Energy Efficiency Improvement and Emission Reduction Project (RRP PRC 44012)

FINANCIAL PERFORMANCE AND FINANCIAL MANAGEMENT ASSESSMENT OF SUBPROJECT COMPANIES

1. The first batch of subprojects under the Hebei Energy Efficiency Improvement and Emission Reduction Project involves nine subproject companies, which are midstream energy- intensive entities that are comparatively medium to large businesses in Hebei Province. This includes seven private enterprises, one state-owned enterprise, and one public foreign company listed in Hong Kong with controlling shares of the state. The companies have adequate shareholders’ equity and rights, which can support more debt–financing from commercial banks. The Hebei provincial government provides strong support to companies investing in projects that promote energy conservation and reduce emissions. Recognizing the project’s direct contribution to resource conservation and protection of local environment, the local governments will provide counterguarantees to the Hebei provincial government on the companies’ respective share in the loan from the Asian Development Bank (ADB).

A. Financial Performance of Subproject Sponsors

2. Jianlong Enterprise Co. Ltd. (Tangshan Jianlong) is a joint venture company between Tangshan Jianlong Enterprises Co., Ltd. (75% equity share) and Jianzhou Holdings Co., Ltd. (25% equity share), a Hong-kong based company. The majority shareholder is in turn a subsidiary of Jianlong Heavy Industry Group Co., Ltd. (Jianlong Group), a private-owned group which operates resources, steel, shipping and electromechanical businesses. It was established in 2002, with a registered capital of $24 million and has it main facilities in , Tangshan city. Tangshan Jianlong’s main products include rolled strips, cold rolled strips, and high grade welded pipes. The company’s products are widely used in cars, roads, containers, and home appliances and are sold to hundreds of clients around the People’s Republic of (PRC). Its major clients include: CIMC Containers Co., Ltd., China Railways, China Minmetals Corp., Sinosteel Tianjin Co., Tianjin Fengming Sheet Steel Co., and Zhejiang Mingcheng Co., which are well known PRC companies in their respective fields.

3. Tangshan Jianlong employs about 4,000 workers and has a total asset of CNY2.5 billion 1 with debt–asset ratio of 63.6% in 2010. The company maintains a hefty cash balance, which is used to secure its credit lines with commercial banks. It has no accounts receivables and major sales transactions are covered by advances from customers or secured by bank notes. Long-term debts are not the main funding source for capital investment, instead, short- term loans and bank credit lines are availed to take advantage of lower interest cost. These short-term loans are renewed on maturity, which make the debt–service ratio indicator meaningless. 2

4. While the company experienced robust profitability in 2007 with net profit margin of 7.7% and high returns on asset and equity, the global economic crisis in 2008 and 2009 affected the company’s profitability with only modest returns registered through 2010. The low net profit margin was mainly on account of the softening of the demand for and steel products coupled by the increase in coal price, a main raw material input in the production of coke used in the iron and steel operations. In 2010, its total annual sales revenue was CNY5.6 billion, but net profit was only CNY46.1 million (net profit margin of 0.8%). From late 2010, the company reported improvement in profitability triggered by increased demand for iron and steel resulting

1 $1 = CNY 6.5. 2 The practice of borrowing short-term, rather than long- term is common among the subproject companies, therefore, the debt–service ratio as an indicator of the companies’ debt–servicing capacity will not apply. 2 from PRC’s economic recovery. At the same time, Tangshan Jianlong also paid a lot of attention to cost control and benchmarking to sector leading firm. These complementary factors should redound to improved bottom line.

5. Hebei Fengmei Coking Co. Ltd. (Hebei Fengmei) is a state-owned enterprise, founded in 2007 with a registered capital of CNY1,065 million invested by Jizhong Energy Fengfeng Group Co., Ltd. (83.8% equity share), Iron and Steel Group Co., Ltd. (9.4% equity share), and Beijing Jin Xinrun International Investment Co., Ltd. (6.8% equity share). Its main facilities are located at the Fengfeng coalmine district of Handan city and produce coke used by iron and steel companies as its main product. Hebei Fengmei employs 1,500 employees and has a total asset of CNY3.4 billion, with total liabilities–asset ratio of 67.8% in 2010. Ongoing construction of the company’s phase 2 facilities saw its assets grow four fold in 2010 from its 2007 level when phase 1 facilities were initially placed in operation. The full commercial operation of phase 1 in 2008 increased revenues by 6.5 times and further to 8 times in 2010. Its sales revenue in 2010 was CNY1.9 billion, with after tax profit of CNY40.3 million. Profitability remains modest in 2009–2010 after the initial losses sustained in 2007–2008. The company has very low receivable level equivalent to less than 1 month’s sales throughout 2007–2010.

6. Hebei Fengmei obtained long-term loans from a domestic bank to partially finance phase 2 construction. Part of the proceeds from this loan and the additional equity contributions received from its shareholders in 2010 are still maintained in the cash account of the company and will be used as the counterpart fund for the ADB-financed project. The company no longer plans to avail of additional local long-term financing for the project but to utilize existing company resources to finance the remaining investment requirement. Any shortfall will be supplemented by short-term borrowings.

7. Hebei Xinglong Grain Biochemical Co., Ltd. (Hebei Xinglong) is a private enterprise, located at Quzhou Industrial Park, in Handan city. Established in 2009 with registered capital of CNY66 million, its main business is grain and oil processing, covering various agriculture products. It operates three branches and six production lines, employs 586 employees, and has a total asset of CNY293.4 million in 2010, with relatively low liabilities– asset ratio of 16.8%. Its total revenue was CNY590.7 million in 2010 with net profit of CNY35.8 million. Its net profit margin is continually improving from 4.3% in 2007 to 6.1% in 2010; the net return on asset also improved from 11.2% in 2007 to 12.2% 2010. The current ratio is high at 10.9 times in 2010. The receivables are low, equivalent to less than 1 month’s sales during the entire 2007–2010 period.

8. Counterpart financing for the project will be provided from self-raised funds and unutilized cash balance from the CNY40 million long-term loan obtained from a local bank in 2010.

9. Hebei Yufeng Enterprises Group Co. Ltd. (Hebei Yufeng) is a private-owned company located at Xicheng Industrial Park, NingJin county, city. Established in 2000, with a total registered capital of CNY120 million, its main businesses are starch, sugar and glucose production. It employs about 2,000 employees and has a total asset of CNY1.0 billion with total liabilities–asset ratio of 49.4% in 2010. Its total sales revenue in 2010 was CNY1.0 billion with CNY118.5 million after tax profit. Its major clients are biochemical producers (70% of whose products are for export), edible oil producers and starch dealers. It has expanded its business in both its upstream and downstream operations. It invested on two subsidiaries: NingJin county Jinyu Grain and Oil Co., Ltd. (100% controlled), an upstream company; and 3

Hebei Yuxing Bio-engineering Co., Ltd. (51% controlled), a downstream company. This strategy will provide the company’s business operation a certain degree of stability against market fluctuations, thus increasing its competitiveness. The receivables are low, equivalent to less than half-month’s sales, throughout 2007–2010 period. The company maintains high inventory levels to hedge against grain price increases and had constructed additional warehousing facilities in 2010 to accommodate higher inventory volumes.

10. Long-term debt is not substantial and short-term loans are availed from local banks and cooperative to finance both operating and capital investment requirements. For the proposed subproject, Hebei Yufeng will finance the counterpart funding requirement through self-raised funds.

11. Hebei Lianguan Carbon Electrode Co., Ltd. (Hebei Lianguan), located in Dazai Industrial Park, Jizhou county, city, is a private-owned company restructured in 2006 from Jizhou Chang’An Carbon Electrode Co., Ltd., which was established in 1994. The company has a registered capital of CNY60 million and total assets of CNY335.0 million with total liabilities–asset ratio of 48.3% in 2010. Hebei Lianquan specializes in the manufacturing of carbon electrodes and employs 500 employees. In 2010, its annual sales revenues was CNY217.0 million, with net profit of CNY40.8 million equivalent to a high net profit margin of 18.8%. The number of months sales in receivables is reasonable at 1.9 months.

12. Hebei Lianguan has low long-term debts, with only short-term loans and bank lines availed to finance both operating and capital investment requirements. For the proposed subproject, the company will finance the counterpart funding requirement through self-raised funds. Should there be a need for additional funds, their existing local bank has expressed willingness to provide financing of CNY15 million to this project.

13. Changsheng Textile Co. Ltd. (Julu Changsheng) is a private-owned company, located in Julu county, Xingtai city. Established in 2006, it has a total asset of CNY154.1 million, with total liabilities–asset ratio of 36.7% in 2010. Its main production line comprises 200 high speed shuttles-less rapier looms, producing 15 million meters per year of top grade denim fabric. The company employs 700 employees. Its total sales revenue in 2010 is CNY195.6 million, with net profit of CNY14.8 million, yielding a net profit margin of 7.6%. The months of sales in receivables is low at only 0.8 months.

14. Counterpart funding for the proposed project will be provided from self-raised funds and from a loan from Agricultural Bank of China (ABC). ABC has issued the letter of intent for that purpose.

15. Hebei Qianjin Iron and Steel Group Co., Ltd. (Hebei Qianjin) , located in Zhongxing Park, in Bazhou county, city, is an iron and steel company which integrates mining and exploration, steel smelting and processing, and trading producing mid to high grade steel for furniture as the main product. Established in 2004, with a registered capital of CNY300 million, it has a production capacity of 4 million t of steel. The company has been ranking among “The Top 100 Enterprises in Hebei Province” for many consecutive years, and “The Top 500 Manufacturers in China”. It employs 4,000 employees and has total assets of CNY 5.8 billion, with total liabilities–asset ratio of 32.8% in 2010. That same year, its annual revenue was CNY8.4 billion with a net profit of CNY319.8 million, equivalent to a net profit margin of 3.8% and return to assets and equity of 5.5% and 8.2%, respectively. These returns are considered low compared to those of previous years when net profit margins were about 10% and returns of asset and equity were also correspondingly higher. The months of sales in receivables is

4 extremely low—very close to zero in the last 4 years as customers pay in advance or through bank notes. Inventory, however, has been traditionally high, equivalent to 1.4 month’s cost of sales in 2010 as the company maintains high work in process and raw materials inventory to hedge against price increases. Prepaid account to suppliers is also a large amount, i.e., CNY1.2 billion in 2010, for the same reason.

16. Hebei Qianjin’s cash balance is also noticeably high, i.e., about CNY800 million (26% of current assets) at the end of 2010 as this is used as collateral for bank notes issued to suppliers. Maintaining cash liquidity has been the management practice in the last years to take advantage of the market price fluctuations in raw materials. This strategy paid off handsomely in the last 4 years of operations when sharp fluctuations were experienced in the iron and steel market.

17. For the proposed ADB project, although internal company resources and domestic funds can be utilized, the company believes that obtaining ADB funds will provide them the opportunity to improve its management system and internal control, and enhance its corporate image. Counterpart funding will be provided from self-raised funds.

18. China Resources Co-generation Co. Ltd. (Cangzhou Cogen) , located in Cangzhou city, is a subsidiary of China Resources Power Holdings Co., Ltd., a public company listed in Hong Kong and controlled by China Resources Group, which is a state-owned enterprise ranked the 345th in the world’s Top 500 by Fortune magazine in 2010. Established in 2007 and in full operation in 2008, Cangzhou Co-gen operates 2 x 330 megawatt cogeneration units, supplies 4.0 billion kilowatt-hours of electricity to the state grid, and supplies 3.5 million gigajoule of heat (servicing a total floor area of about 13 million square meter) to Cangzhou city. It employs 390 employees and has a total asset of CNY3.0 billion and liabilities of CNY2.14 billion in 2010. That year, it generated sales revenue of CNY1.4 billion with a net profit of CNY283.8 million (20% net profit margin, and returns to asset and equity of 9.5% and 33.5%, respectively). The months of sales in receivables is reasonable at 1.4 months.

19. Cangzhou Co-gen has a total liabilities–asset ratio of 71.7%, which is slightly higher than the benchmark ratio of 70%, with its capital investments financed mostly by long-term project loans. By the end of 2010, long-term debt accounted for 50% of its total liabilities. The company’s first half year unaudited financial reports reported that this ratio has improved to a lower level of 64% by the end of June 2011. In addition, its profitability is good. In the first year of the company’s full operation, it broke even and continually achieved high profit margins in subsequent years, i.e., 23% in 2009 and 20% in 2010. The return on equity is even better at 33.5% in 2010. The company expects this trend to continue.

20. The parent holding company also showed good performance in 2010, i.e., 17% gross profit margin and 11.9% net profit margin. Its liabilities–asset ratio is below 65%.

21. Hebei Guangyuan Solar Energy Technology Co. Ltd. (Hebei Guangyuan Solar) is a private company established in Xingtai city in 2000 with CNY10 million registered capital. Its main lines of business involve installation of solar thermal systems to institutional clients for hot water supply and supply of domestic water heating units. Its major clients include schools, hotels, hospitals, residential buildings, and individual farmers. Farmers are motivated to purchase the solar heating products because of a government incentive policy giving them a rebate of 13% on the total price of energy conserving products. The company employs 368 employees and has a total asset of CNY117.2 million with total liabilities–asset ratio of 38.0% in 2010. During the same year, its sales revenue was CNY162.8 million with after-tax profit of 5

CNY14.5 million (net profit margin of 8.9% and returns on asset and equity of 12.4% and 20%, respectively). The profitability level has shown consistent improvement since 2007. The months of sales in receivables is low at only 0.9 months.

22. Counterpart funding for the ADB-funded subproject will be through self-raised funds.

23. Key financial performance indexes, based on the audited financial statements of the nine subproject companies for the past 4 years (2007–2010) are summarized in Table 1.

Table 1: Key Financial Performance Indexes

(CNY million unless otherwise stated) 6 1-Tangshan Jianlong 2-Hebei Fengmei 3-Hebei Xinglong Subproject 2007 2008 2009 2010 2007 2008 2009 2010 2007 2008 2009 2010 Sales Revenue 4,733.5 5,801.1 4,202.1 5,572.8 233.9 1,527.5 1,551.7 1,882.2 432.5 474.7 527.8 590.7 Net Operating Income 470.1 60.0 137.2 120.0 -2.2 25.5 38.8 62.0 27.6 30.1 39.2 49.1 Net Income After Tax 363.9 18.9 79.6 46.1 -8.2 -3.2 9.0 40.3 18.4 22.6 29.4 35.8

Current Assets 936.8 522.9 959.3 1,193.5 207.0 261.6 284.8 1,048.4 81.7 117.9 113.4 102.2 Trade Account Receivables 26.1 - 96.3 - 6.4 86.4 45.2 26.1 10.3 18.5 15.3 17.3 Fixed Assets 1,311.8 1,330.7 1,347.0 1,252.7 654.3 772.2 698.7 2,349.3 65.8 67.2 70.3 135.1 Total Assets 2,265.7 1,873.8 2,325.2 2,464.5 861.3 1,098.1 1,047.6 3,460.2 165.1 202.7 239.8 293.4 Current Liabilities 1,288.9 741.6 969.5 1,366.4 514.5 751.3 151.2 843.4 33.9 33.9 31.6 9.4 Short-term Loans 186.0 147.0 110.0 87.0 186.0 147.0 110.0 87.0 - - - - Long-term Liabilities - 356.6 503.2 201.4 2.9 6.1 536.5 1,503.4 - - - 40.0 Shareholder Equity 976.8 775.6 852.6 896.8 343.9 340.7 359.9 1,113.4 131.3 168.8 208.3 244.0 Net Internal Cash Generation 616.5 236.0 618.1 692.4 1.8 -73.3 138.5 123.2 10.1 -9.5 39.0 21.1 Debt Service 1,680.7 1,359.2 1,819.4 2,550.1 - 24.8 844.9 905.5 0.0 0.0 0.0 1.4

Growth Index of Sales Revenue 100.0 122.6 88.8 117.7 100.0 653.1 663.5 804.8 100.0 109.7 122.0 136.6 (2007=100) Growth Rate of Assets (2007=100) 100.0 82.7 102.6 108.8 100.0 127.5 121.6 401.7 100.0 122.8 145.3 177.7

Months of Sales in Receivables 0.1 - 0.3 - 0.3 0.7 0.3 0.2 0.3 0.5 0.3 0.4 Current Ratio 0.7 0.7 1.0 0.9 0.4 0.3 1.9 1.2 2.4 3.5 3.6 10.9 Debt Service Coverage Ratio 0.4 0.2 0.3 0.3 - -3.0 0.2 0.1 429.8 -2,771.6 7,178.7 15.4

Total Liabilities-Asset Ratio (%) 56.9 58.6 63.3 63.6 60.1 69.0 65.6 67.8 20.5 16.7 13.2 16.8 Operating Income Margin (%) 9.9 1.0 3.3 2.2 -0.9 1.7 2.5 3.3 6.4 6.3 7.4 8.3 Net Profit Margin (%) 7.7 0.3 1.9 0.8 -3.5 -0.2 0.6 2.1 4.3 4.8 5.6 6.1 Net Profit Rate of Assets (%) 16.1 1.0 3.4 1.9 -1.0 -0.3 0.9 1.2 11.2 11.1 12.3 12.2 Net Profit Rate of Equity (%) 37.3 2.4 9.3 5.1 -2.4 -0.9 2.5 3.6 14.1 13.4 14.1 14.7

4-Hebei Yufeng 5-Hebei Lianguan 6-Julu Changsheng Subproject 2007 2008 2009 2010 2007 2008 2009 2010 2007 2008 2009 2010 Sales Revenue 515.4 542.6 725.7 1,020.7 125.1 99.0 155.0 217.0 104.9 114.2 151.2 195.6 Operating Income 47.2 78.0 98.1 140.7 23.2 14.4 33.3 45.3 9.0 10.8 15.7 20.9 Net Income After Tax 33.6 60.6 85.9 118.5 14.3 5.8 25.4 40.8 6.9 7.5 10.8 14.8

Current Assets 267.3 276.7 365.2 542.4 63.7 111.3 133.9 198.8 26.7 34.8 51.0 65.4 Trade Account Receivables 14.1 4.4 18.4 17.8 25.4 9.2 13.5 33.6 8.1 9.3 10.8 12.7 Fixed Assets 270.2 312.3 377.8 468.7 32.6 16.9 65.5 119.2 39.4 61.3 82.8 88.7 Total Assets 552.2 604.1 763.3 1,043.2 142.1 128.2 206.5 335.0 68.2 96.1 133.8 154.1 Current Liabilities 212.4 209.1 295.5 492.6 44.3 101.2 140.9 151.0 18.2 30.8 50.8 56.6 Short-term Loans 138.0 150.0 174.0 425.4 20.2 - 42.0 72.8 12.3 25.3 33.8 39.7 Long-term Liabilities 20.0 15.0 50.0 22.5 2.2 3.4 5.0 10.7 - 3.2 0.3 - Shareholder Equity 191.9 227.8 283.3 397.6 101.0 24.0 60.6 173.4 50.1 62.1 82.7 97.5 Net Internal Cash Generation 111.3 72.0 142.0 29.0 14.6 7.6 13.7 21.6 4.3 6.0 25.2 5.0 Debt Service 211.7 176.0 470.6 385.3 4.9 13.5 30.4 200.6 10.2 2.9 7.5 39.9

Growth Index of Sales Revenue 100.0 105.3 140.8 198.0 100.0 79.1 123.9 173.4 100.0 108.9 144.1 186.5 (2007=100) Growth Rate of Assets (2007=100) 100.0 109.4 138.2 188.9 100.0 90.2 145.3 235.7 100.0 140.9 196.1 225.9

Months of Sales in Receivables 0.3 0.1 0.3 0.2 2.4 1.1 1.0 1.9 0.9 1.0 0.9 0.8 Current Ratio 1.3 1.3 1.2 1.1 1.4 1.1 1.0 1.3 1.5 1.1 1.0 1.2 Debt Service Coverage Ratio 0.5 0.4 0.3 0.1 2.9 0.6 0.5 0.1 0.4 2.1 3.4 0.1

Total Liabilities-Asset Ratio (%) 42.1 37.1 45.3 49.4 32.7 81.6 70.7 48.3 26.6 35.4 38.2 36.7 Operating Income Margin (%) 9.2 14.4 13.5 13.8 18.6 14.6 21.5 20.9 8.6 9.5 10.4 10.7 Net Profit Margin (%) 6.5 11.2 11.8 11.6 11.4 5.8 16.4 18.8 6.5 6.6 7.1 7.6 Net Profit Rate of Assets (%) 6.1 10.0 11.3 11.4 10.0 4.5 12.3 12.2 10.0 7.9 8.1 9.6 7 Net Profit Rate of Equity (%) 17.5 26.6 30.3 29.8 14.1 24.0 41.9 23.5 13.7 12.2 13.0 15.2

7-Hebei Qianjin 8-Cangzhou Cogen 9-Hebei Guangyuan Solar Subproject 2007 2008 2009 2010 2007 2008 2009 2010 2007 2008 2009 2010 8 Sales Revenue 6,207.0 8,006.0 6,650.6 8,357.9 145.6 1,135.8 1,396.6 1,416.7 65.0 81.9 114.5 162.8 Net Operating Income 741.2 905.2 740.3 411.3 14.1 120.0 403.9 335.5 9.7 11.3 17.5 25.0 Net Income After Tax 669.7 824.1 609.4 319.8 4.5 1.4 326.6 283.8 5.3 6.9 10.4 14.5

Current Assets 1,327.6 1,350.7 2,313.2 3,063.7 185.7 683.1 441.9 564.2 71.1 79.9 93.6 114.5 Trade Account Receivables 15.2 - 86.8 18.8 127.6 216.7 149.4 160.7 8.0 9.4 9.9 12.3 Fixed Assets 1,279.3 1,958.7 1,965.5 2,032.2 2,431.5 2,452.5 2,524.3 2,355.8 5.7 4.2 3.4 2.7 Total Assets 2,912.0 3,837.6 4,866.0 5,771.6 2,690.4 3,205.0 3,031.6 2,996.7 76.8 84.1 97.0 117.2 Current Liabilities 986.2 886.9 1,225.8 1,811.7 1,724.5 953.8 708.4 1,123.2 23.5 25.8 26.5 26.5 Short-term Loans 212.0 310.0 227.4 58.0 599.6 410.0 12.0 10.0 3.4 3.4 - - Long-term Debt 0.2 - 80.0 80.0 543.9 1,810.3 1,433.2 1,025.5 - - - 18.0 Shareholder Equity 1,925.6 2,950.8 3,560.2 3,880.0 422.1 441.0 890.1 848.0 53.4 58.2 70.5 72.7 Net Internal Cash Generation 985.4 1,187.5 397.9 390.7 -71.3 -51.1 741.1 250.4 6.6 11.2 9.3 4.5 Debt Service 319.0 270.3 596.8 397.1 1,198.8 1,852.0 1,319.2 1,171.6 2.0 2.1 7.1 2.3

Growth Index of Sales Revenue 100.0 129.0 107.1 134.7 100.0 779.9 958.9 972.8 100.0 126.0 176.2 250.4 (2007=100) Growth Rate of Assets (2007=100) 100.0 131.8 167.1 198.2 100.0 119.1 112.7 111.4 100.0 109.4 126.3 152.5

Months of Sales in Receivables 0.0 - 0.2 0.0 10.5 2.3 1.3 1.4 1.5 1.4 1.0 0.9 Current Ratio 1.3 1.5 1.9 1.7 0.1 0.7 0.6 0.5 3.0 3.1 3.5 4.3 Debt Service Coverage Ratio 3.1 4.4 0.7 1.0 -0.1 -0.0 0.6 0.2 3.4 5.4 1.3 1.9

Total Liabilities-Asset Ratio (%) 33.9 23.1 26.8 32.8 84.3 86.2 70.6 71.7 30.5 30.7 27.3 38.0 Operating Income Margin (%) 11.9 11.3 11.1 4.9 9.7 10.6 28.9 23.7 14.9 13.8 15.3 15.4 Net Profit Margin (%) 10.8 10.3 9.2 3.8 3.1 0.1 23.4 20.0 8.1 8.5 9.1 8.9 Net Profit Rate of Assets (%) 23.0 21.5 12.5 5.5 0.2 0.0 10.8 9.5 6.8 8.3 10.7 12.4 Net Profit Rate of Equity (%) 34.8 27.9 17.1 8.2 1.1 0.3 36.7 33.5 9.8 11.9 14.8 20.0 %= percentage. Source: 9

B. Financial Management Assessment of the Subproject Sponsors

24. An assessment-based on the completed financial management assessment questionnaire, supplemented by the submission of relevant documents and interviews with key finance staff was done for each subproject sponsor.

25. The assessment indicates that accrual basis accounting and PRC enterprise accounting standards, which are patterned after the international accounting standards, are followed. The accounting procedures currently used by the companies are aligned with the regulations and policies issued by the Ministry of Finance, and are considered effective and adequate for the project. The functions related to the authorization, payment, and recording of financial transactions, and asset management are well separated.

26. All companies use computerized accounting system, except for one company, Hebei Guangyuan Solar, which currently uses manual/ stand alone accounting system supplemented by institutional arrangements for management review. This company agreed to implement a computerized accounting system prior to the implementation of the subproject. A complete set of accounting procedures for processing and recording financial transactions is in place and in compliance with PRC’s regulations. Internal control is effective. Five companies have internal audit groups, either as a separate group within the company, or with the parent company, which designate internal auditors to conduct internal audit and report to the board periodically or as needed. The other four companies have indicated that they will set up an internal audit group or appoint an internal auditor should it be necessary. Financial statements are regularly audited by external auditors and submitted to reporting authorities not later than the mandatory submission period. One company, Cangzhou Co-gen, has its financial statements audited by an international accounting firm.

27. The nine subproject companies have generally implemented rigorous budgeting systems, which cover both financial and physical targets and include sufficient details of the company’s activities. Monitoring of actual performance versus targets is done on a regular basis.

28. The companies’ organizational structures are generally adequate for the project. The current accounting departments and their staff can be considered suitable and adequate for the project. Additionally, the companies have organized teams on project management including procurement, disbursement, and construction management, among their functions. All companies do not have any previous experience in dealing with ADB or other international finance institutions. Training in project management, as well as in ADB's guidelines and procedures on procurement and disbursement and on safeguard mechanisms, have been identified as areas for improvement. Some details of each subborrower’s financial management capacity are summarized in Table 2:

Table 2: Summary of Responses to the Financial Management Assessment Questionnaire

Implementing Financial Periodic Insurance Accounting Accounting 10 Agency Staff Project Funding Internal Audit Inventory on Assets Principle Software Total Subproject Tangshan 2 accountants $15 million from Yes by parent Yes Critical PRC Yes, Kingdee's Jianlong 15 1 cashier ADB ,and $12 company equipment is accounting 1 accounting million from self- insured software chief capital 4 staff: $24 million from Yes by itself, Yes Currently No PRC Yes, Ufida’s Hebei Fengmei 14 2 accountants ADB, and $21 and report to ADB-funded accounting 1 cashier million from self- vice president equipment software 1 manager capital will be insured 5 staff: $7 million from Yes by itself (2 Yes Yes. The PRC Yes, Kingdee's Hebei Xinglong 6 2 acc ountants ADB, $2.32 auditors), and subproject accounting 1 cashier million from report to will be software 2 chiefs Handan Bank, Chairman insured and rest from self capital 5 staff: $15 million from No Yes Key PRC Yes, Ufida Hebei Yufeng 15 3 accountants ADB, and the rest equipment financial 1 cashier from self-capital has been software 1 financial insured manager 3 staff: $3.5 million from Yes by itself, No periodic No PRC Yes, Kingdee's Hebei Lianguan 7 2 accountants ADB, and $5.8m and report to fixed-asset accounting 1 cashier from self-capital audit but yes for software committee of periodic the board of raw director material inventory 4 staff: $2 million from No Yes Yes, key PRC Yes, Julu 5 2 accountants ADB, $70k from assets are Jinsuanpan Changsheng 1 cashier Agricultural Bank insured accounting 1 financial of China, and rest software manager from self-capital 3 staff: 2 $7.5 million from No Yes No. but ADB- PRC Yes, Ufida’s Hebei Qianjin 20 accountants ADB, and the rest funded accounting and 1 cashier from its self- equipment/sy software

Implementing Financial Periodic Insurance Accounting Accounting Agency Staff Project Funding Internal Audit Inventory on Assets Principle Software Total Subproject capital stem will be insured 6 staff: 2 $ 14 million from Yes by parent Few PRC and Yes, Cangzhou 7 cashiers and 4 ADB, and the rest company inventory in International Yuanguang Cogen accountants from self-capital raw Software material 11 6 staff: 2 $12 million from No Yes Key PRC No, currently Hebei accountants, 2 ADB, and the rest equipment manual book- Guangyuan cashiers, and from self capital has been keeping, will Solar two managers insured adopt accounting software before the implementation of subproject

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