History and Corporate Structure

HISTORY AND CORPORATE STRUCTURE

Major events and milestones in the development of our business include the following:

¬ In 2003, one clinker production line with annual production capacity of 0.64 million tons was put into operation at Jinan Shijichuangxin Company Limited and construction commenced on several clinker production lines and cement grinding lines at various subsidiaries.

¬ In 2004, Shandong Shanshui increased its annual cement production capacity by 2.0 million tons. Another two clinker production lines with annual production capacity of 1.6 million tons each was put into production at Pingyin Shanshui and Zibo Shanshui Cement Company Limited, or Zibo Shanshui. Four cement grinding lines with annual production capacity of 2.0 million tons each were also put into production.

¬ In 2005, one cement grinding line at Shandong Shanshui with annual production capacity of 3.0 million tons was put into production.

¬ In 2006, Shandong Cement Factory and several other subsidiaries began implementing residual heat recovery technology and further increased their production capacity.

¬ In 2007, we acquired Ñve cement producers in Shandong and Liaoning Provinces and entered into an agreement to acquire the exploration rights to one limestone mine in Liaoning Province. Pingyin Shanshui and Zibo Shanshui also each increased its annual clinker production capacity by 1.6 million tons.

Ì73Ì HISTORY AND CORPORATE STRUCTURE

We are a Cayman Islands holding company and conduct substantially all of our business through our indirectly wholly owned operating subsidiary in the PRC, Shandong Shanshui. Shandong Shanshui has six branches and 28 subsidiaries in the PRC. The following diagram illustrates our corporate structure A1A29(2) immediately after completion of the Global OÅering, assuming the Over-allotment Option is not exercised (without taking into account conversion of the Convertible Notes, if any):

Other China Shanshui CDH MS MS MS CDH Cement IFC CCBI Cement Public Investment(1) Construct IV II I Shareholders R8.08(1)(a) 33.49%(2) 2.33%(3) 5.24%(3) 3.95%(4) 17.48%(5) 2.00%(5) 5.75%(5) 4.76%(6) 25.00%

The Company (Cayman Islands)

100% China Shanshui (Hong Kong)(7) (Hong Kong)

100%

Continental 100% Cement Pioneer Cement(7) (BVI)(7) (Hong Kong) Overseas

100% 100% 100% Domestic 100%

Shandong Shanshui Continental Continental (PRC)(11) Continental (Shandong) (Shandong) 50.00% (Shandong) Cement Cement Cement Mining Products 6.66% 99.00% 4.50% 25.49% (PRC)(9) (PRC)(8) Manufacturing 50.00% (PRC)(10) Shandong 24 other Cement Factory PRC (PRC)(12) subsidiaries(13) 25%

67.99% 69.77% Pingyin Shanshui Anqiu Shanshui Weihai Shanshui (PRC)(15) (PRC)(16) (PRC)(14)

Notes:

(1) China Shanshui Investment is held by the Management Shareholders. Out of its entire issued share capital, approximately 65.55% is held by Zhang Caikui as trustee of the Zhang Trust, 16.19% is held by Li Yanmin as trustee of the Li Trust, 4.18% is held by Dong Chengtian, 1.53% is held by Li Maohuan, 4.35% is held by Yu Yuchuan, 3.05% is held by Zhao Liping, 2.77% is held by Zhao Yongkui, 1.56% is held by Mi Jingtian and 0.82% is held by Wang Yongping. Pursuant to the trust deeds and the letters of wishes relating to the Zhang Trust and the Li Trust, Zhang Caikui and Li Yanmin have the absolute discretion to manage and administer the shares of China Shanshui Investment which are subject to the respective trusts for the beneÑt of the beneÑciaries of the trusts.

(2) The entire shareholding of China Shanshui Investment will be subject to certain lock-up restrictions from the date of this prospectus pursuant to Rule 10.07(1) of the Listing Rules. For details of such lock-up arrangements, please refer to the section headed ""Underwriting'' in this prospectus.

Ì74Ì HISTORY AND CORPORATE STRUCTURE

(3) CDH Cement, a limited liability company incorporated in the BVI, is a wholly owned subsidiary of CDH China Fund, L.P., an exempted limited partnership organized and existing under the laws of the Cayman Islands focused on private equity investments in China. The general partner of CDH China Fund, L.P. is CDH China Holdings Company Limited, a limited liability company organized and existing under the laws of the Cayman Islands. CDH China Fund, L.P. is managed by CDH China I Management Company Limited, a limited liability company incorporated in the BVI. The Shares held by CDH Cement are counted towards the public Öoat. The principal business of CDH Cement is investment holding.

CDH Construct, a limited liability company incorporated in the BVI, is a wholly owned subsidiary of CDH China Fund III, L.P., an exempted limited partnership organized and existing under the laws of the Cayman Islands focused on private equity investments in China. The general partner of CDH China Fund III, L.P. is CDH III Holdings Company Limited, a limited liability company organized and existing under the laws of the Cayman Islands. CDH China Fund III, L.P. is managed by CDH III Management Company Limited, a limited liability company incorporated in the BVI. The Shares held by CDH Construct are counted towards the public Öoat. The principal business of CDH Construct is investment holding.

(4) IFC is an inter-governmental organization aÇliated with the World Bank and established under the Articles of Agreement with 179 member countries as current signatories. It was established to further economic development in less developed member countries by investing in productive private enterprises in association with private investors. IFC does not have any shareholders but the 179 current member countries provide its authorized share capital and collectively determine its policies and approve investments. The Shares held by IFC are counted towards the public Öoat.

(5) MS I, a limited liability company incorporated in the Cayman Islands, is controlled by Morgan Stanley Private Equity Asia L.P. (""MSPEA''), a fund managed by the private equity arm of Morgan Stanley. The general partner of MSPEA is Morgan Stanley Private Equity Asia, L.L.C. (""MSPEA GP''), the managing member of which is Morgan Stanley Private Equity Asia, Inc., a wholly owned subsidiary of Morgan Stanley. The principal business of MS I is investment holding.

MS II, a limited liability company incorporated in the Cayman Islands, is controlled by MSPEA GP (through its control of MS III Limited, another limited liability company incorporated in the Cayman Islands). MSPEA GP is the general partner of a fund managed by the private equity arm of Morgan Stanley, and the managing member of which is Morgan Stanley Private Equity Asia, Inc., a wholly owned subsidiary of Morgan Stanley. The principal business of MS II is investment holding.

MS IV, a limited liability company incorporated in the Cayman Islands, is jointly controlled by MSPEA and Morgan Stanley Private Equity Asia III, L.P. (through their respective control of Morgan Stanley Private Equity Holdings (Cayman) Limited and Morgan Stanley Private Equity Asia III Holdings (Cayman) Limited), which are funds managed by the private equity arm of Morgan Stanley. The general partners of such funds are MSPEA GP and Morgan Stanley Private Equity Asia III, L.L.C. (""MSPEA III GP''), respectively. The managing members of MSPEA GP and MSPEA III GP are Morgan Stanley Private Equity Asia, Inc. and Morgan Stanley Private Equity Asia III, Inc., respectively, both of which are wholly owned subsidiaries of Morgan Stanley. The principal business of MS IV is investment holding.

The MS Investors, the CDH Investors and IFC will not be viewed as a group or parties acting in concert in respect of their interests in our Group on the grounds that each of them is independent from each other in terms of ultimate control and decision- making process. They have not entered into any formal or informal agreement or understanding in relation to consolidating control or voting rights of our Company.

(6) CCBI Cement is a wholly owned subsidiary of CCB International Asset Management Limited, which is ultimately indirectly wholly owned by China Construction Bank Corporation, a company listed on the main board of the Stock Exchange (stock code: 939) and the Shanghai Stock Exchange (stock code: 601939). The shareholding of CCBI Cement is counted towards the public Öoat.

(7) Its principal business is investment holding.

(8) Its principal businesses are manufacturing, storing, transporting and selling of limestone.

(9) Its principal businesses are production of clinker, semi-Ñnished cement products, and sale of the aforesaid self-made products.

(10) Its principal businesses are production of cement products and components for cement-related machines, and sale of the aforesaid products.

(11) Its principal businesses are designing, manufacturing and sale of cement, cement products, and construction materials.

Ì75Ì HISTORY AND CORPORATE STRUCTURE

(12) The remaining 1% equity interest is held by Jinan Shanshui. Its principal businesses are manufacturing of cement and slag Ñne powder.

(13) The details of the 24 subsidiaries directly or indirectly owned by Shandong Shanshui are as follows:

Subsidiary Shareholders Principal businesses

Liaocheng Shanshui Cement Company Shandong Shanshui holding 99% of the Manufacturing and sale of cement and Limited ( ) equity interest; Jinan Shanshui holding cement-related products and new 1% of the equity interest construction materials Dongying Shanshui Cement Company Shandong Shanshui holding 99% of the Manufacturing and sale of cement, Limited ( ) equity interest; Jinan Shanshui holding cement-related products, concrete, new 1% of the equity interest construction materials Changle Shanshui Cement Company Shandong Shanshui holding 99% of the Processing and sale of cement, slag Limited (""Changle Shanshui'') equity interest; Jinan Shanshui holding powder and grinding aids for cement ( ) 1% of the equity interest grinding; sale of limestone mineral products Binzhou Shanshui Cement Company Shandong Shanshui holding 99% of the Manufacturing and sale of cement and Limited ( ) equity interest; Jinan Shanshui holding cement-related products, concrete, and 1% of the equity interest new type construction materials Gucheng Shanshui Cement Company Shandong Shanshui holding 99% of the Manufacturing and sale of cement and Limited ( ) equity interest; Jinan Shanshui holding cement-related products, new type of 1% of the equity interest wall materials and aero-concrete blocks Jinan Shanshui Cement Mechanics Shandong Shanshui holding 99% of the Manufacturing, installation and sale of Company Limited equity interest; Jinan Shanshui holding cement machinery and equipment and ( ) 1% of the equity interest accessories Jinan Shanshui Wuliugang Company Shandong Shanshui holding 99% of the Ordinary freight, transportation, loading Limited ( ) equity interest; Jinan Shanshui holding and unloading of general goods, 1% of the equity interest warehouse and storage services Zibo Shuangfeng Shanshui Cement Shandong Shanshui holding 99% of the Manufacturing and sale of cement and Company Limited equity interest; Jinan Shanshui holding cement-related products, sales of ( ) 1% of the equity interest construction materials Jinan Shanshui Cement Technology Shandong Shanshui holding 90% of the Development, manufacturing and sale Development Company Limited equity interest; Jinan Shanshui holding of cement manufacturing equipment ( ) 10% of the equity interest and related technology services, engineering consulting Zibo Shanshui Cement Company Shandong Shanshui holding 99% of the Manufacturing and sale of clinker and Limited( ) equity interest; Jinan Shanshui holding cement products, sale of construction 1% of the equity interest materials Juye Shanshui Cement Company Shandong Shanshui holding 96% of the Manufacturing and sale of cement Limited ( ) equity interest; Pingyin Shanshui holding 4% of the equity interest Jinan Shijichuangxin Cement Company Shandong Shanshui holding 95.18% of Production, manufacturing and sale of Limited (""Jinan Shijichuangxin'') the equity interest cement, cement products and concrete ( ) products Weifang Shanshui Cement Company Shandong Shanshui holding 100% of Manufacturing and sale of cement, Limited the equity interest clinker and cement-related products ( ) Weifang Shanshui Packaging Products Weifang Shanshui holding 90% of the Production and sale of packaging bags Company Limited (""Weifang equity interest; Changle Shanshui Shanshui Packaging'') holding 10% of the equity interest ( ) Weifang Shanshui Hongda Fuel Weifang Shanshui holding 80% of the Sale of construction materials, steel and Company Limited equity interest; Weifang Shanshui wood ( ) Packaging holding 20% of the equity interest Yantai Shanshui Shandong Shanshui holding 100% of Manufacturing and sale of cement and ( ) the equity interest clinker

Ì76Ì HISTORY AND CORPORATE STRUCTURE

Subsidiary Shareholders Principal businesses

Gongyuan Cement Shandong Shanshui holding 100% of Cement production, sale of cement ( ) the equity interest products, cement packaging, steel, metals and chemical products Qianshan Cement Shandong Shanshui holding 73% of the Manufacturing and sale of Portland slag ( ) equity interest; JIANG Ming holding cement 25.9% of the equity interest; WANG Yinlong holding 1.1% of the equity interest Zaozhuang Shanshui Shandong Shanshui holding 100% of Manufacturing and sale of cement and ( ) the equity interest clinker Dalian Shanshui Cement Company Shandong Shanshui holding 100% of Preparation of cement and cement- Limited the equity interest related production programmes ( ) Benxi Gongyuan Clinker Sales Gongyuan Cement holding 100% of the Sale of clinker, cement and cement Company Limited equity interest products ( ) Tongliao Gongyuan Cement Company Gongyuan Cement holding 100% of the Production of ordinary clay mineral Limited equity interest cement ( ) Yishui Shanshui Cement Company Shandong Shanshui holding 96% of the Manufacturing and sale of cement, Limited equity interest; Jinan Shanshui holding mining and selling of limestone ( ) 4% of the equity interest Dandong Shanshui Cement Company Gongyuan Cement holding 75% of the Under formation. No operations Limited equity interest; Pioneer Cement holding permitted yet. ( ) 25% of the equity interest

(14) Its principal business is manufacturing and sale of cement and concrete.

(15) The remaining 0.35% of the equity interest is held by Jinan Shanshui. Its principal businesses are production and sale of cement, clinker, slag powder and Öy ash powder.

(16) The remaining 0.24% of the equity interest is held by Jinan Shanshui. Its principal businesses are manufacturing and sale of cement and clinker, and limestone mining.

Ì77Ì HISTORY AND CORPORATE STRUCTURE

The Group's shareholding structure immediately after completion of the Global OÅering, assuming the Over-allotment Option is not exercised, and the conversion rights of the Convertible Notes have been exercised in full is as follows:

Other China Shanshui CDH MS MS MS CDH Cement IFC CCBI Cement Public Investment Construct IV II I Shareholders 32.07% 3.10% 5.02%4.25% 16.74% 2.67% 7.65% 4.56% 23.94%

The Company (Cayman Islands)

100% China Shanshui (Hong Kong) (Hong Kong)

100%

Continental 100% Cement Pioneer Cement (BVI) (Hong Kong) Overseas

100% 100% 100% Domestic 100%

Shandong Shanshui Continental Continental (PRC) Continental (Shandong) (Shandong) (Shandong) Cement Cement Cement Mining Products 6.66% 99.00% 4.50% 25.49% 50.00% 50.00% (PRC) (PRC) Manufacturing (PRC) Shandong 24 other Cement Factory PRC (PRC) subsidiaries 25%

67.99% 69.77% Pingyin Shanshui Anqiu Shanshui Weihai Shanshui (PRC) (PRC) (PRC)

Shandong Shanshui, formerly known as Jinan Innovation, is a domestic company with limited liability A1A29(1) established in Jinan, Shandong Province on August 10, 2001 with registered capital of RMB30.2 million. The purpose of the establishment of Jinan Innovation was to absorb and utilize the non-state-owned funds and to enhance the control and growth drivers of the state economy by establishing a legal entity with shares owned by employees and legal persons. At the time of establishment, Jinan Innovation did not have any employees and Mr. Zhang Caikui, who was the legal representative and the sole executive director of Jinan Innovation, was also the legal representative and sole director of Jinan Shanshui. Approximately RMB24.2 million, representing approximately 80.14% of the registered capital of Jinan Innovation at the time of establishment, was contributed in cash by a total of 2,518 employees of Jinan Shanshui participating in the PRC Employee Stock Ownership Plan. These participating employees were transferred to, and became the employees of, Shandong Shanshui, when Jinan Shanshui transferred to Shandong Shanshui substantially all of its cement and related operations in 2005. For details of the transfer of cement and related operations, see the paragraph headed ""Domestic restructuring in 2004 and 2005'' below. The balance of RMB6.0 million, representing

Ì78Ì HISTORY AND CORPORATE STRUCTURE approximately 19.86% of the equity interest of Jinan Innovation, was contributed by Jinan Shanshui in cash. As the PRC Company Law provides that a limited liability company may not have more than 50 shareholders, Jinan Innovation registered ten shareholders at the time of its establishment, including Jinan Shanshui and nine employees selected as representatives by the employees participating in the PRC Employee Stock Ownership Plan. Our PRC legal advisers have advised that only the nine employee representatives and Jinan Shanshui were entitled to enjoy the rights and status as registered shareholders of Jinan Innovation. Therefore, the other employees participating in the PRC Employee Stock Ownership Plan were not entitled to the rights and status as registered shareholders of Jinan Innovation at the relevant time.

Jinan Shanshui was a state-owned enterprise approved by the Jinan Municipal Government and was established on October 21, 1997 under the original name ""Jinan Construction Material Industrial Group Company Limited'' and was renamed ""Jinan Shanshui Group Co., Ltd.'' on June 26, 2000. Jinan Shanshui was held by the State-owned Assets Supervision and Administration Commission of Jinan Municipal Government before its structural reform in October 2004, pursuant to which it became a private enterprise. The structural reform of Jinan Shanshui was carried out in accordance with the State policy at that time and the PRC government was responsible for the engagement of the relevant expert teams to carry out the relevant auditing and assessment work. Based on the appraisal report issued by Shandong Zhengquan CertiÑed Public Accountants Co., Ltd. in September 2004 in connection with the structural reform of Jinan Shanshui, the net asset value of Jinan Shanshui was assessed at approximately RMB1,218 million. After the deductions of (i) employees' settle-down expenses of approximately RMB257 million, (ii) assets to be surrendered to and expropriated by the PRC government of approximately RMB389 million, (iii) value-added amount to the relevant trademarks of approximately RMB371 million, (iv) land use fees of approximately RMB64 million, and (v) liabilities of the four wholly owned subsidiaries of approximately RMB12.4 million, the net asset value of Jinan Shanshui to be transferred pursuant to the structural reform was approximately RMB124.7 million. The employees of Jinan Shanshui, through the establishment of a stock ownership plan with the relevant interests held by the Management Shareholders as employee representatives, set up Jinan Shanshui Lixin Investment and Development Co., Ltd. (""Shanshui Lixin'') and Jinan Shanshui Jianxin Investment and Development Co., Ltd. (""Shanshui Jianxin''). The sole business of each of Shanshui Lixin and Shanshui Jianxin is investment holding. Shanshui Jianxin and Shanshui Lixin acquired 15% and 85% of the equity interests of Jinan Shanshui, respectively. The consideration for the acquisition of all the state- owned shares in Jinan Shanshui by Shanshui Jianxin and Shanshui Lixin was RMB160 million, which was arrived at based on the net asset value of Jinan Shanshui of approximately RMB124.7 million as mentioned above with a premium of approximately 28.7%. After deductions of various expenses, the net consideration of RMB142 million was settled by the entire registered capital of Shanshui Lixin and Shanshui Jianxin in a total amount of approximately RMB123 million and the rest by loans from Jinan Shanshui. The registered capital of Shanshui Lixin and Shanshui Jianxin was contributed by the Management Shareholders (as employee representatives acting on behalf of the employees) as to approximately RMB33.76 million from the second dividend payments by Jinan Innovation as further described below, as to approximately RMB86.2 million from part of the total consideration of RMB162.8 million for the transfer of the entire equity interest in Shandong Shanshui by the Management Shareholders (as employee representatives acting on behalf of the employees) to Pioneer Cement in September 2005, and the balance by further capital contribution made by the employees through the Management Shareholders as employee representatives. For details of the transfer, see the paragraph headed ""Overseas restructuring and private placement in 2005'' below. The restructuring of Jinan Shanshui from a State-owned enterprise to a private enterprise (including the employee settle-down scheme ( ) as part of the restructuring of Jinan Shanshui (""Employee Settle-down Scheme''))

Ì79Ì HISTORY AND CORPORATE STRUCTURE

(""Jinan Restructuring Scheme'') was unanimously approved by the employee representatives on behalf of the employees of Jinan Shanshui at a meeting of the employee representatives of Jinan Shanshui on August 4, 2004. It was provided under the Employee Settle-down Scheme that Jinan Shanshui shall be entitled to receive the sum of approximately RMB257 million as employee settle-down payments upon its restructuring. Jinan Shanshui submitted the Employee Settle-down Scheme to the Labour and Social Security Protection Bureau of Jinan City ( ) (""Jinan Labour Bureau'') for approval and the Employee Settle-down Scheme was approved by Jinan Labour Bureau on September 29, 2004. On October 10, 2004, Jinan Shanshui submitted the Jinan Restructuring Scheme to the Reform Committee of State-owned Industrial Enterprises of Jinan City ( ) (""Jinan Reform Committee'') for approval by the Jinan Municipal Government and the Jinan Restructuring Scheme was approved by the Jinan Municipal Government on October 18, 2004. As advised by our PRC legal advisers, the Jinan Restructuring Scheme was conducted in compliance with the applicable PRC laws and regulations. As of the Latest Practicable Date, the registered capital of Jinan Shanshui was RMB312.6 million and its entire equity interest was indirectly held by the Management Shareholders (as employee representatives acting on behalf of the employees). The scope of Jinan Shanshui's principal activities originally included producing, selling, designing, developing and testing of construction materials, construction equipment, clinker, cement and products made of cement. Since the transfer of substantially all of its cement and related operations to Shandong Shanhui as described in the paragraph headed ""Domestic restructuring in 2004 and 2005'' below, Jinan Shanshui has become an investment holding company, and engages in limited business activities involving the manufacture of building materials and metal-related products.

The PRC Employee Stock Ownership Plan was set up upon the establishment of Jinan Innovation in A1A29(2) August 2001. Our PRC legal advisers have advised that the PRC Employee Stock Ownership Plan was not in contravention of relevant PRC laws and regulations. At the time the PRC Employee Stock Ownership Plan was established, Jinan Shanshui had 3,006 employees, out of which 2,518 employees participated in the PRC Employee Stock Ownership Plan while the remaining 488 did not. There were no penalties or Ñnes imposed on the employees who did not participate in the PRC Employee Stock Ownership Plan.

Since the establishment of the PRC Employee Stock Ownership Plan, 353 of the initially participating employees had transferred their capital contribution and related equity interest in the PRC Employee Stock Ownership Plan to other then existing employees participating in the PRC Employee Stock Ownership Plan due to personal Ñnancial problems or relocation. In addition, following the establishment of Changle Shanshui and Weifang Shanshui in 2002 and 2003, respectively, a total of 1,782 employees of Changle Shanshui and Weifang Shanshui had joined the plan and together made a total capital contribution of approximately RMB67.1 million in cash. The contribution was funded by these employees out of their own Ñnancial resources and invested in Jinan Innovation by the employee representatives acting on behalf of these employees. Changle Shanshui was established on July 30, 2002 in the PRC and was owned as to 60% by Shandong Shanshui and 40% by Jinan Shanshui at the time of its establishment. Weifang Shanshui was established on December 29, 2003 in the PRC and was owned as to 90% by Shandong Shanshui and 10% by Jinan Shijichuangxin at the time of its establishment. As a result, the number of participating employees increased to 3,947 in September 2005 when the entire equity interest of Shandong Shanshui was acquired by Pioneer Cement. All the then and subsequently recruited employees of Jinan Innovation, Jinan Shanshui and their respective subsidiaries were entitled to participate in the plan and no restriction or requisite on the contribution amount was imposed. However, the newly recruited employees would be invited by Jinan Innovation to participate in, and make contribution to, the plan only when Jinan Innovation was proposing an increase of registered capital and required additional funds from its equity holders. On other occasions, the

Ì80Ì HISTORY AND CORPORATE STRUCTURE newly recruited employees could participate in the plan through acquisition of existing capital contribution and related economic interests held by the other participants through the employee representatives upon formal application to Jinan Innovation. From December 2005 to September 2007, 11 participating employees transferred their respective capital contribution and related economic interest in Shandong Shanshui to other existing participating employees due to their termination of employment with Shandong Shanshui.

As at the Latest Practicable Date, the actual number of participating employees under the PRC Employee Stock Ownership Plan was 3,929 (including Mr. Zhang and Mr. Li). The participating employees made cash contributions to the plan, and their attributable interests in Jinan Innovation and economic beneÑts enjoyed by them were determined in accordance with their respective contributed amount. The attributable interests of the participating employees would not be varied by reason of resignation, retirement, or termination of employment of the relevant employees, and were transferable to other employees upon formal application with Jinan Innovation. Jinan Innovation declared dividends on three occasions under the PRC Employee Stock Ownership Plan to the employee participants in proportion to their percentages of attributable interest in Jinan Innovation. The Ñrst dividend payments in the aggregate amount of approximately RMB8.0 million were used as additional capital contribution by the employee representatives on behalf of the participating employees to Jinan Innovation in July 2003. Such contribution of approximately RMB8.0 million together with the additional cash contribution of approximately RMB67.1 million provided by the newly joined employees of Changle Shanshui and Weifang Shanshui as mentioned above made up a total of approximately RMB75.1 million additional capital contribution to the registered capital of Jinan Innovation, which increased the share of equity interest held by the employee representatives on behalf of the participating employees to approximately 94.3% and Jinan Shanshui's share of equity interest was diluted to approximately 5.7%. The second dividend payments by Jinan Innovation in the aggregate amount of approximately RMB33.76 million were used as capital contribution by the employee representatives on behalf of the participating employees to establish two companies, namely Shanshui Lixin and Shanshui Jianxin, to facilitate the aforementioned corporate restructuring of Jinan Shanshui in 2004. The third dividend payments in the aggregate amount of approximately RMB24 million were distributed in the form of cash to the participating employees in 2006.

The employee representatives of the PRC Employee Stock Ownership Plan were selected by the employees' representatives who were nominated by all the employees in each of the subsidiaries and branches in their respective employee representation meetings. An entrustment arrangement was established between the employees and their representatives. Such entrustment arrangement is not required to be registered with any governmental authority but is subject to the General Principles of Civil Law of the PRC ( ), the Contract Law of the PRC ( ) and the relevant regulations. According to the entrustment arrangement, the employee representatives had all the power to control, administer and make decisions for the participating employees in respect of their interests in Jinan Innovation. Each of the participating employees entered into an Entrustment Agreement ( ) in February 2001 delegating all power and authority to the employee representatives to exercise his or her shareholder's rights in Jinan Innovation on his or her behalf, and the related economic beneÑts and risks shall be attributable to him or her. The members of the employee representatives changed several times since the establishment of the plan. Such changes were mainly due to the retirement, resignation and/or internal relocation of the employee representatives. Each of the employee representatives appointed was occupying a managerial or supervisory role in the entities whose employees were participating in the PRC Employee Stock Ownership Plan at the relevant time. Subsequently in December 2004, the employee representatives were changed to Mr. Zhang Caikui and Mr. Li Yanmin in preparation of the Group's reorganization for the purpose

Ì81Ì HISTORY AND CORPORATE STRUCTURE of the investments by the Investors in 2005 and the Listing. The employee representatives hold meetings to determine issues of Jinan Innovation from time to time and all issues previously considered at such meetings were passed by unanimous votes of the employee representatives. Jinan Innovation would subsequently inform the participating employees on various aspects of the results of those meetings during regular meetings of employees or by means of newsletters. Comment-collection boxes have been set up since the establishment of Jinan Innovation for the participating employees to express their comments on any aspects of our Group.

In 2002, Shandong Shanshui acquired all the assets of Jinan Lingyan Cement Company Limited (including Changqing Cement Factory). In 2003, Shandong Shanshui acquired all the assets of Shandong Haihua Group Company Limited (including Weifang Cement Factory). The said two acquisitions of the Changqing Cement Factory and the Weifang Cement Factory were funded solely by our Group. As advised by our PRC legal advisers, the said two acquisitions were in compliance with the applicable PRC laws and regulations. In addition, between January 2002 and July 2004, Shandong Shanshui and Jinan Shanshui established 10 joint ventures to penetrate into the cement markets in Shandong Province, in each of which Shandong Shanshui held a 60% to 90% equity interest and Jinan Shanshui held a 10% to 40% equity interest.

DOMESTIC RESTRUCTURING IN 2004 AND 2005

In July 2003, Jinan Innovation changed its name to Jinan Shanshui Innovation.

On December 15, 2004, as part of the reorganization of our cement operations, the entire equity interest of Jinan Shanshui Innovation was transferred to the Management Shareholders (of which Mr. Zhang Caikui and Mr. Li Yanmin were acting as employee representatives and holding the interests in Jinan Shanshui Innovation for themselves and on behalf of the other 3,938 employees participating in the PRC Employee Stock Ownership Plan, while the other seven Management Shareholders were holding the interests in Jinan Shanshui Innovation for themselves as beneÑcial owners) as to approximately 94.3% by the then nine employee representatives of the PRC Employee Stock Ownership Plan and as to approximately 5.7% by Jinan Shanshui. The transfer of 94.3% equity interest in Jinan Innovation involved (a) a transfer of interests of registered shareholders of Jinan Shanshui Innovation from the previous nine employee representatives to the two new employee representatives (i.e., Mr. Zhang and Mr. Li), together acting on behalf of 3,940 participating employees (including Mr. Zhang and Mr. Li themselves); and (b) a transfer of interests of registered shareholders of Jinan Shanshui Innovation from the employee representatives to the seven Management Shareholders (other than Mr. Zhang and Mr. Li) in their capacity as participating employees of the PRC Employee Stock Ownership Plan and the transferred interest corresponded to these seven Management Shareholders' attributable interest in Jinan Shanshui Innovation held by the employee representatives prior to the transfer. As there was no sale or transfer of attributable interest involved, the transfer of the said 94.3% equity interest in Jinan Shanshui Innovation was eÅected at nil consideration. Our PRC legal advisers have advised that such transfer is legal and valid and the fact that it was eÅected at nil consideration is not in contravention of any PRC laws and regulations. As each of the participating employees has delegated all power and authority to the employee representatives to exercise his or her shareholder's rights in Jinan Shanshui Innovation on his or her behalf, no speciÑc consent on the above transfer was required from the employees. Similar to other decisions made by the employee representatives, the participating employees were informed of the change of employee representatives and the transfer during regular meetings of employees and by means of newsletters. On the other hand, consideration of RMB6 million (representing approximately 5.7% of the then registered capital of RMB105.3 million of Jinan Shanshui Innovation) was paid by the Management Shareholders (of which Mr. Zhang and Mr. Li were acting as employee

Ì82Ì HISTORY AND CORPORATE STRUCTURE representatives for themselves and on behalf of the other 3,938 participating employees) to Jinan Shanshui for the transfer of the approximately 5.7% equity interest of Jinan Shanshui Innovation. The Management Shareholders then collectively held 100% of Jinan Shanshui Innovation. Among these Management Shareholders, Mr. Zhang held an approximately 65.55% interest of Jinan Shanshui Innovation as employee representative (of which Mr. Zhang himself was interested in approximately 13.18% as one of the participating employees and the other participating employees were interested in the remaining approximately 52.37%) and Mr. Li held an approximately 16.19% interest of Jinan Shanshui Innovation as employee representative (of which Mr. Li himself was interested in approximately 6.79% as one of the participating employees and the other employees were interested in the remaining approximately 9.4%).

As for the remaining seven Management Shareholders, Mr. Yu Yuchuan held approximately 4.35%, Mr. Dong Chengtian held approximately 4.18%, Mr. Zhao Liping held approximately 3.05%, Mr. Zhao Yongkui held approximately 2.77%, Mr. Mi Jingtian held approximately 1.56%, Mr. Li Maohuan held approximately 1.53% and Wang Yongping held approximately 0.82% in Jinan Shanshui Innovation, each as beneÑcial owner. There were 3,947 employees participating in the PRC Employee Stock Ownership Plan (including Mr. Zhang, Mr. Li and the other seven Management Shareholders) immediately before and after such transfer and their respective attributable interests in Jinan Shanshui Innovation were identical immediately before and after such transfer. Immediately prior to the transfer, Mr. Zhang was the sole Executive Director of Jinan Shanshui Innovation and Mr. Li was the legal representative of Jinan Shijichuangxin. The appointment of Mr. Zhang and Mr. Li as the new employee representatives in December 2004 was made in preparation of the Group's reorganization for the purpose of the investments by the Investors in 2005 and the Listing. As Mr. Zhang and Mr. Li had been participants of the PRC Employee Stock Ownership Plan since its establishment in August 2001 having the largest and the second largest attributable interests in Jinan Shanshui Innovation, respectively, and given their continuous leadership roles in Jinan Shanshui Innovation, the employees considered it reasonable and natural for them to act as the new employee representatives. Each of the participating employees has signed an Equity Interest Entrustment Declaration ( ) in January 2005 acknowledging the entrustment arrangement and giving speciÑc authority to Mr. Zhang or Mr. Li to manage his or her equity contribution in Jinan Shanshui Innovation. Each of these employees has also provided a conÑrmation in April 2008 acknowledging the transfer of the entrusted equity interest from the original employee representatives to Mr. Zhang or Mr. Li (as the case may be) as the new employee representatives in December 2004 and further conÑrming his or her agreement to such entrustment arrangement. All the Management Shareholders held managerial or supervisory positions in the Group during the Track Record Period and up to the Latest Practicable Date.

On February 6, 2005, Jinan Shanshui Innovation further changed its name to Shandong Shanshui and expanded its registered scope of business to include the sale and production of cement, clinker and related products. During 2005, Jinan Shanshui transferred to Shandong Shanshui substantially all of its cement and related assets and operations including, among others, its employees, Qingdao Zhousheng Cement Company Limited (including Qingdao Cement Factory) and a sum of RMB 257 million (to be used as employee settle- down payment subsequent to the restructuring of Jinan Shanshui), and most of its equity interests in the joint ventures formed with Shandong Shanshui, including (1) 19% of the equity interest of Jinan Shanshui Wuliugang Company Limited for cash consideration of RMB970,000, (2) 29% of the equity interest of Zibo Shanshui for cash consideration of RMB18,740,000, (3) 15% of the equity interest of Anqiu Shanshui for cash consideration of RMB1,170,000, (4) 15.19% of the equity interest of Changle Shanshui for cash consideration of RMB4,600,000, (5) 19% of the equity interest of Dongying Shanshui Cement Company Limited for cash consideration of RMB550,000, (6) 15% of the equity interest of Pingyin Shanshui for cash consideration of

Ì83Ì HISTORY AND CORPORATE STRUCTURE

RMB1,950,000, (7) 19% of the equity interest of Gucheng Shanshui Cement Company Limited for cash consideration of RMB760,000, (8) 19% of the equity interest of Jinan Shanshui Cement Mechanics Company Limited for cash consideration of RMB500,000, (9) 19% of the equity interest of Binzhou Shanshui Cement Company Limited for cash consideration of RMB540,000, (10) 19% of the equity interest of Liaocheng Shanshui Cement Company Limited for cash consideration of RMB500,000, and (11) 99% of the equity interest of Shandong Cement Factory for cash consideration of RMB179,500,000. The acquisitions of the above assets and equity interests from Jinan Shanshui were funded solely by our Group. As advised by our PRC legal advisers, the said acquisitions from Jinan Shanshui were in compliance with the applicable PRC laws and regulations. Before the said transfers of assets and equity interests, around 150 employees of Jinan Shanshui were deployed to Shandong Shanshui for the purpose of helping to set up Shandong Shanshui including participating in the test-based productions and new-type production programmes. Apart from that, Shandong Shanshui's operation was independent from that of Jinan Shanshui and did not rely on the employees of Jinan Shanshui. After the said transfers, Shandong Shanshui controlled 99% of the equity interests in ten subsidiaries and majority equity interests in Ñve other subsidiaries, all of which were engaged in cement production or other cement-related businesses and Shandong Shanshui assumed the payment obligation to the employees transferred from Jinan Shanshui for their entitlement to settle-down payment upon their termination of employment with our Group. As advised by our PRC legal advisers, the Employee Settle-down Scheme and the aforesaid payment arrangement of the settle-down payments were in compliance with the approval issued by the Jinan Municipal Government on October 18, 2004 in respect of the Jinan Restructuring Scheme. Our Group will continue to comply with the said approval in making any settle-down payment to the employees in the future. Apart from the aforesaid transfers of assets and equity interests from Jinan Shanshui to Shandong Shanshui and the sale of clinker from Shandong Shanshui to Jinan Shanshui before 2005, there has been no other transaction or transfer of interest between Shandong Shanshui and Jinan Shanshui. To the best knowledge, information and belief of our Directors, save as disclosed above and for the advances made by Jinan Shanshui to our Group for working capital purposes which had been fully repaid by the Group (particulars of which are set out in note 30 ""Related party transactions'' to our consolidated Ñnancial statements included in the accountants' report contained in Appendix I to this prospectus), Shandong Shanshui has never made use of the Ñnancial resources or other resources (including human resources) of Jinan Shanshui for the establishment or the operation of Shandong Shanshui. There were not any sales of products by Jinan Shanshui to our Group during the Track Record Period.

Upon the restructuring of Jinan Shanshui, 3,981 employees of Jinan Shanshui were transferred to Shandong Shanshui. In 2005, approximately 80 of such transferred employees (collectively, the ""Outgoing Transferred Employees''), who had subsequently left Shandong Shanshui, Ñled a complaint with the Jinan Bureau for Letters and Calls ( ) regarding the basis of calculation of the amount of settle-down payments payable by Shandong Shanshui. A meeting was held on August 7, 2005 between the respective representatives of Jinan Bureau of Letters and Calls and Shandong Shanshui at which the representatives of the said Bureau conÑrmed their agreement with Shandong Shanshui's basis of calculation and suggested to hold a future discussion with the Outgoing Transferred Employees to clarify the basis of calculation. The Directors conÑrmed that the complaints were fully settled through clariÑcation of the basis of calculation with the Outgoing Transferred Employees and an aggregate amount of RMB7.1 million was paid to a total of 278 Outgoing Transferred Employees, including the 80 Outgoing Transferred Employees who brought the initial complaint, in August 2005. As advised by our PRC legal advisers, all settle-down payments paid to the Outgoing Transferred Employees were conducted in compliance with the applicable PRC laws and regulations.

Ì84Ì HISTORY AND CORPORATE STRUCTURE

OVERSEAS RESTRUCTURING AND PRIVATE PLACEMENT IN 2005

On January 25, 2005, China Shanshui (Hong Kong) was incorporated in Hong Kong. On the same R8.05(c) date, Pioneer Cement was incorporated in Hong Kong. China Shanshui (Hong Kong) became Pioneer Cement's sole shareholder after acquisition of its entire issued share capital on January 31, 2005 at a nominal consideration of HK$0.01. On April 11, 2005, the Management Shareholders acquired China Shanshui Investment at a total consideration of HK$1.00. The entire issued share capital of China Shanshui (Hong Kong) was subsequently transferred to China Shanshui Investment on September 9, 2005 at nominal consideration of HK$2.00.

Mr. Zhang Caikui and Mr. Li Yamin as settlors respectively established the Zhang Trust and the Li Trust when the Management Shareholders acquired China Shanshui Investment in April 2005. The trusts were formally recorded and documented in writing in November 2005. Since the establishment of the trusts, China Shanshiu Investment has been held as to approximately 65.55% by Mr. Zhang as trustee of the Zhang Trust (of which Mr. Zhang himself is interested in approximately 13.18% as beneÑciary and the other beneÑciaries are interested in the remaining approximately 52.37%), as to approximately 16.19% by Mr. Li as trustee of the Li Trust (of which Mr. Li himself is interested in approximately 6.79% as beneÑciary and the other beneÑciaries are interested in the remaining approximately 9.4%), as to approximately 4.35% by Mr. Yu Yuchuan, as to approximately 4.18% by Mr. Dong Chengtian, as to approximately 3.05% by Mr. Zhao Liping, as to approximately 2.77% by Mr. Zhao Yongkui, as to approximately 1.56% by Mr. Mi Jingtian, as to approximately 1.53% by Mr. Li Maohuan and as to approximately 0.82% by Mr. Wang Yongping, each as a registered and beneÑcial owner. The two trusts are discretionary in nature and intended to be an extension of, and mirror the substance of, the PRC Employee Stock Ownership Plan upon its termination in September 2005 when Pioneer Cement acquired the entire equity interest in Shandong Shanshui, which accordingly became a wholly foreign-owned enterprise. The beneÑciaries of the two trusts are two diÅerent groups of people without overlap and they are, subject to subsequent minor changes as mentioned below, the same employees as those participating in the PRC Employee Stock Ownership Plan. The respective interests of Mr. Zhang and Mr. Li in China Shanshui Investment have been put into the trusts as trust properties and Mr. Zhang and Mr. Li have been acting as the trustees of the Zhang Trust and the Li Trust, respectively. The powers of Mr. Zhang and Mr. Li as trustees to manage and administer the shares of China Shanshui Investment in their absolute discretion for the beneÑt of the beneÑciaries of the trusts and the suggested portion of interest of each beneÑciary in the trusts are documented in formal trust deeds and related documents (in particular, the letters of wishes) signed by Mr. Zhang and Mr. Li as settlors of the trusts in November 2005. Mr. Zhang and Mr. Li as the only settlors of the trusts may vary the suggested portion of interest of each beneÑciary of the trusts as set out in the letters of wishes as and when they consider appropriate. Our PRC legal advisers have advised that it is not in contravention of any PRC laws or regulations that Mr. Zhang and Mr. Li are the only settlors and trustees of the Zhang Trust and the Li Trust, respectively. The beneÑciaries of the trusts will be provided with copies of the trust deeds and related documents upon request.

Upon the establishment of the Zhang Trust and the Li Trust in 2005, there were 3,940 beneÑciaries (inclusive of Mr. Zhang and Mr. Li) in total. Since then, 11 out of the 3,940 beneÑciaries have ceased to be employees of the Group and transferred their respective interests under the trusts to other beneÑciaries. Mr. Zhang and Mr. Li have respectively amended the trust documents and the letters of wishes to reÖect the above changes under the Zhang Trust and the Li Trust. As of the Latest Practicable Date, the beneÑciaries of the Zhang Trust included 2,539 employees of the Group, among which Mr. Zhang as beneÑciary holds

Ì85Ì HISTORY AND CORPORATE STRUCTURE approximately 13.18% of the issued share capital of China Shanshui Investment. The beneÑciaries of the Li Trust included 1,390 employees of the Group, among which Mr. Li as beneÑciary holds approximately 6.79% of the issued share capital of China Shanshui Investment. The trust arrangement has been acknowledged and agreed upon by each of the employees participating in the PRC Employee Stock Ownership Plan on the understanding that the PRC Employee Stock Ownership Plan would be terminated following the corporate reorganization when Shandong Shanshui became a wholly foreign-owned enterprise in September 2005; and the overseas discretionary trusts would be an arrangement which on one hand complies with the relevant laws and regulations, and on the other hand, enables the spirit and substance of the PRC Employee Stock Ownership Plan to be reÖected and continued after the termination of the PRC Employee Stock Ownership Plan. Each of the participating employees has acknowledged in writing that he or she has provided all powers and authorities to Mr. Zhang or Mr. Li to manage all his or her equity interest and related economic interests in the Group through the trusts and believes Mr. Zhang or Mr. Li will act fairly and impartially. It is also the understanding between the trustees (that is, Mr. Zhang and Mr. Li) and the employees that the percentage of beneÑcial interest in Shandong Shanshui attributable to each of the employees under the PRC Employee Stock Ownership Plan would be identical to that of his or her interest allocation in China Shanshui Investment through the two trusts. Such understanding and related interest allocations have been reÖected and recorded by Mr. Zhang and Mr. Li in the relevant trust documents and the letters of wishes. Except for the distribution in the aggregate amount of approximately RMB24 million in the form of cash to the beneÑciaries in 2006 following the dividend payments by Shandong Shanshui, no economic beneÑts have been distributed through the trusts by way of dividend or otherwise to any of the beneÑciaries of the trusts since the establishment of the trusts. In April 2008, the Company declared dividends in an aggregate amount of approximately US$28.31 million to its shareholders, among which China Shanshui Investment would be entitled to approximately US$14.44 million, representing approximately 51% of the total amount of such dividends. It is intended that China Shanshui Investment would apply such dividend amount to settle the interest payable under the Exchangeable Bonds and there is no current plan for China Shanshui Investment to make further distribution to the beneÑciaries of the trusts in respect of such dividend amount.

On September 5, 2005, Pioneer Cement entered into an equity transfer agreement with the Management Shareholders to acquire the entire equity interest in Shandong Shanshui at a total consideration of RMB162.8 million. Meanwhile, Shandong Shanshui increased its registered capital from RMB105.3 million to RMB272.6 million, which was fully subscribed for by Pioneer Cement. Upon completion of the equity transfer and capital increase, Shandong Shanshui became a wholly foreign-owned enterprise. Pingyin Shanshui was established on August 1, 2003 in the PRC and was owned as to 80% by Shandong Shanshui and as to 20% by Jinan Shanshui at the time of establishment. In May 2004, Jinan Shanshui transferred 15% of the equity interest in Pingyin Shanshui to Shandong Shanshui. The principal business of Pingyin Shanshui is the production of cement and clinker. On September 5, 2005, Pioneer Cement entered into a capital contribution agreement with Shandong Shanshui, Jinan Shanshui and Shandong Cement Factory to increase the registered capital of Pingyin Shanshui, from RMB10 million to RMB178 million, of which RMB44.5 million was contributed by Pioneer Cement, RMB121.0 million was contributed by Shandong Cement Factory, RMB2.36 million was contributed by Shandong Shanshui and RMB124,000 was contributed by Jinan Shanshui. Upon completion of the capital increase on December 7, 2005, Pioneer Cement, Shandong Cement Factory, Shandong Shanshui and Jinan Shanshui owned approximately 25%, 67.99%, 6.66% and 0.35% of Pingyin Shanshui, respectively, and Pingyin Shanshui accordingly became a Sino-foreign joint venture.

Ì86Ì HISTORY AND CORPORATE STRUCTURE

Anqiu Shanshui was established on August 4, 2003 in the PRC and was owned as to 80% by Shandong Shanshui and as to 20% by Jinan Shanshui at the time of establishment. In March 2005, Jinan Shanshui transferred 15% of the equity interest in Anqiu Shanshui to Shandong Shanshui. The principal business of Anqiu Shanshui is production and selling of cement and clinker. On September 5, 2005, Pioneer Cement entered into a capital contribution agreement with Shandong Shanshui, Jinan Shanshui and Shandong Cement Factory to increase the registered capital of Anqiu Shanshui, from RMB10 million to RMB152 million, of which RMB38 million was contributed by Pioneer Cement and RMB104 million was contributed by Shandong Cement Factory. Upon completion of the capital increase on December 7, 2005, Pioneer Cement, Shandong Cement Factory, Shandong Shanshui and Jinan Shanshui owned approximately 25.49%, 69.77%, 4.50% and 0.24% of Anqiu Shanshui, respectively, and Anqiu Shanshui became a Sino- foreign joint venture.

On November 30, 2005, the Investors subscribed for an aggregate of 49% of the then enlarged issued share capital of China Shanshui (Hong Kong) for a total consideration of US$51.1 million. As the entire proceeds from the issue of shares by China Shanshui (Hong Kong) to the Investors were injected into Pioneer Cement to fund the subscription of the increased registered capital of Shandong Shanshui, Anqiu Shanshui and Pingyin Shanshui and the acquisition of Shandong Shanshui from its then existing equity interest holders, no distribution of the proceeds or economic beneÑts was made by China Shanshui (Hong Kong) to China Shanshui Investment, or to any beneÑciary of the Zhang Trust and the Li Trust. All such proceeds have been fully utilized.

Pursuant to a shareholders' agreement dated November 30, 2005 (as amended by the Implementation Agreement dated August 31, 2007) entered into by the Investors, China Shanshui Investment, the Management Shareholders and our Company, (a) if a resolution approving a proposed listing of the Shares on an internationally recognized stock exchange outside of the PRC or on the main board of the Hong Kong Stock Exchange is rejected or revoked by our Directors or (b) if we cannot successfully complete the listing before November 30, 2008, the Investors have the right to require China Shanshui Investment to purchase the Shares held by them at pre-determined prices. In case of (a) above, the price payable to the Investors shall equal an amount which would yield a total internal rate of return of 25.0% to the Investors. Alternatively, the Investors may request that an independent internationally reputable investment bank be appointed to determine the fair market value of the Shares subject to the purchase. In case of (b) above, the price payable to the Investors shall equal an amount which would yield a total internal rate of return of 12.0% to the Investors.

China Shanshui Investment has undertaken that from the completion of the initial public oÅering of the Shares, it will not transfer any Shares if, following such transfer, the total number of Shares transferred by China Shanshui Investment would exceed the lesser of (a) the total number of Shares transferred by the Investors after the date of the initial public oÅering of the Shares, and (b) 30% of the total number of Shares held by China Shanshui Investment as of the date of the initial public oÅering of the Shares. Such restriction shall apply equally to all of the Management Shareholders with respect to the transfer of their respective shareholdings in China Shanshui Investment.

China Shanshui Investment has given certain warranties to the Investors in respect of the aggregate proÑt before taxation of China Shanshui (Hong Kong) based on audited Ñnancial statements prepared under Hong Kong Financial Reporting Standards for the three years ended December 31, 2007, and also for the year ending December 31, 2008. If China Shanshui (Hong Kong) fails to meet any of the prescribed targets, China

Ì87Ì HISTORY AND CORPORATE STRUCTURE

Shanshui Investment has agreed to transfer a certain number of Shares held by it to the Investors. The Investors have agreed to waive their rights in respect of all the above targets subject to the Listing and all related rights and entitlements of the Investors will lapse upon the Listing. The Investors also have customary shareholder rights such as pre-emptive rights, anti-dilution rights, nomination rights, reserved matters protection rights, information rights and minority protection rights, all of which will lapse upon the Listing. To secure the due and punctual performance of the obligations of its shareholders and itself under the investment agreements, China Shanshui Investment charged all the Shares held by it (other than the amount representing 26% of the issued Shares owned by China Shanshui Investment that were mortgaged to CCB International (Holdings) Limited as mentioned below) in favour of the MS Investors, the CDH Investors and IFC, on a pro rata basis based on their respective ownership in our Company. Such share charge will lapse upon the Listing. The Investors are passive investors and the directors respectively nominated by them to our Board have not been involved in the daily management and operation of the Group.

The following diagram illustrates our corporate structure immediately after the overseas restructuring and private placement in 2005 as mentioned above:

A1A 28(2) China Shanshui CDH Cement IFC MS II MS I Investment(1)

51% 10.09% 5.27% 8.70% 24.94%

China Shanshui (Hong Kong) (Hong Kong)

100%

Pioneer Cement (Hong Kong) Overseas

Domestic 100%

Shandong Shanshui 25% (PRC)

6.66% 99% 4.50% 25.49%

Shandong 16 other Cement Factory PRC (PRC) subsidiaries

Pingyin Shanshui 67.99% 69.77% Anqiu Shanshui (PRC) (PRC)

Note:

(1) China Shanshui Investment was held by the Management Shareholders. Out of its entire issued share capital, approximately 65.55% was held by Zhang Caikui as trustee of the Zhang Trust, approximately 16.19% was held by Li Yanmin as trustee of the Li Trust, approximately 4.18% was held by Dong Chengtian, approximately 1.53% was held by Li Maohuan, approximately 4.35%

Ì88Ì HISTORY AND CORPORATE STRUCTURE

was held by Yu Yuchuan, approximately 3.05% was held by Zhao Liping, approximately 2.77% was held by Zhao Yongkui, approximately 1.56% was held by Mi Jingtian and approximately 0.82% was held by Wang Yongping. Pursuant to the trust deeds and the letters of wishes relating to the Zhang Trust and the Li Trust, Zhang Caikui and Li Yanmin have the absolute discretion to manage and administer the shares of China Shanshui Investment which are subject to the respective trusts for the beneÑt of the beneÑciaries of the trusts.

SHARE EXCHANGE, CONVERTIBLE NOTES ISSUANCE AND RIGHTS OFFERING IN 2007

In anticipation of the Global OÅering, China Shanshui Cement Group Limited was incorporated in the A1A 29(1) Cayman Islands on April 26, 2006 as our listing entity. On September 6, 2007, all the then existing shareholders of China Shanshui (Hong Kong) exchanged all of their respective ordinary shares in China Shanshui (Hong Kong) for the same number of newly issued Shares on a pro rata basis. On September 21, 2007, we issued convertible notes in a principal amount of US$20 million due 2011 to the Investors, the entire proceeds of which were used to acquire Continental Cement (BVI). All such proceeds have been fully utilized. The noteholders may elect to require us to redeem in whole or in part the Convertible Notes at a price equal to the outstanding principal amount at any time after July 2, 2011. The Convertible Notes are convertible into a total of 191,607 Shares (representing approximately 5.56% of the enlarged issued share capital of the Company as of the date of this prospectus) six months after the completion of the Global OÅering at a conversion price of US$104.4 per share (subject to adjustment). Upon completion of the Capitalization Issue, the number of conversion Shares subject to the Convertible Notes will be increased to 114,964,200 Shares (representing approximately 4.23% of the enlarged issued share capital of the Company immediately upon the Listing) at an adjusted conversion price of approximately US$0.17 or approximately HK$1.33 per share. If we declare any dividend or distribution on our Shares before the noteholders elect to exercise the conversion rights, the noteholders are entitled to receive payments equal to the dividend payable for each Share multiplied by the total number of Shares issuable upon exercise of the conversion rights. Any new Shares issued upon exercise of the Convertible Notes are not subject to any lock-up restrictions. The holders of the Convertible Notes have certain veto rights in respect of the aÅairs of the Group, all of which will lapse upon the Listing. For details of the Convertible Notes, see the section headed ""Principal terms and conditions of the Convertible Notes and the Exchangeable Bonds'' in Appendix VII to this prospectus.

In October 2007, we conducted a rights oÅering to our Shareholders, under which China Shanshui Investment, MS IV and CDH Construct subscribed for an aggregate of 2,135,422 shares of US$0.01 each in the capital of our Company for total consideration of approximately US$222.9 million. In November 2007, IFC subscribed for 118,778 Shares of US$0.01 each in the capital of our Company for total consideration of approximately US$12.4 million. The entire proceeds of the rights oÅering were contributed by our Company to China Shanshui (Hong Kong) as a capital contribution, which was in turn contributed to Pioneer Cement as a capital contribution. Pioneer Cement utilized approximately US$13.25 million on settlement of fees incurred in business operations and injected approximately US$197.5 million of the proceeds into Shandong Shanshui, which have been entirely used for the acquisition, and settlement of debts, of Yantai Shanshui, Zaozhuang Shanshui, Gongyuan Cement and Qianshan Cement and as general working capital. As of the Latest Practicable Date, approximately US$25.74 million have not been utilized by Pioneer Cement. These unutilized proceeds are intended to be used for establishment of onshore joint venture companies for the purpose of further expansion of our cement business. For details of the rights oÅering, see the section headed ""Further information about our Group Ì Reorganization'' in Appendix VII to this prospectus.

In October 2007, China Shanshui Investment issued the Exchangeable Bonds to CCBI Cement for an amount of US$120.0 million, which was entirely injected by China Shanshui Investment into our Company as

Ì89Ì HISTORY AND CORPORATE STRUCTURE a capital contribution pursuant to the aforesaid rights oÅering. All such proceeds have been fully utilized. 18.27% of the total principal amount of the Exchangeable Bonds, equal to approximately US$21.9 million was exchangeable into the then existing Shares held by China Shanshui Investment. In order to secure the due and punctual performance of its obligations under the agreement for the subscription of the Exchangeable Bonds by CCBI Cement, China Shanshui Investment granted a mortgage in favour of CCB International (Holdings) Limited over certain Shares beneÑcially owned by it representing 26% of all ordinary Shares in the issued and outstanding share capital of our Company from time to time (excluding the Shares to be issued under the Global OÅering). Such share mortgage will lapse upon the Listing.

The following diagram illustrates our corporate structure immediately after the share exchange and rights oÅering in 2007 as mentioned above (without taking into account of conversion of the Convertible Notes and exchange of the Exchangeable Bonds, if any).

China Shanshui CDH CDH Cement IFC MS II MS I MS IV Investment(1) Construct 51% 3.10% 5.27% 2.67% 7.66% 23.30% 6.99%

The Company (Cayman Islands)

100% China Shanshui (Hong Kong) (Hong Kong)

100%

Continental 100% Cement Pioneer Cement (BVI) (Hong Kong) Overseas

100% 100% 100% Domestic 100%

Shandong Shanshui Continental Continental (PRC) Continental (Shandong) (Shandong) (Shandong) Cement Cement Cement Products 6.66% 99% 4.50% 25.49% Mining (PRC) Manufacturing (PRC) (PRC) Shandong 23 other Cement Factory PRC (PRC) subsidiaries 25.00%

Pingyin Shanshui 67.99% 69.77% Anqiu Shanshui (PRC) (PRC)

Note:

Ì90Ì HISTORY AND CORPORATE STRUCTURE

On May 20, 2008, CCBI Cement served an irrevocable notice to China Shanshui Investment to exercise the above right to exchange the principal amount of US$21,920,000 of the Exchangeable bonds for 206,748 shares of US$0.01 each, representing approximately 6.35% of the issued share capital of 3,254,200 shares of US$0.01 each of our Company as at the date of exchange, at the initial exchange price of approximately US$106.02 per share. Upon completion of the Capitalization Issue, CCBI Cement will hold 124,048,800 Shares, representing approximately 6.35% of the issued share capital of the Company immediately before the Listing. After completion of the Global OÅering and immediately upon Listing, CCBI Cement will hold 124,048,800 Shares, representing approximately 4.76% of the issued share capital of our Company, assuming the Over-allotment Option has not been exercised. As such, the eÅective exchange price is equivalent to approximately US$0.18 or approximately HK$1.41 per Share. This represents a discount ranging from approximately 47.8% to 61.4% to the expected range of OÅer Price of between HK$2.70 and HK$3.65 per Share. The Shares held by CCBI Cement may be transferred prior to the Listing Date upon written notiÑcation to our Company and consent by China Shanshui Investment. The outstanding principal amount of the Exchangeable Bonds will be repaid by China Shanshui Investment but not any member of the Group. As any outstanding principal amount cannot be exchanged into Shares and will be subject to repayment by China Shanshui Investment upon the maturity date or early redemption, the shareholding structure of the Company will not change should China Shanshui Investment fail to perform its obligations in respect of the Exchangeable Bonds. For details of the Exchangeable Bonds, see the section headed ""Principal terms and conditions of the Convertible Notes and the Exchangeable Bonds'' in Appendix VII to this prospectus.

Ì91Ì HISTORY AND CORPORATE STRUCTURE

RECENT ACQUISITIONS

During the second half of 2007, we acquired Ñve cement producers in Shandong and Liaoning A1A 28(8) Provinces and entered into an agreement to acquire the exploration rights to one limestone mine in Liaoning Province. These acquisitions enabled us to become the largest producer of clinker and cement in Liaoning Province and fortiÑed our leading market position in Shandong Province. For details of these acquisitions, see the sections headed ""Business Ì Recent acquisitions'' and ""Further information about our Group Ì Changes in share capital of the subsidiaries of our Group'' in Appendix VII to this prospectus.

GOVERNMENT APPROVALS

The registered capital of each of the members of our Group has been fully paid up within the required time limits. We have obtained all necessary government approvals for all the transactions described in this section.

On August 8, 2006, six PRC regulatory agencies, namely the Ministry of Commerce, the State-owned Assets Supervision and Administration Commission, the State Administration of Taxation, the State Administration for Industry and Commerce, the CSRC and the SAFE jointly promulgated the Regulations on Mergers and Acquisitions of Domestic Enterprises by Foreign Investors ( ), which became eÅective on September 8, 2006. The new regulation requires oÅshore special purpose vehicles (""SPVs'') that are controlled by PRC companies or residents and formed for the purpose of seeking a public listing on an overseas stock exchange through acquisitions of PRC domestic companies or assets to obtain CSRC approval prior to publicly listing their securities on an overseas stock exchange. On September 21, 2006, the CSRC published a notice on its website specifying the documents and materials that SPVs are required to submit when seeking CSRC approval for their listings outside of China.

Our PRC legal advisers, Commerce & Finance Law OÇces, have advised us that, based on their understanding of the current PRC laws, regulations and rules as well as the fact that CSRC currently has not issued any deÑnitive rule or interpretation concerning whether oÅerings such as ours will be subject to this new regulation, and given that we have completed the restructuring of our PRC subsidiaries before September 8, 2006, the eÅective date of the new regulation, this regulation does not require an application to be submitted to the CSRC for the approval of the Global OÅering.

In addition, our PRC legal advisers, Commerce & Finance Law OÇces, have advised us that we have complied with the Notice on Relevant Issues concerning Foreign Exchange Administration for Domestic Residents to Engage in Financing and in Round-trip Investment via Overseas Special Purpose Companies ( ) promulgated on October 21, 2005 and the Interim Measures on Foreign Investors Merge Domestic Companies ( ) promulgated on March 13, 2003, and we are not required to obtain prior approvals from the PRC government or any regulatory authority in China for the Global OÅering.

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