)

The carrying amounts of these financial assets and liabilities are reasonable approximation of fair values, either due to their short-term nature or that they are floating rate instruments that are repriced to market interest rates on or near the balance sheet date.

37. cApital management

The primary objective of the Group’s capital management is to support the Group’s growth strategy and maximise shareholder value with the optimal capital structure.

The Group manages its capital structure and makes adjustments to it, in light of changes in economic conditions. To maintain or adjust the capital structure, the Group may adjust the dividend payment to shareholders, return capital to shareholders or issue new shares. No changes were made in the objectives, policies or processes during the years ended 31 December 2007 and 31 December 2006.

As disclosed in Note 31(ii), a subsidiary of the Group is required by the Foreign Enterprise Law of the PRC to contribute to and maintain a non-distributable statutory reserve fund whose utilisation is subject to approval by the relevant PRC authorities. This externally imposed capital requirement has been complied with by the abovementioned subsidiary for the financial year ended 31 December 2007.

The Group monitors capital using a gearing ratio, which is net debt divided by total capital. The Group includes within net debt, interest-bearing loans and borrowings, finance lease liabilities, less cash and fixed deposits. Total equity of the Group represents capital for the Group.

group 2007 2006 s$’000 s$’000

Interest bearing loans and borrowings 198,511 148,664 Finance lease liabilities 291 576 Less: Cash and fixed deposits (121,047) (55,827)

Net debt 77,755 93,413

Total capital equity - total 247,067 218,066

Gearing ratio 32% 43%

126 Hyflux LtdAnnual Report 2007 Reinventing Ourselves Touching Lives Hyflux Ltd and its Subsidiaries NOTES TO THE FINANCIAL STATEMENTS 31 December 2007

38. segment information

Reporting format

The primary segment reporting format is determined to be business segments as the Group’s risks and rates of return are affected predominantly by differences in the products and services produced. Secondary information is reported geographically. The operating businesses are organised and managed separately according to the nature of the products and services provided, with each segment representing a strategic business unit that offers different products and serves different markets.

Business segments

The Municipal segment is a supplier of comprehensive range of innovative water and fluid treatment solutions to municipalities and governments, including commissioning, operation & maintenance of a wide range of water treatment and liquid separation plants on a turnkey or Design-Build-Own-Operate (“DBOO”) arrangement.

The Industrial segment is in the business of liquid separation applications for the manufacturing sector such as the pharmaceutical, biotechnology, food processing and petrochemical oil-related industries.

Geographical segments

The Group’s geographical segments are based on the location of the Group’s customers. Sales to external customers disclosed in geographical segments are based on the geographical location of its customers.

Allocation basis and transfer pricing

Segment results, assets and liabilities include items directly attributable to a segment as well as those that can be allocated on a reasonable basis. Unallocated items comprise mainly corporate assets, income tax and deferred tax liabilities, interest-bearing loans and borrowings and related expenses.

Transfer prices between business segments are set on an arm’s length basis in a manner similar to transactions with third parties. Segment revenue, expenses and results include transfers between business segments. These transfers are eliminated on consolidation.

Reinventing Ourselves Touching Lives Hyflux LtdAnnual Report 2007 127 Hyflux Ltd and its Subsidiaries NOTES TO THE FINANCIAL STATEMENTS 31 December 2007

38. segment information (cont’d)

(a) business segment

The following tables present revenue and results information, assets, liabilities and other segment information regarding the Group’s business segments as at and for the years ended 31 December 2007 and 2006.

2007 municipal industrial Others group s$’000 s$’000 s$’000 s$’000

Revenue: External sales 88,971 102,347 1,468 192,786

Results: Segment results 27,304 10,253 (1,188) 36,369

Net loss on sale of property, plant and equipment (4) Gain on sale of partial interest in a joint venture 8,185 Finance income 2,548 Finance expenses (8,878) Fair value loss on derivative financial instruments (3,532) Share of profit of associates 1,277 Other income - net 108 Negative goodwill on acquisitions of subsidiaries/businesses 2,620

Profit before taxation 38,693 Tax expense (2,048)

Profit for the year 36,645

Assets and liabilities: Segment assets 267,824 112,588 13,097 393,509 Unallocated assets 170,272

Total assets 563,781

Segment liabilities 75,476 40,935 1,031 117,442 Unallocated liabilities 199,272

Total liabilities 316,714

Other segment information: Capital expenditure 12,636 21,050 1,430 35,116 Depreciation and amortisation 4,347 995 1,856 7,198

128 Hyflux LtdAnnual Report 2007 Reinventing Ourselves Touching Lives Hyflux Ltd and its Subsidiaries NOTES TO THE FINANCIAL STATEMENTS 31 December 2007

38. segment information (cont’d)

(a) business segment (cont’d)

2006 municipal industrial Others group (Restated) S$’000 s$’000 s$’000 s$’000

Revenue: External sales 45,264 90,148 6,967 14,379

Results: Segment results 5,291 15,513 (1,519) 19,285

Net gain on sale of property, plant and equipment 52 Gain on sale of a subsidiary and an associate 1,655 Finance income 5,534 Finance expenses (9,078) Fair value gain on derivative financial instruments 115 Share of loss of associates (910) Other expenses - net (314) Negative goodwill on acquisitions of subsidiaries/businesses 3,839

Profit before taxation 20,178 Tax expense (4,821)

Profit for the year 15,357

Assets and liabilities: Segment assets 276,888 121,689 15,896 414,473 Unallocated assets 28,925

Total assets 443,398

Segment liabilities 125,670 19,446 1,536 146,652 Unallocated liabilities 78,680

Total liabilities 225,332

Other segment information: Capital expenditure 10,560 8,408 2,084 21,052 Depreciation and amortisation 991 3,064 914 4,969

Reinventing Ourselves Touching Lives Hyflux LtdAnnual Report 2007 129 Hyflux Ltd and its Subsidiaries NOTES TO THE FINANCIAL STATEMENTS 31 December 2007

38. segment information (cont’d)

(b) geographical segments

The following table presents revenue, capital expenditure and certain assets information regarding the Group’s geographical segments for the years ended 31 December 2007 and 2006.

people’s Republic singapore of China Others Total 2007 2006 2007 2006 2007 2006 2007 2006 s$’000 s$’000 s$’000 s$’000 s$’000 s$’000 s$’000 s$’000 (Restated) (Restated)

Revenue: External sales 12,830 27,018 156,933 104,763 23,023 10,598 192,786 142,379

Other Segment assets 189,083 230,575 194,665 175,408 9,761 8,490 393,509 414,473 Unallocated assets 170,272 28,925

Total assets 563,781 443,398

Capital expenditure 19,582 7,196 14,501 8,198 1,033 5,658 35,116 21,052

39. Dividends group and Company 2007 2006 s$’000 s$’000

Ordinary dividends paid:

Final exempt (one-tier) dividend for 2006 : 1.35 cents (2005 : 1.35 cents) per share 7,016 6,963

The directors propose a final exempt (one-tier) dividend of 1.89 cents per share amounting to a total of S$9,892,000 for 2007, subject to shareholders’ approval at the forthcoming Annual General Meeting.

40. cOmparative figures

Comparative figures in the financial statements have been restated from the previous year to reflect the adoption of new and revised accounting standards.

41. Authorisation of financial statements

The financial statements for the financial year ended 31 December 2007 were authorised for issue in accordance with a resolution of the directors on 14 March 2008.

130 Hyflux LtdAnnual Report 2007 Reinventing Ourselves Touching Lives CORPORATE GOVERNANCE STATEMENT

Hyflux is committed to achieving a high standard of corporate governance. The Group’s corporate governance practices translate into an increase in long-term value and ultimately, return to shareholders. As part of this commitment, the Group subscribes to the Code of Corporate Governance (the “Code”). This statement outlines the main corporate governance practices of the Company with specific reference made to the principles and guidelines of the Code which forms part of the Continuing Obligations of the Singapore Exchange Securities Trading Limited’s (“SGX-ST”) Listing Manual.

The Board is pleased to confirm that for the financial year ended 31 December 2007, the Company has generally adhered to the principles and guidelines as set out in the Code.

BOARD MATTERS

BOARD’S CONDUCT OF ITS AFFAIRS Principle 1: Effective Board to lead and control the Company

Role of the Board The primary role of the board of directors (the “Board”) is to protect and enhance long-term shareholders’ value. Apart from its fiduciary duties, the Board sets the overall strategy of the Group and supervises executive management. The Board also provides leadership and guidance on corporate strategy, business directions, risk policy and implementation of corporate objectives, thereby taking responsibility for the overall corporate governance of the Group.

To assist in the execution of its responsibilities, the Board has established several Board Committees namely; the Audit Committee, Nominating Committee, Remuneration Committee, Risk Management Committee, Executive Committee and Management Committee. These committees function within clearly defined terms of reference, which are reviewed on a regular basis.

Matters which are specifically reserved to the Board for decision are those involving material acquisitions, disposal of assets, corporate or financial restructuring, share issuances, dividends and other returns to shareholders, conflict of interest for substantial shareholder or director, and matters which require Board approval as specified under the Company’s interested person transaction policy.

The Board holds regular meetings each year. It held four meetings in the 2007 financial year. The Board may convene additional meetings to address any specific significant matters that may arise from time to time.

Reinventing Ourselves Touching Lives Hyflux LtdAnnual Report 2007 131 CORPORATE GOVERNANCE STATEMENT

The Directors’ attendance at the Board and Committee Meetings for the financial year ended 31 December 2007 is as follows: board of Audit Nominating Remuneration Risk Management Directors committee committee committee committee no. of no. of no. of no. of no. of no. of no. of no. of no. of no. of name M meetings meetings meetings meetings meetings meetings meetings meetings meetings meetings Held Attended Held Attended Held Attended Held Attended Held Attended

Olivia Lum Ooi Lin 4 4 na na na na 1 1* na na

Teo Kiang Kok 4 3 4 4 1 1 1 1 3 2

Lee Joo Hai 4 4 4 4 1 1 1 1 3 2

Gay Chee Cheong 4 3 4 4 1 1 1 1 na na

Christopher Murugasu 4 4 na na na na 1 1 3 3

Professor Tan Teck Meng1 4 3 4 1 na na na na na na

Raj Mitta1 4 2 na na na na na na 3 2

Rajnish Gopinath2 4 1 na na na na na na na na na : not applicable

1 Professor Tan Teck Meng and Mr Raj Mitta were appointed as directors on 28 April 2007. Professor Tan was appointed as a member of the Audit Committee and Remuneration Committee and Mr Raj Mitta as a member of Risk Management Committee. 2 Mr Rajnish Gopinath retired as a director on 27 April 2007. * Attended by invitation.

Training for Directors The Board has in place programmes for each newly appointed director to receive appropriate training, including an orientation programme to familiarise him with the Group’s structure and its business.

BOARD COMPOSITION AND GUIDANCE Principle 2: Strong and independent element on the Board

The directors of the Company in office as at the date of this report are set out in the Director’s report. Presently, the Board comprises of one Executive Director, two Non-Executive Non-Independent Directors and four Non-Executive Independent Directors. The Board consists of respected business leaders and professionals whose collective core competencies and experience are extensive, diverse and relevant to the industry. Individual directors’ profiles can be found in the “Board of Directors” section of this Annual Report.

Executive Director (Group CEO, President and Managing Director) Ms Olivia Lum Ooi Lin

Non-Executive Non-Independent Directors Mr Teo Kiang Kok Mr Christopher Murugasu

Non-Executive Independent Directors Professor Tan Teck Meng Mr Raj Mitta Mr Lee Joo Hai Mr Gay Chee Cheong

132 Hyflux LtdAnnual Report 2007 Reinventing Ourselves Touching Lives CORPORATE GOVERNANCE STATEMENT

There is presently a good balance between the executive and non-executive directors and a strong and independent element on the Board. The Board considers an ‘independent’ director as one who has no relationship with the Company, its related Companies or its officers that could interfere or be reasonably perceived to interfere, with the exercise of the director’s independent business judgement.

Non-Executive members of the Board exercise no management function in the Company or any of its subsidiaries. Although all the directors have equal responsibilities for the performance of the Group, the role of non-executive directors is primarily to ensure that the strategies proposed by the executive management are fully discussed, vigorously examined, taking into consideration the long-term interest of the shareholders, employees, customers, suppliers and the communities in which the Group conducts its business.

The Board is of the view that the present board size and number of committees facilitate effective decision-making and are appropriate for the nature and scope of the Company’s operations.

CHAIRMAN AND CHIEF EXECUTIVE OFFICER Principle 3: Clear division of responsibilities at the top of the Company

The Company does not have a chairman on the Board of Directors. Responsibilities for various functions and departments in Company are well defined. The Board is of the opinion that the process of decision making by the Board has been independent, based on collective decisions without any individual exercising any considerable concentration of power or influence.

BOARD MEMBERSHIP Principle 4: Formal and transparent process for appointment of new directors to the Board

The Nominating Committeehas been tasked by the Board to recommend individuals of relevant background, possessing experience and knowledge in business, legal, finance and management skills, critical to the Group’s business to be appointed to the Board.

The Nominating Committee comprises three Directors, majority of whom including the Chairman, are Independent Directors:

Nominating Committee: Mr Gay Chee Cheong (Chairman) Mr Lee Joo Hai Mr Teo Kiang Kok

The primary function of the Nominating Committee is to determine the criteria for identifying candidates and to review nominations for the appointment of directors to the Board, to consider how the Board’s performance may be evaluated and to propose objective performance criteria for the Board’s approval. Its duties and functions are outlined as follows:

(a) to make recommendations to the Board on all board appointments and re-nomination having regard to the Director’s contribution and performance (e.g. attendance, preparedness, participation, candour, and any other salient factors);

(b) to ensure that all Directors would be required to submit themselves for re-nomination and re-election at regular intervals and at least once in every three years;

(c) to determine annually whether a director is independent, in accordance with the independence guidelines contained in the Code;

Reinventing Ourselves Touching Lives Hyflux LtdAnnual Report 2007 133 CORPORATE GOVERNANCE STATEMENT

(d) to review whether a director is able to and has adequately carried out his duties as a director of the Company in particular where the Director concerned has multiple board representations; and

(e) to consider how the Board’s performance may be evaluated and to propose objective performance criteria.

The Nominating Committee conducts an annual review of directors’ independence and based on the Code’s criteria for independence, the Nominating Committee is of the view that Professor Tan Teck Meng, Mr Gay Chee Cheong, Mr Lee Joo Hai and Mr Raj Mitta, are deemed independent.

The Nominating Committee has recommended the nomination of directors retiring pursuant to the Company’s Articles of Association, namely, Professor Tan Teck Meng, Mr Raj Mitta, Mr Lee Joo Hai and Mr Gay Chee Cheong.

In reviewing the nomination of the retiring directors, the Nominating Committee considered the performance and contribution of each of the retiring directors, having regards not only to their attendance and to participation at Board and Board Committee meetings but also the time and efforts devoted to the Group’s business and affairs, especially the operational and technical contributions.

BOARD PERFORMANCE Principle 5: Formal assessment of the effectiveness of the Board and contributions by each Director

The Code recommends that the Nominating Committee be responsible for assessing the Board as a whole and also assessing the individual director’s contribution.

But the Nominating Committee believes that it is more appropriate and effective to assess the Board as a whole, bearing in mind that each member of the Board contributes in different ways to the success of the Group.

The Nominating Committee has conducted a Board performance evaluation to assess the effectiveness of the Board in the financial year 2007 and is satisfied that sufficient time and attention has been given by the directors to the affairs of the Group.

134 Hyflux LtdAnnual Report 2007 Reinventing Ourselves Touching Lives CORPORATE GOVERNANCE STATEMENT

The Nominating Committee in conducting the appraisal process to assess the performance and effectiveness of the Board as a whole, focuses on a set of performance criteria which includes the evaluation of the size and composition of the Board, the Board’s access to information, Board’s processes and accountability, Board’s performance in relation to discharging its principal responsibilities and the directors’ standards of conduct.

The Board has taken the view that the financial indicators, as set out in the Code as a guide for the evaluation of the Board and its directors, may not be appropriate as these are more of a measurement of Management’s performance and therefore less applicable to directors.

ACCESS TO INFORMATION Principle 6: Board members to have complete, adequate and timely information

The Board has separate and independent access to members of the senior management team of the Group, the Company Secretary and the external auditors at all times. The directors also have unrestricted access to the Company’s records and information, all Board and Board committees’ minutes, and management accounts to enable them to carry out their duties.

The Company Secretary attends all Board and Board Committee meetings. The Company Secretary administers, attends and prepares minutes of Board and Board Committee meetings, and assists in ensuring that Board procedures are followed and reviewed in accordance with the Company’s Articles of Association so that the Board functions effectively and the relevant rules and regulations applicable to the Company are complied with. The Company Secretary’s role is to advise the Board on all governance matters, ensuring that legal and regulatory requirements as well as board policies and procedures are complied with.

Should Directors whether as a group or individually require professional advice, the Company shall upon the direction of the Board, appoint a professional advisor selected by the Group or the individual, approved by Management, to render the service. The costs of such service shall be borne by the Company.

PROCEDURES FOR DEVELOPING REMUNERATION POLICIES Principle 7: Formal and transparent procedure for fixing remuneration packages of Directors and key management executives

The Remuneration Committee comprises entirely of Non-Executive Directors.

As at the date of this Report, the Remuneration Committee members are:

Remuneration Committee Mr Gay Chee Cheong (Chairman) Mr Lee Joo Hai Mr Teo Kiang Kok Professor Tan Teck Meng Mr Christopher Murugasu

The Remuneration Committee is responsible for ensuring a formal and transparent procedure for developing policy on executive remuneration, and for fixing the remuneration packages of individual directors and senior management employees. The Remuneration Committee’s review covers all aspects of remuneration including but not limited to Directors’ fees, salaries, allowances, bonus, share options and benefits in kind and specific remuneration package for each Director. In structuring a compensation framework for executive Director and key executives, the Remuneration Committee seeks to link a proportion of executive compensation to the Group’s performance. The Remuneration Committee’s recommendation are made in consultation with the Executive Committee and submitted for endorsement by the Board. No Director is involved in deciding his own remuneration.

Reinventing Ourselves Touching Lives Hyflux LtdAnnual Report 2007 135 CORPORATE GOVERNANCE STATEMENT

The Remuneration Committee has access to expert advice inside and/or outside the Company with regard to remuneration matters.

LEVEL AND MIX OF REMUNERATION Principle 8 : The level of remuneration for Directors should be adequate, not excessive, and linked to performance

The remuneration policy of the Company is to provide compensation packages at market rates, which reward performance and attract, retain and motivate directors and senior management employees.

The Executive Director does not receive Directors’ fees. The Executive Director’s and key senior management employees’ remuneration packages are based on service contracts and their remuneration are determined by having regard to the performance of the individuals, performance of the Group and market trends.

Non-Executive Directors are paid an annual Directors’ fees of an agreed amount based on their contributions, taking into account factors such as effort and time spent, responsibilities of the Directors and the need to pay competitive fees to attract, motivate and retain the Directors.

DISCLOSURE ON REMUNERATION Principle 9 : Clear disclosure of remuneration policy, level and mix of remuneration, and the procedure for setting the remuneration

An appropriate and attractive level of remuneration has been set to attract, retain and motivate Directors and employees. The remuneration package consists of both fixed and variable components. The variable component is determined based on the performance of the individual employee and the Group’s performance. Annual increments and adjustments to remuneration are reviewed and approved taking into account the outcome of the annual appraisal of the employees by Management and Executive Committees and the various heads of department. All Non-Executive Directors’ fees are recommended by the Board and are subject to shareholders’ approval at the Annual General Meeting.

For the financial ended 31 December 2007, the Remuneration Committee has recommended to the Board a total Directors’ fees of $456,667 for the Non-Executive Directors, which will be tabled by the Board at the forthcoming Annual General Meeting for shareholders’ approval.

Company’s directors receiving remuneration from the Group for the year ended 31 December 2007 and 2006 are as follows:

number of directors Remuneration band 2007 2006

S$500,000 and above 0 0 S$250,000 to below S$500,000 1 1 Below S$250,000 7 5

136 Hyflux LtdAnnual Report 2007 Reinventing Ourselves Touching Lives CORPORATE GOVERNANCE STATEMENT

Summary compensation table for directors and management committee for the year ended 31 December 2007 (Group) is as follows: Allowances and other salary bonus fees benefits Total

DIRECTORs Between S$250,000 to S$500,000 Olivia Lum Ooi Lin 89% 8% 0% 3% 100%

Below S$250,000 Gay Chee Cheong 0% 0% 100% 0% 100% Lee Joo Hai 0% 0% 100% 0% 100% Teo Kiang Kok 0% 0% 100% 0% 100% Christopher Murugasu 0% 0% 100% 0% 100% Raj Mitta** 0% 0% 100% 0% 100% Professor Tan Teck Meng** 0% 0% 100% 0% 100% Rajnish Gopinath* 0% 0% 100% 0% 100%

Management Committee Between S$250,000 to S$500,000 Sam Ong Eng Keang 71% 18% 0% 11% 100% Benjamin Tan Eng Seng 71% 12% 0% 17% 100%

Below S$250,000 Fong Chun Hoe 92% 8% 0% 0% 100% Wong Khai Theen 83% 14% 0% 3% 100% Peter Wu Siu Kin 82% 18% 0% 0% 100% Foo Hee Kiang 89% 3% 0% 8% 100% Ge Wen Yue 100% 0% 0% 0% 100%

Immediate Family members of Director Below S$250,000 Deirdre Murugasu 100% 0% 0% 0% 100% Teo Yuan Cheng Casey 86% 9% 0% 5% 100%

* Mr Rajnish Gopinath retired as director on 27 April 2007. ** Professor Tan Teck Meng and Mr Raj Mitta were appointed as directors on 28 April 2007. Compensation reflected in table excludes entitlement under employment share options scheme.

Immediate Family members of Directors There are no immediate family members of Directors or controlling shareholders in employment with the Group and whose remuneration exceeds S$150,000 during financial year ended 31 December 2007.

ACCOUNTABILITY Principle 10: Board should present a balanced and understandable assessment of the Company’s performance, position and prospects

The Board is accountable to shareholders for the management of the Group. The Board updates shareholders on the operations and financial position of the Group through, quarterly, half yearly and full year results announcements as well as timely announcements of other matters as prescribed by the relevant rules and regulations. The Management is accountable to the Board by providing the Board with the necessary financial information for the discharge of its duties.

Reinventing Ourselves Touching Lives Hyflux LtdAnnual Report 2007 137 CORPORATE GOVERNANCE STATEMENT

AUDIT COMMITTEE Principle 11: Establishment of Audit Committee with written terms of reference

The Audit Committee comprises the following members at the date of this report:

Mr Lee Joo Hai (Chairman) Mr Gay Chee Cheong Mr Teo Kiang Kok Professor Tan Teck Meng

The members of Audit Committee, collectively, backed with legal, accounting, financial management expertise or business esperience are qualified to discharge the Audit Committee’s responsibilities.

The primary functions of the Audit Committee are as follows:

(a) assist the Board in discharging its statutory responsibilities on financial and accounting matters;

(b) review the financial and operating results and accounting policies of the Group;

(d) review the adequacy of the Company’s internal control (financial and operational) and risk management policies and systems established by the management;

(e) review the audit plans and reports of the external and internal auditors and consider the effectiveness of the actions taken by management on the auditors’ recommendations;

(h) review interested person transactions, as defined in the Listing Manual of the SGX-ST.

The Audit Committee held four meetings during the year. The Audit Committee has reviewed the non-audit services provided by the external auditors, including the fees paid for these services during the year, and is satisfied that the nature and extent of such services would not affect the independence of the external auditors. The Audit Committee has also reviewed the services provided by the Independent Directors’ firms and is satisfied that the provision of such services did not affect their independence.

The Audit Committee has full access to the external auditors and will hold meetings with them at least once a year without the presence of Management. The Audit Committee has authority to access all personnel, records, and other information to enable it to properly discharge its function. It has full authority and discretion to invite any Director or executive officer to attend its meetings.

138 Hyflux LtdAnnual Report 2007 Reinventing Ourselves Touching Lives CORPORATE GOVERNANCE STATEMENT

INTERNAL CONTROLS Principle 12:The Board to ensure that the management maintains a sound system of internal controls to safeguard the shareholders’ investments and the company’s assets

The Audit Committee is fully aware of the need to put in place a system of internal controls within the Group to safeguard the shareholders’ interests and the Group’s assets, and to manage risks. The system is intended to provide reasonable but not absolute assurance against material misstatements or loss, and to safeguard assets and ensure maintenance of proper accounting records, reliability of financial information, compliance with appropriate legislation, regulation and best practice, and the identification and containment of business risks.

The Group regularly reviews and improves its business and operational activities to identify areas of significant business risks as well as taking appropriate measures to control and mitigate these risks. The Group reviews all significant control policies and procedures and highlights all significant matters to the Audit Committee and the Board. The financial risk management objectives and policies are outlined in the financial statements. Risk Management alone does not guarantee that business undertakings will not fail. However, by identifying and managing risks that may arise, the Group can make more informed decisions and benefit from a better balance between risk and reward. This will help protect and create shareholders’ value.

Based on the information provided to the Audit Committee, nothing has come to the its attention to cause the Audit Committee to believe that the system of internal controls and risk management is inadequate.

INTERNAL AUDIT Principle 13: Setting up independent internal audit function

The Group has appointed a professional firm, BDO Raffles Consultants Pte Ltd to undertake the functions of an internal auditor. The internal audit function includes reviewing the effectiveness of the material internal controls of the Group. The Internal Auditor reports directly to the Audit Committee and has an appropriate standing within the Company and the Group and meets the standards set by nationally or internationally recognized professional bodies including the Standards for the Professional Practice of Internal Auditing set by The Institute of Internal Auditors.

Within this framework, the internal audit function will provide reasonable assurance that the risks incurred by the Group in each major activity will be identified, analysed and managed by Management. The Internal Auditor will also make recommendations to enhance the effectiveness and security of the Group’s operations.

COMMUNICATION WITH SHAREHOLDERS Principle 14: Regular, effective and fair communication with shareholders Principle 15: Shareholders’ participation at Annual General Meeting

The Company is committed to regular and proactive communication with its shareholders. It aims to provide shareholders with clear, balanced and useful information on a timely basis to ensure that shareholders receive a balanced and updated view of the Group’s performance and business.

Where there is inadvertent disclosure made to a selected group, the Company will make the same disclosure public as soon as practicable. Communication is made through:

(a) annual reports that are prepared and issued to all Shareholders. The Board makes every effort to ensure that the annual report includes all relevant information about the Group, including future development and other disclosures required by the Companies’ Act, Chapter 50, and Singapore Statements of Accounting Standards; (b) quarterly and full-year financial statements comprising a summary of the financial information and affairs of the Group for the relevant period; (c) explanatory memoranda for Annual General Meeting and Extraordinary General Meetings; (d) press releases on major developments of the Group; (e) disclosures to the SGX-ST via SGXNET; and (f) the Group’s website at http://www.hyflux.com at which Shareholders can access information on the Group.

Reinventing Ourselves Touching Lives Hyflux LtdAnnual Report 2007 139 CORPORATE GOVERNANCE STATEMENT

In addition, shareholders are encouraged to attend the annual general meetings to ensure a high level of accountability and to stay informed of the Group’s strategies and growth. As the Annual General Meeting is the principal forum for dialogue with shareholders, the presence of the chairpersons of the audit, nominating and remuneration committees are required so as to address any question raised at the Annual General Meeting. The Group fully supports the Code’s principle to encourage active shareholder participation.

Risk Management Committee The Risk Management Committee comprises the following members:

Mr Christopher Murugasu (Chairman) Mr Lee Joo Hai Mr Teo Kiang Kok Mr Raj Mitta

The functions of the Risk Management Committee are as follows:

(a) review with Management, and, when needed, with external consultants on areas of risks that may affect the viability and smooth operations of the Company, as well as Management’s risk migitation efforts, with the view of safeguarding shareholder’s interest and Group assets; (b) direct and work with Management to develop and review policies and processes to address and manage identified areas of risk in a systematic and structured manner; (c) make recommendations to the Board in relation to business risks that may affect the Company, as and when these may arise; and (d) perform any other functions as may be agreed by the Board.

Executive Committee The members of the Executive Committee are:

Ms Olivia Lum Ooi Lin (Chairman) Mr Lee Joo Hai Mr Teo Kiang Kok Mr Gay Chee Cheong

Management Committee As at the date of this report, the Management Committee comprise of the following members:

Ms Olivia Lum Ooi Lin (Chairman) Mr Sam Ong Eng Keang Mr Fong Chun Hoe Mr Foo Hee Kiang Mr Wong Khai Theen Mr Ge Wen Yue Mr Peter Wu Siu Kin Mr Benjamin Tan Eng Seng

DEALING IN SECURITIES The Company has adopted its own internal compliance code pursuant to the SGX-ST’s best practices on dealings in securities and these are applicable to all its officers in relation to their dealings in the Company’s securities. Its officers are advised not to deal in the Company’s shares during the period commencing two weeks or one month before the announcement of the Company’s interim or full year results respectively, or if they are in possession of unpublished price-sensitive information of the Company. In addition, its directors and officers are expected to observe insider trading laws at all times even when dealing in securities within the permitted trading period.

The Group has complied with the Best Practices Guide on Securities Transactions issued by the Singapore Exchange.

140 Hyflux LtdAnnual Report 2007 Reinventing Ourselves Touching Lives SUPPLEMENTARY INFORMATION

Material Contracts There were no material contracts of the Company or its subsidiaries involving the interests of the Chief Executive Officer (as defined in the SGX-ST Listing Manual), each Director or Controlling shareholder, either still subsisting at the end of the financial year or entered into since the end of the previous financial year.

Interested party transaction The Group has established procedures to ensure that all transactions with interested persons are reported on a timely manner to the Audit Committee and that the transactions are at arm’s length basis. All interested person transactions are subject to review by the Audit Committee to ensure compliance with the established procedures.

Aggregate value of all interested person transactions during the financial year under Aggregate value of all interested person review (excluding transactions conducted under transactions conducted under Name of shareholders’ mandate pursuant to Rule 920 shareholders’ mandate pursuant to interested person under SGX-ST Listing Manual) Rule 920 under SGX-ST Listing Manual

BDO Raffles Consultants S$53,000 in respect of the internal audit NIL Pte Ltd services rendered

Shook Lin & Bok S$16,000 in respect of trademark application NIL services rendered

Reinventing Ourselves Touching Lives Hyflux LtdAnnual Report 2007 141 SUPPLEMENTARY INFORMATION

Summary of major properties

Approximate group’s site area total lettable effective Description Location (sq m) existing use area (sq m) interest (%) Tenure

Office and 5 Changi South 10,472 Office and 5,630 100 60 years factory Street 1, factory commencing Singapore 486764 from 1 March 1997

Office 40 Changi South 2,426 Office 1,328 100 60 years Street 1, commencing Singapore 486764 from 1 December 1996

Factory No. 99 Juli Road 5,633 Office and 3,241 100 50 years building Zhangjiang factory commencing High-Tech Park from 26 April Pudong Shanghai, 2001 China 201203

Apartment Jinqiao Garden 32 Staff quarters 59 100 70 years Service Apartment commencing Block A, Floor 9, from 15 Unit 2, Shanghai, February China 1994

Office and 8# Factory in 18,040 Office and 23,180 100 50 years factory EPZ, 9# Yang factory commencing Zi Jiang South from 2007 Road, Yangzhou Jiangsu Province, China

Office 1307-1309 Centre 384 Office 232 100 50 years Plaza 188, commencing Jiefangbei HePing, from 12 June District Tianjin, 1994 China 300042

142 Hyflux LtdAnnual Report 2007 Reinventing Ourselves Touching Lives Hyflux Ltd and its Subsidiaries STATISTICS OF SHAREHOLDINGS as at 14 March 2008

Distribution of Shareholdings no. of Size of Holdings Shareholders % no. of Shares %

1 - 999 328 6.09 157,011 0.03 1,000 - 10,000 4,423 82.17 15,980,647 3.05 10,001 - 1,000,000 614 11.41 26,924,963 5.14 1,000,001 and above 18 0.33 480,858,739 91.78

Total 5,383 100.00 523,921,360 100.00

Twenty Largest Shareholders

Name no. of Shares %

1 Olivia Lum Ooi Lin 124,984,141 23.86 2 HSBC (Singapore) Nominees Pte Ltd 72,026,250 13.75 3 Raffles Nominees Pte Ltd 67,814,600 12.94 4 DBS Nominees Pte Ltd 58,475,430 11.16 5 Citibank Nominees Singapore Pte Ltd 49,066,429 9.37 6 Merrill Lynch (S’pore) Pte Ltd 26,386,908 5.04 7 DBSN Services Pte Ltd 23,650,700 4.51 8 United Overseas Bank Nominees Pte Ltd 17,047,366 3.25 9 Morgan Stanley Asia (S’pore) Securities Pte Ltd 14,574,144 2.78 10 DB Nominees (S) Pte Ltd 7,609,738 1.45 11 Murugasu Deirdre 3,931,178 0.75 12 Tommie Goh Thiam Poh 3,022,375 0.58 13 ABN Amro Nominees Singapore Pte Ltd 2,745,000 0.52 14 Foo Hee Kiang 2,691,912 0.51 15 UOB Kay Hian Pte Ltd 2,209,937 0.42 16 Koh Lip Lin 1,590,789 0.30 17 Phillip Securities Pte Ltd 1,531,842 0.29 18 Yong Siew Yoon 1,500,000 0.29 19 DBS Vickers Securities (S) Pte Ltd 924,000 0.18 20 OCBC Nominees Singapore Pte Ltd 853,803 0.16

Total 482,636,542 92.11

Approximately 48.89% of the Company’s shares are held in the hands of public. Accordingly, the Company has complied with Rule 723 of the Listing Manual of SGX-ST.

Reinventing Ourselves Touching Lives Hyflux LtdAnnual Report 2007 143 Hyflux Ltd and its Subsidiaries SUBSTANTIAL SHAREHOLDERS as at 14 March 2008

SUBSTANTIAL SHAREHOLDERS

Name of Shareholder Direct Interest Deemed Interest %

1 Olivia Lum Ooi Lin 124,984,141 52,500,000* 33.88 2 Istithmar PJSC 50,834,131* – 9.70 3 Matthews International Capital Management, LLC 31,746,999* – 6.06

* Shares held in the name of nominees

144 Hyflux LtdAnnual Report 2007 Reinventing Ourselves Touching Lives HYFLUX LTD Company Registration No. 200002722Z (Incorporated in the Republic of Singapore with limited liability)

NOTICE OF ANNUAL GENERAL MEETING

NOTICE IS HEREBY GIVEN that the Annual General Meeting of Hyflux Ltd (“the Company”) will be held at Taurus, Level 1, Marina Mandarin, 6 Raffles Boulevard, Marina Square, Singapore 039594 on 25 April 2008 at 10.00 a.m. for the following purposes:

AS ORDINARY BUSINESS

1. To receive and adopt the Directors’ Report and the Audited Accounts for the year ended 31 December 2007 together with the Auditors’ Report thereon. (Resolution 1)

2. To declare a first and final dividend of 1.89 Singapore cents per ordinary share (one-tier tax exempt) for the year ended 31 December 2007 (previous year: 1.35 Singapore cents per ordinary share). (Resolution 2)

3. To re-elect the following Directors retiring pursuant to the Company’s Articles of Association:

Professor Tan Teck Meng (Retiring under Article 88) (Resolution 3) Mr Raj Mitta (Retiring under Article 88) (Resolution 4) Mr Lee Joo Hai (Retiring under Article 89) (Resolution 5) Mr Gay Chee Cheong (Retiring under Article 89) (Resolution 6)

[See Explanatory Note (i)]

4. To approve the appointment of Mr Ahmed Butti Ahmed as a director pursuant to the Company’s Article of Assciation: (Article 75) (Resolution 7)

5. To approve the payment of Directors’ fees of S$456,667 for the year ended 31 December 2007 (previous year: S$305,166). (Resolution 8)

6. To appoint Messrs KPMG as external auditors in place of Messrs Ernst & Young, and to authorise the Directors to fix their remuneration.

In accordance with the requirements of Rule 1203(5) of the Listing Manual of the Singapore Exchange Securities Trading Limited:

(a) the outgoing Auditors, Messrs Ernst & Young, have confirmed that they are not aware of any professional reasons why the new Auditors should not accept appointment as Auditors of the Company; and

(b) the Company confirms that there were no disagreements with the outgoing Auditors, Messrs Ernst & Young, on accounting treatments within the last 12 months; and

(c) the Company confirms that it is not aware of any circumstances connected with the change of Auditors that should be brought to the attention of shareholders. (Resolution 9)

7. To transact any other ordinary business which may properly be transacted at an Annual General Meeting.

Reinventing Ourselves Touching Lives Hyflux LtdAnnual Report 2007 145 HYFLUX LTD Company Registration No. 200002722Z (Incorporated in the Republic of Singapore with limited liability)

AS SPECIAL BUSINESS

To consider and if thought fit, to pass the following resolutions as Ordinary Resolutions, with or withoutany modifications:

8. Authority to issue shares up to 50 per centum (50%) of the issued shares in the capital of the Company

That pursuant to Section 161 of the Companies Act, Cap. 50 and Rule 806 of the Listing Manual of the Singapore Exchange Securities Trading Limited, the Directors be authorised and empowered to:

(a) (i) issue shares in the Company (“shares”) whether by way of rights, bonus or otherwise; and/or

(ii) make or grant offers, agreements or options (collectively, “Instruments”) that might or would require shares to be issued, including but not limited to the creation and issue of (as well as adjustments to) options, warrants, debentures or other instruments convertible into shares,

at any time and upon such terms and conditions and for such purposes and to such persons as the Directors may in their absolute discretion deem fit; and

(b) (notwithstanding the authority conferred by this Resolution may have ceased to be in force) issue shares in pursuance of any Instrument made or granted by the Directors while this Resolution was in force,

provided that:

(1) the aggregate number of shares (including shares to be issued in pursuance of the Instruments, made or granted pursuant to this Resolution) and Instruments to be issued pursuant to this Resolution shall not exceed fifty per centum (50%) of the issued shares in the capital of the Company (as calculated in accordance with sub-paragraph (2) below), of which the aggregate number of shares and Instruments to be issued other than on a pro rata basis to existing shareholders of the Company shall not exceed twenty per centum (20%) of the issued shares in the capital of the Company (as calculated in accordance with sub-paragraph (2) below);

(2) (subject to such calculation as may be prescribed by the Singapore Exchange Securities Trading Limited) for the purpose of determining the aggregate number of shares and Instruments that may be issued under sub- paragraph (1) above, the percentage of issued shares and Instruments shall be based on the number of issued shares in the capital of the Company at the time of the passing of this Resolution, after adjusting for:

(a) new shares arising from the conversion or exercise of the Instruments or any convertible securities; (b) new shares arising from the exercising share options or vesting of share awards outstanding and subsisting at the time of the passing of this Resolution; and (c) any subsequent consolidation or subdivision of shares.

(3) in exercising the authority conferred by this Resolution, the Company shall comply with the provisions of the Listing Manual of the Singapore Exchange Securities Trading Limited for the time being in force (unless such compliance has been waived by the Singapore Exchange Securities Trading Limited) and the Articles of Association of the Company; and

146 Hyflux LtdAnnual Report 2007 Reinventing Ourselves Touching Lives HYFLUX LTD Company Registration No. 200002722Z (Incorporated in the Republic of Singapore with limited liability)

AS SPECIAL BUSINESS (cont’d)

8. Authority to issue shares up to 50 per centum (50%) of the issued shares in the capital of the Company (cont’d)

(4) unless revoked or varied by the Company in a general meeting, such authority shall continue in force (i) until the conclusion of the next Annual General Meeting of the Company or the date by which the next Annual General Meeting of the Company is required by law to be held, whichever is earlier or (ii) in the case of shares to be issued in pursuance of the Instruments, made or granted pursuant to this Resolution, until the issuance of such shares in accordance with the terms of the Instruments.

[See Explanatory Note (ii)] (Resolution 10)

9. Authority to issue shares under the Hyflux Employees’ Share Option Scheme

That pursuant to Section 161 of the Companies Act, Cap. 50, the Directors be authorised and empowered to offer and grant options under the Hyflux Employees’ Share Option Scheme (“the Scheme”) and to issue from time to time such number of shares in the capital of the Company as may be required to be issued pursuant to the exercise of options granted by the Company under the Scheme, whether granted during the subsistence of this authority or otherwise, provided always that the aggregate number of additional ordinary shares to be allotted and issued pursuant to the Scheme shall not exceed fifteen per centum (15%) of the issued shares in the capital ofthe Company from time to time and that such authority shall, unless revoked or varied by the Company in a general meeting, continue in force until the conclusion of the next Annual General Meeting of the Company or the date by which the next Annual General Meeting of the Company is required by law to be held, whichever is the earlier.

[See Explanatory Note (iii)] (Resolution 11)

By Order of the Board

Yang Ai Chian Company Secretary Singapore, 4 April 2008

Reinventing Ourselves Touching Lives Hyflux LtdAnnual Report 2007 147 HYFLUX LTD Company Registration No. 200002722Z (Incorporated in the Republic of Singapore with limited liability)

Explanatory Notes:

(i) Professor Tan Teck Meng, will upon re-election as a Director of the Company, become Chairman of the Renumeration Committee and remain as a member of the Audit Committee. He is considered as non-executive independent for the purpose of Rule 704(8) of the Listing Manual of the Singapore Exchange Securities Trading Limited.

Mr Raj Mitta will upon re-election as a Director, become Chairman of Risk Management Committee and is considered as a non-executive independent director.

Mr Lee Joo Hai, will upon re-election as a Director of the Company, remain as Chairman of the Audit Committee and is considered as non-executive independent for the purpose of Rule 704(8) of the Listing Manual of the Singapore Exchange Securities Trading Limited. Mr Lee will also remain as a member of the Risk Management, Remuneration and Nominating Committees.

Mr Gay Chee Cheong, will upon re-election as a Director of the Company, remain as a member of the Audit and Remuneration Committees and is considered as non-executive independent for the purpose of Rule 704(8) of the Listing Manual of the Singapore Exchange Securities Trading Limited. Mr Gay will also remain as Chairman of the Nominating Committee.

(ii) The Ordinary Resolution 9, if passed, will empower the Directors from the date of this Meeting until the date of the next Annual General Meeting, or the date by which the next Annual General Meeting is required by law to be held or such authority is varied or revoked by the Company in a general meeting, whichever is the earlier, to issue shares, make or grant instruments convertible into shares and to issue shares pursuant to such instruments, up to a number not exceeding, in total, 50% of the issued shares in the capital of the Company, of which up to 20% may be issued other than on a pro-rata basis to existing shareholders.

For determining the aggregate number of shares that may be issued, the percentage of issued shares in the capital of the Company will be calculated based on the issued shares in the capital of the Company at the time this Ordinary Resolution is passed after adjusting for new shares arising from the conversion or exercise of the Instruments or any convertible securities, the exercise of share options or the vesting of share awards outstanding or subsisting at the time when this Ordinary Resolution is passed and any subsequent consolidation or subdivision of shares.

(iii) The Ordinary Resolution 10, if passed, will empower the Directors of the Company, from the date of this Meeting until the next Annual General Meeting, or the date by which the next Annual General Meeting is required by law to be held or such authority is varied or revoked by the Company in a general meeting, whichever is the earlier, to issue shares in the Company pursuant to the exercise of options granted or to be granted under the Scheme up to a number not exceeding in total (for the entire duration of the Scheme) fifteen per centum (15%) of the issued shares in the capital of the Company from time to time.

PROFILE OF MR AHMED BUTTI AHMED – TO BE READ IN CONJUNCTION WITH RESOLUTION 7

Mr Ahmed Butti Ahmed is the Director General of Dubai Customs and CEO of the Ports, Customs and Free Zone Corporation (PCFC). In addition, he holds the following offices: Chairman of Imdaad (Facilities Management), Chairman of Palm Utilities (District Cooling & Water Treatment), Chairman of Dubai Security Services, Board Member of Dubai World, Board Member of Tamweel and Board Member of Federal Customs Authority Board of Directors. Mr Ahmed Butti Ahmed completed his Masters degree in Science from Denver University in the United States.

Notes:

1. A Member entitled to attend and vote at the Annual General Meeting (the “Meeting”) is entitled to appoint a proxy to attend and vote in his/her stead. A proxy need not be a Member of the Company.

2. The instrument appointing a proxy must be deposited at the Registered Office of the Company at 202 Kallang Bahru, Hyflux Building, Singapore 339339 not less than 48 hours before the time appointed for holding the Meeting.

148 Hyflux LtdAnnual Report 2007 Reinventing Ourselves Touching Lives HYFLUX LTD Company Registration No. 200002722Z (Incorporated in the Republic of Singapore with limited liability)

NOTICE OF BOOKS CLOSURE

NOTICE IS HEREBY GIVEN that the Share Transfer Books and Register of Members of Hyflux Ltd (the “Company”) will be closed at 5.00 p.m. on 6 May 2008 for the preparation of dividend warrants.

Duly completed registrable transfers received by the Company’s Share Registrar, Boardroom Corporate & Advisory Services Pte. Ltd., 3 Church Street #08-01 Samsung Hub, Singapore 049483 up to 5.00 p.m. on 6 May 2008 will be registered to determine shareholders’ entitlements to the said dividend. Members whose Securities Accounts with The Central Depository (Pte) Limited are credited with shares at 5.00 p.m. on 6 May 2008 will be entitled to the proposed dividend.

Payment of the dividend, if approved by the members at the Annual General Meeting to be held on 25 April 2008, will be made on 16 May 2008.

Reinventing Ourselves Touching Lives Hyflux LtdAnnual Report 2007 149 Hyflux Group of Companies

Singapore Hyflux NewSpring Sewage Disposal India Eflux Singapore Pte Ltd (Jia Wang) Co., Ltd Eflux Oil India Private Limited Eflux SK Pte Ltd Hyflux NewSpring Sewage Disposal Hyflux Engineering (India) Pte Ltd (Ru Dong) Co., Ltd Eflux Philippines Pte Ltd Hyflux Lifestyle Products (India) Pte Ltd Hyflux Unitech (Shanghai) Co., Ltd Eflux Vietnam Pte Ltd Kunshan Ecowater Systems Co., Ltd Energy Life Pte Ltd NewSpring Huludao Co., Ltd. Malaysia Hydrochem (S) Pte Ltd Ningxia Hypow Bio-technology Co., Ltd Hyflux Malaysia Sdn Bhd Hydrochem Engineering (S) Pte Ltd Sinolac (Huludao) Biotech Co., Ltd Hyflux Aquosus (Singapore) Pte Ltd Tianjin Dagang NewSpring Co., Ltd MENA Hyflux Capital (Singapore) Pte Ltd Wu Xi Kai Quan Waste Water Treatment Saudi Arabia Hyflux Consumer Products Pte Ltd Co., Ltd Lube Oil Re-refining Company Hyflux Engineering Pte Ltd Hyflux EPC Pte Ltd Hong Kong Dubai Hyflux Filtech (Singapore) Pte Ltd Hyflux Utility (TJ) Limited Hyflux (Middle East) FZCO Hyflux Filtration (S) Pte Ltd Hyflux Utility (HLD) Limited Palm Water LLC Hyflux IP Resources Pte Ltd Hyflux Utility (WX) Limited Hyflux Lifestyle Products (S) Pte Ltd Algeria Hyflux Utility (YK) Limited Hyflux Marmon Development Pte Ltd Hyflux Engineering Algeria Hyflux Utility (LB) Limited Hyflux Management And Hyflux-TJSB Algeria Consultancy Pte Ltd Hyflux Utility (PJ) Limited SPA/Almiyah Attilemcania Hyflux Membrane Manufacturing (S) Pte Ltd Hyflux Utility WT (MG) Limited Hyflux SIP Pte Ltd Hyflux Utility WWT (MG) Limited Hyflux Utility (India) Pte Ltd Hyflux Utility WT (XC) Limited Vietnam Success Blossom Environment Vietnam Hyflux Water Trust Management Pte Ltd Hyflux Utility WWT (XC) Limited Joint Stock Company IndoSpring Utility (S) Pte Ltd Hyflux Utility WT (GCL) Limited Marmon Hyflux Investments Pte Ltd Hyflux Utility (TY) Limited NewSpring Utility Pte Ltd Hyflux Utility (DF) Limited SingSpring Pte Ltd Hyflux Utility (YL) Limited Sinolac (Singapore) Pte Ltd Hyflux Utility (DG) Limited MenaSpring Utility (S) Pte Ltd Hyflux Utility (LP) Limited Hyflux Utility WT (LY) Limited People’s Republic of China Eflux (Taizhou) Co., Ltd British Virgin Islands Hangzhou Zheda Hyflux Hualu Membrane Hyflux Advanced Technology Ltd Technology Co., Ltd Hyflux International Ltd Hydrochem Engineering (Shanghai) Co., Ltd Hyflux Water Projects Ltd Hyflux Aquosus (Shanghai) Co., Ltd IndoSpring Utility Ltd Hyflux Design Engineering SinoSpring Utility Ltd (Shanghai) Co., Ltd Spring China Utility Ltd Hyflux Engineering (Shanghai) Co., Ltd Spring Environment Ltd Hyflux Filtech Shanghai Co., Ltd Hyflux Hi-Tech Product (Yangzhou) Co., Ltd Spring Utility Ltd Hyflux Investment Management And Consultancy Services (Tianjin) Co., Ltd Europe Hyflux NewSpring (De Zhou) Co., Ltd France Hyflux NewSpring (Fu Ning) Co., Ltd Tlemcen Desalination Investment Hyflux NewSpring (Guan Yun) Co., Ltd Company SAS Hyflux NewSpring (Jia Wang) Co., Ltd Hyflux NewSpring (Le Ping) Co., Ltd Netherlands Hyflux NewSpring Hyflux CEPAration B.V. (Liao Yang Gong Chang Ling) Co., Ltd Hyflux NewSpring Construction Engineering Netherlands Antilles (Shanghai) Co., Ltd Hyflux CEPAration N.V. Hyflux NewSpring Sewage Disposal (Guan Yun) Co., Ltd Corporate Information

Audit Committee Company Secretary Mizuho Corporate Bank Limited Lee Joo Hai (Chairman) Yang Ai Chian Singapore Branch Teo Kiang Kok 168 Robinson Road Gay Chee Cheong Registered Office Capital Towers Professor Tan Teck Meng Hyflux Building Singapore 068912 202 Kallang Bahru Nominating Committee Singapore 339339 BNP Paribas, Singapore Branch Gay Chee Cheong (Chairman) Tel: +65 6214 0777 20 Collyer Quay Lee Joo Hai Fax: +65 6214 1211 Tung Centre Teo Kiang Kok Singapore 049319 Share Registrar and Share Transfer Office Arab Bank Remuneration Committee Boardroom Corporate & Advisory 80 Raffles Place Gay Chee Cheong (Chairman) Services Pte Ltd (a member of #32-32 UOB Plaza 2 Teo Kiang Kok Boardroom Limited) Singapore 048624 Lee Joo Hai 3 Church Street Christopher Murugasu #08-01 Samsung Hub NATIXIS, Singapore Branch Professor Tan Teck Meng Singapore 049483 50 Raffles Place #41-01 Singapore Land Tower Risk Management Committee Auditors Singapore 048623 Christopher Murugasu (Chairman) Ernst & Young Lee Joo Hai Certified Public Accountants Bank of China Teo Kiang Kok One Raffles Quay Singapore Branch Raj Mitta North Tower, Level 18 4 Battery Road Singapore 048583 Bank of China Building Executive Committee Singapore 049908 Olivia Lum Ooi Lin (Chairman) Partner-in-Charge (since 2005): Lee Joo Hai Steven Phan Deutsche Bank AG Teo Kiang Kok Singapore Branch Gay Chee Cheong Bankers One Raffles Quay #17-00 DBS Bank Ltd South Tower Management Committee 6 Shenton Way Singapore 048583 Olivia Lum Ooi Lin (Chairman) DBS Building Tower One Sam Ong Eng Keang Singapore 068809 Investor Relations Peter Wu Siu Kin Website: www.hyflux.com Benjamin Tan Eng Seng Oversea-Chinese Banking Contact: Sam Ong Eng Keang Wong Khai Theen Corporation Limited Email: [email protected] Fong Chun Hoe 65 Chulia Street Foo Hee Kiang OCBC Centre Ge Wen Yue Singapore 049513

United Overseas Bank Limited 1 Raffles Place OUB Centre Singapore 048616 Hyflux Ltd Hyflux Building 202 Kallang Bahru Singapore 339339 Tel: (65) 6214 0777 Fax: (65) 6214 1211 www.hyflux.com