Annual Report 2017

Annual

Report 2017

Xiamen Kehua Hengsheng Co., Ltd.

No. 1 China UPS Brand - CCID 2017

30 Years Experiences in Power Industry

April 2018

2017 Annual Report of Xiamen Kehua Hengsheng Co., Ltd.

Contents

 Company Information………………………………………………………………...….…….2  Analysis on Main Businesses………………………………………………………..…………2 1. Overview………………………………………………………………………………….…2 2. Revenues and costs……………………………………………………………...….....……2 3. Expenses…………………………………………………………...... ……7 4. Investment in research and development……………………………….……………...…7  Analysis on Investment……………………...... ……………………...... 9 1. Overview……………………………………………………………………………………..9 2. Significant equity investment acquired during the reporting period……….…………10 3. Significant non-equity investment ongoing during the reporting period…….………12 4. Financial assets measured at fair value…….………….……….……….……….………12 5. Use of Raised Funds……. ….……….……….……….…...…….……….……….………12  Shareholders and Actual Controllers….……….…...…….……….……………….………16 1. Total number of shareholders of the Company and their shareholdings…….……….16  Status of the Company’s Employees.……………….………………………………………18  Main business during the reporting period……….……….…...…….……….……...……18 1. Cloud computing basic service (“cloud-based” business) ….…………………………19 2. Energy-based business….………….………. ………….……….…...…...….…...…….…19 3. New energy business….…………….……………….……….…...……...….…...…….…19  Core Competitiveness Analysis .…………….……….…... …….…...…….…...... …….…20  Discussion and Analysis on Operations…………….……….…...………………...…….…23  Outlook of Future Development of the Company…………….……….…...... …….…25 1. Industry trends…………….……….…... ………….………. …….…...…...…….…….…25 2. Company's development strategy…………….……….…. …….….....…………...….…27 3. 2018 annual operational planning…………….……….…... …….…...…………………27  Performance of the social responsibility …………….……….…... …….…... ……..…….29

2017 Annual Report of Xiamen Kehua Hengsheng Co., Ltd.  Company Information Stock Short Name Kehua Hengsheng Stock Code 002335 Stock Exchange on which the shares are Shenzhen Stock Exchange listed Chinese Name of the 厦门科华恒盛股份有限公司 Company Chinese Abbreviation 厦门科华恒盛股份有限公司 of the Company English Name of the XIAMEN KEHUA HENGSHENG CO.，LTD. Company (if any) Legal Representative Chen Chenghui of the Company No. 457, Malong Road, Torch Park, Torch High-Tech Industrial Zone, Registered address Xiamen, Fujian, China Postal Code of the 361006 Registered Address No. 457, Malong Road, Torch Park, Torch High-Tech Industrial Zone, Address Xiamen, Fujian, China Postal Code of the 361006 Office Address Website www.kehua.com.cn E-mail [email protected]

 Analysis on Main Businesses 1. Overview Refer to the relevant content of “I. Overview” in the “Discussion and Analysis on Operations” section. 2. Revenues and costs (I) Operating revenue composition Unit: RMB 2017 2016 Increase Amount Proportion in Amount Proportion in and operating operating decrease on

revenue revenue year-on- year basis (%) Total of operating 2,412,344,741.63 100% 1,769,996,350.07 100% 36.29% revenue By industries Electrical and electronic equipment 2,382,469,162.41 98.76% 1,733,349,792.29 97.93% 37.45% manufacturing industry Other 29,875,579.22 1.24% 36,646,557.78 2.07% -18.48% operations By products

2017 Annual Report of Xiamen Kehua Hengsheng Co., Ltd. High-end power supply 735,785,700.09 30.50% 699,636,616.22 39.53% 5.17% products Basic cloud products and 740,430,537.17 30.69% 303,662,834.56 17.16% 143.83% services New energy 340,460,740.76 14.11% 266,452,255.75 15.05% 27.78% products Auxiliary 366,993,846.89 15.21% 282,251,385.08 15.95% 30.02% products Photovoltaic power 71,377,320.91 2.96% 55,209,439.05 3.12% 29.28% generation Power automation system and 127,421,016.59 5.28% 126,137,261.63 7.13% 1.02% smart energy management system Other 29,875,579.22 1.24% 36,646,557.78 2.07% -18.48% operations

(II) Situation of industries, products or regions with a revenue or business profit accounting for more than 10% of that of the Company √Applicable □Not applicable

Whether the Company shall abide by the disclosure requirements of a special industry No Unit: RMB Year-on- Year-on- Year-on- year year Gross year Operating movement movement Operating cost profit movement revenue in in rate in gross operating operating profit rate revenue cost By industries Electrical and electronic equipment 2,382,469,162.41 1,594,544,208.19 33.07% 37.45% 43.34% -2.75% manufacturing industry By products High-end power supply 735,785,700.09 462,788,376.84 37.10% 5.17% 8.83% -2.12% products Basic cloud 740,430,537.17 508,846,687.07 31.28% 143.83% 142.30% 0.43% products and services New energy 340,460,740.76 244,997,532.00 28.04% 27.78% 38.20% -5.43% products Auxiliary 366,993,846.89 272,642,766.64 25.71% 30.02% 35.17% -2.83%

2017 Annual Report of Xiamen Kehua Hengsheng Co., Ltd. products Photovoltaic power 71,377,320.91 19,684,497.20 72.42% 29.28% 32.30% -0.63% generation Power automation system and 127,421,016.59 85,584,348.44 32.83% 1.02% 2.76% -1.14% smart energy management system The main business data adjusted at the end of the reporting period will be taken for the recent one year if the Company's statistical caliber of main business data is adjusted during the reporting period. □ Applicable √ Not applicable

(III) Whether the Company's sales revenue from material object is greater than service revenue √Yes □No Trade category Item Unit 2017 2016 Increase and decrease on year-on- year basis (%) Electrical and Sales volume Pcs (set) 563,586 634,808 -11.22% electronic Production Pcs (set) 573,565 625,414 -8.29% equipment quantity (set/pcs) Inventory Pcs (set) 34,386 24,407 40.89% Sales volume Pcs (set) 22,781 22,331 2.02% Supporting Production device for new Pcs (set) 22,182 20,847 6.40% quantity energy (pcs) Inventory Pcs (set) 1,757 2,356 -25.42% Power Sales volume Pcs (set) 10,668 12,622 -15.48% automation Production Pcs (set) 8,386 15,459 -45.75% system and quantity smart energy system Inventory Pcs (set) 6,485 8,767 -26.03% Explanation on the causes for the related data with a year-on-year change over 30% √Applicable □Not applicable 1. The main reason for the increase in the ending inventory of power electronic equipment is that the Company's final sales orders have increased, and the delivery has not yet been completed by the end of the period, which leads to the increase in the ending inventory. 2. The current sales consumption of the power automation system and smart energy system is mainly from the inventory, so the production volume in the current period is decreased. (IV) Performance for major sales contracts signed by the Company as of the reporting period □ Applicable √ Not applicable (V) Composition of operation cost By industry and product Unit: RMB

2017 Annual Report of Xiamen Kehua Hengsheng Co., Ltd. 2017 2016 Increase and decrease Trade Proportion Proportion Item in in on year- category Amount Amount operating operating on-year costs costs basis (%) Electrical and electronic Prime equipment business 1,594,544,208.19 99.73% 1,112,386,140.11 99.60% 43.34% manufacturing cost industry Prime Other business 4,375,194.27 0.27% 4,502,205.43 0.40% -2.82% operations cost Unit: RMB 2017 2016 Increase and Proportion Proportion decrease By product Item in in Amount Amount on year- operating operating on-year costs costs basis (%) High-end Prime power business 462,788,376.84 28.94% 425,243,328.54 38.07% 8.83% supply cost products Basic cloud Prime products business 508,846,687.07 31.82% 210,003,531.39 18.80% 142.30% and services cost Prime New energy business 244,997,532.00 15.32% 177,273,267.39 15.87% 38.20% products cost Prime Auxiliary business 272,642,766.64 17.05% 201,704,375.23 18.06% 35.17% products cost Photovoltaic Prime power business 19,684,497.20 1.23% 14,878,892.55 1.33% 32.30% generation cost Power automation system and Prime smart business 85,584,348.44 5.35% 83,282,745.01 7.46% 2.76% energy cost management system Other Other operating 4,375,194.27 0.27% 4,502,205.43 0.40% -2.82% operations cost

Notes By product Item 2017 2016 Increase

2017 Annual Report of Xiamen Kehua Hengsheng Co., Ltd. and decrease Proportion Proportion on year- Amount Amount in in on-year operating operating basis costs costs (%) Raw 400,84,257.11 86.62% 367,855,919.56 86.50% 8.98% High-end materials power supply Others 61,914,119.74 13.38% 57,387,408398 13.50% 7.98% Raw 153,235,161.90 30.11% 107,693,789.07 51.28% 42.29% Basic cloud materials products and IDC O&M 347,644,352.78 68.32% 98,736,921.12 47.02% 252.09% services cost Others 7,967,172.39 1.57% 3,572,821.20 1.70% 122.99% Raw Product series 221,753,151.60 90.51% 162,974,936.85 91.93% 36.07% for new materials energy Others 23,244,380.40 9.49% 14,298,330.54 8.07% 62.57% Raw 267,003,282.42 97.93% 196,206,466.74 97.27% 36.08% Auxiliary materials products Others 5,639,484.22 2.07% 5,497,908.49 2.73% 2.58% Power Raw 81,039,996.16 94.69% 80,349,221.69 96.48% 0.86% automation materials system and smart energy management Others 4,544,352.28 5.31% 2,933,523.32 3.52% 54.91% system Operation Photovoltaic and power 19,684,497.20 100.00% 14,878,892.55 100.00% 32.30 maintenance generation cost (VI) Information on main sales customers and main suppliers Main sales customers of the Company Total sales amount of the top 5 customers (RMB) 234,912,793.92 Proportion of the total sales amount of the top 5 customers in total 9.74% annual sales amount Proportion for the sales amount of the related parties among the top 5 0.00% clients in total annual sales amount Information on the top 5 customers of the Company S/N Customer name Sales amount (RMB) Proportion in total annual sales amount 1 No.1 62,806,507.21 2.60% 2 No.2 50,298,570.17 2.09% 3 No.3 44,149,477.17 1.83% 4 No.4 39,726,603.52 1.65% 5 No.5 37,931,635.85 1.57% Total -- 234,912,793.92 9.74% Explanation on other situations of main customers □ Applicable √ Not applicable Main suppliers of the Company

2017 Annual Report of Xiamen Kehua Hengsheng Co., Ltd. Total purchase amount of the top 5 suppliers (RMB) 295,284,731.86 Proportion of the total purchase amount of the top 5 suppliers in 14.01% total annual purchase amount Proportion of the purchase amount of the related parties among the 0.00% top 5 suppliers in total annual purchase amount Information on the top 5 suppliers of the Company S/N Name of supplier Purchase amount Proportion in total annual (RMB) purchase amount 1 No.1 113,507,274.26 5.38% 2 No.2 47,141,950.84 2.24% 3 No.3 46,423,649.40 2.20% 4 No.4 45,256,672.49 2.15% 5 No.5 42,955,184.87 2.04% Total -- 295,284,731.86 14.01% Explanation on other situations of main suppliers □ Applicable √ Not applicable

3. Expenses Unit: RMB 2017 2016 Increase and Explanation on major changes decrease on year-on-year basis (%) Selling expense 264,293,591.14 223,158,850.19 18.43% No significant change Mainly increase for technical Management 280,944,295.95 222,115,753.12 26.49% development expense and expense payroll Financial Mainly increase in interest 42,402,191.60 12,499,817.53 239.22% expenses expenses and exchange losses 4. Investment in research and development √ Applicable □ Not Applicable During the reporting period, the Company considering the way of “One Body Two Wings” as the strategic goal, will continue to invest more in research and development, drive innovation with client demand and cutting-edge technology and maintain its leading position of product and technology in the industry to provide the clients with better products and service. At present, the Company owns three product solution systems for energy base business, cloud base business and new energy business. For cloud base business, relaying on the leading design and monitoring technologies and smart networking of data center and abundant engineering design and construction experiences, the Company has successively presented and optimized various overall industry- level solutions such as cloud dynamic ecological energy saving type data center, modular data center, micro data center and product series, including fundamental hardware and software products, such as the power, environment and O&M management system at large-scale data center with more than 1000 cabinets and the power, environment and O&M management

2017 Annual Report of Xiamen Kehua Hengsheng Co., Ltd. system for wide-area multi-level users. All of these are able to effectively increase the economic benefits per unit area of the data center, and actively assist the public sector, government and enterprise users, Internet companies and other users in continuous energy conservation and high-reliability information construction, and gain recognition and application of large-scale representative customers in the industry. Meanwhile, the Company has kept optimizing the application and system performance of leading quantum communication technology in the data center solutions with high safety level for building the new energy saving and high safety level type data centers for national defense and military industry, government, finance and other important customers. In terms of Energy-based Business, the Company has developed high-efficiency UPS products based on lithium battery backup energy storage, and received batch orders from customers. The configuration of high-end power supply product lines is enriched by the developed 800KVA high-efficiency high-power high-frequency UPS, industrial high-power UPS series products of 480V system as well as 2MW urban rail transit energy feedback system. After independently developed nuclear class UPS has been awarded with the 1E class K3 type product certification for nuclear power plant, 400KVA nuclear power UPS system has been successfully applied to Hualong One in Fangchenggang Phase II, and the Company continues to maintain its first position in the domestic high-power high-end power supply market. Relying on the Company's technological accumulation in Energy-based business for many years, the "Key Technology and Industrialization of Disaster Recovery Backup Power Supply for Major Projects" of the Company won the first prize of Scientific and Technological Progress Award in 2016 in Fujian province, and the "Key Technology and Application of High-Power Multi-Energy UPS System" won the first prize of Technological Invention Award in 2017 offered by Ministry of Education of China. In terms of New Energy Business, in addition to continuously optimizing and upgrading the full range of products, the Company has developed 20 MW class micro-grid system technologies, including photovoltaic power generation, lithium battery energy storage, diesel power generation, hydroelectric power generation, multi-level users and the like, and 3MW outdoor high-capacity photovoltaic power generation system with integrated box transformer, to further improve the Company’s market competitiveness in the fields of photovoltaic power generation, energy storage and energy Internet. In terms of new energy electric vehicle charging, the Company has developed a new generation of high-efficiency AC/DC charging module to comprehensively improve the operation efficiency and economic benefits of the charging system. The developed high-capacity flexible charging system technologies and products as well as the charging pile operation cloud management system based on wide-area applications comprehensively improve the Company's market competitiveness in urban station-level charging stations, expressway electric vehicle charging stations, hotel and parking lot electric vehicle charging stations, domestic electric vehicle charging piles and other applications, and lay a solid industrialization foundation for enlarging the Company’s energy and management businesses in electric vehicle. As of 2017, the Company had a total of 386 valid authorized patent, including 67 patents for invention, 193 utility models and 126 industrial design patents; and 229 software copyright filings, so there were 615 valid intellectual properties obtained. R&D input of the Company 2017 2016 Change proportion Number of R&D 948 744 27.42% personnel (person) Proportion for the number of R&D 25.00% 22.68% 2.32% personnel

2017 Annual Report of Xiamen Kehua Hengsheng Co., Ltd. Amount of R&D 210,929,179.53 140,013,101.20 50.65% investment (RMB) Proportion of R&D input in operating 8.74% 7.91% 0.83% revenue Capitalized amount of 86,064,110.92 50,886,149.99 69.13% R&D input (RMB) Proportion of capitalized R&D input 40.80% 36.34% 4.46% in R&D input Causes for significant change in the proportion of the total R&D investment in operating revenue compared with that in the previous year □ Applicable √ Not applicable Explanation on causes and their reasonability for a great change of capitalization rate of R&D investment □ Applicable √ Not applicable

 Analysis on Investment 1. Overview √Applicable □Not applicable Investment during the reporting Amount of investment in the Variation range period (RMB) same period of the previous year (RMB) 696,132,467.26 281,155,996.50 147.60%

2017 Annual Report of Xiamen Kehua Hengsheng Co., Ltd.

2. Significant equity investment acquired during the reporting period √Applicable □Not applicable Unit: RMB

Progress Investment situation as Involvement Name of the Investment Investment Shareholdi Source of Investme Expected gain or loss in Disclosure date Disclosure index Main business Partner Product type at the in lawsuit or Investee options amount ng funds nt term revenue the current (if any) (if any) Balance not period Sheet Date Internet data center Beijing Telecommunic business of Type I Yunjv, ation value- telecommunication Beijing added Refer to value-added Dadao, business, http://www.cninfo. Beijing business, Internet Guangzhou Internet com.cn/cninfo- CloudVSP access service 637,50 Self- Dexun, Long- Acquisition 100.00% information Done 49,385,456.94 No May 19, 2017 new/index for Technology business of Type II 0,000.00 raised natural term service, details Co., Ltd. telecommunication persons Shi economic (Announcement value-added business Jun, Xiao information No.: 2017-059) (the business Guiyang consultation, certificate of and Tian etc. telecommunication Suning value-added business is valid until April 18, 2019); information service business of Type II telecommunication value-added business (only Internet information service): The Internet information service ; excludes technical development, transfer, consultation and service of news, publication, education, health care, drug and medical apparatus and instruments, the

2017 Annual Report of Xiamen Kehua Hengsheng Co., Ltd.

technical development, technical transfer, technical consultation and technical services of electronic bulletin business (the business certificate of telecommunication and information service business is valid until February 20, 2019); and sales of computers, software and auxiliary equipment; economic information consultation 637,500,000. Total ------0.00 49,385,456.94 ------00

2017 Annual Report of Xiamen Kehua Hengsheng Co., Ltd.

3. Significant non-equity investment ongoing during the reporting period □ Applicable √ Not applicable 4. Financial assets measured at fair value □ Applicable √ Not applicable 5. Use of Raised Funds √Applicable □Not applicable (I) Overall use of raised funds √Applicable □Not applicable Unit: RMB 10,000 Total Total Proportion of Purpose raised raised Total Total Raised Total total and Total funds funds for accumulative raised funds not Raised Raised accumulative accumulative disposition Raised used changed raised funds funds used for year way raised funds raised funds of raised Funds during use during for changed not more than used for changed funds not current reporting use used two years use used period period Private 2016 165,799.8 42,223.3 42,223.3 35,158.01 35,158.01 21.21% 0 None 0 placement Total -- 165,799.8 42,223.3 42,223.3 35,158.01 35,158.01 21.21% 0 -- 0 Explanation on the overall use of raised funds With the ZJXK[2015] No. 2905 Document approved by the China Securities Regulatory Commission, the Company has issued 46,081,100 RMB-denominated ordinary shares by private placement at an issuing price of RMB 35.98 per share. The total raised funds are RMB 1,657,997,978.00, from which the issuance expense of RMB 25,641,039.20 is deducted to obtain the net actual raised funds of RMB 1,632,356,938.80. The Grant Thornton Certified Public Accountants (special ordinary partnership) has verified the above funds and issued ZTYZ (2016) No. 350ZA0033 Capital Contribution Verification on April 20, 2016. By the end of December 31, 2017, an amount of RMB 1,645,983,484.54 (including interest income deducting net handling charge of RMB 13,626,545.74) among the raised funds has been used, and an amount of RMB 0 is left. (II) Committed projects supported by the raised funds √Applicable □Not applicable

Unit: RMB 10,000

Date on Whether Total Accumulati Total Investment which the Benefit Whether Whether the Committed investment the Project committe Investment ve investment progress by project obtained the project projects and is Changed d during the investment after the end of achieves during the expected feasibility is disposition of extra (Including investmen reporting by the end adjustment the period the reporting benefit is significantly raised funds Partial t by raised period of the (1) (3)=(2)/(1) intended period achieved changed Change) funds period (2) use Committed investment projects Jinxiang County 20 MW Distributed Photovoltaic Power April 19, Generation Project in No 17,100 17,100 1,479.6 17,119.58 100.11% 948.35 No No 2016 Jining of Shandong for Photovoltaic Agriculture Xinzhai Town 20 MW March No 17,100 17,100 4,734.93 17,255.3 100.91% 1,104.76 No No Distributed 25, 2016

2017 Annual Report of Xiamen Kehua Hengsheng Co., Ltd.

Photovoltaic Power Generation Project in Shandong or Photovoltaic Agriculture Humiao Mountain 20 MW Ground Distributed No 17,100 17,100 16,312.08 95.39% N/A Yes Photovoltaic Power Generation Project in Yiyang Qianyangpo 20 MW Ground Distributed Photovoltaic Power No 17,100 17,100 16,312.08 95.39% N/A Yes Generation Project in Yiyang Anxi 2 MW Distributed Photovoltaic Power No 1,690 1,690 8.08 0.48% N/A Yes Generation Project in Quanzhou of Fujian Jinjiang 3.3 MW Distributed Photovoltaic Power No 2,788.5 2,788.5 33.32 1.19% N/A Yes Generation Project in Quanzhou of Fujian Nan’an 4.7 MW Distributed Photovoltaic Power No 3,971.5 3,971.5 0.7 0.02% N/A Yes Generation Project in Quanzhou of Fujian Changle 10 MW Distributed Photovoltaic Power No 8,450 8,450 0.00% N/A Yes Generation Project in Fujian Jianlibao 5.6MW Distributed Decembe Photovoltaic Power No 4,700 4,700 850.76 4,243.41 90.29% r 28, 310.83 No No Generation Project in 2016 Foshan - Phase I 20 MW Distributed Photovoltaic Power May 31, No 10,800 10,800 10,800 100.00% 1,675.71 Yes Yes Generation Project in 2015 Ningxia Guixi 30 MW Demonstration Project of Photovoltaic Power No 15,300 15,300 192.17 1.26% N/A Yes Station for Ecological Agriculture in Jiangxi Supplementary current No 49,700 47,163.62 35,158.01 82,321.63 174.54% N/A No funds Subtotal committed 164,598.3 -- 165,800 163,263.62 42,223.3 -- -- 4,039.65 -- -- investment projects 5 Disposition of extra raised funds None No 0 0 0 0 0.00% 0 163,263.6 164,598.3 Total -- 165,800 42,223.3 -- -- 4,039.65 -- -- 2 5 Situation of and 1. For Xinzhai Town 20 MW Distributed Photovoltaic Power Generation Project in Shandong for Photovoltaic reasons for not Agriculture, the reasons for not reaching the expected benefits are as follows: the feasible electricity price is RMB reaching the scheduled 1.13 per kWh, but the actual electricity price is only RMB 1 per kWh, as a result, the generated energy was 22.91 progress or expected Gwh, and the income was decreased by RMB 2.55 million in 2017 due to the price difference. Considering the

2017 Annual Report of Xiamen Kehua Hengsheng Co., Ltd. benefits (by specific above factors, the net profit has reached RMB 13.56 million, with an achievement rate of 111 %. projects) 2. For Jinxiang County 20 MW Distributed Photovoltaic Power Generation Project in Jining of Shandong for Photovoltaic Agriculture, the reasons for not reaching the expected benefits are as follows: ① the feasible electricity price is RMB 1.18 per kWh, but the actual electricity price is only RMB 1 per kWh, as a result, the energy generated in 19.21 MW project was 22.11 Gwh in 2017, and the income was decreased by RMB 3.4 million due to the price difference; ② the loss in energy was 0.76 Gwh and the income was decreased by RMB 650,000 due to the power brownout in Spring Festival, the line reconstruction by power companies and the overhaul of switch cabinets; ③ under the influence of long-term rainy weather, the generated energy was decreased by 0.98 Gwh and the income was decreased by RMB 830,000; ④ considering the above factors, the net profit reached RMB 14.36 million, with an achievement rate of 103 %. 3. In Jianlibao 5.6 MW Distributed Photovoltaic Power Generation Project in Foshan - Phase I, the reasons for not reaching the expected benefits are as follows: the loss caused by supplying power to owners for free in the first three months at the beginning of the grid connection was RMB 690,000, and the outage cost caused by equipment failure in the second quarter was RMB 270,000. Considering the above factors, the net profit has reached RMB 4.07 million, with an achievement rate of 102 %. 1. 20MW Distributed Photovoltaic Power Generation Project in Fujian includes Nanan, Jinjiang and Anxi Warehouse Roof Photovoltaic Power Generation Projects in Fujian and Changle Roof Photovoltaic Power Generation Project in Fujian. (1) For Nanan, Jinjiang and Anxi Warehouse Roof Photovoltaic Power Generation Projects in Fujian, the owner unit is required to reconstruct the warehouses involved in the roof power stations in order to ensure the storage safety of materials, and the warehouse reconstruction must be approved by the superior competent department and other departments. The actual time for commencement of construction still cannot be determined after communicating with the owner unit for many times. (2) For Changle Roof Photovoltaic Power Generation Project in Fujian, when the project is under construction, it is found that the cotton-like substances generated in the production process of the owner unit fall on the roof, which will affect the normal power generation of the power station, lead to the decline in power generation efficiency and increase the operation and maintenance cost of the power station. For the above reasons, the Company considered and approved the Proposal on Terminating Part of the Fundraising Projects and Using the Remaining Raised Funds of RMB 172,034,700 to Permanently Supplement Working Fund of the Company (the above amount includes interest income, and the specific amount is subject to the fund balance of the special account of the Project when the funds are actually appropriated) at the 15th Meeting of the Seventh Board of Directors on November 06, 2017. This proposal was considered and approved on November 23, 2017 by resolution of the Company’s Fifth Extraordinary General Meeting of Shareholders in 2017. By December 31, 2017, the Company has used the remaining raised funds of RMB 17,423.46 in its special account for raised funds to permanently supplement working fund of the Company. 2. For 30 MW Distributed Photovoltaic Power Generation Project in Jiangxi, 40 MW Distributed Photovoltaic Power Generation Project in Henan, 5.6 MW Distributed Photovoltaic Power Generation Project in Guangdong Explanation on and 20MW Distributed Photovoltaic Power Generation Project in Ningxia, the Company considered and approved significant changes of the Proposal on Terminating Part of the Fundraising Projects and Using the Remaining Raised Funds and those project feasibility of Completed Fundraising Projects to Permanently Supplement Working Fund at the 17th Meeting of the Seventh Board of Directors on December 07, 2017, agreeing that the Company will terminate part of the fundraising projects and use the remaining raised funds of RMB 155,771,800 to supplement working fund (the above amount includes interest income, and the specific amount is subject to the fund balance of the special account of the Project when the funds are actually appropriated). This proposal was considered and approved on December 25, 2017 by resolution of the Company’s sixth Extraordinary General Meeting of Shareholders in 2017. Including: (1) For 30 MW Distributed Photovoltaic Power Generation Project in Jiangxi, the grid-connected line of this Project needs to cross the trunk railway, and the formalities are still in progress after consulting relevant departments and communicating for many times. The Company is unable to estimate the time to obtain approval. In order to improve the utilization efficiency of raised funds, the Company has terminated its investment in 30MW Distributed Photovoltaic Power Generation Project in Jiangxi. By December 31, 2017, the Company has used the remaining raised funds of RMB 155,821,600 in its special account for raised funds to permanently supplement working fund of the Company. (2) For 40 MW Distributed Photovoltaic Power Generation Project in Henan, this Project has been completed according to the Company's investment projects with funds raised by private placement and use plans, and transferred by the Company to Huadian Fuxin Energy Limited Company on August 25, 2016, so it meets the requirements of project completion. By December 31, 2017, the Company has used the remaining raised funds of RMB 16,422,500 in its special account for raised funds to permanently supplement working fund of the Company. (3) For 20MW Distributed Photovoltaic Power Generation Project in Ningxia, this Project has been completed according to the Company's investment projects with funds raised by private placement and use plans, so it meets the requirements of project completion. By December 31, 2017, the Company has used the remaining raised funds of RMB 5,052,200 in its special account for raised funds to permanently supplement working fund of the Company. Amount, purpose and N/A use progress of extra raised funds

2017 Annual Report of Xiamen Kehua Hengsheng Co., Ltd.

Change of N/A implementation location of investment projects by raised funds

Adjustment of N/A implementation mode of investment projects by raised funds

Initial investment and Applicable replacement of investment projects by As at December 31, 2016, the Company has invested RMB 610,755,500 of self-raised funds in total for investment raised funds projects. The Company has replaced a portion of self-raised funds for investment projects with the raised funds at this time, and the replaced amount is RMB 610,755,500 in total. The above matters are discussed and approved at the 33th Session of the 6th Meeting of the Board of Directors and the 19th Session of the 6th Meeting of the Board of Supervisors. Meanwhile, the independent directors express their independent consent opinions, the Grant Thornton Certified Public Accountants (special ordinary partnership) issues an assurance report, and the sponsor institution presents the review opinions and performs necessary legal procedures. Temporary N/A supplementary current funds by raised funds not used Surplus of raised N/A funds after project implementation and causes thereof Purpose and The fund balance of Humiao Mountain 20 MW Ground Distributed Photovoltaic Power Generation Project in disposition of raised Yiyang and Qianyangpo 20 MW Ground Distributed Photovoltaic Power Generation Project in Yiyang is RMB funds not used 16,422,500. The fund balance of Jianlibao 5.6MW Distributed Photovoltaic Power Generation Project in Foshan - Phase I is RMB 5,052,200. The above projects have been ready for their intended use, and the balance of raised funds have been used to permanently supplement working fund of the Company. Problems and other conditions in use and None disclosure of raised funds (III) Change in projects supported by raised funds □ Applicable √ Not applicable The Company has no change on projects supported by raised funds during the reporting period.

2017 Annual Report of Xiamen Kehua Hengsheng Co., Ltd.

 Shareholders and Actual Controllers 1. Total number of shareholders of the Company and their shareholdings Unit: share

Total number of Total number of preferred Total number Total number of preferred shareholders (if of ordinary ordinary shareholders (if any) resuming shareholders shareholders as at any) resuming voting rights as as at the end 21,853 the end of the month 22,218 0 0 voting rights at at the end of the of the before the disclosure the end of the month before the reporting date of the annual reporting period disclosure date of period report (see Note 8) the annual report (see Note 8) Shareholders holding more than 5% shares of the Company or shareholdings of top 10 shareholders Increase Pledged or frozen status Number of and shares held decrease Number of Number of Name of Nature of at the end Shareholding changes restricted unrestricted Shareholder shareholder of the Share during the shares held shares held Quantity reporting status reporting period period Domestic Xiamen Kehua non-state- Weiye Co., 30.92% 86,143,249 0 0 86,143,249 Pledged 11,500,000 owned legal Ltd. person Domestic Chen natural 16.62% 46,307,720 0 34,730,790 11,576,930 Pledged 25,300,000 Chenghui person Domestic Huang natural 4.90% 13,642,00 -10000 0 13,642,000 Pledged 3,184,700 Wanling person Xiamen Xiangyu State-owned Financial enterprise 3.59% 10,005,466 -34 0 10,005,466 Holdings legal person Group Co., Ltd. Domestic Shi Jun natural 3.37% 9,381,455 9,381,455 7,036,091 2,345,364 Pledged 9,381,455 person Beijing Jingtai Domestic Sunshine non-state- 2.84% 7,908,235 2,597,565 0 7,908,235 Pledged 7,767,146 Investment owned legal Co., Ltd. person Domestic Lin Yi natural 1.39% 3,872,800 0 2,904,600 968,200 person Domestic Li Huimin natural 1.08% 3,000,039 3,000,039 0 3,000,039 Pledged 3,000,000 person First Capital Securities - Guosen Securities - Oiwa Quantify Allwin Others 0.91% 2,542,169 -2,460,531 0 2,542,169 Absolute Collective Asset Management Plan

2017 Annual Report of Xiamen Kehua Hengsheng Co., Ltd.

China Fortune Securities - SPD Bank - China Fortune Securities Others 0.88% 2,443,200 0 0 2,443,200 Zhidao Collective Asset Management Plan No.1 Status of the strategic investor or general legal person becoming one of top 10 shareholders due to None equity offering (if any) (see Note 3) In the top 10 shareholders, Chen Chenghui is the nephew of Huang Wanling. Except that, there is no Description of the related association among the controlling shareholders, the actual controller and the top 10 shareholders. All of relationship or concerted action them are not the persons acting in concert. It is unknown whether there is association among other top of the above shareholders 10 shareholders or whether they are persons acting in concert. Shareholding by top 10 holders of shares not subject to trading restriction Number of shares not subject to trading restriction as at the Class of shares Name of Shareholder end of the reporting period Class of shares Quantity RMB ordinary Xiamen Kehua Weiye Co., Ltd. 86,143,249 86,143,249 shares RMB ordinary Huang Wanling 13,642,000 13,642,000 shares RMB ordinary Chen Chenghui 11,576,930 11,576,930 shares Xiamen Xiangyu Financial Holdings RMB ordinary 10,005,466 10,005,466 Group Co., Ltd. shares Beijing Jingtai Sunshine Investment RMB ordinary 7,908,235 7,908,235 Co., Ltd. shares RMB ordinary Li Huimin 3,000,039 3,000,039 shares First Capital Securities - Guosen Securities - Oiwa Quantify Allwin RMB ordinary 2,542,169 2,542,169 Absolute Collective Asset shares Management Plan China Fortune Securities - SPD Bank - China Fortune Securities Zhidao RMB ordinary 2,443,200 2,443,200 Collective Asset Management Plan shares No.1 RMB ordinary Shi Jun 2,345,364 2,345,364 shares RMB ordinary Wu Jianwen 2,209,000 2,209,000 shares Description on the related relationship or concerted action In the top 10 shareholders of unrestricted shares, Chen Chenghui is the nephew of Huang Wanling. between top 10 unrestricted Except that, there is no association among the controlling shareholders, the actual controller and the circulating shareholders, and top 10 shareholders. All of them are not the persons acting in concert. It is unknown whether there is between top 10 unrestricted association among other top 10 shareholders of unrestricted shares or whether they are persons circulating shareholders and top 10 acting in concert. shareholders Description on conditions of top 10 ordinary shareholders participating in the margin trading and securities None lending business (if any) (see Note 4) Whether top 10 ordinary shareholders and top 10 ordinary shareholders without trading limited conditions have performed the agreed repurchase transactions during the reporting period

2017 Annual Report of Xiamen Kehua Hengsheng Co., Ltd.

□ Yes √ No

 Status of the Company’s Employees 1. Number of employees, discipline composition and degree of education Number of employees on active duty in the parent 1,727 company (person) Number of employees on active duty in the main 2,066 subsidiaries (person) Total number of employees on active duty (person) 3,793 Total number of employees payable in current period 3,793 (headcount) Number of the retired employees with expenses borne 0 by the parent company and main subsidiaries (person) Discipline Composition Number of Persons for Discipline Composition Category of Discipline Composition (Person) Production personnel 938 Sales Personnel 686 Technical personnel 1,778 Financial personnel 109 Administrative personnel 282 Total 3,793 Degree of Education Category of Education Qty. (Person) Master or above 248 Bachelor’s Degree 1,603 Junior College 900 Technical secondary school 377 Others 665 Total 3,793

 Main business during the reporting period Whether the Company shall abide by the disclosure requirements of a special industry No In 2017, under the guidance of strategic development of “One Body Two Wings”, the Company has kept advancing in such main businesses as energy-based businesses (UPS, high-end customized power supply, military power supply and electric power automation system), cloud-based businesses (cloud power, cloud services and cloud security) and new energy businesses (PV, energy storage, microgrid, power sales and electrical vehicle charging system). At the same time, the Company has deeply developed the market to further promote the organic integration of Energy-based Business, Cloud Base Service Business and New Energy Business, develop new business modes and turnkey solutions such as "Subway + Photovoltaic", and further promote the Company's transformation from equipment manufacturers to turnkey solution and technical service providers. During the reporting period, the Company further optimized its organization and strengthened its operation reform, to optimize its operation quality and profitability.

2017 Annual Report of Xiamen Kehua Hengsheng Co., Ltd.

1. Cloud computing basic service (“cloud-based” business) Cloud computing basic service business is an important part of the Company's strategic planning, and is also the strategic direction of the Company's key investment in recent years. During the reporting period, the Company completed the 100% merger and acquisition of Cloud VSP, and on this basis, it integrated its cloud computing-related businesses and established the "Kehua Hengsheng•Cloud Group" that is operated independently. Through strategic mergers and acquisitions and the establishment of Cloud Group, the Company improved its service capabilities in cloud computing industry to provide customers with total solutions in all aspects from product program, planning & design, engineering construction, operation and maintenance management, EPC business to IDC basic services (cabinet leasing, bandwidth leasing, customization of data center at enterprise level, etc.) and IDC value-added services (DDOS traffic cleaning, SDN, data synchronization, etc.). At present, the Company has built four large data centers in Beijing, Shanghai and Guangzhou, serving a wide range of customers including government, finance and Internet companies, and some data centers serve top Internet companies in China. During the reporting period, the Cloud Group won five awards in 2017 IT Market Annual Meeting as well as the GITC 2017 "Best Internet Service Award" and the "2017 Award of Most Influential Enterprise in China IDC Industry". 2. Energy-based business In 2017, the Energy-based Business of the Company continued to lead in finance, communication, public and other fields. According to a report issued by CCID Consulting Company Limited (CCID), in 2017, the sales of the Company ranks second among all UPS vendors and ranks first among local UPS vendors in China. And in terms of high power UPS market, the Company ranks second among all UPS vendors and ranks first among local UPS vendors in 2017. At the same time, the Company actively promoted its layout in rail transit, military industry, nuclear power and other fields, and opened wider market space. In the field of rail transit, nearly half of cities with approved rail transit planning in China have chosen the Company's solutions. In April 2017, the opening ceremony of Fujian Rail Transit Association was held at the Company, which further highlighted the Company's influence in the field of rail transit. In the field of nuclear power, the Company was among the first to be awarded the civil nuclear safety equipment design and manufacturing license in the industry, and had developed the first domestic 1E class K3 type UPS (including chargers and inverters) equipment for nuclear power plant, thus breaking the foreign technology monopoly while successfully winning the bid for Guangxi Fangchenggang Nuclear Power Station Project Phase II which is a leading project of "Hualong One" of CGN. In the field of military industry, the Company participated in the information assurance of the military parade for the 90th anniversary of the founding of PLA, and was praised for its outstanding contribution. During the reporting period, the high-reliable product quality and high-efficiency service capability enabled the Company to provide all-round power protection for the Harbin sub-venue of CCTV Spring Festival Gala 2017, the Xiamen BRICS Summit and the opening ceremony of the Tianjin National Games of PRC, and achieved satisfactory results. 3. New energy business During the reporting period, the Company was listed in the top 500 global new energy enterprises for three consecutive years. In overseas markets, the "2017 Energy Storage Inverter (PC) Report" released by IHS Markit, a world-renowned information consulting company showed that the shipments of Kehua Hengsheng energy storage inverters ranked sixth in the world in 2016, and Kehua Hengsheng ranked fifth in the global market of energy storage inverters with a capacity of more than 10 KW. In the field of micro-grid and energy storage, the Company launched a series of turnkey solutions, including micro-grid system solutions, city-level micro-grid energy storage solutions, micro-grid energy storage solutions in areas without power or with weak power, and off- grid system solutions, which are widely used in factories, office buildings, data centers, hospitals,

2017 Annual Report of Xiamen Kehua Hengsheng Co., Ltd. schools, areas without power and other places. In the field of power sales, the Company explored the power sales business in Guangdong and other places. In the charging pile field, the company was listed in the suppliers for China Vanke Co., Ltd. to assist in green commuting of the electric vehicle. As the leading provider of new energy solutions and comprehensive energy services in China, the Company's "Pilot Demonstration Project of Smart Distributed Microgrid Cloud Platform based on Flexible Trading of Green Energy" was listed in the first batch of "Internet +” smart energy (energy Internet) demonstration projects of the National Energy Administration. During the reporting period, the Company won many honors such as "the Enterprise with the Fastest Growth of Charging Piles in China of the Year" and "the Fastest Growing Enterprise in China Inverter Market of the Year".

 Core Competitiveness Analysis Whether the Company shall abide by the disclosure requirements of a special industry No Under the guidance of "One Body, Two Wings" strategy, the Company has consolidated its advantages in R&D, production and marketing, strengthened brand building, optimized business layout and continuously enhanced its core competitiveness. (I) Multi-scenario integration solution services advantages With the implementation of " Internet +", " Made in China 2025" and other national strategies, and the rapid development of big data, new energy and intelligent manufacturing and other industries, the demands of customers are gradually changing, and the demands of multi-scene integration are constantly emerging. Benefiting from the Company's deep development and accumulation in "Energy-based" business, "Cloud-based" business and "New Energy" business, the Company has provided customers with multi-scenario integration solutions such as "Photovoltaic + Traffic" and "Data Center + Photovoltaic" to meet customer needs in all dimensions from product to solution and from hardware to software during the reporting period. The service capabilities of multi-scenario integration solutions "One Body, Two Wings, Keeping Pace" have become the Company's differentiated competitive advantage, thereby forming a unique organic business ecosystem of Kehua. (II) Industry-leading technology advantages As the industry's first "State-Accredited Enterprise Technology Center", undertaker of "Key National Torch project", “National Key High-Tech Enterprise" and "National Technology Innovation Demonstration Enterprise", the Company has always been adhering to the development concept of "independent innovation, development of self-owned brand" and has accumulated profound technical precipitation after 30 years’ of industry practice. The Company continues to increase R&D investment to form technology core driving force and lead the development of the industry through technological innovation. At present, the Company has formed a R&D team with self-cultivated 3 expert enjoying special allowance of the State Council with the core that includes more than 900 persons, carried out industry-university-research cooperation with over ten institutions of higher learning and scientific research institutions such as Tsinghua University and Zhejiang University depending on the platform advantage of "State-Accredited Enterprise Technology Center", continuously strengthened the capacity of independent innovation to achieve rapid marketization of scientific research results. In 2017, the Company established more than 80 new R&D projects, completed the R&D progress of major R&D projects as planned, and obtained fruitful R&D achievements. In terms of intellectual property rights, 274 patents were declared in 2017, including 85 inventions, 128 utility models, 37 industrial design patents and 24 software filings. As of 2017, the Company had a total of 386 valid authorized patent, including 67 patents for invention, 193 utility models and 126 industrial design patents; and 229 software copyright filings, so there were

2017 Annual Report of Xiamen Kehua Hengsheng Co., Ltd.

615 valid intellectual properties obtained. (III) Perfect marketing services advantages The Company has a professional marketing services team and has built a sound marketing service system which provides a strong support for the Company's product technology research and development, market positioning and marketing. Relaying on the "3A" innovative service concept of "Active Service, Customer First", depending on three operation centers (Beijing, Shanghai and Guangzhou), 9 major national technical service centers and more than 50 manufacturer directly- controlled marketing service branches, the Company adopts a "complex" operation and management model which combines business department with offices and changes traditional passive service into active service taking directly-controlled branches, regional technology service center, customer service center and the R&D headquarters as supports, to provide users with proactive preventive services, rapidly respond to customer needs and provide diversified and personalized services to customers to the greatest degree. In 2017, the Company provided a series of capability trainings for employees in marketing service positions, which further improved its marketing service capability and won the praises of customers. Furthermore, based on the development of CRM Phase II, the Company has further improved the CRM system management platform, standardized customer relationship management and provided personalized service to customers through in-depth analysis of needs of customers to improve customer satisfaction and loyalty. With the deepening of the Company's strategic transformation, the Company's ability to provide multi-scenario integration technology services became increasingly prominent. Relying on its accumulated experience in cloud computing, new energy and power electronics industries, the Company could provide systematic technical solutions such as "Photovoltaic + Traffic” and "Data Center + Photovoltaic” so as to provide customers with total marketing solutions. (IV) Excellent ad first-class supply chain system As one of the first enterprises with accredited “integrated informatization and industrialization management system”, the Company implements core business process planning management, process optimization, quality management & control and production management process of product manufacturing process by relying on informatization and industrialization integration means, always adheres to informatization, documentation and visualization management in the whole manufacturing process to control various factors in the production process, so as to achieve standardization, normalization, work flow and automation. At the same time, the Company fully introduces automation equipment such as SMT, ICT and ATE, which greatly enhance the Company's intelligentization and delicacy management level. The Company continuously improves information management system, realizes real-time management & control of whole production process and unified traceability of product quality through the gradual improvement and popularization of core systems such as ERP, MES, OA, PLM, QMS and CRM, builds a Kehua lean production system (KPS) characterized by "Quality, Cost, Efficiency, Flexibility, Agility and Integration" to create a transparent, intelligent and lean 2025 model factory. During the reporting period, the Company further optimized and integrated the supply chain organization, and made a sorting in all dimensions of planning & scheduling, production control & procurement and quality. In 2017, the Company greatly improved its serviceability rate and delivery cycle of products. (V) Customer & Brand Advantage With excellent product quality, excellent after-sales service and good brand reputation, the Company serves a wide range of industries such as education, medical, finance, communications and power. Its customer base includes central and local governments at all levels, national defense and military companies, big state-owned banks. China Mobile, China Telecom, State Administration of Radio and Television, CNPC, Sinopec, State Grid, China Southern Power Grid, SAIC, Xiamen

2017 Annual Report of Xiamen Kehua Hengsheng Co., Ltd.

Golden Dragon and other customers in key industries and has accumulated abundant key customer resources. The Company's main business has ranked the first in domestic brands for 20 years. The brands have been highly recognized and trusted by the industry and customers. The brands and the Company has won UPS customer satisfaction brand award, outstanding national brand award in data center, excellent centralized inverter supplier, superior intellectual property rights enterprise in Fujian Province, national technological innovation demonstration enterprise, one of the world's top 500 new energy companies, an enterprise that grows fastest in China’s new energy vehicle charging facilities field etc. for several times, with a wide range of brand influence. After establishment of the Cloud Group in 2017, relying on its service capability in the whole industry chain, the Company quickly reached the leading level in the cloud computing base service industry. During the reporting period, the Cloud Group won five awards in 2017 IT Market Annual Meeting as well as the GITC 2017 "Best Internet Service Award" and the "2017 Award of Most Influential Enterprise in China IDC Industry". (VI) Talent Management Advantage The Company continuously adheres to the strategy of “Developing the Company by Talents” and provides talent support for the development strategy of the Company through talent selection, cultivation, use and retention. With the strategic transformation of the Company, the Company’s talent structure has also changed. Especially when the Company focused on the “Cloud Computing Base Technical Services” business, the Company expanded the recruitment of leading talents and core talents, accelerated the introduction of high-level talents and strengthened the construction of high-quality talent team. The Company has always advocated the concept of joint development for individual and enterprise and created a sustainable and stable development space for talents; it established and improved the Company's incentive mechanism and implemented equity incentives, which effectively mobilized the enthusiasm of the Company's senior management personnel and core backbone as well as attracted and stabilized the excellent management talents and technical (business) personnel to work together to create a healthy win-win development path for both the Company and employees. With the continuous innovation and development of the Company, by building a professional human resource management information platform, the Company realized the functions such as recruitment training management and personnel information management, so that the human resources management can be more systematic, modular and integrated. Employees' information can be inquired and analyzed to tap into the potential of the Company's human resources and further optimize the staffing and job setting on the whole, thus realizing the overall strategic goal of “Developing the Company by Talents”.

2017 Annual Report of Xiamen Kehua Hengsheng Co., Ltd.

 Discussion and Analysis on Operations I. Overview In 2017, the Company continued to optimize its operations and management under the guide of “One Body, Two Wings” strategy and continuously improved its corporate governance. Externally, the Company focused on the industry, deeply ploughed the market, and continued to promote the transition to solution and technical service providers in the three major business segments of the body “Energy Base Business” as well as the two wings “Cloud Base Service Business” and “New Energy Business”. In addition, it has continuously introduced multi-scenario integration technical solutions, such as "PV + Transportation", "Data Center + PV", etc., so that the Company's performance can achieve multi-stage actuation. Internally, the Company continued to integrate key resources, optimize business processes, deepen informatization construction, improve organizational structure and strengthen risk control, so that the Company’s efficiency and benefit are significantly improved. The Company inherits the enterprise culture of "Diligence, Unity and Win-win” and adheres to the model of "target management + performance contract". In 2017, the Company fully implemented the contract system for profit & performance, improved profit center mechanism, encouraged profit & risk sharing to “unite as one”, so that the achievement of strategic transformation of the Company are gradually demonstrated. In the reporting period, the Company achieved operating revenues of RMB 2,412,344,741.63 with a year-on-year increase of 36.29%. Net profit attributable to shareholders of the listed company was RMB 426,208,114.86 with a year-on- year increase of 148.42%. Basic earnings per share was RMB 1.55 with a year-on-year increase of 131.34%. (I) Promote group operation of cloud base business and deep development of cloud base service business In the first half of 2017, the Company completed the acquisition of 100% equity of Cloud VSP and changed the Company's cloud base business from base service (cabinet leasing, bandwidth leasing, etc.) to the business structure of combining basic services and value-added services (data synchronization, DDOS cleaning, etc.). This has rapidly increased the Company’s market share and industry position in the cloud computing industry and marks the Company’s transformation from a provider of data center products and total solution to a cloud computing service operator, which has greatly improved the Company’s core competitiveness. In the second half of 2017, the Company integrated all of its cloud computing businesses to form the Cloud Group. The Cloud Group faces to the market, orients to the customers and target on the profit and full implements independent operation in human resource, finance, marketing and R&D. Currently, the business scope of Cloud Group covers the following businesses of data center: planning & design, engineer construction, product scheme, operation & maintenance management, EPC business, IDC base business (cabinet leasing, bandwidth leasing, customization of data center at enterprise level, etc.) and IDC value- added service (DDOS traffic cleaning, SDN, data synchronization, etc.). Meanwhile, the Cloud Group also input R&D resources to actively develop all-new solutions such as TopWAN, TopVaas and TopDCC to provide whole industry chain service of cloud computing base industry for customers. During the reporting period, the Cloud Group won five awards in 2017 IT Market Annual Meeting as well as the GITC 2017 “Best Internet Service Award” and the “2017 Award of Most Influential Enterprise in China IDC industry”. (II) Strengthen human resource management, increase incentives to talents and stimulate motivation of talents During the reporting period, the Company systematically carried out human resource management in organization construction, talent echelon, talent training and incentive mechanism and effectively supported the implementation of the Company strategy and operation objective. In

2017 Annual Report of Xiamen Kehua Hengsheng Co., Ltd. terms of organization construction, in order to better adapt to the market and improve operation efficiency, the Company optimized and improved its organizational structure, established the “Cloud Group” and set up the operation management center. The new organizational structure is more adapted to the rapid development of the Company's business, conducts effective management and control of the Company's operation and supports the achievement of strategic objectives of the Company and each center. In terms of talent echelon, the Company vigorously expanded talent introduction channels, increased the introduction of core high-end talents, and established a professional senior talent team. The Company intensively focused on qualification assessment of core business backbone and systematically reviewed and evaluated the Company’s “talent map”. Through a series of measures, the Company has established a well-organized and gradient talent team to provide new talent motivation for the strategic transformation of the Company. In terms of talent training, the Company organized a series of strategy publicity training, sales skill training and induction training for new employees to help various employees to quickly adapt to the post and make the talent team of the Company “unite as one” and “make the best use of talents”. In terms of incentive mechanism, based on the employment principle of “Fairness, Impartiality and Openness”, the Company implemented a new round of equity incentive in 2017 to ensure that the incentive to core backbone and talents are in place. At the same time, clear performance targets are set for equity incentives and decomposed into all levels and individuals of the organization. The degree of profit completion is linked to equity incentives and annual bonus, which greatly enhanced the enthusiasm of the employees and fully released the talent's motivation. (III) Deepen information construction and improve operation efficiency In 2017, according to the strategic planning of informatization, the Company promoted the informatization construction in an orderly manner and combed and optimized the following aspects: informatization of product delivery, informatization of innovation process, informatization of production and manufacturing and office informatization. In term of informatization of product delivery, the Company relied on CRM system and ERP system to carry out systematic management on product delivery. The Company optimized the results of the phase I of CRM and organized the CRM application competition for the backbone of marketing business to further enhanced the marketing team's informatization application capability of the Company and promoted the conversion of sales results. Meanwhile, the Company carried out the phase II CRM construction, successively launched channel management, overseas marketing business management, customer service system and other projects and organically integrated customer management, sales process management, expense budget management and after-sale management, thus effectively supporting product delivery and better business development. During the reporting period, the Company evaluated the optimization suggestions during the use of ERP, established a business process more suitable for product delivery and improved customer satisfaction. In term of informatization of innovation process, the Company further optimized the PLM system and adjusted the management process according to the latest organization structure, thus accelerating the innovation process. In term of informatization of production and manufacturing, relying the KPS system independently developed by Kehua and the introduced MES system, all node information in production and manufacturing are managed in the informatization system and all decks in production and manufacturing can be tracked and traced, thus ensuring the product quality. At the same time, the Company's management method of transparent factories, green factories, and smart factories has been widely recognized by customers. In term of office informatization, the new OA cooperative office system was successfully launched to make the business process operate more efficient and smother by process optimization. Meanwhile, the Company launched the OA system for the mobile, which greatly improved the office efficiency of the Company. (IV) Strengthen capital operation and increase capital benefit

2017 Annual Report of Xiamen Kehua Hengsheng Co., Ltd.

In 2017, the Company continued to adhere to the policy of “internal growth + external M&A”. In the basic field of cloud computing, the Company completed a strategic acquisition of 100% equity of Cloud VSP. Through the integration of existing resources such as brands, teams and technologies, the Company increased the IDC operation scale and marketing capabilities, truly realized the business layout of cloud computing base services + value-added services and initially achieved the strategic transformation of “from hard to soft” and "from product to scheme, and from scheme to platform". During the reporting period, the Company completed the withdrawal of the equity of CEI Cloud Data Storage Technology (Beijing) Co., Ltd., and achieved an investment income of approximately RMB 130 million. (V) Promote brand building and improve enterprise image During the reporting period, the Company strengthened brand promotion and marketing to establish a good enterprise image and improve the Company’s brand effect. In 2017, the Company mainly won the following awards: five awards in 2016-2017 China IT Market Annual Meeting, the 2016-2017 Award for Highest Market Share Among China High-end UPS Domestic Brands, the 2016-2017 Annual Successful Enterprise in China High-end UPS Market, the 2017 Annual Successful Enterprise in IT Market by China Green Data Center, the 2017 Annual Fastest Growing Enterprise in China Inverter Market and the 2016 Outstanding Application Award for Integration of Informatization and Industrialization in China. The Company was also selected as one of the first batch of "Internet +” intelligent energy (energy Internet) demonstration projects of the National Energy Administration, which intensively reflected the Company's good enterprise image. In 2017, the Company launched the national exhibition tour “Energy Interconnection, Smart Pilot” and received a good reputation in the industry. The Company, as president of the Fujian Rail Transit Association, hosted the opening ceremony for the first rail transit industry organization in Fujian Province, guided and promoted the quicker and better development of the rail transit industry in Fujian Province, and further enhanced the Company’s industry brand effect. During the reporting period, the Company also undertook information assurance tasks such as the military parade for 90th Anniversary of the PLA and the BRICS Summit, which further enhanced the Company's reputation in the industry.

 Outlook of Future Development of the Company 1. Industry trends (I) UPS industry China has entered a critical period of the "13th Five-year" Plan, and many new concepts and policies such as 5G, Big Data, Cloud Computing, "Internet+" and "Made in China 2025" are all focused on the new generation of information technology, high-end equipment and other strategic key industries, which becomes a new growth point for the UPS market. According to the 2016-2017 China UPS Market Annual Research Report issued by CCID, the overall UPS market sales volume of China in 2016 was RMB 5,574 million, with an increase of 8.7% compared to 2015. At the same time, due to the impact of the UPS application terminal, the power of China's UPS market will further migrate to high power, and the product above 100KVA will further expand its proportion, accounting for 40.1% of the overall market. During 2016-2018, approximately RMB 3.6 trillion will be invested to the key transport infrastructure construction projects, and the power equipment requirement will have a market scale of RMB 20-30 billion. Therefore, the incremental space of UPS and the whole power system market will continue to expand. (II) Data center industry With the rapid development of industries such as cloud computing, big data, the Internet of

2017 Annual Report of Xiamen Kehua Hengsheng Co., Ltd.

Things, and 5G, the global data center maintains a healthy growth trend. Data center investment not only includes building new data centers, but also upgrading and outsourcing service on existing computer rooms. The growth speed of global data center varies greatly in different regions and is relatively higher in emerging markets such as Brazil, China and India, etc. According to estimation of intelligence, the growth speed of data centers in Asia-Pacific region in 2016 was 9.3%, in which the data center in Japan has the largest investment scale of USD 17.6, followed by China, India and South Asia region with investment of USD 12.4 and USD 8.56 respectively. The following figure shows the global IDC market size and IDC market size in China predicted by the IDC circle. It can be seen from the figure that the IDC market size in China has maintained a growth rate of over 35% in recent years. Additionally, Ministry of Industry and Information Technology of the People’s Republic of China has recently issued the Three-Year Action Plan on the Development of Cloud Computing (2017-2019), which clearly points out that the size of the cloud computing industry in China will reach RMB 430 billion by 2019 and the future cloud computing industry chain will have huge market space.

(III) New energy industry Upon the release of "13th Five-Year" Energy Plan, the new energy-supported energy transformation system in China has been experiencing a rapid change, and the vigorous development of new energy has become a national strategy. China has unveiled a series of polices and measures to actively support the new energy industry, which makes wind power, photovoltaic power, micro-grid stored energy and distributed energy become the key development areas of new energy, and the new energy industry has proceeded to a rapid development lane. According to the Plan, the photovoltaic power, solar power and wind power will reach 105 GW, 5 GW and 210 GW respectively by 2020, showing that the new energy industry entails a huge market space. During the "13th Five-Year" Plan period, energy storage has been included into the Top 100 Major Projects. The National Energy Administration has issued the Action Plan for Energy Technical Reform and Innovation (2016-2030), and the Key Innovation Action Roadmap for Energy Technical Reform and Innovation, providing the planning for advanced energy storage and micro-grid technology innovation. It is foreseen that energy storage will become the most energetic and powerful industry in the energy field. Statistics show that the compound annual growth rate of the global energy storage industry has reached 193% in the recent five years, and the capacity of our energy storage market is expected to reach USD 100 billion in the next decade. In 2016, the National Development and Reform Commission and the National Energy Administration issued the Administration Regulations on Orderly Deregulation of Distribution Network Business, and announced to release social capital to invest in the construction of incremental distribution network. In July 2017, the National Energy Administration and the National Development and Reform Commission issued the Trial Measures for Promoting the Construction of Grid-connected Micro-grids. In addition, the new energy electric vehicles industry also steps into the opportunity period for

2017 Annual Report of Xiamen Kehua Hengsheng Co., Ltd. rapid development According to statistics, in 2017, 27 provinces and 77 cities throughout the country introduced relevant incentive policies. Among these policies are 84 policies involving new energy automobile industry, 73 policies involving charging piles, and 49 policies of subsidy. As required in the 13th Five-Year National Plan on the Development of Strategic Emerging Industries, the production and sales volume of new energy vehicles will reach over 2 million, the accumulated production and sales volume will reach 5 million, and the charging device market scale in China will exceed RMB 100 billion by 2020. According to the Energy Work Guidance for 2018 issued by the National Energy Administration in 2018, the country plans to build 600,000 charging piles within 2018, consisting of 100,000 public charging piles and 500,000 private charging piles, which releases great policy benefits. 2. Company's development strategy The Company will continue adhering to the development strategy of "One Body Two Wings", i.e., the three business sectors taking the "Energy-based Business" (high-end UPS, customized power supply, military power supply and electric power automation system) as the body and taking the "Basic Cloud Computing Services" (data center, data security and cloud resource services) and "New Energy Business" (wind and solar power generation, energy storage, micro-grid and electric vehicle charging system) as the two wings, and make full use of the advantage of "Homologous in technology, and being made in the same production line" to accelerate the horizontal expansion and deepen the vertical expansion of relevant diversified business, transform from an equipment supplier to a system solution and platform service provider, and expedite the transformation from equipment manufacturing to advanced and service-oriented manufacturing. 3. 2018 annual operational planning (Special tips: this operational planning does not constitute the Company’s performance commitment to the investors, so we remind you to keep sufficient risk awareness and understand the difference between the operational planning and the performance commitment.) 2018 is the 30th anniversary of the founding of the Company. The Company will continue to adhere to the “One Body Two Wings” strategic planning and deepen its development in the three major business segments: “Energy-based”, “Cloud-based” and “New Energy”. (I) Focusing on "One Body Two Wings", and keeping deepening strategic transformation In terms of “Energy-based”, in 2018, the Company will focus on grasping development opportunities in the fields of military industry, nuclear power, rail transportation and others on the basis of maintaining its original industrial strengths, and taking advantage of the development of the division + office matrix to promote business development in depth. In terms of military industry, the Company is seizing the opportunities of military reform and civil-military integration to combine the Company’s military product development plan with the military equipment development plan to accelerate the development and layout of product lines. In terms of nuclear power, the Company is seizing the opportunities for domestic nuclear equipment to go to sea and using the Company’s accumulated experience and reputation in “Hualong I” to continue to develop domestic and overseas markets. In terms of rail transportation, the Company is using the advantages of the integration of the Company and KangBiDa to deepen and subdivide its field markets and continue to expand its market share. In terms of “Cloud-based”, the integrated cloud group has been operating efficiently and using the service capabilities of the entire industry chain to accelerate cooperation with the three major operators and frontline Internet operators, continuing to expand the scale of the cloud group and enhancing the Company’s cloud business profitability. In terms of “New Energy”, the Company continues to increase the scale of development of power stations (centralized or distributed), actively expands new businesses such as energy storage, micro-grid and power sales, and expands the scale of new photovoltaic energy. At the same time, in the field of charging system, the Company is

2017 Annual Report of Xiamen Kehua Hengsheng Co., Ltd. actively expanding the EPC project of the charging system and opening up a comprehensive business structure from modules, charging piles, charging stations, and cloud platforms to EPC. (II) Strengthening innovation-driven development, and further cultivating core advantages The Company will continue to maintain high investment and high output in research and development. According to the Company’s “One Body Two Wings” strategic planning, it will closely integrate market requirements, give full play to the platform advantages of the country’s recognized enterprise technology center, strengthen breakthroughs in key technologies and core technologies, and drive business transformation and upgrading with technology innovation. At the same time, the Company will use a full range of intellectual property achievements to build the core competitiveness of products and programs to build a “Moat” for technological advantage. On the other hand, the Company will make use of its core technology advantages and application development advantages to customize solutions for customers on a demand basis, continuously introduce new products and new application solutions, increase product value, and meet the ever- escalating market demands. (III) Improving the supply chain system, and enhancing the manufacturing capacity In 2018, the Company will further optimize processes in planning and scheduling, production control and procurement, quality and other aspects, and improve the efficiency and effectiveness of supply chain management. The Company is always dedicated to an excellent supply chain with comprehensive competitive advantages and Kehua characteristics that is integrated with quality, cost, efficiency, flexibility, agility and integration. As one of the first batch of enterprises implementing the management system of "Integration of Informatization and Industrialization" in China, the Company will improve its on-demand customization capacity and flexible manufacturing capacity through in-depth integration and application of the management system of "Integration of Informatization and Industrialization", and build its integrated purchase and supply capacities for service-oriented manufacturing according to the needs of strategic transformation. Additionally, the Company will further implement the quality policy of "Leading technology, superior quality, and user trust", continuously promote the construction of quality management system, and devote itself to build a "Made in China 2025" sample plant with transparency, intelligence and sophistication. (IV) Strengthening the brand construction, and increasing the brand value Combining the Company’s 30 years of development experience and brand influence, the Company will strengthen the publicity and reputation of the three major business segments in the segmented fields, and formulate independent publicity plans for the three aspects of “Energy-based”, “Cloud-based” and “New Energy”. And the Company will make targeted investments. The Company will use marketing activities, WeChat, Weibo and other Internet platforms, to increase brand communication efforts, focus on joint promotion with a strong brand, participate in important domestic and international exhibitions, and further enhance the Company’s brand awareness and reputation. (V) Strengthening the talent team construction, and supporting the strategic transformation In 2018, the Company is focusing on profitability in terms of manpower management and talent incentives to fully liberate productivity. Centering on the strategic planning and business transformation requirements, the Company will accelerate the organization reform and team building, expand talent recruitment channels, carry out both internal and external recruitments, improve the talent recruitment efficiency, and widely attract excellent talents and teams required in the new business sectors of the Company. In terms of employee incentives, the Company is continuing to promote the implementation of options such as equity incentives and employee stock ownership

2017 Annual Report of Xiamen Kehua Hengsheng Co., Ltd. plans to further motivate the enthusiasm and initiative of the employees. In terms of performance management, the Company simplifies the performance appraisal methods for organizations and employees, takes profits as the center, takes into account the strategic objectives of long-term development, establishes a remuneration and incentive mechanism with external competitive advantages and fully mobilized internal capabilities, giving full play to the value of talents, and improve organizational effectiveness. At the same time, with the occasion of the 30th anniversary of the Company’s founding, the Company promotes the corporate culture of “Struggle, Solidarity, and Win-win”, to further enhance the centripetal force and recognition of employees, especially new employees, and to promote the achievement of the Company’s strategic goals. (VI) Deepening the information application, and improving the management efficiency In 2018, the Company will systematically promote informationization in the four aspects of product delivery informationization, innovation process informationization, manufacturing informationization and office informationization. In terms of CRM application, CRM application competitions will continue to be implemented, and the results of CRM construction will be truly integrated into the marketing process to help new employees and low-performing marketing staff to improve their performance. At the same time, in 2018, the Company will integrate the experience of smart manufacturing into the KPS system and output the KPS management system to the outside world, giving priority to assisting suppliers and partners in improving the efficiency of production and manufacturing. In terms of OA, the Company will integrate all its subsidiaries into an integrated OA management system. On one hand, it will improve the management collaboration; on the other hand, it will ensure the security of data. At the same time, in 2018, the Company will carry out management efficiency improvement work on the basis of systematic improvement of the OA process, further optimize and streamline the process from complicated to simple process, and enhance the OA management process to promote the business. (VII) Improving internal control construction, and enhancing risk control Continuously improving the internal control system serves as the core topic for operation and risk control of the Company. In particular, it is required to enhance the normal working mechanism where the risk control committee and investment committee can well control the operation, investment and other risks, make internal control and audit by centering on the Company's strategic objectives and major projects, strengthen project and risk control, and further improve the risk control system according to the development of actual business. In 2018, the Company will conduct effective audits for engineering projects, mergers and acquisitions and major businesses to provide guarantees for the healthy and stable development of the Company. (VIII) Strengthening capital operation, and promoting asset appreciation According to the Company's strategic planning and business transformation and layout requirements, the Company will strengthen the management activities relating to the capital market, well manage the relationship with investors, formulate appropriate capital investment guiding strategies by focusing on the company strategy, in order to better take advantage of the capital market to accelerate the Company’s strategic layout, seize suitable opportunities to accelerate resources integration and promote the business development of the Company by means of merging and acquisition and private placement of shares. At the same time, the Company will further explore and implement innovative business models, adopt light asset operating methods for most new projects, revitalize funds and create more value for shareholders.

 Performance of the social responsibility According to the provisions of Shenzhen Stock Exchange Social Responsibility Instructions to

2017 Annual Report of Xiamen Kehua Hengsheng Co., Ltd.

Listed Companies, the Company achieves good performance in the aspects of protection of rights and interests for the shareholders and creditors, employees, and suppliers and clients, production safety and occupational health, public relations and public welfare, etc. during the reporting period. In addition, the company operation and information disclosure are normative, the Company is strong in independence and the actual practices comply with the regulated documents on governing of the listed companies issued by the China Securities Regulatory Commission. 1. Protection of rights and interests for the shareholders and creditors The Company discloses relevant information in a fair, true, complete, accurate, timely and transparent manner, treat all the investors impartially, keep good communication with all the investors, and ensure that all the shareholders have the equal opportunity to obtain the information in strict accordance with the Company Law of the People’s Republic of China, Securities Law of the People's Republic of China, Code of Corporate Governance for Listed Companies in China, Stocking Listing Rules of the Shenzhen Stock Exchange and any other relevant laws and regulations as well as the Articles of Association during the reporting period. The Shareholders’ Meeting, the Board of Directors and the Board of Supervisors operate normatively, improve the legal person governing structure continuously, establish an effective control system and conduct the corporate governance activities persistently during the reporting period. The Shareholders’ Meeting, the Board of Directors and the Board of Supervisors perform their respective functions, coordinate the operation of the Company and check and balance with each other effectively to practically guarantee the legal rights and interests of all the shareholders and creditors. During the reporting period, the Company strictly complied with the regulations and completed implementing the 2016 annual profit distribution plan to reward shareholders. 2. Protection of rights and interests for the employees The Company develops employee care and welfare system, establishes the Labor Union, Party Branch, Youth League Branch and other organizations and holds the general elections. The organizations support the corresponding services and welfare according to the critical demands and expectations of the different groups of the Company and guarantee the legal rights and interests of the employees according to the Labor Law, Trade Union Law and other laws and regulations. The Company adheres to the talent concepts of “the employees with career dedication and daring to challenge are our talents; the employees with spirits as honesty, professional dedication, pragmatism, innovation, continuous improvement, and pursuit of excellence are the greatest wealth of the Company” to build a scientific and competitive talent mechanism platform to select, deploy, train and retain the talents. Meanwhile, the Company undertakes a variety of employee activities to motivate their enthusiasm and passion to the greatest extent, laying a sound foundation for the company culture. The Company sets a long-term goal of developing and benefiting with the employees. In 2017, the Company implemented the third phase of restricted stock / option unlocking/ exercise option of the 2014 equity incentive plan, carried out the 2017 restricted stock incentive plan to further improve the Company’s long-term incentive mechanism to attract and retain outstanding talents, and fully mobilized the enthusiasm of its directors, senior management personnel, middle-level managers, core business (technical) cadres and other core personnel to make its core talents have more sense of belonging while employee interests are realized. 3. Protection of rights and interests for the suppliers and clients The Company focuses on the establishment of good strategic partnership between the suppliers and the clients, improving the procurement and client service procedures by the fair and just evaluation system, fair and transparent procurement procedures and all-round servicing system so as to provide more competitive products and services in the market. The Company communicates the

2017 Annual Report of Xiamen Kehua Hengsheng Co., Ltd. development strategies, company culture, market information and dynamic product information effectively by means of suppliers conference, channel meeting, high-level visits, training session and thematic analysis meeting to build a trustful and cooperative platform together with the clients and implement the social responsibilities to the suppliers and clients. 4. Environmental protection and sustainable development The Company advocates sustainable green development, lay emphasis on the environmental protection and pollution prevention and control, actively responds to the national call on environmental protection, strictly abides by the national environmental protection laws and regulations, and fulfill the commitments to environmental protection and sustainable development. The Company strictly abides by the relevant environmental protection laws and regulations and the corresponding standards to control the “three wastes (waste water, wastes and waste gases)” effectively and comprehensively, governs the discharge of three wastes strictly, effectively control and conduct innocent disposal on the three wastes. The treatment of three wastes is under the normal operation. The Company introduces new process, equipment, materials and other measures during the design development and manufacturing to ensure the product quality and to pursue the environmental protection and energy saving to as to guarantee the sustainable development of the Company. 5. Production safety and occupational health The Company strictly executes the Labor Law, Production Safety Law, Law on the Prevention and Control of Occupational Diseases and other national laws and regulations on the labor and production safety, follow the ISO14001 and OHSAS18001 systems , organizes to establish the leading organization for production safety to take charge of the daily production safety, fully implements the director responsibility system, and clearly determine the responsibilities of each post and every employees to form a perfect organization and working network system. The Company pays special attention to the training on safety knowledge and increases the safety awareness of all the employees so as to ensure the production safety. It develops various systems, such as Management on Environmental Factors, Operation Control of Environmental and Occupational Health and Safety and Monitoring Plan on Operation Control of Environmental and Occupational Health and Safety, organizes the departments for the identification of the environmental factors and sources of danger to identify the major environmental factors and sources of danger, develops and implements the control measures and contingency plans, improves the working environment for the employees so as to ensure the physical and mental health of the employees. 6. Public relations and public welfare The Company always bears in mind the social responsibilities and missions of the company, that is, to promote the development of the regional economy and the city, to be enthusiastic in public good and return the society , and to promote the harmony of the communities and society. The Company pays the taxes by laws with integrity, contributes to the society, adheres to independent innovation and intellectual property strategy, and actively creates employment opportunities. When making efforts to develop its economy, the Company also actively participates in the social activities for public good concerning the sanitation and education, community construction, donations for education, helping the poor in the region where the Company is located and influences and promotes the development of the local economy by its development so as to organically combine pursuing profit with undertaking social responsibilities. It raises the donations during the company to help the colleagues in hardship to pull through the difficulties. 2. Performance of the social responsibility of targeted poverty alleviation During the reporting year, the Company hasn’t implemented targeted poverty alleviation and has no subsequent targeted poverty alleviation plan.

2017 Annual Report of Xiamen Kehua Hengsheng Co., Ltd.

3. Situation about environmental protection Whether the listed company and its subsidiaries belong to the key pollutant discharging entities announced by the environmental protection department. N/A The Company and its major subsidiaries are not key pollutant discharge units, and their relevant emissions are in compliance with the regulations of the environmental protection department.