2018 ANNUAL REPORT 昆明滇池水務股份有限公司 Kunming Dianchi Water Treatment Co., Ltd. (a joint stock company incorporated in the People’s Republic of China with limited liability) Stock Code: 3768 臻於至善 源遠流長 CONSUMMATION & SUSTAINABILITY Contents 2 CHAPTER ONE CORPORATE INFORMATION 4 CHAPTER TWO LETTER FROM THE CHAIRPERSON 7 CHAPTER THREE DEFINITIONS 10 CHAPTER FOUR GLOSSARY OF TECHNICAL TERMS 12 CHAPTER FIVE SUMMARY OF OPERATING AND FINANCIAL DATA 16 CHAPTER SIX MANAGEMENT DISCUSSION AND ANALYSIS 45 CHAPTER SEVEN PROFILES OF DIRECTORS, SUPERVISORS AND SENIOR MANAGEMENT 56 CHAPTER EIGHT REPORT OF THE BOARD OF DIRECTORS 93 CHAPTER NINE CORPORATE GOVERNANCE REPORT 115 CHAPTER TEN REPORT OF THE BOARD OF SUPERVISORS 122 CHAPTER ELEVEN INDEPENDENT AUDITOR’S REPORT 128 CHAPTER TWELVE CONSOLIDATED FINANCIAL STATEMENTS ONE CORPORATE INFORMATION CHAPTER ONE CORPORATE INFORMATION REGISTERED NAME OF THE COMPANY HONG KONG LEGAL ADVISER TO 昆明滇池水務股份有限公司 THE COMPANY Latham & Watkins LLP ENGLISH NAME OF THE COMPANY 18th Floor, One Exchange Square Kunming Dianchi Water Treatment Co., Ltd. 8 Connaught Place Central REGISTERED OFFICE AND HEADQUARTERS Hong Kong IN THE PRC Wastewater Treatment Plant No. 7 PRC LEGAL ADVISER TO THE COMPANY Kunming Dianchi Tourist Resort Yunnan Beichuan Law Firm Yunnan Province Room 101, Unit 1, Building 204 PRC Jinxing District Panlong District PRINCIPAL PLACE OF BUSINESS IN Kunming, Yunnan Province HONG KONG PRC Room 1901, 19/F, Lee Garden One 33 Hysan Avenue H SHARE REGISTRAR Causeway Bay, Hong Kong Tricor Investor Services Limited Level 22, Hopewell Centre WEBSITE OF THE COMPANY 183 Queen’s Road East www.kmdcwt.com Hong Kong STOCK CODE BOARD OF DIRECTORS 03768 Executive Directors Ms. Guo Yumei (Chairperson) LEGAL REPRESENTATIVE OF THE COMPANY Mr. Luo Yun Ms. Guo Yumei Non-executive Directors AUTHORIZED REPRESENTATIVES Ms. Ma Ce Mr. Chiu Ming King FCIS, FCS Ms. Song Hong Mr. Luo Yun Independent Non-executive Directors JOINT COMPANY SECRETARIES Mr. Yin Xiaobing Mr. Yang Yang Mr. He Xifeng Mr. Chiu Ming King FCIS, FCS Mr. Sin Lik Man INDEPENDENT AUDITOR PricewaterhouseCoopers Certified Public Accountants 22/F Prince’s Building Central Hong Kong 2 Kunming Dianchi Water Treatment Co., Ltd. CHAPTER ONE CORPORATE INFORMATION BOARD COMMITTEES Ping An Bank Audit Committee Kunming Chuncheng Sub-branch Mr. Yin Xiaobing (Chairperson) 1st Floor, Baifuqi Commercial Plaza Mr. He Xifeng No. 32 Wujing Road Mr. Sin Lik Man Guandu District, Kunming Yunnan Province Remuneration and Appraisal Committee PRC Mr. He Xifeng (Chairperson) Ms. Guo Yumei Bank of Communications Mr. Yin Xiaobing Yunnan Branch 1st Floor Counter Nomination Committee Bank of Communications Building Mr. Yin Xiaobing (Chairperson) No. 397 Baita Road Ms. Guo Yumei Panlong District, Kunming Mr. He Xifeng Yunnan Province PRC Strategy and Investment Decision Committee Ms. Guo Yumei (Chairperson) China Merchants Bank Mr. Luo Yun Kunming Shijicheng Sub-branch Mr. Yin Xiaobing 1A and 1B, 1st Floor Century Golden Recourses BOARD OF SUPERVISORS International Business Center Tower 2 Mr. Na Zhiqiang (Chairperson) Kunming Mr. Yao Jianhua Yunnan Province Mr. Shao Wei PRC PRINCIPAL BANKS China Everbright Bank Kunming Dianchi Road Sub-branch Project & Design Unit Building No. 1177 Dianchi Road Xishan District, Kunming Yunnan Province PRC China Minsheng Bank Kunming Dianchi Road Sub-branch No. 331 Huancheng South Road Kunming Yunnan Province PRC 2018 ANNUAL REPORT 3 TWO LETTER FROM THE CHAIRPERSON CHAPTER TWO LETTER FROM THE CHAIRPERSON In 2018, macroeconomic situation was severe and downward pressure on the economy increased. The environmental protection industry experienced a double-pressure test of financial and environmental protection regulation. In the previous year, Kunming Dianchi Water Treatment Co., Ltd. (the “Company” or “Dianchi Water”) began the new journey of “new undertakings” with standardized management as the starting point. Facing complex and ever-changing international and domestic market environment, new changes in the industry, the Company accurately grasped national strategies and new environmental protection policies and identified the juncture of macroeconomic policies and ecological environmental protection policies to clarify work ideas and mission objectives and explore financing potential of international capital markets. The Company also made use of the advantages of international and domestic dual financing platforms, actively expanded financing channels and developed a portfolio of stock assets revitalization, quality assets diversification and optimization of investment structure to form a benign pattern of mutual promotion of financing and investment and symbiotic coexistence. The Company commenced a new situation for healthy development of the Company in the new era of being listed and maintained a steady growth in revenue and profit, thereby winning recognition and affirmation from the capital market and all walks of life. PERFORMANCE REVIEW: In 2018, the Company’s revenue was approximately RMB1,430 million, representing an increase of 16.8% over 2017. The net profit attributable to shareholders of the Company was approximately RMB349 million, representing an increase of 11.6% over 2017. In terms of main business, the Company’s total volume of wastewater treatment in 2018 created a new record high. The Company successfully completed pollutant emission reduction tasks issued by the local government. Wastewater treatment operation management continues to maintain industry advance and leading level in Yunnan province. The effluent quality of the water purification plants of Kunming City and the lakes of Kunming City is superior to the first-class A standard, which is the highest in the industry. The comparable average power consumption per ton of water is lower than the industry average. Revenue and profit of reclaimed water business and running water business also maintain steady growth. 4 Kunming Dianchi Water Treatment Co., Ltd. CHAPTER TWO LETTER FROM THE CHAIRPERSON In terms of technological innovation, the Company’s technological research and development system has been substantially established. Technological innovation has been promoted in depth and blossoming with significant benefits. Each production unit has improvement in technological innovation awareness and quality, from minor reforms and small-scale equipment transformation in the past to upgrading of utilizing systematic thinking and systematic analysis methods to conduct process analysis and achieve precise control and overall process optimization. Benefited by technological innovation as well as transformation and application of results, the Company saved nearly twice of the direct production costs compared to the previous year which improved its service capacity for ecological civilization construction in its business area. In terms of investment and financing, under the background of “strict supervision” and tight capital source in the domestic financial market, the Company continuously optimized capital structure, fully exploited capital market resources and broadened domestic and overseas financing channels to successfully build a domestic and overseas financing “dual platform” and exert stronger financing advantages. Moreover, by strengthening collection of account receivables, strictly controlling production cost expenditure, strengthening budget management and improving capital utilization, the Company further strengthened financial management control and effectively responded to fluctuation of market liquidity risk. In accordance with the principles of steady progress and prudent investment, the Company continued to seize development opportunities as well as accelerate endogenous growth and extensive expansion to excavate market potential of industry synergy, so that a layout of the entire water treatment industry chain could be substantially formed, extending from municipal sewage treatment to other business areas such as rural micro-polluted water and industrial wastewater, upstream water source protection, running water supply, downstream reclaimed water use, sludge disposal, derived solid waste industry and thermal power supply. Various market projects which effectively improved residents’ ecological environment in the service areas had been unanimously affirmed and praised by the local governments and the population. The professional capabilities and corporate image of the Company can also be showcased in an all-round manner. PROSPECTS: 2019 is a crucial year to implement national economic and social development of the 13th Five-Year Plan of the PRC and to win the battle against pollution. Local governments at all levels have high demand for environmental protection and extensive market potential due to macroeconomic policies. For Dianchi Water Treatment, it is a critical year for the Company to take advantage of the capital, technology and talents of regional leading enterprises of the industry to seize policy opportunities, expand market share and consolidate foundation for development, thereby amplifying developmental benefits. 2018 ANNUAL REPORT 5 CHAPTER TWO LETTER FROM THE CHAIRPERSON In 2019, there are still a number of uncertainties in the economy all over the world, which is a crucial stage of transformational development for the environmental protection industry. The Company will accurately grasp new changes in policies, economy and market environment and focus on transformational development and risk prevention. Through policy-driven, market-driven and innovation-driven