Industry Overview

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INDUSTRY OVERVIEW

The information presented in this section, unless otherwise indicated, is derived from various official government publications and other publications and from the market research report prepared by Frost & Sullivan, which was commissioned by us. We believe that the information has been derived from appropriate sources and we have taken reasonable care in extracting and reproducing the information. We have no reason to believe that the information is false or misleading in any material respect or that any fact has been omitted that would render the information false or misleading in any material respect. The information has not been independently verified by us, the Sponsor, the [REDACTED],the[REDACTED],the [REDACTED], or any of our or their respective directors, officers or representatives or any other person involved in the [REDACTED] (excluding Frost & Sullivan) and no representation given as to its accuracy, completeness or fairness. Accordingly, you should not place undue reliance on such information or statistics.

REPORT COMMISSIONED FROM FROST & SULLIVAN

We commissioned Frost & Sullivan, an independent market research and consulting company, to conduct an analysis of, and to prepare a report on the granite aggregates market in the PRC for the period from 2014 to 2024. The report prepared by Frost & Sullivan for us is referred to in this document as the Frost & Sullivan Report. Founded in 1961, Frost & Sullivan has 40 offices with more than 2,000 industry consultants, market research analysts, technology analysts and economists globally. We paid Frost & Sullivan a fee of HK$400,000 which we believe reflects market rates for reports of this type.

Frost & Sullivan’s independent research consists of both primary and secondary research obtained from various sources in respect of the granite aggregates market in the PRC. Primary research involved in-depth interviews with leading industry participants and industry experts. Secondary research involved reviewing company reports, independent research reports and data based on Frost & Sullivan’s own research database. Projected data were obtained from historical data analysis plotted against macroeconomic data with reference to specific industry-related factors.

In compiling and preparing the research, Frost & Sullivan assumed that the social, economic and political environments in the relevant markets are likely to remain stable in the forecast period, which ensures the stable and healthy development of the granite aggregates market in the PRC. In addition, Frost & Sullivan has developed its forecast on the following bases and assumptions: The PRC economy is likely to maintain stable growth in the next decade and the respective countries and regions’ social, economic and political environment is likely to remain stable in the forecast period. Additionally, the granite aggregates market in the PRC is expected to grow based on the macroeconomic assumptions of the respective economy. Additional key industry drivers include: increasing demand for granite aggregates from downstream industries, rising investment in infrastructure and growing adoption of granite aggregates.

OVERVIEW OF THE PRC AND GUANGDONG GRANITE AGGREGATES MARKET

Definition and Introduction

Granite is a type of felsic intrusive igneous rock that is granular and phaneritic in texture, predominantly white, pink, or gray in color, depending on their mineralogy. Granite is nearly always massive, hard, and tough. It is used as a construction material, a dimension stone, an architectural stone, a decorative stone, and it has also been used to manufacture a wide variety of products.

In the PRC, granite is a widespread construction stone and is used in buildings, bridges, paving, monuments, and many other exterior projects. Indoors, polished granite slabs and tiles are used in countertops, tile floors, stair treads and many other design elements.

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INDUSTRY OVERVIEW

In particular, granite aggregate is one of the most common application in the PRC. Aggregate is a broad category of coarse to medium grained particulate material used in construction, including sand, gravel, crushed stone, slag, stone powder, recycled concrete and geosynthetic aggregates. Granite aggregates are crushed hard rock of granular structure, being the most common type of aggregate. Given different size of fractions, granite aggregates can be used in various applications, including road construction, production of paving slabs and other similar construction products, production of concrete and road surfacing.

Application of Granite

Construction Dimension Stone Architectural Stone Decorative Stone Others Material

Source: Frost & Sullivan

Value Chain Analysis

Mine construction is a pre-requisite for granite block extraction. Mine construction includes stripping the topsoil and weathered rocks above the granite deposit, construction of working benches, construction of infrastructures such as connecting roads and waste rock dumps, as well as connecting power, water and other utilities. Granite block extraction involves cutting, overturning, separation and reshaping granite rocks using specialised mining equipment. Granite aggregates extracted from the quarry are processed into blocks of different sizes, and granite aggregates at the processing plant. The granite aggregates are generally sold directly to end customers in the construction industry, including concrete companies, cement companies and contractors. Due to the specialisation of work and cost control, it is an industry norm that granite aggregates companies will outsource the mining, blasting and crushing processes to third party subcontracting companies. Further, it is an industry norm that granite aggregates companies typically enter into long-term framework sales contracts with their customers and not one-off sale contracts.

Upstream Midstream Downstream

Mine construction and granite Production and distribution Construction Materials block extraction

Source: Frost & Sullivan

Business Model Analysis

As granite aggregates is heavy and bulky, granite aggregates enterprises usually supply their products to the downstream users within 100 km, which is considered the most economical and efficient transportation distance. In other words, the granite aggregates enterprises mainly supply the products within their own provinces. The localized market operation is the industry norm in the granite aggregates industry. On the other hand, vertically integrated operations, from mining, process and sales of granite aggregates, are increasingly performed by the large-scale enterprises to capture the opportunities in the granite industry and enhance their profitability.

With the limited amount of natural aggregates from the sea and river, the demand for manufactured aggregates, including granite aggregates, is rapidly growing in cities located near coast and river, such as Guangdong Province.

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INDUSTRY OVERVIEW

Outlook of the Granite Aggregates Market in The PRC

Construction industry in the PRC has been supported by various governmental policies over the years. In 2017, the State Council has issued “Opinions of Promoting Sustainable and Healthy Development of Construction Industry”《關於促進建築業持續健康發展的意見》 ( ) which has outlined the promotion of quality and safety of construction works, and the sustainable development of the industry in the coming years. On the other hand, the “13th Five-Year Plan for Development of Construction Industry”《建築業發展 ( “十三五” 規劃》) also layout the growth target of the construction industry with around 7% during 2016 to 2020. The supportive government policies would act as the driver to the overall construction industry and the relevant downstream industry, including mining, process and sales of granite aggregates in the PRC. Better Infrastructure Linking the Greater Bay Area

The establishment of Greater Bay Area amplifies the connectivity between Hong Kong, Macau and Chinese cities, including Shenzhen and Guangzhou, which offers enterprises with tremendous opportunities with new industries emerging and cementing themselves in the international value chain. In particular, the integration would further propel the infrastructure development and strengthen the supply chain industry in higher-tech manufacturing and services in the Greater Bay Area. The ongoing key infrastructure projects include the Shenzhen-Zhongshan Corridor, Hong Kong-Shenzhen Airport Rail Link and Guangzhou-Qingyuan Intercity Railway. The infrastructure projects would translate into growth opportunities for the construction industry. In addition, the better infrastructure linking the Greater Bay area would boost the demand for office and other commercial space across the Greater Bay Area. It is expected that there would be a solid increase in the demand for building materials, including aggregates, cement and concrete, thereby benefiting the mining, processing and sales of granite aggregates in the Greater Bay Area. Accelerated Development of Regional Integration in the Yangtze River Delta

In addition, the outline of the Plan for the Development of Regional Integration in the Yangtze River Delta (長三角一體化發展) promotes the integration between the cities in the region, particularly in the areas of infrastructure and business activities. The implementation of national strategies, such as the strategy of developing the Yangtze River Economic Belt and the strategy of integrated development of the Yangtze River Delta, facilitates the integrated development of city agglomerations. Accelerated layout for industrial cooperation projects, integration and promotion of innovation platforms, coordinated layout for new-generation information infrastructure and closer cooperation on constructing industrial Internet provide a growth impetus to the construction market in the PRC. Promotion for the Coordinated Development of the Beijing-Tianjin-Hebei Region

The Coordinated Development of the Beijing-Tianjin-Hebei Region (京津冀協同發展規劃) aims at an orderly relocation of all non-essential functions from Beijing, the national capital, to neighboring locations. The move entails adjusting the economic structure and rationalizing space utilization, while exploring a new model of optimized coordinated development in a region with a dense population, to create a new growth pole in the region. The broad region covers Beijing, Tianjin and 11 prefecture-level cities in the neighboring Hebei Province. The coordinated development explores a new growth model in densely-populated areas, featuring a better economic structure, a cleaner environment and improved public services. It is expected that the building development and infrastructure in the neighboring Hebei Province would be further promoted, thus providing an impetus to the construction market. Outlook of the Granite Aggregates Market in Guangdong Province

According to Guangdong Provincial Development and Reform Commission, the PRC government has issued 1,098 major construction projects in 2018 with total investment of over RMB5,670 billion and an annual investment of over RMB600 billion. The gross output value of construction enterprises in Guangdong Province increased from RMB844.0 billion in 2014 to RMB1,663.3 billion in 2019, at a CAGR of approximately 14.5%. As set out in the “13th Five-Year Plan”, the government will actively develop intercity and municipal (suburban) rail

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INDUSTRY OVERVIEW services and encourage the use of existing tracks to operate intercity rail services so as to form core networks of rail transit lines, running at different levels, which ensure efficient connections between small, medium, and large cities as well as towns. The development of public transportation is prioritised to speed up the development of urban rail transit, bus rapid transit, and other forms of mass public transportation. Guangdong Province targets to establish a comprehensive transportation system that is safe, efficient, green and intelligent. For example, the Baiyun International Airport will launch 30 new cargo routes, Guangzhou Port will add 30 international liner routes, introduce high-speed rail to Guangzhou Railway Station and Guangzhou East Railway Station. The total length of the expressway in Guangdong Province would increase from 8,800 km to 11,000 km. Along with such development of transportation infrastructures, buildings for residential and commercial use in neighboring area are also expected to increase and hence driving the demand for construction works and building materials in Guangdong Province. The Group’s customers are not involved in the selected infrastructure projects below. In particular, gross value of construction works performed in Yangjiang City increased from RMB10.3 billion in 2016 to RMB11.5 billion in 2019. Selected Infrastructure Projects in Guangdong Province

Expected Project Project Name Total Investment Length of Highway Completion Status Shantou-Zhanjiang Expressway Over RMB80 853 kilometers 2020 Ongoing billion Xingning-Shanwei Express Way Over RMB10 48.2 kilometers 2020 Ongoing billion He Hui Guan Expressway Over RMB35 255.7 kilometers 2020 Ongoing billion Zhongshan-Kaiping Expressway Over RMB26.5 152.4 kilometers 2020 Ongoing billion Kaiping-Yangchun Expressway Over RMB14 83 kilometers 2020 Ongoing billion Dongguan-Panyu Expressway Over RMB22 65 kilometers 2020 Ongoing billion Guangzhou-Zhongshan-Jiangmen Over RMB19.5 68.6 kilometers 2019 Ongoing Expressway billion Source: Frost & Sullivan

Production Volume of Concrete and Cement in the PRC

Cement and concrete are the key construction materials in the PRC. With the rising demand from the construction sector, production volume of cement and concrete in the PRC amounted to 2,330.0 million tonnes and 2,527.5 million cubic metres in 2019, at a CAGR of -1.3% and 7.4% from 2014 to 2019. With the population growth and urbanization, the rising investment in infrastructure projects would continue to boost the demand for building materials, including cement and concrete. Production volume of cement and concrete in the PRC is expected to reach 2,364.9 million tonnes and 3,662.3 million cubic metres in 2024, at a CAGR of 0.3% and 7.7% respectively.

Production Volume of Concrete and Cement in Guangdong Province

In particular, benefited by the rapid economic development and the provincial government’s plans to further enhance the transportation infrastructure in Guangdong Province, the PRC, production volume of cement and concrete in Guangdong Province, the PRC, is expected to reach 191.7 million tonnes and 235.1 million tonnes by 2024, representing a CAGR of 3.1% and 3.3% during 2019 to 2024.

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INDUSTRY OVERVIEW

Production Volume of Aggregates in Guangdong Province

The production volume of aggregates in Guangdong Province increased from 1,003.0 million tonnes in 2014 to 1,275.3 million tonnes in 2019, representing a CAGR of 4.9%. The increase was primarily due to the rising infrastructure investment and supportive government policies. Going forward, the expedited infrastructure development in Guangdong Province will be the major

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INDUSTRY OVERVIEW impetus driving the growth of the construction market and building materials. The production volume of aggregates in Guangdong Province would increase from 1,342.1 million tonnes in 2020 to 1,651.5 million tonnes in 2024, at a CAGR of 5.3%.

Production Volume of Aggregates (Guangdong Province), 2014-2024E

Million Tonnes CAGR: 5.3% 1,800 1,651.5 1,600 CAGR: 4.9% 1,572.9 1,495.8 1,421.6 1,400 1,342.1 1,275.3 1,205.0 1,200 1,160.0 1,060.0 1,003.0 1,010.0 1,000

800

600

400

200

0 2014 2015 2016 2017 2018 2019 2020E 2021E 2022E 2023E 2024E Source: Frost & Sullivan

Market Size of Granite Aggregates in Guangdong Province

Driven by the continued urbanization and construction buildings, the production volume of granite aggregates in Guangdong Province increased from 80.2 million tonnes in 2014 to 114.2 million tonnes in 2019, representing a CAGR of 7.3%. Given the rising investment and upgrade of transportation system, such growth momentum is expected to be sustained in the next five years. The production volume of granite aggregates in Guangdong Province is expected to increase from 122.1 million tonnes in 2020 to 158.8 million tonnes in 2024, representing a CAGR of 6.8%.

Production Volume of Granite Aggregates (Guangdong Province), 2014-2024E

Million Tonnes CAGR: 6.8%

160 158.8 148.5

140 CAGR: 7.3% 134.3 128.1 122.1 120 114.2 105.4 100 97.2 87.5 80.2 80.8 80

60

40

20

0 2014 2015 2016 2017 2018 2019 2020E 2021E 2022E 2023E 2024E Source: Frost & Sullivan

Outlook of the Granite Aggregates Market in Western Guangdong Province

The three prefectural-level cities of Zhanjiang, Maoming and Yangjiang make up western Guangdong Province with an emphasis on heavy and chemical industries which contribute 80% of the region’s total gross domestic product. Zhanjiang and Maoming are located at the crossroads of the China (Hainan) Pilot Free Trade Zone (Hainan FTZ), Guangdong-Hong Kong-Macao Greater Bay Area and Beibu Gulf, thus enjoying the advantages as an integrated regional transport hub. With the accelerating development in Zhanjiang and Maoming and their advantageous location at the crossroads of three national strategic initiatives, the two cities have the potential to attract

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INDUSTRY OVERVIEW industries relocated from the Greater Bay Area, the Hainan FTZ and Beibu Gulf area. The Implementation Plan for the Outline Development Plan for the Guangdong-Hong Kong-Macao Greater Bay Area calls for efforts to promote the co-ordination, synergy and collaborative development of the Greater Bay Area and its neighbouring areas, including western Guangdong.

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INDUSTRY OVERVIEW

The development of western Guangdong’s railway system is highlighted in the Implementation Plan for the Outline Development Plan for the Guangdong-Hong Kong-Macao Greater Bay Area, promulgated recently by the Guangdong Provincial government in 2019. The document sets out the support that will be given to the construction of a railway linking Guangzhou with Haikou via Zhanjiang. western Guangdong is poised to play a crucial connecting role in the overland international route between the pan-PRD region and ASEAN countries. The first high-speed railway in western Guangdong, the Jiangmen-Zhanjiang section of the Shenzhen-Zhanjiang Railway started operations on 1 July 2018. This expansion of the Pearl River Delta rail network has facilitated exchanges between the GBA and western Guangdong. More than 14 million passenger trips were recorded in the Jiangmen-Zhanjiang line’s first year of operation, according to the China Railway Guangzhou Group Co Ltd.

In addition to transport network construction, Guangdong Province’s further opening policies will also advance western Guangdong Province’s development. In December 2017, the Several Policy Measures for Further Expanding Opening-Up and Actively Using Foreign Investment were implemented in Guangdong. It is expected that foreign investments would be tapped to speed the establishment of a modern industrial structure in Guangdong Province.

The granite aggregates enterprises are located in western Guangdong Province. As such, they are able to capture the market growth for building materials by delivering the products to customers at lower transportation cost and shorter period. In particular, our Group is located near to the Port of Yangjiang which enable it to ship the granite aggregates to other regions and provinces, thus having greater customer base and market growth opportunities than other granite aggregates enterprises in Guangdong Province. Demand Analysis of Granite Aggregates in Yangjiang City

Most of the Group’s corporate customers engage in concrete mixing plants and concrete product manufacturing businesses that purchase the Group’s granite aggregates for the manufacturing of concrete and concrete products before selling these concrete and concrete products for use in construction projects. The demand analysis below demonstrates that there is a genuine demand for concrete in Yangjiang City, which, in turn, leads to a demand for granite aggregates. Granite aggregate is a requisite material for concrete production which generally cannot be substituted by other materials. On average, one cubic metre of concrete weighs approximately 2.5 tonnes, and 50% of it is composed of granite aggregates. As such, if a concrete mixing plant manufactures one cubic metre of concrete, it will require approximately 1.25 tonnes of granite aggregate. Therefore, in order to understand the demand of the Group’s customers for concrete, reference can be made to (i) the supply and demand for concrete in Yangjiang City; and (ii) the supply and demand for concrete in Yangjiang City from 2016 to 2019 and the estimated supply and demand for concrete in Yangjiang City from 2020 to 2024 are as follows:

Concrete demand Production in Yangjiang City volume in for construction Yangjiang City projects (’000 (’000 cubic Year cubic metres) metres) 2016 ...... 7,095.20 4,801.00 2017 ...... 7,349.40 4,954.60 2018 ...... 7,121.20 5,123.60 2019 ...... 7,264.40 5,309.50 2020E ...... 7,555.00 5,521.90 2021E ...... 7,857.20 5,742.70 2022E ...... 8,155.80 5,961.00 2023E ...... 8,449.40 6,175.60 2024E ...... 8,702.9 6,391.7

Source: Frost &Sullivan

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INDUSTRY OVERVIEW

As disclosed above, the concrete production volume in Yangjiang City will not be able to satisfy the local demand for concrete which entailed and is expected to continue to entail a shortage in concrete. Furthermore, as concrete is a fluid mixture that will stiffen within in a short period of time, it has to be quickly delivered to construction sites. In addition, concrete mixing plants will generally only commence the production of concrete when the orders from customers are confirmed. Therefore, customers of concrete mixing plants generally intend to order from concrete mixing plants that are located within approximately 25 km of them to ensure the quality and fluidity of the concrete. As a result, customers of concrete mixing plants in Yangjiang City would generally prefer to purchase ready-mixed concrete within the Yangjiang region (where the Yangjiang Mine of the Company is located), which, in turn, drives the establishment of ready-mixed concrete manufacturing as a regional business in the Yangjiang region.

The table below illustrates the approximate percentage of the Group’s production volume to the (estimated) granite aggregates required in order to satisfy the total production volume of concrete in Yangjiang City based on (i) the total production volume of 412,000 m3 of the Group in 2019, (ii) the estimated production volume of 900,000 m3 in 2021, and (iii) the estimated production volume of 2,000,000 m3 in 2023, following its development plan:

Percentage of the Group’s Percentage of Percentage of Granite production the Group’s the Group’s aggregate volume (based production production Production required for on the volume (based volume (based volume of such production on the annual on the annual concrete in production volume of production production Yangjiang City volume 412,000 cubic volume of volume of (’000 cubic (’000 cubic metres in 900,000 cubic 2,000,000 cubic Year metres) metres)(note) 2019) metres) metres) 2018...... 5,123.6 2,561.8 — — — 2019...... 5,309.5 2,654.8 15.5% 33.9% 75.3% 2020E ...... 5,521.9 2,761.0 14.9% 32.6% 72.4% 2021E ...... 5,742.7 2,871.4 14.3% 31.3% 69.7% 2022E ...... 5,961.0 2,980.5 13.8% 30.2% 67.1% 2023E ...... 6,175.6 3,087.8 13.3% 29.1% 64.8% 2024E ...... 6,391.7 3,195.9 12.9% 28.2% 62.6%

Note: 50% of the concrete is composed of granite aggregates.

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INDUSTRY OVERVIEW

As illustrated above, assuming the production volume of the Group reaches 2,000,000 cubic metres per year according to its development plan, it would be able to satisfy approximately 65% to 75% of the demand of granite aggregates for producing concrete. This shows that there is sufficient demand for the Group to expand its production and the Group would be able to become the major market player of granite aggregates in Yangjiang.

Natural Sand Market in Yangjiang City

Sand is an essential component of concrete and pressures on sand resources have grown rapidly, especially due to rapid urbanisation in the PRC and Guangdong Province. In 2019, the average selling price of river sand in Guangdong Province is approximately RMB219.4 per cubic meter. In order to produce 1 cubic metre of concrete (which weighs approximately 2.5 tonnes), 30% of it is sand (i.e. approximately 0.75 tonnes of sand). Having said that, sand mining has serious environmental impact, including damaging rivers, wreaking havoc on coastal ecosystems, and even wiping away entire islands.

Guangdong Provincial Government has issued Regulations of Guangdong Province on the Administration of Sand Mining in River Courses 《廣東省河道采砂管理條例》 which was first issued in 2005 and amended to further tighten regulation on sand mining in Guangdong Province, and ban on illegal sand mining, which targets to enhance the control on overall sand supply and environmental protection in 2012 and 2019. This regulation would lead to the decrease in supply of sands and further enlarge the imbalance between the supply and demand for sands in Guangdong Province. In response the rising needs for building materials, downstream users have started to source substitution materials, with similar characteristics, to replace natural sand. In particular, the Technical Guidelines for the Application of Manufactured Sand Cement Concrete in Guangzhou《廣州市機制砂混凝土應用技術指引》specifies the technical specification and application of manufactured sand cement concrete in Guangzhou, such as selection of ores, size of manufactured sand and its applications. Implementation Details of Interim Measures for River Sand Mining in Yangjiang City《陽江市河道采砂暫行辦法實施細則》is launched in 2017 to promote the legal and systematic river sand mining in Yangjian City, which ensures the water supply ,flood protection and shipping safety.

According to the Yangjing Hengcai River Sand Operation Company Limited* (陽江市恒財河 砂經營有限公司) (which is the only state-owned enterprise authorised by the Municipal Government of Yangjiang to perform mining, distribution and transportation of river sand in Yangjiang City), the estimated production volume of river sand in Yangjiang City from 2017 to 2019 is as follows:

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INDUSTRY OVERVIEW

River Sand 2017 2018 2019 Production Volume of River Sand in Yangjiang (’000 tonnes)...... 3,201.5 980 980 River Sand Required for the Production of Concrete in Yangjiang (’000 tonnes) .... 3,716.0 3,842.7 3,982.1 Production Volume of Concrete in Yangjiang (’000 cubic meters) ...... 4,954.6 5,123.6 5,309.5

Notes:

1. In order to product 1 cubic metre of concrete (which weights approximately 2.5 tonnes), 30% of it is sand (i.e. approximately 0.75 tonnes of sand).

2. 1 cubic metre of concrete weights approximately 1.4 tonnes on average.

Market Drivers and Trends

Accelerated urbanisation. With the continuing economic growth, the PRC has experienced rapid urbanisation and industrialisation. According to World Bank, the urbanisation rate in the PRC has increased from 54.3% in 2014 to 60.6% in 2019 and is expected to rise in the subsequent five years, reaching 67.5% by the end of 2024. Accelerated urbanisation poses an important population challenge to urban planning, especially in needs infrastructure development and housing. The urbanisation rate in Guangdong province has increased from 68.0% in 2014 to 71.4% in 2019 and is expected to rise in the subsequent five years, reaching 77.1% by the end of 2024. The rising urban population requires the support of better infrastructure construction, which consists of reliable roads and rails, electricity, and telecommunications. In particular, the needs for housing and public transport are on the rise, which in turn boost the demand for construction materials accordingly.

Strong investment in real estate development. The Guangdong Provincial government has been increasing public expenditures on infrastructures for years. Gross Value of Construction Works Performed in Guangdong Province increased from RMB835.7 billion in 2014 to RMB1,663.3 billion in 2019, at a CAGR of 14.8%. It is estimated to reach RMB3,339.7 billion at a CAGR of 15.0% from 2020 to 2024. The rising investment will be driving a number of new and existing infrastructure and property development projects. The key infrastructure projects include Shantou-Zhanjiang Expressway, Xingning-Shanwei Express Way and He Hui Guan Expressway. Following the expansion of infrastructure facilities, the demand for building materials would grow accordingly. These large developments are providing a huge growth potential for the granite aggregates market in Guangdong Province in the near future.

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INDUSTRY OVERVIEW

Industry Consolidation. Market consolidation and structural reform have taken place in the PRC granite aggregate industry. Enterprises with smaller scale do not have sufficient financial capability to sustain their business as their output efficiency may be outcompete by the large enterprises, who also have enough resources to expand their business by merger and acquisition. On the other hand, national authority and the government have issued several production standard, regarding to product quality and production site environment, such as “Catalogue of Promoting Advanced and Eliminating Outdated Safety and Technical Equipment”《推廣先進與淘汰落後安全 技術裝備目錄(第二批)》, “Stone Industry Green Mining Standard”《石材行業綠色礦山建設規範》, to strengthen the industry safety and technical standard of the whole granite aggregate industry in the PRC. In addition, Ministry of Industry and Information Technology has issued “Opinions on

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INDUSTRY OVERVIEW

High Quality Development of Manufactured Sand Aggregate Industry”《關於推進機製砂石行業高 質量發展的若干意見》 in 2019 which has aimed to achieve more than 25% of the market are shared by manufactured sand aggregate enterprises with more than 500 million tonnes annual capacity.

Upgrade of Mining Technology and Equipment. The current mining technology and equipment for granite aggregate in the PRC is relatively fallen behind when comparing with the international industry standard which has low efficiency, unsustainable, and high environmental impact. In the meantime, the granite aggregate are required to comply with the national standard, “GB/T14685-2011 Specification Of Pebble And Crushed stone For Building”《GB/T14685-2011建 築用卵石和碎石》, for construction use. Therefore, the industry players in the PRC are adapting more advanced exploring technology, automated production line and machineries to further increase their production efficiency, and at the same time mitigating the environmental impact as well. For examples, some of the leading players adopted hydraulic drilling rigs, flame cutting machine in their production line. In addition, more resources are deployed on R&D to develop more varieties of granite products with different specification, such as shape, size, and hardness, etc.

Market Opportunities

Integration of Smart Manufacturing and Smart Mining. With the emergence of 5G and development of smart manufacturing, mining industry in the PRC has been adopting such technologies into their manufacturing process, such as smart blasting, automated mining, as well as safety monitoring system, to increase their production efficiency and product quality. The cost of production of granite aggregate is increasing during the last few years due to the tightened environmental policies. As such, with the aid of smart manufacturing technologies, a higher production efficiency with lower environmental impact can be achieved, which would serve as a business opportunity for granite aggregate industry in the PRC.

Greater Bay Area Development. Granite aggregate enterprises in the PRC, especially Guangdong Province, may capture the business opportunities brought by the development plan of the Guangdong-Hong Kong-Macau Greater Bay Area. Numerous infrastructural projects will be introduced during the development, such as Humen Bridge III, Guangdong-Zhanjiang Rapid Railway, in order to create a “one-hour-living circle” within the area which would result in boosting the demand of granite aggregate for transportation facility construction.

Shortage of natural sand aggregate. The amount of natural sand aggregate available in the PRC has been decreasing due to the huge market demand for urban development which has resulted in a rapid increase in the price of natural sand aggregates. Therefore, downstream users have started to source substitution materials with similar characteristics to replace natural sand aggregates. As such, manufactured sand (機製砂), including granite aggregates and sand powder, will be one of the major substitutes and become more popular in the future.

Market Challenges

Rising cost pressure. Transportation cost is the major cost item of operating granite aggregate mining business in the PRC due to the heavy weight and low mobility of granite. With the increasing fuel price in recent year, transportation would create a huge financial burden to the operators. On the other hand, the PRC government has tightened the regulatory policies on mining works regarding to the environmental impact created by such activities. The granite aggregate industry players are required to acquire appropriate equipment or installing large scale environmental control system, such as ventilation system, to comply with such regulation which would result in increasing the overall operation cost.

Low level of technologies and regulatory standard. Compared with other developed countries in Europe and the U.S., the technical knowledge, capability, capacity, management and sales channel development of granite aggregate enterprises in the PRC has seen room for improvement. Currently, a majority of granite aggregate enterprises in the PRC generally have a low level of production technologies and equipment without strong capability for research and

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INDUSTRY OVERVIEW development. Furthermore, despite the promulgation of various specific industry standards and policies by the PRC government for development and promoting granite aggregate, the penetration rate of such measures to the industry is still low and hence causing a variation of product output quality. As a result, issues in technology and lack of regulatory standard pose a great challenge for advancement of granite aggregate market in the PRC.

Granite Aggregate Prices

The price of granite aggregates in Guangdong Province has been fluctuating in recent years and has experienced a slight decrease of a CAGR of -0.3% during 2014 to 2019. The price has recovered since 2017 due to the increasing demand of sand aggregates for various construction projects within Guangdong Province. By estimation, the price of granite aggregates in Guangdong Province is expected to rise steadily at a CAGR of 1.9% during 2020 to 2024. The estimated growth is mainly attributable to the steady rise in demand of granite aggregates in the PRC due to the decreasing resources of natural sand aggregate.

Price Index of Granite Aggregate (Guangdong Province), 2014-2024E

CAGR 2014-2019 2020E-2024E 2014=100 160 Index -0.3% 1.9%

140

116.4 110.0 120 107.7 103.9 105.8 100.0 100.4 101.8 96.5 98.7 100 87.9

80

60

40

20

0 2014 2015 2016 2017 2018 2019 2020E 2021E 2022E 2023E 2024E Source: Frost & Sullivan

Granite aggregates could be further divided into four types, namely 1-2 granite aggregates, 1-3 granite aggregates, machine stones and sand powder. The average selling prices of the granite aggregates, machine stones and sand powder generally follow the same trends and record the CAGR of -0.3%, -0.8% and -1.2% from 2014 to 2019. It is forecasted that the average selling price of granite aggregates, machine stones and sand powder would increase at the CAGR of 1.9%, 1.5% and 1.6% from 2020 to 2024.

Average Selling Price of Granite Aggregates, Sand Powder and Machine Stones (Guangdong Province), 2014-2024E

CAGR Unit: RMB/tonne 2014 2015 2016 2017 2018 2019 2020E 2024E CAGR 14-19 20E-24E Granite Aggregates* ..... 67.1 75.1 66.3 58.9 64.7 66.2 68.3 73.7 -0.3% 1.9% Machine stones ...... 53.9 55.8 52.7 51.4 51.6 51.8 53.3 56.6 -0.8% 1.5% Sand powder ...... 46.2 46.5 45.8 42.1 43.1 43.5 44.0 46.9 -1.2% 1.6% Machine Wash Sand Powder . 57.4 58 56.9 53.3 54.4 54.7 55.5 58.7 -1.0% 1.4% * Note 1-2 and 1-3 granite aggregates are included. Source: Frost & Sullivan

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INDUSTRY OVERVIEW

Cost Analysis

Mining and processing enterprises are a labour intensive industry and therefore, labour wage is a key cost item. The average wage of employed persons in urban areas in mining and processing industry registered a steady growth from RMB61,677 in 2014 to RMB73,589 in 2019, representing a CAGR of 3.6% during 2014 to 2019. Meanwhile, the average annual wage in Guangdong Province recorded a higher level than the overall PRC level due to higher demand for such labour in Guangdong Province. During 2014 to 2019, the wage has increased from RMB78,585 in 2014 to RMB120,305 in 2019, representing a CAGR of 8.9% during 2014 to 2019.

Average Annual Wage of Employed Persons in Urban Areas in Mining and Processing Industry (The PRC and Guangdong Province), 2014-2024E

CAGR 2014-2019 2020E-2024E RMB The PRC 3.6% 2.9% Guangdong Province 8.9% 7.0% 180,000 168,891 157,842 160,000 147,654 137,994 140,000 128,846 120,305 120,000 112,224 104,687 100,000 91,276 86,026 78,585 80,000 84,897 80,179 82,504 73,589 75,724 77,920 60,000 69,500 71,516 61,677 59,404 60,544 40,000

20,000

0 2014 2015 2016 2017 2018 2019 2020E 2021E 2022E 2023E 2024E The PRC Guangdong Province

Source: National Bureau of Statistics of China, Frost & Sullivan

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INDUSTRY OVERVIEW

Other than labour, electricity and fuel are the key cost items operating granite aggregate business. These items have recorded a decline trend in recent years, with negative CAGRs of 2.9%, 2.9% and 2.9% for electricity in Guangdong Province, diesel and petrol during 2014 to 2019 respectively. And it is expected that these cost items will experience decline during the forecast period with CAGRs of -2.7%, -2.3%, and -1.6% for electricity in Guangdong Province, diesel and petrol during 2019 to 2024 respectively.

COMPETITIVE LANDSCAPE OF GRANITE AGGREGATES MARKET IN THE PRC, GUANGDONG PROVINCE AND WESTERN GUANGDONG PROVINCE

Overview of Competitive Landscape

The overall aggregates market in the PRC is highly fragmented with over 18,000 market participants by the end of 2019. Before 2010, the market was mainly dominated by natural aggregates and most aggregates market participants were located near coastal areas due to the distribution of natural aggregates and lower cost of marine transportation. After that, with the increasing demand for aggregates and rising awareness of environmental protection, the PRC government starts to restrict the production of natural aggregates and support the development of manufactured aggregates. In 2010, the PRC State Council promulgated the National Plan for Developing Priority Zones《全國主體功能區規劃》 ( ), which recognises Bohai Economic Rim, Yangtze River Delta and Pearl River Delta as the key regions for the development of aggregate industry. With the urbanisation process and infrastructure construction, quarries with abundant resource reserves and near the site of construction has experienced more rapid development. Currently, the market is highly fragmented and the majority of market participants are small-sized enterprises.

The development of aggregates in different regions is subject to local characteristics including types of stones, availability of resources, transport convenience and etc. The aggregates market in Guangdong Province mainly consists of granite aggregates given the abundant granite resources in the region and is dominated by domestic enterprises. By the end of 2019, there were approximately over 500 enterprises engaged in the extraction and manufacturing of aggregates in Guangdong Province, approximately half of which were small-sized enterprises. By the end of 2019, the overall market size of granite aggregates in Guangdong Province reached 114.2 million tonnes with the top five market participants together taking up a market share of 36.9%.

According to the Master Plan of Mineral Resources in Guangdong (2016 – 2020)《廣東省礦 ( 產資源總體規劃(2016-2020年)》) issued by the Department of Natural Resources of Guangdong, the total number of quarries for construction aggregates should not exceed 1,150. In particular, western Guangdong is expected to have 239 quarries for construction aggregates as stated in the Master Plan. In 2019, there were approximately 134 quarries in Western Guangdong, approximately 45.5% (i.e. 61) of which focused in the extraction and manufacture of granite aggregates. In 2019, the market size of granite aggregates market in Western Guangdong achieved 24.8 million tonnes. The granite aggregates market in Western Guangdong is concentrated with the top five market participants taking up a market share of approximately 55.6% in 2019. Our Group is the largest granite quarry with the longest approved period of mining rights in western Guangdong in terms of approved production capacity and approved period of mining rights in 2019.

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INDUSTRY OVERVIEW

It is not uncommon for granites mines to operate under full production capacity. Generally speaking, the full production capacity of granites mines is constrained by: (i) exploration efficiency is not optimal, (ii) depletion of granites during production process, (iii) output can only be increased by using more labour and equipment that requires capital investment, (iv) some mines take time to progress from mine construction to full production, leading to time lag until maximum production levels are reached. In light of the above, given that many granite mines do not reach their full production capacity, the “aggregate production capacity of the suppliers with valid mining rights” will not be achieved in practice.

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INDUSTRY OVERVIEW

Ranking of Leading Market Participants in Guangdong and Western Guangdong

Leading Market Participants in Guangdong, 2019

Production Estimated Capacity of Period of Production Market Participants in Market Share Listing Rank Description Raw Granite Mining Volume Guangdong (%), 2019 Status (Thousand Rights (Thousand Cubic Metre) Tons), 2019 Established in 2006, the company has two quarries located in Jiangmen, Guangdong. The company Till 2025 and 1 Company A 5,800 22,305.5 19.5% Private mainly engages in the extraction, manufacturing and 2037 sales of granite aggregates. The company was established in 2006 in 2 Company B Guangzhou, Guangdong. Major products include 3,800 Till 2019 5,791.1 5.1% Private granite gravel, sand and powder. Established in 2014, the company owns a granite quarry in Lianjiang , Guangdong. It mainly produces 3 Company C 200 Till 2037 5,018.2 4.4% Private granite aggregates including gravel, sand and powder. The company was established in 2014 and focuses in the extraction, manufacturing and sales of granite 4 Company D 1,200 Till 2027 4,990.7 4.4% Private aggregates. It has a granite quarry located in Jiangmen. Established in 2013, the company has a granite 5 Company I quarry located in Wuchuan, Guangdong. 200 Till 2027 4,043.5 3.5% Private It mainly produces granite aggregates.

The Group 900 Till 2038 NA NA Private

Top 5 subtotal 42,149.0 36.9% Other 72,051.0 63.1% Total 114,200.0 100.0%

Source: Frost & Sullivan

Note : Since our Group commenced trial production in March 2019, its market share in 2019 is not available.

Leading Market Participants in Western Guangdong, 2019

Production Estimated Capacity in Period of Production Market Ran Market Participants in Terms of Listing Description Mining Volume Share (%), k Western Guangdong Raw Granite Status Rights (Thousand 2019 (Thousand Tons), 2019 Cubic Metre) Established in 2014, the company owns a granite quarry in Lianjiang , Guangdong. It mainly produces 1 Company C 200 Till 2037 5,018.2 20.2% Private granite aggregates including gravel, sand and powder. Established in 2013, the company has a granite 2 Company I quarry located in Wuchuan, Guangdong. 200 Till 2027 4,043.5 16.3% Private It mainly produces granite aggregates. The company was founded in 2013 and owns a 3 Company F 200 Till 2026 2,855.3 11.5% Private granite quarry in Wuchuan , Guangdong. Founded in 2012, the company focuses on the 4 Company G extraction and manufacturing of granite aggregates 150 Till 2034 940.7 3.8% Private in Maoming, Guangdong. The company was established in 2007 in Lianjiang , 5 Company H Guangdong. Its products include granite gravel, 120 Till 2021 935.8 3.8% Private sand and powder.

The Group 900 Till 2038 NA NA Private

Top 5 subtotal 13,793.5 55.6%

Other 11,032.1 44.4%

Total 24,825.6 100.0% Source: Frost & Sullivan

Note : As our Group has only commenced trial production only in March 2019, information on our market share in 2019 was not available.

Supply of Granite Aggregates in Yangjiang City

The total production of granite aggregates in 2018 and 2019 was 5,961.6 thousand tonnes in and 5,284.1 thousand tonnes respectively.

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INDUSTRY OVERVIEW

Ranking of Leading Market Participants in Yangjiang

By the end of 2019, there were approximately around 551 enterprises engaged in the extraction and manufacturing of aggregates in Guangdong province, of which 34 are located in Yangjiang city. Among the 34 market participants in Yangjiang City, 15 of them are principally engaged in the extraction and manufacturing of granite aggregates.

The Group is one of the two market participants with production capacity in terms of raw granite over 500,000 cubic metres per annum in Yangjiang City. The Group is the largest market participant by production capacity in terms of raw granite in Yangjian City in 2019. The exploration potential further showcase the production capability and leading position, and places the Group in a better position to recure purchase orders. The below table sets forth the business profile of the granite aggregates market participants in Yangjiang City.

Leading Market Participants in Yangjiang City, 2019

Production Estimated Capacity in Period of Production Market Ran Market Participants in Terms of Listing Description Mining Volume Share (%), k Western Guangdong Raw Granite Status Rights (Thousand 2019 (Thousand Tons), 2019 Cubic Metre) Established in 2011, the company owns a granite quarry in Yangjiang, Guangdong. It mainly 1 Company J 400 Till 2019 1,044.0 19.8% Private produces granite aggregates including gravel, sand and powder for construction use. Founded in 2014, the company has a granite 2 Company K quarry located in Yangjiang, Guangdong. It 600 Till 2024 870.0 16.5% Private produces granite aggregates and stones. The company was founded in 2010 and owns a 3 Company L 300 Till 2021 783.0 14.8% Private grantte quarry in Yangjiang, Guangdong Founded in 2013, the company focuses on the 4 Company M extraction and manufacturing of granite aggregates 200 Till 2021 522.0 9.9% Private in Yangjiang, Guangdong. The company was established in 2009 in 5 Company N Yangjiang, Guangdong. Its products include granite 180 Till 2020 469.8 8.9% Private gravel, sand and powder.

The Group 900 Till 2038 NA NA Private

Top 5 subtotal 3,688.8 69.8%

Other 1,595.3 30.2%

Total 5,284.1 100.0%

Entry Barriers

Licensing requirement. Granite aggregates market participants are required to obtain relevant licenses and certificates issued by the PRC government such as Mining Rights (採礦權)atthe Ministry of Natural Resources of the PRC. In particular, the exploration and production activities

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INDUSTRY OVERVIEW of granite aggregates are subject to the specifications stated in the license, including types of products, exploration methods, mining depths, production area, production capacity, years of operation and etc.

Capital investment. Substantial capital investment is considered as one of the entry barriers in the granite aggregates market in the PRC. For example, upfront capital investment for construction of infrastructure, such as setting up access to the mine field, wastewater treatment facilities, as well as procurement of specialised production machineries. In addition, extraction and stripping of the topsoil and weathered rocks above the granite deposit are required to carry out prior to the commencement of commercial operation of the mine, which would also incur a substantial amount of cost for the operators. Therefore, new market participants without sufficient capital investment may find it hard to establish and sustain their business in the PRC.

Market know-how. In general, well established market participants in the granite aggregates market in the PRC are experienced and professional enterprises with established and stable relation with key suppliers and customers. Moreover, management team is required to possess specific knowledge in the production process, technique and business management. Therefore, market know-how is one of the entry barriers for new market entrants of the granite aggregates market in the PRC.

Key Success Factors

Geographic location. Geographic location is crucial for the operation of granite aggregates extraction, processing and sales, as it is related to the transportation cost and sustainable production of the market participants. For example, aggregates usually have a low value-to-weight rate, which makes transportation cost a large proportion of the overall selling price of aggregates. Therefore, distance between suppliers’ sites and customers’ sites becomes a key differentiator between different granite aggregates market participants. Successful market participants usually choose a site location closer to downstream clients to minimise transportation cost and maintain competitive prices in the granite aggregates market in Guangdong Province.

Resource reserve. The production capacity of granite aggregates market participants is largely determined by reliable exploration information and the availability of granite resources at the exploration sites. Higher level of resource reserves contribute to higher production capacity and longer economic mine life, which will affect the operation scale of market participants as well. Market participants with higher optimal production capacity and longer economic mine life are more likely to gain more market share in the competition. Therefore, large-scale market participants usually have exploration sites with sufficient resource reserves for large-scale production.

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INDUSTRY OVERVIEW

Product quality. As granite aggregates is one of the key raw materials for the production of cement and concrete, the quality of granite aggregates is essential. The quality of granite aggregates is related to the size of aggregates, the cleanliness of aggregates, stone powder content, moisture content and etc. Well established granite aggregates market participants are able to supply products with high and stable quality, which is preferred by downstream customers such as cement and concrete producers, construction contractors and etc.

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