CHINA SHIPPING DEVELOPMENT COMPANY LIMITED

Transcription

1 THIS CIRCULAR IS IMPORTANT AND REQUIRES YOUR IMMEDIATE ATTENTION If you are in any doubt as to any aspect of this circular or as to the action to be taken, you should consult a stockbroker and other registered dealer in securities, bank manager, solicitor, professional accountant or other professional adviser. If you have sold or transferred all your shares in China Shipping Development Company Limited, you should at once hand this circular to the purchaser or the transferee or to the bank, stockbroker or other agent through whom the sale or transfer was effected for transmission to the purchaser or the transferee. Hong Kong Exchanges and Clearing Limited and The Stock Exchange of Hong Kong Limited take no responsibility for the contents of this circular, make no representation as to its accuracy or completeness and expressly disclaim any liability whatsoever for any loss howsoever arising from or in reliance upon the whole or any part of the contents of this circular. This circular does not constitute an invitation or offer to acquire, purchase or subscribe for the securities of China Shipping Development Company Limited. LR14.63(2)(b) LR14A.69(4) LR14.58(1) LR14A.70 App 1B.1 LR13.51A CHINA SHIPPING DEVELOPMENT COMPANY LIMITED (a joint stock limited company incorporated in the People s Republic of China with limited liability) (Stock Code: 1138) (1) VERY SUBSTANTIAL ACQUISITION: ACQUISITION OF 100% EQUITY INTERESTS IN DALIAN OCEAN; (2) MAJOR TRANSACTION: DISPOSAL OF 100% EQUITY INTERESTS IN CS BULK; (3) CONNECTED TRANSACTION: EXEMPTION OF THE NON-COMPETITION UNDERTAKING; AND (4) ELECTION OF EXECUTIVE DIRECTOR Financial Adviser of CS Development Independent Financial Adviser of the Independent Board Committee and the Independent Shareholders A letter from the Board is set out on pages 6 to 20 of this circular. A letter from the Independent Board Committee is set out on pages 22 to 23 of this circular. A letter from the Independent Financial Adviser to the Independent Board Committee and the Independent Shareholders is set out on pages 24 to 49 of this circular. The notice convening the AGM of China Shipping Development Company Limited to be held at 2:00 p.m. on Friday, 20 May 2016 at 3rd Floor, Ocean Hotel, No Dong Da Ming Road, Hongkou District, Shanghai, the PRC was despatched the Shareholders on 1 April, If you intend to appoint a proxy to attend the AGM, you are required to complete and return the accompanying proxy form in accordance with the instructions printed thereon. For holder of H Shares, the proxy form should be returned to Computershare Hong Kong Investor Services Limited by hand or by post not less than 24 hours before the time appointed for holding the AGM or any adjourned meeting thereof. Completion and return of the proxy form will not preclude you from attending and voting in person at the AGM or at any adjourned meeting should you so wish, but in such event the instrument appointing a proxy shall be deemed to be revoked. If you intend to attend the AGM in person or by proxy, you are required to complete and return the reply slip to the Office of the Secretary to the Board of Directors of the Company not later than Friday, 29 April April 2016

2 CONTENTS Page DEFINITIONS... 1 LETTER FROM THE BOARD... 6 LETTER FROM THE INDEPENDENT BOARD COMMITTEE LETTER FROM THE INDEPENDENT FINANCIAL ADVISER APPENDIX I FINANCIAL INFORMATION OF THE GROUP... I-1 APPENDIX II FINANCIAL INFORMATION OF DALIAN OCEAN GROUP... II-1 APPENDIX III THE ACCOUNTANT S REPORT OF DALIAN OCEAN....III-1 APPENDIX IV UNAUDITED PRO FORMA FINANCIAL INFORMATION OF THE ENLARGED GROUP...IV-1 APPENDIX V SUMMARY OF THE VALUATION REPORTS... V-1 APPENDIX VI GENERAL INFORMATION....VI-1 APPENDIX VII BIOGRAPHY OF THE PROPOSED DIRECTOR...VII-1 i

3 DEFINITIONS In this circular, unless the context otherwise requires, the following terms and expression have the meaning set forth below. LR14A.70(4) 17 Bulk Carrier Companies the 17 bulk carrier companies of CS Development injected in to CS Bulk under the CS Restructuring, i.e. China Shipping Bulk Carrier (Hong Kong) Co., Limited, China Shipping Bulk Carrier (Hong Kong) Wylex Co., Limited, CS Puyuan Marine Co., Limited, Pingan Shipping S.A., Xiwang Shipping S.A., Jixiang Shipping S.A., Fanhua Shipping S.A., Ronghua Shipping S.A., Shaohua Shipping S.A., Nianhua Shipping S.A., Inhua Shipping S.A., Caihua Shipping S.A., Jiahuishan Shipping S.A., Jialongshan Shipping S.A., Jiamaoshan Shipping S.A., Jiashengshan Shipping S.A. and Li Chuan Shipping S.A., all of which were wholly-owned subsidiaries of CSDHK Actual Net Profits AGM Appraised Value Asset Transfer Agreement associate(s) Board China Shipping the audited net profits/loss attributable to equity holders after netting off non-occurring gains/losses as set out in the annual consolidated statements of Dalian Ocean for the Compensation Period the annual general meeting to be held at 2:00 p.m. on Friday, 20 May 2016 at 3rd Floor, Ocean Hotel, No Dong Da Ming Road, Hongkou District, Shanghai, the PRC by the Company to consider and, if thought fit, to approve, the resolutions relating to, among other things, the Proposed Transactions as contemplated under the Asset Transfer Agreement and the Compensation Agreement, the Exemption of the Non-competition Undertaking, and the election of an executive Director the appraised value of the Target Assets as of the Reference Date which are set out in the Valuation Reports the asset acquisition and disposal agreement in relation to the Proposed Transactions dated 29 March 2016 entered into between the CS Development, COSCO Company and COSCO Bulk in respect of purchase and sale of assets under the Proposed Transactions has the meanings as ascribed thereto under the Listing Rules the board of Directors of CS Development China Shipping (Group) Company, a state-owned enterprise in the PRC, and the controlling shareholder of CS Development 1

4 DEFINITIONS China Shipping Group Closing Audit Date Closing Date China Shipping and its subsidiaries if the Closing Date is before or on 15th (inclusive) of a month, it refers to the end of the month preceding the Closing Date; if the Closing date is after the 15th (exclusive) of a month, it refers to the end of the month of the Closing Date the date on which the Consideration has been fully paid according to the Asset Transfer Agreement CS Bulk China Shipping Bulk Carrier Co., Limited, a company incorporated in PRC with limited liability, and a direct wholly-owned subsidiary of CS Development CS Bulk Group CS Bulk Consideration CS Bulk Disposal CS Development or Company CS Development Group or Group CS Bulk and its subsidiaries the total price payable by COSCO Company in respect of the CS Bulk Disposal the disposal by CS Development of 100% equity interests in CS Bulk to COSCO Company (itself or through COSCO Bulk) China Shipping Development Company Limited, a joint stock limited company incorporated in the PRC, the H shares of which are listed on the Stock Exchange (Stock Code: 1138) and the A shares of which are listed on the Shanghai Stock Exchange (Stock Code: ), and a direct non-wholly-owned subsidiary of China Shipping CS Development and its subsidiaries CSDHK China Shipping Development (Hong Kong) Marine Co., Limited, a company incorporated in Hong Kong with limited liability, and a wholly-owned subsidiary of CS Development CS Restructuring in respect of CS Bulk Disposal, the restructuring whereby CS Development has undergone a series of restructuring of its bulk shipping assets and has injected certain subsidiaries and affiliated companies of CS Development into CS Bulk prior to the completion of CS Bulk Disposal. For details, please refer to the announcement dated 11 December 2015 of the Company 2

5 DEFINITIONS Compensation Agreement a revised profit forecast compensation agreement dated 29 March 2016 entered into between CS Development and COSCO Company regarding that the Actual Net Profit of Dalian Ocean shall not be lower than Estimated Net Profit for the Compensation Period Compensation Period the period which lasts from the year in which the Dalian Ocean Acquisition completes to the end of the third accounting year thereafter (the year in which the Dalian Ocean Acquisition completes is the first accounting year), i.e. the compensation periods will be the year 2016, the year 2017 and the year 2018 if Dalian Ocean Acquisition completes during the year 2016 Consideration the Dalian Ocean Consideration and the CS Bulk Consideration controlling shareholder COSCO Bulk has the meanings as ascribed thereto under the Listing Rules China COSCO Bulk Shipping (Group) Co., Ltd, a company incorporated in the PRC with limited liability and a wholly-owned subsidiary of COSCO Company COSCO Company China Ocean Shipping (Group) Company, a state-owned enterprise in the PRC, and the controlling shareholder of Dalian Ocean COSCO Group Dalian Ocean Dalian Ocean Acquisition Dalian Ocean Group Dalian Ocean Consideration Director(s) COSCO Company and its subsidiaries Dalian Ocean Shipping Company Limited, a company with limited liability transformed from DO Company, a direct wholly-owned subsidiary of COSCO Company the acquisition of 100% equity interests in Dalian Ocean from COSCO Company by CS Development Dalian Ocean and its subsidiaries the total price payable by CS Development for the Dalian Ocean Acquisition the director(s) of CS Development DO Company Dalian Ocean Shipping Company, a wholly state-owned enterprise incorporated in the PRC, and a direct wholly-owned subsidiary of COSCO Company. It was transformed into Dalian Ocean on 24 December

6 DEFINITIONS Estimated Net Profits Enlarged Group Exemption HK$ HKFRS Hong Kong Independent Board Committee Independent Financial Adviser Independent Non-executive Directors Independent Shareholders an estimate of the net profits/loss of Dalian Ocean for the Compensation Period made by COSCO Company which is based on and no lower than the net profit forecast set out in the Valuation Reports filed with the competent authority CS Development and its subsidiaries upon completion of the Proposed Transactions the partial exemption of the Non-competition Undertaking issued on 15 June 2011 by China Shipping, the details of which are set out in the Letter from the Board HK$, the lawful currency of Hong Kong Hong Kong Financial Reporting Standards the Hong Kong Special Administrative Region of the PRC an independent board committee, which comprises Mr. Wang Wusheng, Mr. Ruan Yongping, Mr. Ip Sing Chi, Mr. Rui Meng and Mr. Teo Siong Seng, all of whom are Independent Non-executive Directors, to advise and provide recommendations to the Independent Shareholders on the Asset Transfer Agreement, the Compensation Agreement, the Proposed Transactions contemplated thereunder and, the Exemption of the Non-competition Undertaking TC Capital Asia Limited, a licensed corporation under the SFO to carry out type 1 (dealing in securities) and type 6 (advising on corporate finance) regulated activities and an independent financial adviser to the Independent Board Committee and the Independent Shareholders in respect of the Asset Transfer Agreement, the Compensation Agreement, the Proposed Transactions contemplated thereunder and, the Exemption of the Non-competition Undertaking the independent non-executive Directors of CS Development the shareholders of CS Development who may vote on the resolutions in respect of the Asset Transfer Agreement, the Compensation Agreement, the Proposed Transactions and, the Exemption of the Non-competition Undertaking at the AGM under the Listing Rules (excluding China Shipping and its associates) 4

7 DEFINITIONS Latest Practicable Date Listing Rules LNG LPG MOFCOM PRC or China PRC GAAP Tuesday, 19 April 2016, being the latest practicable date prior to the printing of this circular for the purpose of ascertaining certain information contained in this circular Rules Governing the Listing of Securities on the Stock Exchange liquefied natural gas liquefied petroleum gas the Ministry of Commerce of the PRC ( ) the People s Republic of China, which shall, for the purpose of this circular, exclude Hong Kong, the Macau Special Administrative Region and Taiwan PRC Generally Accepted Accounting Principles Proposed Transactions the transactions contemplated under the Asset Transfer Agreement, i.e. the Dalian Ocean Acquisition and the CS Bulk Disposal Reference Date 31 December 2015 RMB Share(s) Shareholder(s) Stock Exchange Target Assets Target Companies US$ Valuation Report(s) Renminbi, the lawful currency of the PRC the share(s) of CS Development the shareholder(s) of CS Development The Stock Exchange of Hong Kong Limited 100% equity interests in Dalian Ocean and 100% equity interests in CS Bulk Dalian Ocean and CS Bulk US$, the lawful currency of United States of America The valuation reports on Dalian Ocean and CS Bulk that were issued on 8 March 2016 by the Valuer and have been filed with the competent authority Valuer China Tong Cheng Assets Appraisals Co., Ltd., an independent third party of the CS Development, COSCO Company, COSCO Bulk and the Target Companies 5

8 LETTER FROM THE BOARD CHINA SHIPPING DEVELOPMENT COMPANY LIMITED (a joint stock limited company incorporated in the People s Republic of China with limited liability) (Stock Code: 1138) App1B.1 LR13.51A Executive Directors: Xu Lirong (Chairman) Huang Xiaowen Ding Nong Yu Zenggang Yang Jigui Han Jun Qiu Guoxuan Independent Non-Executive Directors: Wang Wusheng Ruan Yongping Ip Sing Chi Rui Meng Teo Siong Seng Registered Office: Room A-1015, No. 188 Ye Sheng Road China (Shanghai) Pilot Free Trade Zone People s Republic of China Principal place of business in Hong Kong: 20/F, Alexandra House 18 Chater Road Central, Hong Kong LR2.14 App1B April 2016 To the Shareholders Dear Sir/Madam, (1) VERY SUBSTANTIAL ACQUISITION: ACQUISITION OF 100% EQUITY INTERESTS IN DALIAN OCEAN; (2) MAJOR TRANSACTION: DISPOSAL OF 100% EQUITY INTERESTS IN CS BULK; (3) CONNECTED TRANSACTION: EXEMPTION OF THE NON-COMPETITION UNDERTAKING; AND (4) ELECTION OF EXECUTIVE DIRECTOR I. INTRODUCTION We refer to the announcements of the Company dated 11 December 2015 and 29 March 2016, pursuant to which, as part of the restructuring of China Shipping Group and COSCO Group, CS Development entered into a series of agreements: LR14.58(3) 6

9 LETTER FROM THE BOARD (1) the Asset Transfer Agreement, pursuant to which (i) CS Development has agreed to acquire 100% equity interests in Dalian Ocean from COSCO Company; (ii) CS Development has agreed to dispose of 100% equity interests in CS Bulk to COSCO Company (itself or through COSCO Bulk). These two transactions are inter-conditional and shall come into effect simultaneously; and (2) the Compensation Agreement, pursuant to which COSCO Company has agreed: (i) to compensate CS Development for the shortfall in cash between the accumulative Actual Net Profits and the accumulative Estimated Net Profits of Dalian Ocean occurred during the Compensation Period; (ii) upon the end of the Compensation Period, COSCO Company shall provide additional compensation for the impairment amount of Dalian Ocean at the end of the Compensation Period if that is greater than the amount of cash compensation paid by COSCO Company for the Compensation Period. We also refer to the announcement of the Company dated 8 March 2016 where the Board announced its approval to appoint Mr. Sun Jiakang as an executive Director, subject to the Shareholders approval at the AGM. The purpose of this circular is to provide you with, among other things: (1) further information as is necessary to enable you to make an informed decision on whether to vote for or against the resolutions to be proposed at the AGM relating to, among other things, the Proposed Transactions contemplated under the Asset Transfer Agreement and the Compensation Agreement and the election of Mr. Sun Jiakang as an executive Director; (2) the letter of advice from the Independent Financial Adviser in relation to the Asset Transfer Agreement, the Compensation Agreement, the Proposed Transactions and, the Exemption of the Non-competition Undertaking; and (3) the letter of recommendation from the Independent Board Committee to the Independent Shareholders in relation to the Asset Transfer Agreement, the Compensation Agreement, the Proposed Transactions and, the Exemption of the Non-competition Undertaking. II. ASSET TRANSFER AGREEMENT As at 29 March 2016, the Company entered into the Asset Transfer Agreement with COSCO Company and COSCO Bulk. LR14.58(3) LR14.63(1) A. Principal Terms Parties: CS Development; COSCO Company; and COSCO Bulk Subject Matter: (1) CS Development has agreed to acquire and COSCO Company has agreed to dispose of 100% equity interests in Dalian Ocean. LR14.60(1) 7

10 LETTER FROM THE BOARD Consideration: (2) CS Development has agreed to dispose of and COSCO Company has agreed to acquire (by itself or through COSCO Bulk) 100% equity interests in CS Bulk. The Dalian Ocean Acquisition and the CS Bulk Disposal are inter-conditional and shall come into effect simultaneously. If either one of the Dalian Ocean Acquisition and the CS Bulk Disposal will not proceed to completion, the other will not proceed to completion. The Dalian Ocean Consideration is RMB6,628,455,200, and the CS Bulk Consideration is RMB5,392,221,600. According to the Valuation Reports, the Appraised Value of Dalian Ocean is RMB6, million, and the Appraised Value of CS Bulk is RMB5, million. The Consideration is determined based on such Appraised Value after considering other relevant factors, including: (1) current situation and future development prospects of the industries in which the Target Companies operate; (2) historical financial performance and future development potential of the Target Companies; (3) current situation and future development prospects of the industries in which CS Development operates; (4) historical financial performance and future development potential of CS Development; and (5) various valuation multiples including P/E ratio, P/B ratio and EV/EBITDA ratio of the comparable companies as well as the historical comparable transactions. The summary of the Valuation Reports is set out in Appendix V Summary of the Valuation Reports. The Valuation Reports have been filed with a competent authority and are under an internal review. The filing process is expected to be done before the AGM. The Consideration shall be adjusted based on the results of such filing. A further announcement will be published if the Consideration is adjusted. LR14.58(4) LR14.58(5) LR14A.70(8) App1B.31(2)(b) 8

11 LETTER FROM THE BOARD The Dalian Ocean Consideration payable by CS Development under the Dalian Ocean Acquisition is intended to be partially offset by the CS Bulk Consideration payable by COSCO Company under the CS Bulk Disposal, and the balance is intended to be settled in cash within 30 business days of the date on which all the conditions precedent are satisfied or otherwise waived by the parties. Conditions precedent: The parties have agreed that completion of the Proposed Transactions is conditional upon fulfilment of the following: (1) the Valuation Reports having been filed with the competent authority; (2) COSCO Company and China Shipping having settled all the debts repayable by CS Bulk and its subsidiaries to the Group before the Closing Date (inclusive) according to the requirements under the Asset Transfer Agreement. As at the Latest Practicable Date, the total amount of debts owned to CS Development and its wholly-owned subsidiaries incurred by CS Bulk and its subsidiaries as a result of the CS Restructuring was approximately RMB5, million (including RMB4,233,364,590.14, US$5 and HK$2,104,607,290) which will be settled by COSCO Company and/or its designated wholly-owned subsidiaries. As at the Latest Practicable Date, the total amount of debts incurred by CS Bulk and its subsidiaries as a result of the non-operating funds financing from the Group to CS Bulk and its subsidiaries was approximately RMB11, million (including RMB6,261,344,338.44, US$386,714, and HK$3,444,300,104.55) which will be settled by China Shipping and/or their designated connected person(s). COSCO Company has undertaken to be jointly and severally liable for the settlement with China Shipping; (3) no material adverse change having occurred to the business, operations, assets, liabilities, etc. of the Target Companies since the Reference Date; (4) the Independent Shareholders of CS Development having passed resolutions to approve the Proposed Transactions; (5) the competent internal decision-making departments of COSCO Company and the Target Companies having approved the Proposed Transactions; 9

12 LETTER FROM THE BOARD Completion: (6) all approvals by the relevant regulatory authorities in relation to the Proposed Transactions, including but not limited to, the approvals from the competent state-owned assets supervisory institutions and the MOFCOM, having been obtained and such regulatory approvals not having been revoked before the Closing Date; and (7) no material breach of the terms of the Asset Transfer Agreement having occurred, and the declarations, representations and warranties given by CS Development, COSCO Company and COSCO Bulk as set out therein remaining effective. The Proposed Transactions will be completed on the Closing Date. Upon completion of the Proposed Transactions, Dalian Ocean will become a wholly-owned subsidiary of CS Development and its financial results will be consolidated into the financial statements of CS Development Group; CS Bulk will cease to be a subsidiary of CS Development and its financial results will no longer be consolidated into the financial statements of CS Development Group. LR14.66(6) Other principal terms: (1) During the transition period from the Reference Date to the Closing Audit Date, CS Development is entitled to all the increase in the equity of Dalian Ocean due to profit-making or any other reason; all the decrease in the equity of Dalian Ocean due to loss-making or any other reason will be borne by COSCO Company, and COSCO Company shall compensate CS Development in equivalent cash. (2) During the transition period from the Reference Date to the Closing Audit Date, all the increase in the equity of CS Bulk due to profit-making or any other reason will be retained by CS Development, and COSCO Company or COSCO Bulk shall pay for such increase to CS Development in equivalent cash; all the decrease in equity of CS Bulk due to loss-making or any other reason will be borne by CS Development, and CS Development shall compensate COSCO Company or COSCO Bulk in equivalent cash. 10

13 LETTER FROM THE BOARD B. Reasons for and Benefits of the Proposed Transactions LR14.58(8) LR14A.69 It is intended that CS Development will be, through the Proposed Transactions, built into a listed platform of professional oil and gas transportation to enhance its overall profitability, thereby enhancing the interests of all the Shareholders. The Proposed Transactions will push forward the achievement of such strategic goals on the following aspects: (1) to create a large energy transportation fleet with a globally leading position. Following the Proposed Transactions, CS Development will build a specialised crude oil and refined oil transportation fleet and is expected to become a global leader in the oil transportation market in terms of transportation capacities; (2) to enhance the international competitiveness of CS Development and gradually realise the global layout; (3) to further strengthen the leading position in the domestic oil transportation market, further enhance the competitiveness in all relevant market segments and effectively enhance the sustainable and stable profitability while improving the counter-cycle capabilities; (4) to achieve a strong alliance between the two major players of transportation of LNG imported by China, lock in long-term and stable revenues and effectively counter cyclical fluctuations in the oil transportation market; (5) to coordinate and centralise the procurement of all relevant resources and fully utilise the existing resources, significantly enhance the bargaining power for various cost items while improving the efficiency of resource utilisation, and effectively reduce procurement costs; (6) to fully optimise the utilisation of human resources, fully compensate the insufficiency in the tanker crew and satisfy the demand for future expansion of the fleet scale as well as the strategic need for a global route layout; besides, gradually enhance the competitiveness of staff in terms of internationalisation and specialties; and (7) to broaden and release the financial resources of CS Development and enhance its overall profitability through the disposal of bulk shipping business against the background of the significant imbalance between the supply and demand of global bulk shipping which has led to a gradual decline in the Baltic Dry Index ( BDI ) and China Containerized Freight Index ( CCFI ) indices in the past five years and a historical low level of the BDI index in As such, the Directors (excluding the Independent Non-executive Directors who will give their opinions based on the recommendations of the Independent Financial Adviser) consider that the Proposed Transactions under the Asset Transfer Agreement are entered into after arm s length negotiations and based on normal commercial terms, and therefore terms of such transactions are fair and reasonable and in the interests of the Company and its Shareholders as a whole. LR14.63(2)(c) 11

14 LETTER FROM THE BOARD III. FINANCIAL EFFECTS OF THE PROPOSED TRANSACTIONS A. Financial Effects of Dalian Ocean Acquisition and CS Bulk Disposal Upon completion of Dalian Ocean Acquisition and CS Bulk Disposal, Dalian Ocean will become a subsidiary of CS Development and its financial information will be included into the consolidated financial statements of CS Development. The Enlarged Group s unaudited pro forma consolidated statement of financial position (assuming the Proposed Transactions were completed on 31 December 2015), the Enlarged Group s unaudited pro forma consolidated statement of profit or loss and other comprehensive income and the unaudited pro forma consolidated statement of cash flows (assuming the Proposed Transactions were completed on 1 January 2015), have been prepared in accordance with the standards set out on page IV-1 of this circular. According to the audited consolidated financial statements of the Group for the year ended 31 December 2015, the Group had total assets, total liabilities and net assets of approximately RMB68, million, RMB41, million and RMB26, million, respectively as at 31 December 2015, and in a state of net current liabilities. According to the Enlarged Group s unaudited pro forma consolidated balance sheet set out in Appendix IV to this circular (assuming that the Proposed Transactions were completed on 31 December 2015), the Enlarged Group s total assets will decrease to approximately RMB67, million, its total liabilities will decrease to approximately RMB41, million, and its net asset value will decrease to approximately RMB25, million. However, the Enlarged Group will record net current assets of approximately RMB10, million. The Group recorded an audited consolidated profit attributable to owners of the Group approximately of RMB million for the year ended 31 December Based on the unaudited pro forma consolidated statement of profit or loss and other comprehensive income of the Enlarged Group set out in Appendix IV to this circular (assuming the Proposed Transactions were completed on 1 January 2015) the unaudited pro forma consolidated profit attributable to owners of the Enlarged Group would be increased from approximately RMB million to a profit of approximately RMB2, million for the year ended 31 December For further details, please refer to Appendix IV to this circular. B. Financial effects of Dalian Ocean Acquisition As a result of the Dalian Ocean Acquisition, the consolidated profit attributable to owners of the Dalian Ocean Group approximately of RMB million for the year ended 31 December 2015 will be consolidated into the consolidated statement of profit or loss and other comprehensive income of the Enlarged Group for the year ended 31 December C. Financial Effects of the CS Bulk Disposal As at 31 December 2015, the equity attributable to owners of CS Bulk was approximately RMB4, million. As a result, CS Development is expected to accrue a gain of approximately RMB million under the CS Bulk Disposal. CS Development will recognise such gain under the CS Bulk Disposal in its consolidated income statement as at the Closing Date. LR14.70(2) 12

15 LETTER FROM THE BOARD The proceeds from the CS Bulk Disposal will be applied to offset part of the Dalian Ocean Consideration. Besides, as a result of the CS Bulk Disposal, the Group will decrease the total assets, total liabilities and net assets by approximately RMB16, million, RMB11, million and RMB5, million respectively. IV. COMPENSATION AGREEMENT LR14A.70(10(a) LR14A.63 A. Principal Terms Date: 29 March 2016 Parties: Subject Company: Compensation: CS Development; and COSCO Company Dalian Ocean COSCO Company, in accordance with the relevant PRC laws and regulations concerning valuations based on the income approach and pursuant to the Compensation Agreement, undertakes that: (1) During the Compensation Period, the Actual Net Profits shall not be less than the Estimated Net Profits of Dalian Ocean which has been determined by COSCO Company. Based on the net profit forecast set out in the Valuation Reports, COSCO Company has determined that the accumulative Estimated Net Profits for the three years from 2016 to 2018 shall be RMB819 million. The Estimated Net Profits shall be adjusted based on the filing results of the Valuation Reports. A further announcement will be published if the Estimated Net Profits are adjusted. (2) If the accumulative Actual Net Profits of Dalian Ocean for the Compensation Period is lower than its accumulative Estimated Net Profits for the Compensation Period, COSCO Company shall compensate CS Development for the shortfall in cash. There is no cap for the compensation from COSCO Company. The amount of compensation payable by COSCO Company in cash will be determined based on the Compensation Agreement and the following formula: Compensation payable in cash = accumulative Estimated Net Profits of Dalian Ocean for the Compensation Period - accumulative Actual Net Profits of Dalian Ocean for the Compensation Period 13

16 LETTER FROM THE BOARD (3) If compensation has been paid by COSCO Company in equivalent cash for all the decrease in the equity of Dalian Ocean due to loss-making during the transition period pursuant to the Asset Transfer Agreement, such amount should be deducted from the compensation amount payable by COSCO Company due to the shortfall calculated according to the Compensation Agreement. (4) Upon the end of the Compensation Period, CS Development will perform an impairment assessment of Dalian Ocean. If the impairment amount on Dalian Ocean at the end of the Compensation Period is greater than the amount of cash compensation paid by COSCO Company for the Compensation Period, COSCO Company shall provide additional compensation. The amount of such additional compensation in cash will be determined based on the Compensation Agreement and the following formula: Additional compensation amount = the impairment amount of Dalian Ocean at the end of the period - the amount of cash compensation paid by COSCO Company Conditions precedent: The effectiveness of the Compensation Agreement is conditional upon the fulfilment of the following: (1) the Independent Shareholders of CS Development passing resolutions to approve the Compensation Agreement; (2) the competent internal decision-making departments of COSCO Company approving the Compensation Agreement; and (3) condition precedents in the Asset Transfer Agreement having been fulfilled or waived. Termination: If Asset Transfer Agreement is cancelled or terminated, the Compensation Agreement shall be cancelled or terminated at the same time. V. THE LISTING RULES IMPLICATIONS LR14.58(3) LR14.63(3) As the highest applicable percentage ratio (as defined in Rule of the Listing Rules) of the Dalian Ocean Acquisition exceeds 100%, the Dalian Ocean Acquisition constitutes a very substantial acquisition of the Company and is subject to the requirements of reporting, announcement, circular and shareholder s approval under Chapter 14 of the Listing Rules. 14

17 LETTER FROM THE BOARD As the highest applicable percentage ratio of the CS Bulk Disposal is more than 25% but less than 75%, the CS Bulk Disposal constitutes a major transaction of the Company and is subject to the requirements of reporting, announcement, circular and shareholders approval under Chapter 14 of the Listing Rules. The Proposed Transactions are conducted in the context of the restructuring which involves the COSCO Company and China Shipping as well as certain of their respective group member companies (including the Company) disposing and acquiring certain assets and equity interests among themselves (including the Proposed Transactions) ( the Group Restructuring ). Although, the Proposed Transactions are not conditional upon other transactions under the Group Restructuring, the Company voluntarily considers the Proposed Transactions as connected transactions (as defined under Chapter 14A of the Listing Rules) of the Company, and China Shipping and its associates will voluntarily abstain from voting on the resolutions with respect to the Proposed Transactions. LR14A.68(2) LR14A.70(2)(4) The Company has formed an Independent Board Committee in relation to the Proposed Transactions, to advise the Independent Shareholders and has appointed TC Capital Asia Limited as the Independent Financial Adviser to advise the Independent Board Committee and the Independent Shareholders in accordance with the Listing Rules. Given that Mr. Xu Lirong, Mr. Huang Xiaowen, Mr. Ding Nong, Mr. Yu Zenggang, Mr. Yang Jigui, Mr. Han Jun and Mr. Qiu Guoxuan, all being executive Directors of the Company, hold positions in entities connected with its parent company, they have abstained from voting on the relevant Board resolutions approving the Asset Transfer Agreement, the Compensation Agreement and the Proposed Transactions thereunder due to potential conflict of interests. LR14A.70(11) VI. WAIVERS FROM STRICT COMPLIANCE WITH THE LISTING RULES The Valuation Reports were prepared based on the income approach and asset-based approach, and the valuation conclusion has been arrived at using the income approach. Therefore, the valuations under the Valuation Reports of the Target Companies are regarded as profit forecasts under Rule of the Listing Rules. The Company has applied for and the Stock Exchange has granted a waiver from strict compliance with the requirements on profit forecast under Rules 14.62, Rule 14.66(2), 14A.68(7) and Rule 14A.70(13) of the Listing Rules regarding the Valuation Reports for the Proposed Transactions based on the grounds below: (1) The valuation is led by COSCO Company and not CS Development, while the CS Development only provided the Valuer with historical financial information. (2) The valuation is required by the applicable PRC laws and regulations rather than pursuant to the Listing Rules. (3) While the Consideration will be determined by reference to the Appraised Value, the Board of Company will consider other factors when assessing the Proposed Transactions. 15

18 LETTER FROM THE BOARD (4) The CS Bulk will cease to be part of the Company after the Proposed Transactions so the profit forecast in respect of the CS Bulk will be irrelevant to the Company s future financial position. (5) The financial impact of the CS Bulk Disposal and the Dalian Ocean Acquisition has been set out in III. FINANCIAL EFFECTS OF THE PROPOSED TRANSACTIONS in the Letter From the Board of this circular. VII. EXEMPTION OF THE NON-COMPETITION UNDERTAKING OF CHINA SHIPPING Pursuant to the requirements of the relevant PRC laws, in order to avoid competition between the Company and China Shipping, after negotiation between the Company and China Shipping, China Shipping issued the Non-competition Undertaking ( ) (the Original Undertaking ) on 15 June 2011 pursuant to which China Shipping undertook as follows: (1) China Shipping has positioned the Company as the only ultimately integrated business platform focusing on the oil transportation, bulk and LNG transportation under China Shipping. (2) For the bulk vessels and tankers wholly-owned by China Shipping and the non-listed enterprises under its control, China Shipping undertook that when appropriate and within five years thereof, such assets of bulk vessels and tankers would be injected into the Company through, among other things, asset acquisition or reorganization, or such assets would be disposed of, so as to eliminate the competition between China Shipping and the Company and facilitate the sustainable and stable development of the Company. (3) For the bulk vessels and tankers leased by China Shipping (H.K.) Holdings Co., Ltd. ( ), a subsidiary of China Shipping, under finance leases which would expire successively in 2011 and 2012, China Shipping undertook that upon completion of title acquisition of the vessels under the finance leases by China Shipping (H.K.) Holdings Co., Ltd., such assets of bulk vessels and tankers would be injected into the Company through, among other things, asset acquisition or reorganization, or would be disposed of, when appropriate and within five years thereof. (4) Prior to the completion of injecting the aforesaid bulk vessels and tankers into the Company or disposal of them by China Shipping, China Shipping would lease the aforesaid vessels to the Group for operation under the conditions prevailing in the market based on the business requirement of the Company, or entrust the Group to operate and manage the aforesaid vessels, thus eliminating competition. As of the Latest Practicable Date, China Shipping has injected all its oil transportation assets into the Company, and has entrusted CS Bulk to operate and manage those bulk shipping business controlled by China Shipping and not operated by the Company. However, those bulk shipping assets have not yet been injected into the Company, nor have disposal thereof been completed. 16

19 LETTER FROM THE BOARD As the Company intends to implement the CS Bulk Disposal and the Dalian Ocean Acquisition, upon completion of the Proposed Transactions, the Company will become a listed company engaged in professional oil and gas transportation and no longer engage in bulk shipping business. Therefore, requiring China Shipping to inject the bulk shipping assets into the Company will no longer meets the Company s need of planning and positioning for the future business development. Accordingly, based on the requirements of the relevant laws and regulations, and after comprehensive consideration about the performance of the aforesaid undertaking, the business development strategy and the actual situation of the Company, together with the analysis on the feasibility necessity of performing the undertaking, the Board considers that continuous performance of the Original Undertaking will be unfavorable to the business development of the Company and to the protection of interests of the Company and its Shareholders. Meanwhile, taking into account that there is uncertainty as to whether the Proposed Transactions can be completed or can be completed prior to the expiry date of the Original Undertaking (i.e., 15 June 2016), subject to approval of the Shareholders, the Company proposes to conditionally exempt part of the Original Undertaking, with details as follows: Upon completion of the Proposed Transactions, the Company will agree to exempt the undertaking under item 1 and item 2 of the Original Undertaking that bulk shipping assets should be injected into the Company or disposed of; and the undertaking under item 4 regarding lease and entrusted operation of the bulk shipping assets prior to injection or disposal thereof (the Exemption ). In the event that the Proposed Transactions fail to proceed to completion, the Original Undertaking shall continue to be performed whereas the term of the undertaking will extend to within one year from the date of announcement of termination of the Proposed Transactions. As China Shipping is a substantial shareholder of the Company, it is a connected person of the Company according to the Listing Rules. Therefore, the Exemption constitutes a connected transaction of the Company, and is subject to the Independent Shareholders approval. The Directors (excluding the Independent Non-executive Directors who will give their opinions based on the recommendations of the Independent Financial Adviser) consider that the Exemption is agreed after arm s length negotiations and based on normal commercial terms taking into account the business plan of the Company, and therefore the terms of the Exemption are fair and reasonable and in the interests of the Company and its shareholders as a whole. VIII.INFORMATION ON THE PARTIES LR14.58(2) A. CS Development LR14.58(6) The Company is principally engaged in the business of transportation of product oil, crude oil, coal and iron ore in the coastal areas of China and other areas in the world, and transportation of LNG imported by China. LR14.58(7) LR14.60(2) 17

20 LETTER FROM THE BOARD (1) Simplified corporate structure of the CS Development Group as of the Latest Practicable Date LR14.58(3) LR14A.70(3)(4) CS Development 100% 100% CS Bulk CSDHK Other subsidiaries 17 Bulk Carrier Companies 100% 51% 50% 49% 49% Hong Kong Hai Bao Shipping Co., Limited Shanghai Times Shipping Co., Limited Shenhua Zhonghai Marine Co., Limited China Ore Shipping Pte. Ltd. (2) Simplified corporate structure of the CS Development Group immediately following completion of the Proposed Transactions CS Development 100% 100% Dalian Ocean CSDHK Other subsidiaries B. China Shipping China Shipping is a large shipping conglomerate involved in import and export business, trading, coastal and ocean cargo transportation, dry bulk cargo transportation, supply of food for vessels, management of docks and other services in relation to the above, and operates in different regions of the PRC and across the world. C. COSCO Company COSCO Company is principally engaged in the business of container shipping, dry bulk shipping, tanker transportation, logistics terminals, ship repairing and building, financial services and trade. D. COSCO Bulk COSCO Bulk is principally engaged in the business of dry bulk shipping. E. Dalian Ocean Dalian Ocean is principally engaged in tanker shipping business which provides oil and gas shipping services covering oil tanker shipping, LNG shipping and LPG shipping, etc. As at 31 December 2015, it owned 29 oil tanker with 6.60 million deadweight tons. The predecessor of Dalian Ocean is DO Company and is a wholly state-owned enterprise incorporated in the PRC. It completed transformation into a company with limited liability on 24 December

21 LETTER FROM THE BOARD Based on the audited consolidated financial statements of Dalian Ocean for the year ended 31 December 2015 prepared in accordance with the HKFRS, the consolidated net assets of Dalian Ocean as at 31 December 2015 were RMB6, million. The audited consolidated net profits (both before and after tax) of Dalian Ocean for the two years ended 31 December 2014 and 31 December 2015 prepared in accordance with the HKFRS are set out as follows: For the financial year ended 31 December 2014 RMB million For the financial year ended 31 December 2015 RMB million Consolidated net profits/(loss) before tax Consolidated net profits/(loss) after tax F. CS Bulk CS Bulk is principally engaged in the bulk shipping business. Based on the audited consolidated financial statements of CS Bulk for the year ended 31 December 2015 prepared in accordance with the PRC GAAP, the consolidated net assets of CS Bulk as at 31 December 2015 were RMB4, million. Having considered the financial impact of the CS Restructuring, the restated audited consolidated net profits (both before and after tax) of CS Bulk for the two years ended 31 December 2014 and 31 December 2015 prepared in accordance with the PRC GAAP are set out below: For the financial year ended 31 December 2014 RMB million For the financial year ended 31 December 2015 RMB million Consolidated net profits/(loss) before tax , Consolidated net profits/(loss) after tax , IX. ELECTION OF EXECUTIVE DIRECTOR We refer to the Company s announcements dated 8 March 2016 where the Board announced its approval to appoint Mr. Sun Jiakang as an executive Director, subject to the Shareholders approval at the AGM. His election will take effect immediately after the Shareholders approval at the AGM. Biography of Mr. Sun Jiakang are set out in appendix VII to this circular. X. AGM The AGM will be convened at 2:00 p.m. on Friday, 20 May 2016 at 3rd Floor, Ocean Hotel, No Dong Da Ming Road, Hongkou District, Shanghai, the PRC for the Shareholders to consider and, if thought fit, approve, among other things, (1) the Asset Transfer Agreement, the Compensation 19

22 LETTER FROM THE BOARD Agreement and the Proposed Transactions as contemplated thereunder; (2) the Exemption of the Non-competition Undertaking; and (3) the election of Mr. Sun Jiakang as an executive Director. The notice convening the AGM was dispatched to Shareholders on 1 April 2016 pursuant to Rule 19A.39A of the Listing Rules. As stated in the V-THE LISTING RULES IMPLICATION, China Shipping and its associates will voluntarily abstain from voting for the resolutions in respect of the Proposed Transactions at the AGM. LR2.17 LR14.63(2)(d) LR14.66(13) As at the Latest Practicable Date, China Shipping controlled or was entitled to exercise control of 1,554,631,593 A shares of the Company, representing a total of approximately 38.56% of the entire issued share capital of the Company. To the extent that the Company is aware, having made all reasonable enquiries, as at the Latest Practicable Date: LR2.17(2)(3) (a) there was no voting trust or other agreement or arrangement or understanding entered into by or binding upon China Shipping; (b) China Shipping was not subject to any obligation or entitlement whereby it has or might have temporarily or permanently passed control over the exercise of the voting right in respect of its Shares in the Company to a third party, whether generally or on a case-by-case basis; and (c) it is not expected that there would be any discrepancy between the beneficial shareholding interests of China Shipping in the Company and the number of Shares in the Company in respect of which it would control or would be entitled to exercise control over the voting right at the AGM. XI. RECOMMENDATION LR14.63(2)(c) LR14A.68(3) Your attention is drawn to the letter from the Independent Board Committee and the letter from the Independent Financial Advisor set out in P.22 to 23 and P.24 to 49 respectively of this circular. Having taken into account the advice of the Independent Financial Adviser, the Independent Board Committee considers that the terms and conditions of the Asset Transfer Agreement, the Compensation Agreement, the Proposed Transactions contemplated thereunder and, the Exemption of the Non-competition Undertaking, though not entered into in the ordinary and usual course of business of the Group, are in line with the long-term business strategies of the Group and on normal commercial terms, and the terms of the relevant agreements are fair and reasonable and to the interests of the Company and the Shareholders as a whole. Accordingly, the Independent Board Committee recommends the Independent Shareholders to vote in favour of the relevant resolutions to be proposed at the AGM. 20

23 LETTER FROM THE BOARD The Directors (excluding the Independent Non-executive Directors) also recommend the Shareholders to vote in favour of the resolutions to be proposed at the AGM to approve the Asset Transfer Agreement, the Compensation Agreement, the Proposed Transactions contemplated thereunder and, the Exemption of the Non-competition Undertaking. The Directors (including the Independent Non-executive Directors) also consider that the resolution to approve the election of Mr. Sun Jiakang as an executive Director is in the interests of the Company and the Shareholders as a whole. Accordingly, the Directors recommend the Shareholders to vote in favour of the relevant resolutions as well as other resolutions to be proposed at the AGM. XII. OTHER INFORMATION Your attention is also drawn to the additional information set out in this circular. By order of the Board China Shipping Development Company Limited Mr. Xu Lirong Chairman 22 April

24 LETTER FROM THE INDEPENDENT BOARD COMMITTEE CHINA SHIPPING DEVELOPMENT COMPANY LIMITED (a joint stock limited company incorporated in the People s Republic of China with limited liability) (Stock Code: 1138) 22 April 2016 To the Independent Shareholders Dear Sir/Madam, (1) VERY SUBSTANTIAL ACQUISITION: ACQUISITION OF 100% EQUITY INTERESTS IN DALIAN OCEAN (2) MAJOR TRANSACTION: DISPOSAL OF 100% EQUITY INTERESTS IN CS BULK AND (3) CONNECTED TRANSACTION: EXEMPTION OF THE NON-COMPETITION UNDERTAKING LR14A.70(6) We hereby refer to the circular (the Circular ) dated 22 April 2016 issued by China Shipping Development Company Limited ( the Company ), of which this letter forms part. Unless otherwise specified, capitalized terms defined in the Circular shall have the same meanings when used herein. The Independent Board Committee has been formed to advise you in relation to the Asset Transfer Agreement, the Compensation Agreement, the Proposed Transactions contemplated thereunder and, the Exemption of the Non-competition Undertaking, details of which are set out in the section headed Letter from the Board. TC Capital Asia Limited has been appointed as the Independent Financial Adviser to advise the Independent Board Committee and the Independent Shareholders in this regard. The full text of the letter of advice from the Independent Financial Adviser containing its recommendation and principal factors it has taken into consideration in arriving at its recommendations is set out in the section headed Letter from the Independent Financial Adviser of the Circular. Having considered the terms and conditions of the Asset Transfer Agreement, the Compensation Agreement, the Proposed Transactions contemplated thereunder and, the Exemption of the Non-competition Undertaking, as well as the advice and recommendation of the Independent Financial Adviser set out in this letter of advice, we consider that the terms and conditions of the Asset Transfer Agreement, the Compensation Agreement, the Proposed Transactions contemplated thereunder and, the Exemption of the Non-competition Undertaking, although are not entered into in the ordinary and usual course of business of the Group, fall squarely in line with the long-term business strategy of the Group, and are on normal commercial terms and the terms of each of the respective agreements are fair and reasonable and in the interests of the Company and the Shareholders as a whole. 22

25 LETTER FROM THE INDEPENDENT BOARD COMMITTEE On the basis above, we recommend that the Independent Shareholders vote in favour of the resolutions to be proposed at the AGM in respect of the Asset Transfer Agreements, the Compensation Agreement, the Proposed Transactions contemplated thereunder and, the Exemption of the Non-competition Undertaking. Yours faithfully, Wang Wusheng Independent non-executive Director Ruan Yongping Independent non-executive Director Ip Sing Chi Independent non-executive Director Rui Meng Independent non-executive Director Teo Siong Seng Independent non-executive Director 23

26 LETTER FROM THE INDEPENDENT FINANCIAL ADVISER The following is the full text of the letter of advice from TC Capital Asia Limited, the Independent Financial Adviser to the Independent Board Committee and the Independent Shareholders, which has been prepared for the purpose of incorporation into this circular, setting out its advice to the Independent Board Committee and the Independent Shareholders in respect of the Asset Transfer Agreement, the Compensation Agreement, the Proposed Transactions and the Exemption. The Independent Board Committee and the Independent Shareholders China Shipping Development Company Limited (the Company ) Dear Sirs, 22 April 2016 VERY SUBSTANTIAL ACQUISITION: ACQUISITION OF 100% EQUITY INTERESTS IN DALIAN OCEAN; MAJOR TRANSACTION: DISPOSAL OF 100% EQUITY INTERESTS IN CS BULK; AND CONNECTED TRANSACTION: EXEMPTION OF THE NON-COMPETITION UNDERTAKING INTRODUCTION We refer to our appointment as the independent financial adviser to advise the Independent Board Committee and the Independent Shareholders in relation to, the Asset Transfer Agreement, the Compensation Agreement, the Proposed Transactions and the Exemption, details of which are set out in the letter from the Board (the Letter from the Board ) in the circular of the Company to the Shareholders dated 22 April 2016 (the Circular ), of which this letter forms part. Capitalized terms used in this letter have the same meanings as those defined in the Circular unless the context otherwise requires. In respect of the Dalian Ocean Acquisition, as the highest applicable percentage ratio (as defined in Rule of the Listing Rules) exceeds 100%, the Dalian Ocean Acquisition constitutes a very substantial acquisition of the Company and is subject to the requirements of reporting, announcement, circular and shareholders approval under Chapter 14 of the Listing Rules. In respect of the CS Bulk Disposal, as the highest applicable percentage ratio (as defined in Rule of the Listing Rules) is more than 25% but less than 75%, the CS Bulk Disposal constitutes a major transaction of the Company and is subject to the requirements of reporting, announcement, circular and shareholders approval under Chapter 14 of the Listing Rules. 24

27 LETTER FROM THE INDEPENDENT FINANCIAL ADVISER In respect of the Exemption, as China Shipping is a substantial shareholder of the Company, it is a connected person of the Company according to the Listing Rules. Therefore, the Exemption constitutes a connected transaction of the Company, and is subject to the Independent Shareholders approval. As the Proposed Transactions are conducted in the context of the restructuring which involves COSCO Company and China Shipping as well as certain of their respective group member companies (including the Company) disposing and acquiring certain assets and equity interests among themselves (including the Proposed Transactions) (the Group Restructuring ) and the Proposed Transactions are not conditional upon other transactions under the Group Restructuring, the Company voluntarily considers the Proposed Transactions as connected transactions (as defined under Chapter 14A of the Listing Rules) of the Company, and China Shipping and its associates will voluntarily abstain from voting on the resolutions with respect to the Proposed Transactions. We have been appointed by the Company to advise the Independent Board Committee and the Independent Shareholders as to whether the Asset Transfer Agreement, the Compensation Agreement, the Proposed Transactions and the Exemption, as far as the Independent Shareholders are concerned, are in the interests of the Company and the Shareholders as a whole; and to give independent advice to the Independent Board Committee and Independent Shareholders as to whether the Independent Shareholders should vote in favour of the Asset Transfer Agreement, the Compensation Agreement, and the Proposed Transactions and the Exemption. As at the Latest Practicable Date, we did not have any relationships or interests with the Company or any other parties that could reasonably be regarded as relevant to the independence of us. In the last two years, we have acted as an independent financial adviser to the then independent board committee and independent shareholders of the Company in relation to three occasions as detailed in the circulars of the Company dated 23 May 2014, 12 September 2014 and 12 November 2015 respectively. Given (i) our independent role in these three engagements; and (ii) our fees for these three engagements represented an insignificant percentage of our revenue, we consider these three engagements would not affect our independence to form our opinion in respect of the Asset Transfer Agreement, the Compensation Agreement, and the Proposed Transactions and the Exemption. BASIS OF OPINION In putting forth our recommendation, we have relied on the information and facts supplied to us by the Directors and/or management of the Company. We have reviewed, among other things: (i) (ii) the Asset Transfer Agreement; the Compensation Agreement; (iii) the unaudited pro forma financial information of the Enlarged Group as contained in Appendix IV to the Circular; (iv) the accountant s report of Dalian Ocean for the three years ended 31 December 2015 as contained in Appendix III to the Circular; 25

28 LETTER FROM THE INDEPENDENT FINANCIAL ADVISER (v) the audited report of CS Bulk for the three years ended 31 December 2015 having considered the financial impact of the CS Restructuring; (vi) the valuation reports of Dalian Ocean and CS Bulk as at 31 December 2015 which were prepared by the Valuer, a summary of which is contained in Appendix V to the Circular; and (vii) annual report of the Company for the year ended 31 December 2014 (the 2014 Annual Report ) and the year ended 31 December 2015 (the 2015 Annual Report ). We have assumed that all such information, opinions, facts and representations, which have been provided to us by the Directors or the representatives of the Company, for which they are fully responsible, are true, accurate and complete in all respects. The Company has also confirmed to us that no material facts have been omitted from the information supplied and we have no reason to suspect that any material information has been withheld by the Company or is misleading. We consider that we have sufficient information to reach an informed view and to provide a reasonable basis for our recommendation. We have not, however, carried out any independent verification of the information provided by the Directors and the representatives of the Company, nor have we conducted any independent investigation into the business, affairs, operations, financial position or future prospects of each of the Group, Dalian Ocean, CS Bulk, China Shipping, China Shipping Group, COSCO and COSCO Group. PRINCIPAL FACTORS AND REASONS In formulating our opinion in respect of the Asset Transfer Agreement, the Compensation Agreement, the Proposed Transactions and the Exemption, we have taken into account the following principal factors and reasons: 1. Background of the Asset Transfer Agreement and the Compensation Agreement On 11 December 2015, the Company and COSCO entered into an agreement (the Framework Agreement ), pursuant to which (i) the Company has agreed to acquire 100% equity interests in Dalian Ocean from COSCO Company; (ii) the Company has agreed to dispose of 100% equity interests in CS Bulk to COSCO Company and/or its wholly-owned subsidiaries upon completion of the CS Restructuring. On 29 March 2016, the Company, COSCO Company and COSCO Bulk entered into the Asset Transfer Agreement which has superseded and replaced the Framework Agreement; and the Company and COSCO Company entered into the Compensation Agreement. 2. Information on the Company, COSCO Company, COSCO Bulk, Dalian Ocean and CS Bulk 2.1 Information on the Company As stated in the Letter from the Board, the Company is principally engaged in the business of transportation of product oil, crude oil, coal and iron ore in the coastal areas of China and other areas in the world, transportation of LNG imported by China. 26

29 LETTER FROM THE INDEPENDENT FINANCIAL ADVISER Set out below is the financial highlight of the Group in accordance with HKFRS, as extracted from the 2015 Annual Report and the 2014 Annual Report: % For the year ended 31 December (Audited) (RMB million) % (Audited) (RMB million) % (Audited) (RMB million) Revenue 100% 11, % 12, % 12,213 - Oil shipment 48% 5,389 45% 5,500 50% 6,079 - Dry bulk shipment 52% 5,955 55% 6,774 50% 6,134 Contribution by segment 100% (181) 100% 1, % 2,345 - Oil shipment 211% (382) 59% % 2,164 - Dry bulk shipment (111%) % 563 8% 181 Profit attributable to owners of the Company (2,234) Cash and cash equivalents 1,919 2,449 2,086 Total assets 58,842 65,750 68,379 Equity attributable to owners of the Company 21,227 21,829 25,697 From the above table, we note that the Group recorded revenue of approximately RMB12,274 million for the year ended 31 December 2014 ( FY2014 ), representing an increase of approximately RMB930 million or 8.2% as compared to approximately RMB11,344 million for the year ended 31 December 2013 ( FY2013 ). Net profit attributable to owners of the Company increased by approximately RMB2,543 million from loss of approximately RMB2,234 million in FY2013 to profit of approximately RMB309 million in FY2014. According to the 2014 Annual Report, revenue from the oil shipping business amounted to approximately RMB5,500 million in FY2014, representing an increase of approximately 2.1% as compared to FY2013. The share of revenue from oil shipping business declined from approximately 48% for FY2013 to approximately 45% for FY2014. We note that the Group achieved a shipping volume of approximately billion tonne-nautical miles of oil, representing an increase of approximately 2.4% year-on-year. The contribution by oil shipping business amounted to approximately RMB825 million for FY2014, representing approximately 59% of the total contribution. According to the management of the Company, the higher share of contribution by the oil shipping business was mainly due to upturn tanker shipping markets together with a deteriorating bulk shipping markets at the same period. 27

30 LETTER FROM THE INDEPENDENT FINANCIAL ADVISER According to the 2015 Annual Report, revenue from oil shipping business amounted to approximately RMB6,079 million for the year ended 31 December 2015 ( FY2015 ), representing an increase of approximately RMB579 million or 10.5% as compared to approximately RMB5,500 million for FY2014. On the contrary, revenue from dry bulk shipping business amounted to approximately RMB6,134 million for FY2015, representing a decrease of approximately RMB640 million or 9.4% as compared to approximately RMB6,774 million for FY2014. The contribution by oil shipping business amounted to RMB2,164 million for FY2015, representing an increase of approximately 162.3% from that for FY2014 and accounting for approximately 92% of total contribution for FY2015. As advised by the management of the Company, the increase in revenue and contribution from oil shipping business was mainly due to (i) the demand of oil shipment was generally stable during the year; (ii) the Group made progress in cooperating with internationally renowned oil companies and made breakthrough in long-term vessel chartering business; and (iii) the Group further promoted efficient cost management and benefited from the relative low fuel cost. The decrease in revenue and contribution from dry bulk shipping business was mainly due to weak demand in dry bulk shipping industry. 2.2 Information on COSCO Company As disclosed in the Letter from the Board, COSCO Company is principally engaged in the business of container shipping, dry bulk shipping, tanker transportation, logistics terminals, ship repairing and building, financial services and trade. 2.3 Information on COSCO Bulk As disclosed in the Letter from the Board, COSCO Bulk is principally engaged in the business of dry bulk shipping. 2.4 Information on Dalian Ocean As disclosed in the Letter from the Board, Dalian Ocean is principally engaged in tanker shipping business which provides oil and gas shipping services covering oil tanker shipping, LNG shipping and LPG shipping, etc. As at 31 December 2015, it owned 29 oil tankers with 6.60 million deadweight tons. The predecessor of Dalian Ocean is DO Company and is a wholly state-owned enterprise incorporated in the PRC. It completed transformation into a company with limited liability on 24 December

31 LETTER FROM THE INDEPENDENT FINANCIAL ADVISER Audited report of Dalian Ocean for the three years ended 31 December 2015 was set out in Appendix III to the Circular. Set out below is the financial highlight of Dalian Ocean in accordance with HKFRS: For the financial year ended 31 December (RMB million) (RMB million) (RMB million) (Audited) (Audited) (Audited) (Loss)/profit before tax (935) (318) 816 (Loss)/profit for the year (945) (404) 808 (Loss)/profit attributable to owner of Dalian Ocean (909) (373) 804 As shown in the table above, Dalian Ocean recorded loss before tax of approximately RMB935 million and RMB318 million for FY2013 and FY2014. For FY2015, Dalian Ocean recorded a profit before tax of approximately RMB816 million, which was mainly due to more revenue generated which is benefited from the upturn tanker shipping market during the year and lower operating cost due to lower oil price. 2.5 Information on CS Bulk As disclosed in the Letter from the Board, CS Bulk is principally engaged in the bulk shipping business. As stated in the Letter from the Board, set out below is the restated audit consolidated net profits (both before and after tax) of CS Bulk for the two years ended 31 December 2014 and 31 December 2015 prepared in accordance with PRC GAAP, having considered the financial impact of the CS Restructuring: For the financial year ended 31 December RMB million RMB million (Audited) (Audited) Consolidated net profits/(loss) before tax 205 (1,512) Consolidated net profits/(loss) after tax 278 (1,474) As shown in the table above, CS Bulk (after considered the financial impact of the CS Restructuring) recorded profits before tax of approximately RMB205 million and profits after tax of approximately RMB278 million for FY2014. For FY2015, CS Bulk recorded loss before tax of approximately RMB1,512 million and loss after tax of approximately RMB1,474 million, which was mainly due to deterioration in the dry bulk shipping market. 29

32 LETTER FROM THE INDEPENDENT FINANCIAL ADVISER 2.6 Information on China Shipping As disclosed in the Letter from the Board, China Shipping is a large shipping conglomerate involved in import and export business, trading, coastal and ocean cargo transportation, dry bulk cargo transportation, supply of food for vessels, management of docks and other services in relation to the above, and operates in different regions of the PRC and across the world. 3. Industry overview As mentioned above, Dalian Ocean is principally engaged in tanker shipping business while CS bulk is principally engaged in the bulk shipping business. Below is the industry overview of tanker shipping industry and dry bulk shipping industry. (i) Tanker shipping The tanker shipping sector involves transportation of liquid or gas bulk commodities such as oil, liquefied natural gas and chemicals. The graph below depicts historical trend of the Middle East to Japan daily tanker rate ( Tanker Rate ), which is a leading indicator for the tanker shipping industry, from 1 April 2011 to the Latest Practicable Date. With reference to the website of the Baltic Exchange Ltd. Tanker Rate is a measurement of the freight rate paid for tankers. Tanker Rate ($) Source: Bloomberg The Tanker Rate remained volatile for the period from 2011 to 2014 and started to rise in The Tanker Rate remained volatile for the period from 1 January 2016 to the Latest Practicable Date and reached its five-year peak in January According to an article namely Weak demand, vessel surplus to create horror 2016 for commodities shipping dated 28 December 2015 issued by CNBC, China has been looking to boost strategic reserves of crude, taking advantage of multi-year lows in prices, which has helped the oil tanker market rally. According to another article namely China imports record crude as price cash accelerates buying dated 13 January 2016 issued by Bloomberg News, China increased imports of crude oil by 8.8% to a record 334 million metric tons in 2015 and 30

33 LETTER FROM THE INDEPENDENT FINANCIAL ADVISER China may start four additional strategic petroleum reserves in 2016 as part of a plan to stockpile enough oil to cover 100 days worth of net imports by Given the strong demand of crude oil import from China, the outlook of the tanker shipping market is expected to remain stable to positive in the next few years. (ii) Dry bulk shipping The dry bulk shipping sector involves transportation of major dry bulk commodities such as iron ore, coal, food supplies, bauxite and phosphate rock, with coal and iron ore almost making up two-thirds of the entire bulk shipping sector. According to an article namely Weak demand, vessel surplus to create horror 2016 for commodities shipping dated 28 December 2015 issued by CNBC, dry bulk shipping markets have been hit hard by a slide in demand for coal by China, which is also trying to ease its dependence on the polluting fuel and meet environmental pledges. According to the data collected by the National Bureau of Statistics of China, the total coal import dropped from approximately 327 million ton in 2013 to approximately 291 million ton in Driven by sustained weakness in economic activity of China and new measures on supporting environmental friendly energy, it is expected that domestic coal consumption continued to fall and coal imports recorded further decline in The graph below depicts the historical trend of the Baltic Dry Index ( BDI ), which is a leading indicator for the dry bulk industry, from 1 April 2011 to the Latest Practicable Date. With reference to the website of the Baltic Exchange Ltd., BDI is a measurement of the cost of shipping major bulk commodities on a number of shipping routes and is calculated daily by based on the average of spot freight rates. BDI Index 2,500 2,000 1,500 1, Source: Bloomberg The index remained volatile for the past 5 years and reached over 2,000 in 2011 and For the year of 2015, the index reached its peak level in 2015 of 1,222 on 5 August 2015 and plunged by over 50% subsequently and fell below the level of 600 in For most of 2015, it has been on a 31

34 LETTER FROM THE INDEPENDENT FINANCIAL ADVISER downward trend lead by the slowdown in imports from China. Although the index began to increase in the beginning of 2016, the index is still at historic low for the past 5 years and the weak demand in China is likely to continue to negatively impact the prospect of the dry bulk industry. 4. The Asset Transfer Agreement and the Compensation Agreement On 11 December 2015, the Company and COSCO entered into the Framework agreement, pursuant to which (i) the Company has agreed to acquire 100% equity interests in Dalian Ocean from COSCO Company; (ii) the Company has agreed to dispose of 100% equity interests in CS Bulk to COSCO Company and/or its wholly-owned subsidiaries upon completion of the CS Restructuring. On 29 March 2016, the Company, COSCO Company and COSCO Bulk entered into the Asset Transfer Agreement which has superseded and replaced the Framework Agreement; and the Company and COSCO Company entered into the Compensation Agreement. 4.1 Principal terms and conditions of the Asset Transfer Agreement Date: 29 March 2016 Parties: The Company COSCO Company and COSCO Bulk Subject matter: (i) The Company (as purchaser) has agreed to acquire and COSCO Company (as vendor) has agreed to dispose of 100% equity interests in Dalian Ocean. (ii) The Company (as vendor) has agreed to dispose of and COSCO Company has agreed to acquire (by itself or through COSCO Bulk) 100% equity interests in CS Bulk upon completion of the CS Restructuring. The Dalian Ocean Acquisition and the CS Bulk Disposal are inter-conditional and shall come into effect simultaneously. If either one of the Dalian Ocean Acquisition and the CS Bulk Disposal will not proceed to completion, the other will not proceed to completion. Consideration: The Dalian Ocean Consideration is RMB6,628,455,200, and the CS Bulk Consideration is RMB5,392,221,600. According to the Valuation Reports, the Appraised Value of Dalian Ocean is RMB6, million, and the Appraised Value of CS Bulk is RMB5, million. The Consideration is determined based on such Appraised Values after considering other related factors, including: (i) current situation and future development prospects of the industries in which the Target Companies operate; 32

35 LETTER FROM THE INDEPENDENT FINANCIAL ADVISER (ii) historical financial performance and future development potential of the Target Companies; (iii) current situation and future development prospects of the industries in which the Company operates; (iv) (v) historical financial performance and future development potential of the Company; and various valuation multiples including P/E ratio, P/B ratioi and EV/EBITDA ratio of the comparable companies as well as the historical comparable transactions. The summary of the Valuation Reports is included in the Appendix V to Circular. The Valuation Reports have been filed with a competent authority and are under an internal review. The filing process is expected to be done before the AGM. The Consideration shall be adjusted based on the results of such filing. A further announcement will be published if the Consideration is adjusted. The Dalian Ocean Consideration payable by the Company under the Dalian Ocean Acquisition is intended to be partially offset by the CS Bulk Consideration payable by COSCO Company under the CS Bulk Disposal, and the balance is intended to be settled in cash within 30 business days of the date on which all the conditions precedent are satisfied or otherwise waived by the parties. Conditions precedent: The parties have agreed that completion of the Proposed Transactions is conditional upon fulfilment of the following: (i) (ii) the Valuation Reports having been filed with the competent authority; COSCO Company and China Shipping having settled all the debts repayable by CS Bulk and its subsidiaries to the Group before the Closing Date (inclusive) according to the requirements of the Asset Transfer Agreement. As at the Latest Practicable Date, the total debts owned to the Company and its wholly-owned subsidiary incurred by CS Bulk and its subsidiaries as a result of CS Restructuring was approximately RMB5, million (including RMB4,233,364,590.14, US$5 and HK$2,104,607,290), which will be settled by COSCO Company and/or its designated wholly-owned subsidiaries. 33

36 LETTER FROM THE INDEPENDENT FINANCIAL ADVISER As at the Latest Practicable Date, the total amount of debts incurred by CS Bulk and its subsidiaries as a result of the non-operating funds financing from the Group to CS Bulk and its subsidiaries were approximately RMB11, million (including RMB6,261,344,338.44, US$386,714, and HK$3,444,300,104.55), which will be settled by China Shipping and/or their designated connected person(s). COSCO Company has undertaken to be jointly and severally liable for the settlement with China Shipping; (iii) no material adverse change having occurred to the business, operations, assets, liabilities, etc. of the Target Companies since the Reference Date; (iv) (v) (vi) the Independent Shareholders of the Company passing resolutions to approve the Proposed Transactions; the competent internal decision-making departments of COSCO Company and the Target Companies having approved the Proposed Transactions; all approvals by the relevant regulatory authorities in relation to the Proposed Transactions, including but not limited to, the approvals from the competent state-owned assets supervisory institutions and the MOFCOM, having been obtained and such regulatory approvals not having been revoked before the Closing Date; and (vii) no material breach of the terms of the Asset Transfer Agreement having occurred, and the declarations, representations and warranties given by the Company, COSCO Company and COSCO Bulk as set out in the Asset Transfer Agreement remaining effective. Completion: The Proposed Transactions will be completed on the Closing Date. Upon completion of the Proposed Transactions, Dalian Ocean will become a wholly-owned subsidiary of the Company and its financial results will be consolidated into the financial statements of the Group; CS Bulk will cease to be a subsidiary of the Company and its financial results will no longer be consolidated into the financial statements of the Group. 34

37 LETTER FROM THE INDEPENDENT FINANCIAL ADVISER Other principal terms: (i) During the transition period from the Reference Date to the Closing Audit Date, the Company is entitled to all the increase in the equity of Dalian Ocean due to profit-making or any other reason; all the decrease in the equity of Dalian Ocean due to loss-making or any other reason will be borne by COSCO Company, and COSCO Company shall compensates the Company in equivalent cash. (ii) During the transition period from the Reference Date to the Closing Audit Date, all the increase in equity of CS Bulk due to profit-making or any other reason will be retained by the Company, and COSCO Company or COSCO Bulk shall pay for such increase to the Company in equivalent cash; all the decrease in equity of CS Bulk due to loss-making or any other reason will be borne by the Company, and the Company shall compensate COSCO Company or COSCO Bulk in equivalent cash. 4.2 Reasons for and benefits of the Proposed Transactions As discussed in the Letter from the Board, it is intended that the Company will be, through the Proposed Transactions, built into a listed platform of professional oil and gas transportation to enhance its overall profitability, thereby enhancing the interests of all the Shareholders. The Proposed Transactions will push forward the achievement of such strategic goals on the following aspects: (i) to create a large energy transportation fleet with a globally leading position. Following the Proposed Transactions, the Company will build a specialised crude oil and refined oil transportation fleet and is expected to become a global leader in the oil transportation market in terms of transportation capacities; (ii) to enhance the international competitiveness of the Company and gradually realise the global layout; (iii) to further strengthen the leading position in the domestic oil transportation market, further enhance the competitiveness in all relevant market segments and effectively enhance the sustainable and stable profitability while improving the counter-cycle capabilities; (iv) to achieve a strong alliance between the two major players of transportation of liquefied natural gas (LNG) imported by China, lock in long-term and stable revenues and effectively counter cyclical fluctuations in the oil transportation market; (v) to coordinate and centralise the procurement of all relevant resources and fully utilise the existing resources, significantly enhance the bargaining power for various cost items while improving the efficiency of resource utilisation, and effectively reduce procurement costs; 35

38 LETTER FROM THE INDEPENDENT FINANCIAL ADVISER (vi) to fully optimise the utilisation of human resources, fully compensate the insufficiency in the tanker crew and satisfy the demand for future expansion of the fleet scale as well as the strategic need for a global route layout; besides, gradually enhance the competitiveness of staff in terms of internationalisation and specialties; and (vii) to broaden and release the financial resources of the Company and enhance its overall profitability through the disposal of bulk shipping business against the background of the significant imbalance between the supply and demand of global bulk shipping which has led to a gradual decline in the BDI and China Containerized Freight Index in the past five years and a historical low level of the BDI index in As discussed in the paragraph headed Industry overview above, the dry bulk shipping market continues to be negatively impacted by the weak demand in China. Also, as discussed in the paragraph headed Information on the Company above, the contribution from dry bulk shipping business dropped significantly for FY2015 as compared with that for FY2014. As discussed with the management of the Company, given the unsatisfactory result from the dry bulk shipping business, the CS Buk Disposal will be beneficial to the Company as the Company is able to realize return from the investment in CS Bulk and better reallocate resources in areas with better prospects such as tanker shipping business. As discussed in the paragraph headed Industry overview above, beneficial from the strong demand of crude oil import from China, the outlook of the tanker shipping market is expected to remain stable to positive in the next few years. After the acquisition of Dalian Ocean, the Company is expected to form a specialized oil transportation fleet and further strengthen its competitiveness in tanker shipping market, therefore benefited from the strong demand of crude oil import from China. Therefore, we are of the view that, despite the entering into the Asset Transfer Agreement is not in the ordinary and usual course of business of the Group, the Proposed Transactions are in the interests of the Company and its Shareholders as a whole. 4.3 Principal terms and conditions of the Compensation Agreement Date: 29 March 2016 Parties: Subject company: The Company COSCO Company Dalian Ocean 36

39 LETTER FROM THE INDEPENDENT FINANCIAL ADVISER Compensation: COSCO Company, in accordance with the relevant PRC laws and regulations concerning valuations based on the income approach and pursuant to the Compensation Agreement, undertakes that: (i) (ii) During the Compensation Period, the Actual Net Profits shall not be less than the Estimated Net Profits of Dalian Ocean which shall be determined by COSCO Company. Based on the net profit forecast which were set out in the Valuation Reports, COSCO Company has determined that the accumulative Estimated Net Profit for the three years from 2016 to 2018 shall be RMB819 million. The Estimated Net Profits shall be adjusted based on the filing results of the Valuation Reports. A further announcement will be published if the Estimated Net Profits are adjusted. If the accumulative Actual Net Profits of Dalian Ocean for the Compensation Period is lower than its accumulative Estimated Net Profits for the Compensation Period, COSCO Company shall compensate CS Development for the shortfall in cash. There is no cap for the compensation from COSCO Company. The amount of compensation payable by COSCO Company in cash will be determined based on the Compensation Agreement and the following formula: Compensation payable in cash = accumulative Estimated Net Profits of Dalian Ocean for the Compensation Period - accumulative Actual Net Profits of Dalian Ocean for the Compensation Period. When the accumulative Actual Net Profits of Dalian Ocean is a negative figure, per the above formula, its absolute value shall be added to be the accumulative Estimated Net Profits. (iii) If compensation has been paid by COSCO Company in equivalent cash for all the decrease in the equity of Dalian Ocean due to loss-making during the transition period pursuant to the Asset Transfer Agreement, such amount should be deducted from the compensation amount payable by COSCO Company due to the shortfall calculated according to the Compensation Agreement. 37

40 LETTER FROM THE INDEPENDENT FINANCIAL ADVISER (iv) Upon the end of the Compensation Period, CS Development will perform an impairment assessment of Dalian Ocean. If the impairment amount on Dalian Ocean at the end of the Compensation Period is greater than the amount of cash compensation paid by COSCO Company for the Compensation Period, COSCO Company shall provide additional compensation. The amount of such additional compensation in cash will be determined based on the Compensation Agreement and the following formula: Additional compensation amount = the impairment amount of Dalian Ocean at the end of the period - the amount of cash compensation paid by COSCO Company Conditions precedent: The effectiveness of the Compensation Agreement is conditional upon the fulfilment of the following: (i) (ii) the Independent Shareholders of the Company passing resolution to approve the Compensation Agreement; the competent internal decision-making departments of COSCO Company approving the Compensation Agreement; (iii) condition precedents in the Asset Transfer Agreement has been fulfilled or waived; Termination: If the Asset Transfer Agreement is cancelled or terminated, the Compensation Agreement shall be cancelled or terminated at the same time. As the Dalian Ocean Consideration is based on the appraised value of Dalian Ocean, which is determined based on, among others, the Estimated Net Profits of Dalian Ocean, the Compensation Agreement, which will compensate the Company in the case that the Actual Net Profits of Dalian Ocean shall be less than the Estimated Net Profits, provides additional assurance to the Company. Based on the above, we are of the view that the Compensation Agreement is in the interest of the Company and its Shareholder as a whole. 4.4 The Consideration As stated in the Letter from the Board, the Consideration was arrived on an arm s length basis with reference to a number of factors, including but not limited to (i) the Appraised Value of Dalian Ocean and CS Bulk; (ii) current situation and future development prospects of the industries in which Dalian Ocean and CS Bulk operate; (iii) historical financial performance and future development potential of Dalian Ocean and CS Bulk; (iv) current situation and future development prospects of the industries in which the Company operates; (v) historical financial performance and future development potential of the Company; and (vi) various valuation multiple including P/E ratio, P/B ratio and EV/EBITDA ratio of the comparable companies as well as the historical comparable transactions. 38

41 LETTER FROM THE INDEPENDENT FINANCIAL ADVISER (i) The Valuation Reports We have discussed with the Valuer regarding the Valuer s qualification and experience in relation to the performance of the valuation. The Valuer is a qualified asset appraisal firm authorised by the Ministry of Finance of the PRC to perform valuation works in the PRC. The Valuer has relevant experience in performing valuation in shipping industry. We further understand that the Valuer is independent from the Company and the other parties involved in the Proposed Transactions. In addition, we have also reviewed the terms of the engagement of the valuation and noted that the scope of work is appropriate to the opinion required to be given and we are not aware of any limitation on the scope of work which might have an adverse impact on the degree of assurance given by the Valuer. Based on the above, we are of the view that the scope of work of the Valuer is appropriate and the Valuer is qualified for valuing Dalian Ocean and CS Bulk. (a) Valuation methodologies We have noted and discussed with the Valuer and understand that they have adopted the income approach in valuing Dalian Ocean and CS Bulk. The Valuer considered both income approach and asset-based approach in valuing Dalian Ocean and CS Bulk. Besides the tangible assets such as vessels and working capitals, Dalian Ocean also relies on important intangible assets, such as scale of shipping market, shipping techniques, demand and supply network, service capabilities, management skills, human resources and goodwill. The valuation based on the income approach has fully reflected the above mentioned tangible and intangible assets together with the synergy between Dalian Ocean and its subsidiaries. Therefore, the appraisal results of income approach are taken as the final conclusions in valuing Dalian Ocean. Given the current dry bulk shipping industry condition, with most players experiencing losses and a significant drop in the market value of the dry bulk vessels, we concur with the Valuer that it would not be fair or reasonable to value the equity interest of a dry bulk shipping company at the downturn of the industry using replacement cost of its vessels. In comparison, the income approach is based on the assumption that a company will continue its operation and takes into account the dry bulk shipping industry condition in the mid to long term in a normalized operating environment. Therefore, the appraisal results of income approach are taken as the final conclusions in valuing CS Bulk. (b) The income approach The discounted cash flow valuation method is based on the premise that the value of a business is the net present value of its future cash flows. This approach requires assessment of expected income, costs, planned capital expenditure and working capital changes. We have reviewed the past business performance of Dalian Ocean and CS Bulk as well as the future potential of Dalian Ocean and CS Bulk/ the breakdown of the projection schedules. 39

42 LETTER FROM THE INDEPENDENT FINANCIAL ADVISER The discount rate used by the Valuer is the weighted average cost of capital ( WACC ), to reflect all business risks including intrinsic and extrinsic uncertainties in relation to Dalian Ocean and CS Bulk. We have understand the calculation of WACC from the Valuer and consider that WACC adopted by the Valuer in the valuation of Dalian Ocean and CS Bulk is fair and reasonable. During the course of their discussions with the Valuer, we have not identified any major factors which would lead them to cast doubt on the fairness and reasonableness of the methodologies, principal bases and assumptions adopted in arriving at the valuation of Dalian Ocean and CS Bulk. (ii) Comparable analysis (A) Dalian Ocean Acquisition (a) Comparable Tanker Shipping Companies In order to assess the fairness and reasonableness of the Dalian Ocean Consideration, we have attempted to identify comparable tanker shipping companies (the Comparable Tanker Shipping Companies ) that (i) are currently listed on the Main Board of the Stock Exchange, the Shanghai Stock Exchange and the Shenzhen Stock Exchange; and (ii) are primarily engaged in tanker shipping business in Hong Kong and the PRC (i.e. for companies listed on the Main Board of the Stock Exchange, generating equal to or more than 50% of their revenue from tanker shipping business; for companies listed on Shanghai Stock Exchange or Shenzhen Stock Exchange, the description of principal business is tanker shipping business). The Comparable Tanker Shipping Companies have been selected exhaustively based on the above criteria, which have been identified, to the best of our endeavours, in our research through public information. Shareholders should note that the businesses, operations and prospects of Dalian Ocean are not the same as those of the Comparable Tanker Shipping Companies and as such, the Comparable Tanker Shipping Companies may only be used to provide a general reference only. 40

43 LETTER FROM THE INDEPENDENT FINANCIAL ADVISER In our assessment, we have considered price-to-earnings ratio ( P/E ), price-to-book value ratio ( P/B ) and enterprise value-to-earnings before interests, taxes, depreciation and amortization, and operating lease costs ratio (the EV/EBITDA ), which are commonly used to assess the financial valuation of a company engaged in shipping business. P/E, P/B and EV/EBITDA analysis of the Comparable Tanker Shipping Companies are shown below. Company name Ticker Market capitalization P/E P/B EV/ EBITDA (HK$ million) (times) (times) (times) (Note 1) (Note 2) (Note 3) (Note 4) China Merchants Energy Shipping Co Ltd SH 31, The Company (Note 5) 1138HK/ SH 30, Average Maximum Minimum CS Bulk (Note 6) Source: Bloomberg, Stock Exchange and Shanghai Stock Exchange, latest financial reports of the Comparable Tanker Shipping Companies Notes: 1. The market capitalizations of the Comparable Tanker Shipping Companies are calculated by multiplying the share price and the number of issued shares of the respective companies (the market capitalization comprises both A share market capitalization and H share market capitalization if the company is dual-listed in Main Board of Stock Exchange and Shanghai Stock Exchange) as at the Latest Practicable Date. The market capitalization of the Company comprises both A share market capitalization and H share market capitalization of the Company as the Company is dual-listed in Main Board of Stock Exchange and Shanghai Stock Exchange. 2. The P/Es of the Comparable Tanker Shipping Companies are calculated by dividing their market capitalization by the net profit attributable to the equity holders of the respective companies according to their latest financial reports. 3. The P/Bs of the Comparable Tanker Shipping Companies are calculated by dividing their market capitalization by the net assets value ( NAV ) attributable to equity holders of the respective companies according to their latest financial reports. 4. The EV/EBITDA of the Comparable Tanker Shipping Companies are calculated by dividing their market capitalization by the earnings before interests, taxes, depreciation and amortization, and operating lease costs according to their latest financial reports. 41

44 LETTER FROM THE INDEPENDENT FINANCIAL ADVISER 5. Since the revenue contribution of oil shipment segment of the Company is around 50% as discussed in the paragraph headed Information on the Company above, the Company is also selected as the Comparable Tanker Shipping Companies. 6. The implied P/E of Dalian Ocean is calculated by dividing the Dalian Ocean Consideration by the net profit attributable to the owner of the Target PRC Company for the year ended 31 December The implied P/B of Dalian Ocean is calculated by dividing the Dalian Ocean Consideration by the consolidated net equity excluding non-controlling interests of Dalian Ocean as at 31 December The implied EV/EBITDA is calculated by dividing the Dalian Ocean Consideration by the earnings before interests, taxes, depreciation and amortization, and operating lease costs of Dalian Ocean which is based on the audited financial statements of Dalian Ocean for the year ended 31 December As illustrated above, the P/Es of the Comparable Tanker Shipping Companies range from approximately 22,62 times to approximately times, with an average of approximately times (the Average Comparable Tanker Shipping Companies P/E ). The P/Bs of the Comparable Tanker Shipping Companies range from approximately 0.99 times to approximately 1.91 times, with an average of approximately 1.45 times (the Average Comparable Tanker Shipping Companies P/B ). The EV/EBITDA of the Comparable Tanker Shipping Companies range from approximately times to approximately times, with an average of approximately times (the Average Comparable Tanker Shipping Companies EV/EBITDA ). We note that the implied P/E, P/B and EV/EBITDA of Dalian Ocean is 8.24 times, 1.09 times and 6.03 times, respectively. The implied P/E, P/B and EV/EBITDA of Dalian Ocean is below the Average Comparable Tanker Shipping Companies P/E, the Average Comparable Tanker Shipping Companies P/B and the Average Comparable Tanker Shipping Companies EV/EBITDA, respectively. As such, we are of the view that the Dalian Ocean Consideration is fair and reasonable in this regard. (b) Comparable Tanker Shipping Transactions In order to assess the fairness and reasonableness of the Dalian Ocean Consideration of, to the best of our endeavours, we have reviewed transactions over the past two years which involved acquisition of 100% equity interests in tanker shipping business or assets (the Comparable Tanker Shipping Transactions ). The Comparable Tanker Shipping Transactions are selected exhaustively based on the above criteria, which have been identified, to our best endeavour, in our research through public information. Shareholders should note that the businesses, operations and prospects of Dalian Ocean are not the same as those of the target companies in the Comparable Tanker Shipping Transactions and as such, the Comparable Tanker Shipping Transactions may only be used to provide a general reference only. 42

45 LETTER FROM THE INDEPENDENT FINANCIAL ADVISER Similar to the Comparable Tanker Shipping Companies analysis, in our assessment, we have considered P/E, P/B and EV/EBITDA as our benchmark and the analysis of the Comparable Tanker Shipping Transactions are shown below. Announcement date Target name Acquirer Transaction size P/E P/B EV/ EBITDA (times) (times) (times) (Note 1) (Note 2) (Note 3) 20-May-14 ACM Shipping Group Ltd. Braemar Shipping Services PLC GBP44 million Dec-15 Frontline 2012 Ltd. Frontline Ltd. US$1,596 million Average Maximum Minimum Dalian Ocean (Note 4) Source: Bloomberg Note: 1. The P/Es of the Comparable Tanker Shipping Transactions are calculated by dividing the consideration by the then net profit of the respective shipping business or assets. 2. The P/Bs of the Comparable Tanker Shipping Transactions are calculated by dividing the consideration by the then NAV of the respective shipping business or assets. 3. The EV/EBITDA of the Comparable Tanker Shipping Transactions are calculated by dividing the consideration by the then earnings before interests, taxes, depreciation and amortization, and operating lease costs of the respective shipping business or assets. 4. The implied P/E of Dalian Ocean is calculated by dividing the Dalian Ocean Consideration by the net profit attributable to the owner of the Target PRC Company for the year ended 31 December The implied P/B of Dalian Ocean is calculated by dividing the Dalian Ocean Consideration Acquisition by the consolidated net equity excluding non-controlling interests of Dalian Ocean as at 31 December The implied EV/EBITDA is calculated by dividing the Dalian Ocean Consideration by the earnings before interests, taxes, depreciation and amortization, and operating lease costs of Dalian Ocean which is based on the audited financial statements of Dalian Ocean for the year ended 31 December As illustrated above, the P/Es of the Comparable Tanker Shipping Transactions range from approximately times to approximately times, with an average of approximately times (the Average Comparable Tanker Shipping Transactions P/E ). The P/Bs of the Comparable Tanker Shipping Transactions range from approximately 1.17 times to approximately 6.07 times, with an average of approximately 3.62 times (the Average Comparable Tanker Shipping Transactions P/B ). 43

46 LETTER FROM THE INDEPENDENT FINANCIAL ADVISER The EV/EBITDA of the Comparable Tanker Shipping Transactions range from approximately times to approximately times, with an average of approximately times (the Average Comparable Tanker Shipping Transactions EV/EBITDA ). We note that the implied P/E, P/B and EV/EBITDA of Dalian Ocean is 8.24 times, 1.09 times and 6.03 times, respectively. The implied P/E, P/B and EV/EBITDA is below the Average Comparable Tanker Shipping Transactions P/E, the Average Comparable Tanker Shipping Transactions P/B and the Average Comparable Tanker Shipping Transactions EV/EBITDA, respectively. As such, we are of the view that the Dalian Ocean Consideration is fair and reasonable in this regard. (B) CS Bulk Disposal (a) Comparable Dry Bulk Shipping Companies In order to assess the fairness and reasonableness of the CS Bulk Consideration, we have attempted to identify comparable dry bulk shipping companies (the Comparable Dry Bulk Shipping Companies ) that (i) are currently listed on the Main Board of the Stock Exchange, Shanghai Stock Exchange and Shenzhen Stock Exchange; and (ii) are primarily engaged in dry bulk shipping business in Hong Kong and the PRC (i.e. for companies listed on the Main Board of the Stock Exchange, generating equal to or more than 50% of their revenue from dry bulk shipping business; for companies listed on the Shanghai Stock Exchange or Shenzhen Stock Exchange, the description of principal business is dry bulk shipping business). The Comparable Dry Bulk Shipping Companies have been selected exhaustively based on the above criteria, which have been identified, to the best of our endeavours, in our research through public information. Shareholders should note that the businesses, operations and prospects of CS Bulk are not the same as those of the Comparable Dry Bulk Shipping Companies and as such, the Comparable Dry Bulk Shipping Companies may only be used to provide a general reference only. 44

47 LETTER FROM THE INDEPENDENT FINANCIAL ADVISER In our assessment, we have considered P/E, P/B and EV/EBITDA, which are commonly used to assess the financial valuation of a company engaged in shipping business. However, given that CS Bulk recorded net losses and negative EBITDA historically, P/E and EV/EBITDA of CS Bulk is not applicable and hence, should not be used for the purpose of the Comparable Dry Bulk Shipping Companies analysis. P/B analysis of the Comparable Dry Bulk Shipping Companies are shown below. Company name Ticker Market capitalization P/B (HK$ million) (times) (Note 1) (Note 2) Sinotrans Shipping Limited 368 HK 5, Pacific Basin Shipping Limited 2343 HK 2, The Company 1138 HK/ SH 30, China Shipping Haisheng Co., Ltd SH 8, Ningbo Marine Company Limited SH 7, Chang Jiang Shipping Group Phoenix Co., Ltd ( CJ Phoenix ) SZ 12, Average (excluding CJ Phoenix) (Note 3) 1.78 Maximum (excluding CJ Phoenix)(Note 3) 4.96 Minimum (exculding CJ Phoenix) (Note 3) 0.29 CS Bulk (Note 4) 1.25 Source: Stock Exchange, latest financial reports of the Comparable Dry Bulk Shipping Companies Notes: 1. The market capitalizations of the Comparable Dry Bulk Shipping Companies are calculated by multiplying the share price and the number of issued shares of the respective companies as at the Latest Practicable Date. The market capitalization of the Company comprises both A share market capitalization and H share market capitalization of the Company as the Company is dual-listed in Main Board of Stock Exchange and Shanghai Stock Exchange. 2. P/Bs of the Comparable Dry Bulk Shipping Companies are calculated by dividing their market capitalization by the NAV attributable to equity holders of the respective companies according to their latest financial reports. 45

48 LETTER FROM THE INDEPENDENT FINANCIAL ADVISER 3. Since CJ Phoenix has incurred loss from 2012 to 2014, trading in the shares of CJ Phoenix on the Shenzhen Stock Exchange was suspended from December 2013 to December 2015 for delisting process according to the relevant listing rules in the Shenzhen Stock Exchange. Trading in the shares of CJ Phoenix on the Shenzhen Stock Exchange was resumed in December Due to loss-making, the book value of CJ Phoenix is considerably low, therefore leading to the higher P/B ratio. Thus, we consider the P/B ratio of CJ Phoenix is an outlier and rule it out in calculating average, maximum and minimum P/B ratio. 4. The implied P/B of CS Bulk is calculated by dividing the CS Bulk Consideration by the consolidated net equity excluding non-controlling interest of CS Bulk as at 31 December As illustrated above, the P/Bs of the Comparable Dry Bulk Shipping Companies (excluding CJ Phoenix) range from approximately 0.29 times to 4.96 times, with the average of approximately 1.78 times (the Average Comparable Dry Bulk Shipping Companies P/B (excluding CJ Phoenix) ). We note that the implied P/B of CS Bulk is 1.25 times, which is lower than the Average Comparable Dry Bulk Shipping Companies P/B (excluding CJ Phoenix) but within the range of Comparable Dry Bulk Shipping Companies P/B (excluding CJ Phoenix). As such, we are of the view that the CS Bulk Consideration is fair and reasonable in this regard. (b) Comparable Dry Bulk Shipping Transactions In order to assess the fairness and reasonableness of the CS Bulk Consideration, to the best of our endeavours, we have reviewed transactions over the past two years which involved acquisition of 100% equity interests in dry bulk shipping business or assets (the Comparable Dry Bulk Shipping Transactions ). The Comparable Dry Bulk Shipping Transactions are selected exhaustively based on the above criteria, which have been identified, to our best endeavour, in our research through public information. Shareholders should note that the businesses, operations and prospects of CS Bulk are not the same as those of the target companies in the Comparable Dry Bulk Shipping Transactions and as such, the Comparable Dry Bulk Shipping Transactions may only be used to provide a general reference only. 46

49 LETTER FROM THE INDEPENDENT FINANCIAL ADVISER Similar to the Comparable Dry Bulk Shipping Companies analysis, in our assessment, we have considered P/E, P/B and EV/EBITDA as our benchmark. However, given that CS Bulk recorded net losses and negative EBITDA historically, P/E and EV/EBITDA of CS Bulk is not applicable and hence P/B is used in the below analysis. Announcement date Target name Acquirer name Transaction size P/B (times) (Note 1) 7-Oct-14 Golden Ocean Group Ltd. Knightsbridge Shipping Ltd. 7 billion Norwegian Krones Apr-15 Baltic Trading Ltd. Genco Shipping & Trading Ltd. US$291 million Dec-15 China COSCO Bulk Shipping (Group) Co., Ltd. China Ocean Shipping (Group) Company RMB6,768 million 1.28 Average 0.88 Maximum 1.28 Minimum 0.27 CS Bulk (Note 2) 1.25 Source: Bloomberg Notes: 1. The P/Bs of the Comparable Dry Bulk Shipping Transactions are calculated by dividing the consideration by the then NAV of the respective shipping business or assets. 2. The implied P/B of CS Bulk is calculated by dividing the CS Bulk Consideration by the consolidated net equity excluding non-controlling interest of CS Bulk as at 31 December As illustrated above, the P/Bs of the Comparable Dry Bulk Shipping Transactions range from approximately 0.27 times to 1.28 times, with the average of approximately 0.88 times (the Average Comparable Dry Bulk Shipping Transactions P/B ). We note that the implied P/B of CS Bulk is 1.25 times, which is higher than the Average Comparable Dry Bulk Shipping Transactions P/B. As such, we are of the view that the CS Bulk Consideration is fair and reasonable in this regard. 5. Financial effects of the Proposed Transactions As advised by the Directors, upon completion of the Proposed Transactions, Dalian Ocean will become a wholly-owned subsidiary of the Company and their financial results, assets and liabilities will be fully consolidated into the financial statements of the Group. CS Bulk will cease to be a subsidiary of the Company and their financial results, assets and liabilities will not be consolidated into the financial statements of the Group. 47

50 LETTER FROM THE INDEPENDENT FINANCIAL ADVISER The unaudited pro forma financial information of the Enlarged Group is included in Appendix IV to the Circular. (i) Effect on net profit As stated in the Letter from the Board, as at 31 December 2015, the equity attributable to owners of CS Bulk was approximately RMB4,327 million. As a result, the Company is expected to accrue a gain of approximately RMB822 million under the CS Bulk Disposal. The Company will recognise such gain under the CS Bulk Disposal in its consolidated income statement as at the Closing Date. As stated in the Letter from the Board, the proceeds from the CS Bulk Disposal will be applied to offset part of the Dalian Ocean Consideration. Also, based on the 2015 Annual Report, the net profit of the Group was approximately RMB490 million. As stated in the Appendix IV of the Circular, the Enlarged Group s net profit would increase by approximately RMB2,433 million or 496.9% to approximately RMB2,923 million assuming the Proposed Transactions to be completed on 31 December As such, we consider that the Proposed Transactions will have a positive impact on the net profit of the Group. (ii) Effect on net assets value Based on the 2015 Annual Report, the net asset value of the Group was approximately RMB26,523 million. As stated in the Appendix IV of the Circular, the Enlarged Group s total assets and total liabilities would decrease by approximately RMB1,175 and RMB353 respectively, and as a result, the net assets value would decrease by approximately RMB822 million or 3.1% to approximately RMB25,701 million assuming the Proposed Transactions to be completed on 31 December As such, we consider that the Proposed Transactions will not have a material impact on the net assets value of the Group. (iii) Effect on gearing The net financial debts of the Group were approximately RMB39,650 million and the gearing ratio of the Group (calculated by total equity divided by net financial debts) was approximately 149.5% as at 31 December After the completion of the Proposed Transactions, the net financial debts of the Enlarged Group would be approximately RMB39,025 million and gearing ratio of the Enlarged Group would be 151.8%, mainly due to decrease in total equity as Dalian Ocean has less net assets than CS Bulk. As such, we consider that the Proposed Transactions would have no material impact on gearing level of the Group. (iv) Effect on cash/working capital As disclosed in the 2015 Annual Report, the Group had current assets of RMB6,466 million including cash and cash equivalents of RMB2,086 million. As stated in the Appendix IV of the Circular, upon completion of the Proposed Transactions, the current assets would increase by approximately RMB14,957 million, including increase in cash and cash equivalents by approximately RMB2,155 million. As such, we consider that the Proposed Transactions would have a positive impact in cash/working capital of the Group. 48

51 LETTER FROM THE INDEPENDENT FINANCIAL ADVISER Based on the above, we consider that the Proposed Transactions would have a positive financial impact on the Group. 4.6 Conclusion on the Asset Transfer Agreement, the Compensation Agreement and the Proposed Transactions Having taken into account (i) despite the entering into the Asset Transfer Agreement is not in the ordinary and usual course of business of the Group, the Proposed Transactions are in the interests of the Company and its Shareholders as a whole as mentioned in the paragraph headed Reasons for and benefits of the Proposed Transactions above; (ii) the Compensation Agreement is in the interest of the Company and its Shareholder as a whole as mentioned in the paragraph headed Principal terms and conditions of the Compensation Agreement above; (iii) the Dalian Ocean Consideration and the CS Bulk Consideration is fair and reasonable as mentioned in the paragraph headed The Consideration above; and (iv) the Proposed Transactions would have a positive financial impact on the Group as mentioned in the paragraph headed Financial effects of the Proposed Transactions above, we are of the view that, though the entering into of the Asset Transfer Agreement, the Compensation Agreement and the Proposed Transactions are not in the ordinary and usual course of business of the Group, the terms of the Asset Transfer Agreement, the Compensation Agreement and the Proposed Transactions are on normal commercial terms, fair and reasonable insofar as the Independent Shareholders are concerned and in the interests of the Company and the Shareholders as a whole. 5. Exemption of the Non-Competition Undertaking of China Shipping As stated in the Letter from the Board, pursuant to the requirements of the relevant PRC laws, in order to avoid competition between the Company and China Shipping, after negotiation between the Company and China Shipping, China Shipping issued the Non-competition Undertaking (the Original Undertaking ) on 15 June Please refer to the Letter from the Board for the details of the Original Undertaking. As at the Latest Practicable Date, China Shipping has injected all its oil transportation assets into the Company, and has entrusted CS Bulk to operate and manage those bulk shipping business controlled by China Shipping and not operated by the Company. However, those bulk shipping assets have not yet been injected into the Company, nor have disposal thereof been completed. As the Company intends to implement the CS Bulk Disposal and the Dalian Ocean Acquisition, upon completion of the Proposed Transactions, the Company will become a listed company engaged in professional oil and gas transportation and no longer engage in bulk shipping business. Therefore, still requiring China Shipping to inject the bulk shipping assets into the Company will no longer meets the need of planning and positioning for the future business development. Accordingly, based on the requirements of the relevant laws and regulations, and after comprehensive consideration about the performance of the foresaid undertaking, the business development strategy and the actual situation of the Company, together with the analysis on the feasibility necessity of performing the undertaking, the Board considers that continuous performance of the Original Undertaking will be unfavorable to the business development of the Company and to 49

52 LETTER FROM THE INDEPENDENT FINANCIAL ADVISER the protection of interests of the Company and its Shareholders. Meanwhile, taking into account that there is uncertainty as to whether the Proposed Transactions can be completed or can be completed prior to the expiry date of the Original Undertaking (i.e. 15 June 2016), subject to approval of the Shareholders, the Company proposes to conditionally exempt part of the Original Undertaking with details as follows: In case of completion of the Proposed Transactions, the Company will agree to exempt the undertaking under item 1 and item 2 of the Original Undertaking that bulk shipping assets should be injected into the Company or disposed of; and the undertaking under item 4 regarding lease and entrusted operation of the bulk shipping assets prior to injection or disposal thereof. In the event that the Proposed Transactions fails to proceed to completion, the Original Undertaking shall continue to be performed whereas the term of performance will extend to within one year from the date of announcement of termination of the Proposed Transactions. Given (i) the Exemption is in line with the CS Bulk Disposal; and (ii) the Proposed Transactions, which include, among others, the CS Bulk Disposal, are on normal commercial terms, fair and reasonable insofar as the Independent Shareholders are concerned and in the interests of the Company and the Shareholders as a whole as mentioned in the paragraph headed The Asset Transfer Agreement and the Compensation Agreement above, we concur with the Board s view that, despite the entering into the Exemption is not in the ordinary and usual course of business of the Group, the Exemption is fair and reasonable insofar as the Independent Shareholders are concerned and in the interests of the Company and the Shareholders as a whole. RECOMMENDATION As mentioned above, though the entering into the Asset Transfer Agreement, the Compensation Agreement and the Proposed Transactions and the Exemption are not in the ordinary and usual course of business of the Group, we are of the view that terms of the Asset Transfer Agreement, the Compensation Agreement and the Proposed Transactions are on normal commercial terms, fair and reasonable insofar as the Independent Shareholders are concerned and in the interests of the Company and the Shareholders as a whole and the Exemption is fair and reasonable insofar as the Independent Shareholders are concerned and in the interests of the Company and the Shareholders as a whole. Accordingly, we would recommend (i) the Independent Board Committee to advise the Independent Shareholders and (ii) the Independent Shareholders, to vote in favour of the ordinary resolutions in this regard. Yours faithfully, For and on behalf of TC Capital Asia Limited Edward Wu Chairman Note: Mr. Edward Wu has been a responsible officer of Type 6 (advising on corporate finance) regulated activities under the SFO since He has participated in and completed various advisory transactions in respect of connected transactions of listed companies in Hong Kong. 50

53 APPENDIX I FINANCIAL INFORMATION OF THE GROUP I. THREE-YEAR FINANCIAL INFORMATION OF THE GROUP LR14.69(7) The audited consolidated financial statements of the Company for the years ended 31 December 2013, 2014 and 2015 together with the relevant notes to the financial statements of the Company can be found on pages 74 to 190 of the annual report of the Company for the year ended 31 December 2013, pages 85 to 208 of the annual report of the Company for the year ended 31 December 2014 and pages 85 to 198 of the annual report of the Company for the year ended 31 December Please also see below the hyperlinks to the said annual reports: App1B.31(2)(3) The Company is a major shipping company having its business across the coastal region of the PRC and internationally. The Company was established on 3 May 1994, and the registered capital of the Company now is RMB4.033 billion. The registered address of the Company is China (Shanghai) Pilot Free Trade Zone and the headquarter office of the Company is Shanghai Port International Cruise Terminal in the North Bund Area of Shanghai. The Company was listed on the Stock Exchange of Hong Kong Limited and Shanghai Stock Exchange, and stock code is and , respectively. The main business scope of the Company includes coastal and ocean shipping of crude oil and refined oil, coastal and ocean shipping of coal and iron ore, and the Company is now actively exploring shipping business of China s importing LNG. Set out below is the management discussion and analysis of the Group s operations for the three years ended 31 December The information set out below is principally extracted from the Management Discussion and Analysis section of the relevant annual reports of the Group to provide further information relating to the financial condition and results of operations of the Group during the periods stated. These extracted materials were prepared prior to the Proposed Transactions and speak as of the date they were originally published. The Group s prospects and intentions will have changed since that date, and the reader should therefore not place undue reliance on this information, particularly the information consisting of or relating to forward-looking or future statements REVIEW OF OPERATING RESULTS DURING THE REPORTING PERIOD Facing the complicated market environment, the Group adhered to the strategic guidance and innovation-driven general keynotes of work and to continue to deepen the strategy of major clients, great co-operation and comprehensive services. The Company actively innovated its business ideas and modes, pushed forward a transformation in an orderly manner and obtained breakthroughs in all aspects including marketing, cost control, safety management, management upgrade and capital operation, maintaining an overall stable development trend. In 2015, the volume of cargo shipped by the Company accumulated to approximately 184 million tonnes, up 1.1% year-on-year; transport turnover were approximately billion tonne-nactical miles, increased by 9.5% year-on-year; revenue derived from operations (after business tax and I-1

54 APPENDIX I FINANCIAL INFORMATION OF THE GROUP surcharge) was approximately RMB12,213 million, decreased by 0.5% year-on-year; operating costs were approximately RMB9,867 million, decreased by 9.4% year-on-year. The profit for the year attributable to owners of the Company was RMB417 million, and the basic earnings per share was RMB10.49 cents. (1) Revenue from Principal Operations In 2015, overall details of the Group s principal operations by products transported and geographical regions were as follows: Principal Operations by Products Transported Industry or Product Description Gross profit margin Increase/ (decrease) in revenue as compared to 2014 Increase/ (decrease) in operating costs as compared to 2014 Increase/ (decrease) in gross profit margin as compared to 2014 Operating Revenue costs (RMB 000) (RMB 000) (%) (%) (%) (%) Oil shipment 5,187,777 3,062, Coal shipment 1,562,249 1,520, Iron ore shipment 2,260,133 2,074, Other dry bulk shipment 809, , Vessel chartering 2,393,341 2,319, Total 12,212,973 9,867, Principal Operations by Geographical Regions Regions Increase/ (decrease) in revenue as compared to Revenue 2014 (RMB 000) (%) Domestic shipment 4,821, International shipment 7,391, I-2

55 APPENDIX I FINANCIAL INFORMATION OF THE GROUP (2) Shipping business Oil shipment In 2015, the oil shipping market was better than in 2014 in general. Affected by beneficial factors such as the higher shipping prices, significant decrease in fuel prices and gradual realisation of results from various innovative measures of the Company, oil shipping business obtained a good result. For domestic oil shipment, due to the opening up of the domestic crude oil market, the Company further established the operating strategy and goal of leading the innovation of the operating mode of the domestic crude oil market, becoming the leading force to safeguard the market order and continuously consolidating and enhancing its leading position in the market. Centered on this strategy objective, the Company strengthened strategic layout, strategically exited the refined oil market, innovated the integrated logistical service modes and seized the opportunities of capital injection into Beihai Shipping to establish a close partnership with China National Offshore Oil Corporation. The Company actively promoted the new competition and cooperation mode to undergo cooperation of various kinds with the domestic shipping companies, such as exchanging the anchors, the routes, the cargo and short-and-long term rental. They not only brought a win-win solution to the shipping companies, but also increased protection for the shipping customers, realising a win-win situation for both the shipment owner and the shipping company. In 2015, the Company s domestic oil transport turnover was billion tonne-nautical miles, increased by 5.1% year-on-year; revenue derived from operations was RMB2,158 million, increased by 8.6% year-on-year; gross profit rate was 40.5%, increased by 6.5% year-on-year. The Company s market share in the domestic shipping market remained at around 54%. In particular, with the year-on-year decrease by 2.9% of the freight rates for coastal crude oil, the Company s domestic crude shipping business continued to maintain a relatively high profitability level with a gross profit rate of 43.7%, realising gross profit of RMB860 million, increased by 31.0% year-on-year. In the international oil shipment market, the Company actively carried out the strategies of globalisation, following and diversification, which greatly enhanced the Company s ability to study the market, to bargain, to resist market fluctuation and its profitability. In aspects of client diversification, market diversification, route diversification and business diversification combining self-operation and term lease, or long-term lease and short-term lease, comprehensive breakthrough has been achieved to significantly lower dependency on single clients, single markets and single routes. Profitability is further strengthened. In 2015, the Company completed exported oil shipment turnover of billion tonne-nautical miles, decreased by 13.4% year-on-year (mainly because part of the self-operating vessels changed to vessels for lease); transport income was RMB3,921 million, increased by 11.6% year-on-year; gross profit rate was 32.8% and gross profit was RMB1,284 million, increased by RMB1,140 million year-on-year, representing an increase of 786.6%. In 2015, the Group achieved a shipping volume of approximately billion tonne-nautical miles of oil, representing a decrease of approximately 12.0% year-on-year; revenue derived from oil transportation was approximately RMB6,079 million, representing an increase of 10.5% year-on-year. An analysis of the transportation volume and revenue in terms of product types is as follows: I-3

56 APPENDIX I FINANCIAL INFORMATION OF THE GROUP Transportation volume by product types In 2015 In 2014 (billion tonnenautical miles) Increase/ (decrease) (billion tonnenautical miles) (%) Domestic Crude oil Refined oil International Crude oil Refined oil Total Revenue by shipment types In 2015 In 2014 Increase/ (decrease) (RMB million) (RMB million) (%) Domestic 2,158 1, Crude oil 1,960 1, Refined oil Vessel charting International 3,921 3, Crude oil 2,178 2, Refined oil 941 1, Vessel chartering Total 6,079 5, (3) Shipping business Dry bulk shipment For domestic bulk cargo shipment, in 2015, China Shipping Bulk Carrier Co., Limited ( CS Bulk ) strengthened marketing on domestic big customers by advanced arrangement of Contract of Aftreightment ( COA Contract ) contract negotiations early in the year, and strived to increase the fulfilment rate of the contracts. In 2015, CS Bulk signed COA contracts for domestic dry bulk cargoes with a shipping volume of million tonnes. Through early disposal and seal of its coastal transport capacity, the Company decreased its loss by RMB168 million during the whole year. I-4

57 APPENDIX I FINANCIAL INFORMATION OF THE GROUP For international dry bulk shipment, the Company actively adjusted the market structure to transform it from the traditional coastal shipping market to ocean cargo market; strengthened the cooperation with Baosteel Group Corporation ( Baosteel ) and Wuhan Iron And Steel (Group) Corporation ( Wugang ), actively pushed forward the cooperation with Valley in Brazil. Foreign trading capacity took up 77%, with a foreign turnover of 82%. Foreign transport income took up 75% of the total income. Meanwhile, the Company adjusted the supply structure to transform it from traditional thermal coal shipment to non-coal shipment of high added-value including grain and chemical fertiliser. Non-coal shipping capacity took up 75%, while the non-coal shipping volume reached 58%. For strengthening of international cargo shipment, the Company strived to improve very large ore carriers ( VLOC ) operation and completed 56 routes, turnover of million tonnes during the whole year and achieved operating income of RMB1,252 million. Meanwhile, the Company enhanced its ability to study the market for better cargo capacity layout. The Company increased capacity to the third country, and its capacity input in the third countries during the whole year increased by 7.9% year-on-year and the third countries turnover increased by 11.6% year-on-year. In addition, the Company developed cargo rental business, achieving cargo rental income of RMB186 million during the whole year. In 2015, the Group achieved a shipping volume of approximately billion tonne-nautical miles of dry bulk cargo, representing an increase of approximately 26.6% year-on-year; operating revenue derived from dry bulk cargo transportation was approximately RMB6,134 million, representing a decrease of 9.5% year-on-year. An analysis of the transportation volume and revenue in terms of product types is as follows: Transportation volume by types Increase/ (decrease) (billion tonnenautical miles) (%) In 2015 In 2014 (billion tonnenautical miles) Domestic Coal Iron ore Other dry bulk (note) International Coal Iron ore Other dry bulk (note) Total I-5

58 APPENDIX I FINANCIAL INFORMATION OF THE GROUP Revenue by shipment types Increase/ In 2015 In 2014 (decrease) (RMB million) (RMB million) (%) Domestic 2,664 2, Coal 1,311 1, Iron ore Other dry bulk (note) Vessel chartering International 3,470 4, Coal Iron ore 2,110 2, Other dry bulk (note) Vessel chartering Total 6,134 6, Note: Other dry bulk cargoes include metal ore, non-metallic ore, steel, cement, timber, grain, fertilizer and so on except for coal and iron ore. (4) Progress made in Liquefied natural gas ( LNG ) shipment In 2015, the Company steadily pushed forward the phase 1 vessel construction of the Mobil DES project and the APLNG project, and actively worked better on the negotiation and development of the relevant projects. The Company strengthened coordination with its business partners, accelerated the construction of a team of talents. As of December 2015, there were 13 vessels in total owned by the Mobile DES project, APLNG project and YAMAL project which the Company participated or directed. In 2015, the Company s LNG business entered the stage of garnering profits. The 3 LNG vessels of the Mobile DES project were put into operation and completed 13 voyages with shipment of 990,000 tonnes, turnover of 4,300 million tonne-nautical miles. The Company achieved net profits of approximately USD7.13 million, and investment profits of RMB13.33 million under the equity method. I-6

59 APPENDIX I FINANCIAL INFORMATION OF THE GROUP 2. COSTS AND EXPENSES ANALYSIS While achieving well in transportation operations, the Company has seriously and consistently implemented the various requirements of the Board on further enhancing management, cost reduction and efficiency improvement. Starting on operational management and overall budget management, cost management and control was further strengthened and all types of various costs and expenses were effectively under control. In 2015, transportation cost of RMB9.87 billion was incurred, representing a decrease of 9.4% year-on year, while ensuring notable improvement in the operating profit of the Company. The composition of the main operating costs is as follows: Composition Item In 2015 In 2014 Increase/ (decrease) ratio in 2015 (RMB 000) (RMB 000) (%) (%) Fuel costs 2,735,705 4,555, Port costs 1,144,577 1,107, Sea crew cost 1,304,625 1,499, Lubricants expenses 214, , Depreciation 1,880,065 1,842, Insurance expenses 212, , Repair expenses 321, , Charter cost 1,595, , Provision for onerous contracts 127, , Others 331, , Total 9,867,199 10,885, Fuel costs were the major expense for the Company. Affected by the significant slump of international oil price and the Company s active efforts to control costs, the lower fuel costs was the highlight of the cost-controlling work. In 2015, while the transportation turnover volume of the Company increased by 9.5% year-on-year, the fuel consumption volume was 1,124,300 tonnes, representing a decrease of 4.0% year-on-year; and average fuel consumption decreased from 2.72kg/1,000 nautical miles in 2014 to 2.39 kg/1,000 nautical miles, decreasing by 12.1% year-on-year, the utilisation efficiency of fuel has been improved significantly. In 2015, the Company incurred fuel costs of RMB2,736 million, representing a decrease of 40.0% year-on-year and accounting for 27.7% of the costs of transportation costs. Regarding sea crew costs, the Group implemented reform of its crew management system, which enabled the Group to reduce crew costs of approximately RMB195 million in I-7

60 APPENDIX I FINANCIAL INFORMATION OF THE GROUP In addition, the Group further strengthened communication and coordination with insurance companies and P&I Clubs. As a result, actual expenditures on insurance fees of the Group decreased by RMB25.93 million respectively in In 2015, the Group incurred charter cost of RMB1.596 billion, representing an increase of 208.8% year-on-year. Such increases were because in 2015, the Group disposed 36 vessels with an aggregate capacity of 1,329,000 deadweight tonnes and the Company chartered in some vessels to replace the disposed old vessels so as to ensure the normal operation of the Company. 3. OPERATING RESULTS OF THE JOINT VENTURES AND THE ASSOCIATES In 2015, the Group has recognised its share of profits in its joint ventures of approximately RMB72 million, representing a decrease of 64.9% as compared to that of the same period in In 2015, the 5 joint ventures achieved a shipping volume of billion tonne-nautical miles, representing a decrease of 12.4% as compared to the same period in The operating revenue achieved by the 5 joint ventures in 2015 was approximately RMB5.786 billion, representing a decrease of 31.9% as compared to that of the same period in 2014, and the net profit realised by the 5 joint ventures in 2015 was approximately RMB55 million, representing a decrease of 83.2% as compared to that of the same period in As at 31 December 2015, the 5 joint ventures owned 88 dry bulk vessels with a total capacity of 4.84 million deadweight tonnes and 3 vessels under construction with a total capacity of 143,000 deadweight tonnes. The operating results achieved by the 5 joint ventures in 2015 are as follows: Company name Interest held by the Group 2015 Shipping volume 2015 Operating revenue 2015 Net profit/(loss) (billion tonnenautical miles) (RMB 000) (RMB 000) Shenhua Zhonghai Marine Co., Limited 49% ,002,173 32,548 Shanghai Times Shipping Co., Limited 50% ,071,262 1,361 Shanghai Friendship Marine Co., Limited 50% ,666-13,846 Huahai Petrol Transportation & Trading Co., Limited 50% ,130 20,668 Guangzhou Development Shipping Co., Limited 50% ,487 13,929 I-8

61 APPENDIX I FINANCIAL INFORMATION OF THE GROUP In 2015, the net profit achieved by China Shipping Finance Co., Limited ( CS Finance ), a non-shipping joint venture, with 25% interest held by the Company, was approximately RMB208 million. In 2015, the Group has recognised its share of profits in its associates of approximately RMB216 million. In 2015, 2 associates achieved a shipping volume of billion tonne-nautical miles. The operating revenue achieved by the 2 associates in 2015 was approximately RMB1.615 billion, and the net profit realised by the 2 associates in 2015 was approximately RMB503 million. As at 31 December 2015, the 2 associates owned 11 vessels with a total capacity of 2.19 million deadweight tonnes. The operating results achieved by the 2 associates in 2015 are as follows: Company name Interest held by the Group 2015 Shipping volume 2015 Operating revenue 2015 Net profit (billion tonnenautical miles) (RMB 000) (RMB 000) Shanghai Beihai Shipping Company Limited 40% ,336, ,968 China Ore Shipping Pte Ltd. 49% ,327 15, FINANCIAL ANALYSIS (1) Net cash generated from operating activities The net cash generated from operating activities of the Group for the Reporting Period was approximately RMB5,084,984,000 compared to that for the year ended 31 December 2014 was approximately RMB3,157,049,000, representing an increase of approximately 61.1%. (2) Capital commitments RMB 000 RMB 000 Authorised and contracted for: Construction and purchases of vessels (note 1) 5,764,137 5,430,061 Equity investments (note 2) 777, ,668 6,541,654 5,969,729 I-9

62 APPENDIX I FINANCIAL INFORMATION OF THE GROUP The group had capital commitments as at 31 December 2015, of which RMB2,918,629,000 (2014: RMB1,112,199,000) from the Group will be due within one year. Note: (1) According to the construction or purchase agreements entered into by the Group from April 2013 to June 2015 (2014: January 2007 to December 2014), these capital commitments will fall due in 2016 to 2018 (2014: 2015 to 2017). (2) Included capital commitments in respect of equity investments is commitment to invest in an associate, China Ore Shipping Pte Ltd., and a joint venture, Shenhua Zhonghai Marine Co., Limited, of the Group. In addition to the above, the Group s share of the capital commitments of its associates which are contracted for but not provided amounted to RMB121,975,000 (2014: RMB486,298,000). The Group s share of the capital commitments of its joint ventures, which are contracted for but not provided amounted to RMB2,929,925,000 (2014: RMB3,225,137,000); which are authorised but not contracted for amounted to RMB382,200 (2014: RMBNil). (3) Capital structure The Group s net debt-to-equity ratio as at 31 December 2015 and 2014 was as follows: RMB 000 RMB 000 Total debts 39,238,534 41,211,060 Less: Cash and cash equivalents (2,085,889) (2,449,240) Net debt 37,152,645 38,761,820 Total equity 26,523,203 22,647,729 Net debt-to-equity ratio 140% 171% (4) Cash and cash equivalents Cash at banks generates interest income at floating rates based on daily bank deposit rates. Short-term fixed deposits are deposited for various periods of between one day to three months depending on the immediate cash requirements of the Group, and interest income shall accrue at the respective short-term fixed deposit rates. Included in cash and cash equivalents is an amount of RMB794,370,000 (2014: RMB696,892,000) of bank balance deposited with CS Finance, a joint venture of the Group. As at 31 December 2015, none of bank deposits (2014: bank deposits of RMB611,900,000) has/had been pledged to secure short-term bank borrowings. The pledged bank deposits were released upon the settlement of relevant bank borrowings during the Reporting Period. I-10

63 APPENDIX I FINANCIAL INFORMATION OF THE GROUP Certain cash and cash equivalents are denominated in the following foreign currencies: RMB 000 RMB 000 USD 1,292,096 1,579,382 SGD HKD 12,324 11,182 Others The carrying amounts of pledged bank deposits were denominated in the following foreign currency: RMB 000 RMB 000 USD 611,900 (5) Trade and bills receivables RMB 000 RMB 000 Trade and bills receivables 2,233,434 1,735,214 Due from associates 736 Due from joint ventures 40,200 9,627 Due from fellow subsidiaries ,274,111 1,746,263 Trade receivables due from associates, joint ventures and fellow subsidiaries are unsecured, non-interest-bearing and under normal credit period as other trade receivables. An ageing analysis of the trade and bills receivables at the end of the reporting period, based on the invoice date, is as follows: RMB 000 RMB months 1,577,830 1,503, months 604, , months 48,784 58, months 40,055 47, years 3,043 4,668 2,274,111 1,746,263 I-11

64 APPENDIX I FINANCIAL INFORMATION OF THE GROUP No impairment losses (2014: RMBNil) was made for the trade and bills receivables that are neither past due nor impaired because these receivables are within credit period granted to the respective customers and the management considers the default rate is low for such receivables based on historical information and past experience. In determining the recoverability of a trade and bills receivables, the Group considers any change in credit quality of the trade and bills receivables from the date credit was initially granted up to the end of the Reporting Period. In view of the good settlement history of those receivables of the Group which are past due but not impaired for the Reporting Period, the Directors of the Company consider that no allowance is required. Included in trade and bills receivables are debtors with total carrying amount of approximately RMB377,530,000 (2014: RMB242,644,000) which are past due as at the end of the Reporting Period for which the Group had not provided for impairment losses (2014: RMBNil) as there has not been a significant change in credit quality and the amounts are still considered to be recoverable. Ageing of trade and bills receivables which are past due but not impaired, is as follows: RMB 000 RMB months 335, , months 39,055 47,443 Over 1 year 3,043 4, , ,644 The Group normally allows a credit period of 30 to 120 days to its major customers. In view of the fact that the Group s trade and bills receivables relate to a large number of diversified customers, there is no significant concentration of credit risk. Trade and bills receivables are non-interest-bearing. Receivables that were past due but not impaired relate to a number of independent customers that have a good track record with the Group. Based on past experience, management believes that no impairment allowance is necessary in respect of these balances as there has not been a significant change in credit quality and the balances are considered fully recoverable. The Group does not hold any collateral over these balances. I-12

65 APPENDIX I FINANCIAL INFORMATION OF THE GROUP Certain trade and bills receivables are denominated in the following foreign currencies: RMB 000 RMB 000 USD 1,105, ,211 AUD 2 (6) Prepayments, deposits and other receivables RMB 000 RMB 000 Prepayments 149, ,850 Deposits and other receivables 836, ,039 Due from associates 3,427 Due from joint ventures 333,929 74,565 Due from fellow subsidiaries 185, ,662 Due from related companies - Due from joint ventures of ultimate holding company 16,971 16,971 - Due from a joint venture of a fellow subsidiary 25 76,153 1,523, ,667 The amounts due from associates, joint ventures, fellow subsidiaries and related companies are unsecured, non-interest-bearing and repayable on demand. Certain prepayments, deposits and other receivables are denominated in the following foreign currencies: RMB 000 RMB 000 USD 304, ,041 HKD 81,117 23,011 AUD 34,019 22,820 JPY 4,735 1,914 Others 20,317 13,629 I-13

66 APPENDIX I FINANCIAL INFORMATION OF THE GROUP (7) Trade and bills payables RMB 000 RMB 000 Trade and bills payables 619, ,700 Due to ultimate holding company Due to joint ventures 3, Due to fellow subsidiaries 236, ,627 Due to related companies - Due to joint ventures of ultimate holding company 12,844 9,576 - Due to joint ventures of fellow subsidiaries 31, , , ,669 Trade payables due to ultimate holding company, joint ventures, fellow subsidiaries and related companies are unsecured, non-interest-bearing and under normal credit period as other trade payables. Certain trade and bills payables are denominated in the following foreign currencies: RMB 000 RMB 000 USD 515, ,246 HKD 12,384 36,944 JPY 5,664 2,283 EUR 4,919 6,161 Others 1,494 9,458 An ageing analysis of the trade and bills payables at the end of the reporting period, based on the invoice date, is as follows: RMB 000 RMB months 612, , months 118, , months 47,088 51, months 80,573 66, years 37,122 24,436 Over 2 years 8,499 9, , ,669 I-14

67 APPENDIX I FINANCIAL INFORMATION OF THE GROUP Trade and bills payables are non-interest-bearing and are normally settled in one to three months. (8) Other payables and accruals RMB 000 RMB 000 Other payables 594,645 (57,484) Accruals 42,344 41,906 Due to ultimate holding company 6,422 17,647 Due to joint ventures 74,816 4,962 Due to fellow subsidiaries 12,519 97,665 Due to related companies - Due to joint ventures of fellow subsidiaries , ,696 Other payables and accruals are non-interest-bearing and are normally settled in one to three months. The amounts due to ultimate holding company, joint ventures, fellow subsidiaries and related companies are unsecured, non-interest-bearing and repayable on demand. Certain other payables and accruals are denominated in the following foreign currencies: RMB 000 RMB 000 USD 375, ,656 HKD 11,978 3,412 Others 5,651 1,937 I-15

68 APPENDIX I FINANCIAL INFORMATION OF THE GROUP (9) Provision for onerous contracts RMB 000 RMB 000 At 1 January 281, ,694 Provision during the year 127, ,358 Utilised during the year (142,287) (175,850) Exchange realignment (594) 613 At 31 December 266, ,815 Current portion of provision for onerous contracts 107, ,287 Non-current portion of provision for onerous contracts 159, , , ,815 As at 31 December 2015, the Group has a provision of RMB266,762,000 (2014: RMB281,815,000) for onerous contracts relating to the non-cancellable chartered-in oil tanker and dry bulk vessel contracts. As at 31 December 2015, the committed charterhire expenses of non-cancellable chartered-in oil tanker and dry bulk vessel contracts with lease term expiring over twenty-four months from the end of the Reporting Period and with period not being covered by chartered-out oil tanker and dry bulk vessel contracts of which management cannot reliably assess their onerous contracts amounted to approximately RMB2,556,989,000 (2014: RMB2,709,313,000). (10) Derivative financial instruments RMB 000 RMB 000 Liabilities Current portion 508 Non-current portion 411, ,553 As at 31 December 2015, the Group held thirty-one (2014: thirty-one) interest rate swap agreements and the total notional principal amount of the outstanding interest rate swap agreements was USD609,800,282 (approximately RMB3,959,799,000) (2014: USD609,800,282 (approximately RMB3,731,368,000)). The interest rate swap agreements, with maturity in 2016, 2031 and 2032, are designated as cash flow hedges in respect of the bank borrowings of the Group with a floating interest rate. I-16

69 APPENDIX I FINANCIAL INFORMATION OF THE GROUP During the Reporting Period, the floating rates of the bank borrowings were 3 month London Inter-Bank Offered Rate ( Libor ) plus 0.42% or 2.20% (2014: 3 month Libor plus 0.42%, 0.45% or 2.20%). Loss for the interest rate swap agreements during the Reporting Period is as follows: RMB 000 RMB 000 Total fair value loss included in the hedging reserve 104, ,415 Hedge loan interest included in finance costs 1,807 3,386 Total loss on cash flow hedges of the interest rate swap agreements 106, ,801 On 28 January 2014, the Group released one of the interest rate swap agreements with Citibank, N.A., Hong Kong and its notional principal amount was approximately USD41,334,000 prior to maturity in January I-17

70 APPENDIX I FINANCIAL INFORMATION OF THE GROUP (11) Interest-bearing bank and other borrowings (a) The Group s interest-bearing bank and other borrowings are analysed as follows: Annual effective interest rate Maturity (%) RMB 000 RMB 000 Current liabilities (i) Bank borrowings Secured 5% to 10% discount to the People s Bank of China ( PBC ) Benchmark interest rate, Libor % to 2.15%, 3 month Libor, 3 month Libor % to 2.15%, 6 month Libor % to 1.70%, fixed rate of 3.50% to 4.80% ,487,272 1,926,196 Unsecured 9% to 10% discount to the PBC Benchmark interest rate, PBC Benchmark interest rate, Libor % to 4%, 3 month Libor, 3 month Libor % to 2.20%, fixed rate of 1.70% to 4.80% ,529,070 4,030,944 6,016,342 5,957,140 (ii) Other borrowings Secured 5% discount to the PBC Benchmark interest rate, fixed rate of 6% , ,160 Unsecured 10% discount to the PBC Benchmark interest rate, Libor % to 2.90%, 6 month Libor %, fixed rate of 1.50% to 6% ,179,360 2,032,790 2,188,030 2,285,950 Interest-bearing bank and other borrowings Current portion 8,204,372 8,243,090 I-18

71 APPENDIX I FINANCIAL INFORMATION OF THE GROUP Annual effective interest rate Maturity (%) RMB 000 RMB 000 Non-current liabilities (i) Bank borrowings Secured 5% to 10% discount to the PBC Benchmark interest rate, Libor % to 2.15%, 3 month Libor % to 2.20%, 6 month Libor % to 1.70%, fixed rate of 4.27% to 4.80% 2018 to ,264,504 11,295,416 Unsecured 10% to 20% discount to the PBC Benchmark interest rate, PBC Benchmark interest rate, Libor % to 1.85%, 3 month Libor % to 2.40%, fixed rate of 2.91% to 6% 2017 to ,789,686 7,388,464 20,054,190 18,683,880 (ii) Other borrowings Secured 5% discount to the PBC Benchmark interest rate , ,540 Unsecured 6 month Libor + 2% to 2.50%, fixed rate of 3.60% to 6.51% 2017 to ,298,721 4,611,923 5,399,191 4,741,463 Interest-bearing bank and other borrowings Non-current portion 25,453,381 23,425,343 I-19

72 APPENDIX I FINANCIAL INFORMATION OF THE GROUP The Group s bank and other borrowings are secured by pledges of the Group s 53 vessels (2014: 48 vessels) and 6 vessels under construction (2014: 13 vessels under construction) with total net carrying amount of RMB20,639,356,000 (2014: RMB19,154,098,000) and RMB6,004,226,000 (2014: RMB4,995,123,000) respectively as at 31 December As at 31 December 2015, no bank deposits (2014: bank deposits of RMB611,900,000) has/had been pledged to secure short-term bank borrowings. The pledged bank deposits were released upon the settlement of relevant bank borrowings during the Reporting Period. Except for secured bank borrowings of RMB13,326,897,000 (2014: RMB12,470,966,000), unsecured bank borrowings of RMB7,437,128,000 (2014: RMB6,978,985,000) and unsecured other borrowings of RMB1,948,080,000 (2014: RMB611,923,000) which are denominated in USD, all interest-bearing bank and other borrowings are denominated in RMB. (b) As at 31 December 2015, the Group s interest-bearing bank and other borrowings were repayable as follows: RMB 000 RMB 000 Analysed into: (i) Bank borrowings: Within one year or on demand 6,016,342 5,957,140 In the second year 4,577,413 2,689,239 In the third to fifth year, inclusive 8,131,904 10,204,923 Over five years 7,344,873 5,789,718 26,070,532 24,641,020 (ii) Other borrowings: Within one year or on demand 2,188,030 2,285,950 In the second year 1,658,540 8,670 In the third to fifth year, inclusive 3,680,215 4,640,993 Over five years 60,436 91,800 7,587,221 7,027,413 33,657,753 31,668,433 Included in other borrowings represent an amount of RMB292,800,000 (2014: RMB1,421,790,000) which was borrowed from CS Finance, a joint venture of the Group. As at 31 December 2015, the current and non-current portion of this borrowing amounted to RMB253,400,000 (2014: RMB1,370,990,000) and RMB39,400,000 (2014: RMB50,800,000) respectively. I-20

73 APPENDIX I FINANCIAL INFORMATION OF THE GROUP Included in other borrowings represent an amount of RMB7,148,080,000 (2014: RMB5,411,923,000) was borrowed from the Company s ultimate holding company. As at 31 December 2015, the current and non-current portion of this borrowing amounted to RMB1,849,360,000 (2014: RMB800,000,000) and RMB5,298,720,000 (2014: RMB4,611,923,000) respectively. (c) Details of notes are as follows: Notes with principal amount of RMB3,000,000,000 was issued by the Group to investors on 3 August The notes carried a fixed interest yield of 3.90% per annum and were issued at a price of 100 per cent of its principal amount, resulting in no discount on the issue. The notes become interest-bearing since 4 August 2009, payable annually in arrears on 4 August of each year. The notes had been fully redeemed on 3 August (12) Other loans RMB 000 RMB 000 Baosteel Resources International Company Limited ( Baosteel Resources International ) 420, ,784 Kantons International Investment Limited ( Kantons International ) 519, ,769 Shanghai Puyuan Shipping Co., Limited ( SH Puyuan ) 107,681 Mitsui O.S.K. Lines, Limited ( MOL ) 241, ,140 Petrochina International Co., Limited ( Petrochina International ) 17,721 12,286 1,199, ,660 Less: Current portion of other loans (44,714) Non-current portion of other loans 1,199, ,946 Loan from Baosteel Resources International represents an amount of USD64,680,000 (approximately RMB420,016,000) (2014: USD67,130,000 (approximately RMB410,784,000)) which was provided to Hong Kong Hai Bao Shipping Co., Limited to finance the construction of vessels and daily operations. The loan is unsecured, interest-bearing at fixed rate of 3% (2014: fixed rate of 3.50%) per annum and repayable in According to the contract signed between East China LNG Shipping Investment Co., Limited ( ELNG ) and its non-controlling shareholder, Kantons International, USD7,069,829 (approximately RMB45,909,000) (2014: USD5,885,854 (approximately RMB36,015,000)) which was provided to ELNG to finance certain vessels construction projects being carried out by the associates held by ELNG. The loan is unsecured, interest-bearing at approximately 3.30% to 6.20% over 3 month Libor (2014: approximately 3.30% over 3 month Libor) per annum and repayable within twenty years after the vessels construction projects are completed. I-21

74 APPENDIX I FINANCIAL INFORMATION OF THE GROUP According to the contract signed between China Energy Shipping Investment Co., Limited ( China Energy ) and its non-controlling shareholder, Kantons International, USD73,000,707 (approximately RMB474,037,000) (2014: USD44,248,019 (approximately RMB270,754,000)) which was provided to China Energy to finance certain vessels construction projects being carried out by the subsidiaries of China Energy. The loan is unsecured, interest-bearing at approximately 2.20% over 3 month Libor (2014: approximately 2.20% over 3 month Libor) per annum and repayable within twenty years after the vessels construction projects are completed. According to the contract signed between CS Puyuan Marine Co., Limted ( CS Puyuan )and its non-controlling shareholder, SH Puyuan, as at 31 December 2014, USD17,597,200 (approximately RMB107,681,000) was provided to CS Puyuan to finance its daily operations. The loan was unsecured, non-interest-bearing and originally repayable in 2015 and Pursuant to equity transfer agreement dated 6 November 2015, both SH Puyuan and the Group agreed this loan was waived. According to the contracts signed between China Energy and the non-controlling shareholder of its subsidiaries, MOL, USD37,245,259 (approximately RMB241,856,000) (2014: USD22,575,542 (approximately RMB138,140,000)) which were provided to China Energy to finance certain vessels construction projects being carried out by the subsidiaries of China Energy. The loans are unsecured, interest-bearing at approximately 2.20% over 3 month Libor (2014: approximately 2.20% over 3 month Libor) per annum and repayable within fifteen years after the vessels construction projects are completed. According to the contract signed between North China LNG Shipping Investment Co., Limited ( NLNG ) and its non-controlling shareholder, Petrochina International, USD2,729,070 (approximately RMB17,721,000) (2014: USD2,007,839 (approximately RMB12,286,000)) which was provided to NLNG to finance certain vessels construction projects being carried out by the associates held by NLNG. The loan is unsecured, interest-bearing at approximately 4.90% to 5.50% over 3 month Libor (2014: approximately 4.90% over 3 month Libor) per annum and repayable within twenty years after the vessels construction projects are completed. I-22

75 APPENDIX I FINANCIAL INFORMATION OF THE GROUP (13) Obligations under finance leases Minimum lease payments Present value of minimum lease payments RMB 000 RMB 000 RMB 000 RMB 000 Amounts payable under finance leases - Within one year 65,389 68,977 48,751 43,979 - In the second year 65,358 68,977 50,917 46,630 - In the third to fifth year, inclusive 196, , , ,273 - Over five years 142, , , , , , , ,460 Less: Future finance charges (67,054) (116,335) Present value of lease obligations 402, ,460 Less: Amount due within one year shown under current liabilities (48,751) (43,979) Amount due after one year 354, ,481 The Group s obligations under finance leases are secured by charges over the leased assets. Interest rates underlying all under finance leases are at 10% discount to the PBC Benchmark interest rate (2014: 10% discount to the PBC Benchmark interest rate) per annum. I-23

76 APPENDIX I FINANCIAL INFORMATION OF THE GROUP (14) Bonds payable RMB 000 RMB 000 Convertible bonds 3,145,147 Corporate bonds 3,978,488 4,973,360 3,978,488 8,118,507 Less: Current portion of bonds payable (4,143,383) Non-current portion of bonds payable 3,978,488 3,975,124 (a) Convertible bonds The Company s A-share convertible bonds amounting to RMB3,950,000,000 were issued on 1 August 2011, with a term of six years, by issuing 39,500,000 number of bonds at a nominal value of RMB100 each. The convertible bonds are convertible into A-shares of the Company at anytime between six months after the date of issue of the convertible bonds and the maturity date of the convertible bonds, being 2 February 2012 to 1 August 2017, at initial conversion price of RMB8.7 per share. On 17 May 2012, the Company declared a 2011 final dividend of RMB0.1 per share (before tax). According to the terms of issuance of the convertible bonds and relevant regulations by China Securities Regulatory Commission, the Company changed the conversion price from RMB8.70 per share to RMB8.60 per share effective from 1 June If the convertible bonds have not been converted, they will be redeemed at 105% of par value within five trading days after the maturity of the convertible bonds. The convertible bonds bear interest at 0.5% for the first year, 0.7% for the second year, 0.9% for the third year, 1.3% for the fourth year, 1.6% for the fifth year and 2% for the sixth year. The interests are payable annually in arrears on 1 August of each year starting from Within the last two years of the convertible bonds, if the closing price of A-share is traded at lower of 70% of the initial conversion price for thirty consecutive trading days, the convertible bonds holders are entitled a one-off right to request the Company to redeem the convertible bonds wholly or partially at par, with interest accrued on that day. The Company is entitled to redeem the convertible bonds wholly at par plus accrued interest if: (i) the closing price of the Company s shares is at or higher than 130% of the initial conversion price for any fifteen trading days in thirty consecutive trading days from issuance of the Bonds; or (ii) the aggregate par value of the outstanding convertible bonds is less than RMB30,000,000 at any time from issuance of the convertible bonds. The convertible bonds were split into liability (including the value of closely-related early redemption option and callable option) and equity components of RMB3,039,329,000 and I-24

77 APPENDIX I FINANCIAL INFORMATION OF THE GROUP RMB873,043,000 respectively upon initial recognition by recognising the liability component at its fair value and attributing the residual amount to the equity component. The liability component is subsequently carried at amortised cost and equity component is recognised in the convertible bonds equity reserve. The effective interest of the liability component is 5.6% per annum. On 12 August 2014, the Company passed a special resolution to approve the downward adjustment to the conversion price from RMB8.60 per share to RMB6.24 per share in accordance with the terms of issuance of the convertible bonds, when adjustment became effective on 14 August As the closing price of the A Shares had been equal to or higher than 130% of the conversion price of the convertible bonds (being RMB6.24 per share) for at least fifteen trading days out of the thirty consecutive trading days between 26 November 2014 and 8 January 2015, the Board had on 8 January 2015 resolved to redeem all outstanding convertible bonds in accordance with the specified redemption procedures. On 13 February 2015, the Company completed its redemption of all outstanding convertible bonds. The convertible bonds were delisted from the Shanghai Stock Exchange on 13 February The movement of the liability component of the convertible bonds for the Reporting Period is set out below: RMB 000 Carrying amount at 1 January ,424,692 Interest charge 192,486 Interest paid (35,586) Conversion during the year (436,445) Carrying amount at 31 December 2014 and 1 January ,145,147 Interest charge 14,677 Conversion during the year (3,120,694) Redemption (34,744) Gain on early redemption of convertible bonds (4,386) Carrying amount at 31 December 2015 The fair value and effective interest rate of the liability component of the convertible bonds as at 31 December 2015 was RMBNil (2014: RMB3,145,147,000) and Nil% (2014: 5.6%) per annum respectively. Interest expense of RMB14,677,000 (2014: RMB192,486,000) was recognised in profit or loss in respect of the convertible bonds for the Reporting Period. I-25

78 APPENDIX I FINANCIAL INFORMATION OF THE GROUP (b) Corporate bonds The movement of the corporate bonds for the Reporting Period is set out below: RMB 000 Carrying amount at 1 January ,967,236 Interest charge 6,124 Carrying amount at 31 December 2014 and 1 January ,973,360 Interest charge 5,128 Redemption (1,000,000) Carrying amount at 31 December ,978,488 Current portion of corporate bonds Non-current portion of corporate bonds 3,978,488 3,978,488 As at 31 December 2015, the balances of corporate bonds are as follows: Issue date Term of the bond Total principal value Book value of bond at initial recognition At 31 December 2014 Interest charge Redemption At 31 December 2015 RMB 000 RMB 000 RMB 000 RMB 000 RMB 000 RMB August years 1,000, , ,236 1,764 (1,000,000) 3 August years 1,500,000 1,487,100 1,489,656 1,148 1,490, October years 1,500,000 1,488,600 1,491,727 1,550 1,493, October years 1,000, , , ,407 5,000,000 4,959,500 4,973,360 5,128 (1,000,000) 3,978,488 The Company issued two batches of corporate bonds on 3 August The first batch is a three-year corporate bonds with a principal value of RMB1 billion, carrying an annual fixed interest rate of 4.20% and was repaid on 3 August The issuing price was 100 per cent of principal value, resulting in no discount on the issue. Interest on the bonds is paid annually. The second batch is a ten-year corporate bonds with a principal value of RMB1.5 billion, carrying an annual fixed interest rate of 5% and matures on 3 August The issuing price was 100 per cent of principal value, resulting in no discount on the issue. Interest on the bonds is paid annually. I-26

79 APPENDIX I FINANCIAL INFORMATION OF THE GROUP The Company issued further two batches of corporate bonds on 29 October The first batch is a seven-year corporate bonds with a principal value of RMB1.5 billion, carrying an annual fixed interest rate of 5.05% and matures on 29 October The issuing price was 100 per cent of principal value, resulting in no discount on the issue. Interest on the bonds is paid annually. The second batch is a ten-year corporate bonds with a principal value of RMB1 billion, carrying an annual fixed interest rate of 5.18% and matures on 29 October The issuing price was 100 per cent of principal value, resulting in no discount on the issue. Interest on the bonds is paid annually. (15) Contingent liabilities (i) In August 2011, one of the Group s cargo vessels Bihuashan collided with Li Peng 1, which caused Li Peng 1 to sink afterwards. The Group has set up a Limitation of Liability for Maritime Claims Fund amounting to RMB22,250,000. Since the Group had been insured, all compensations will be borne by the insurance company. As at 31 December 2015, the Group was still in the process of settling all the issues concerned. (ii) In January 2012, fuel leakage occurred in one of the Group s tanker Daiqing 75 during its voyage in Bohai Sea of the PRC. As at 31 December 2014, claims on damage caused by the fuel leakage amounted to an aggregate of RMB19,370,000 plus court costs. Of which, RMB11,250,000 had been fully settled by insurance companies. Since the Company had been insured with PICC Property and Casualty Company Limited and West of England Insurance Services (Luxembourg) S.A., all compensations will be borne by the insurance companies. On 24 July 2015, the court announced the final claims on damage to be RMB4,000,000 and the Group agreed to settle the issues concerned with the amount. The final leakage incident in relation to the Daiqing 75 tanker was resolved after the Group settled such amount. (iii) ELNG, a non-wholly-owned subsidiary of the Company, holds 30% equity interests in each of Aquarius LNG Shipping Limited ( Aquarius LNG ) and Gemini LNG Shipping Limited ( Gemini LNG ), and NLNG, a non-wholly-owned subsidiary of the Company, holds 30% equity interests in each of Capricorn LNG Shipping Limited ( Capricorn LNG ) and Aries LNG Shipping Limited ( Aries LNG ). Each of these four companies aforesaid entered into ship building contracts for the construction of one LNG vessel. After the completion of the LNG vessels, the four companies would, in accordance with time charters agreements to be signed, lease the LNG vessels to the following charterers: Company name Aquarius LNG Gemini LNG Aries LNG Capricorn LNG Charterer Papua New Guinea Liquefied Natural Gas Global Company LDC Papua New Guinea Liquefied Natural Gas Global Company LDC Mobil Australia Resources Company Pty Ltd. Mobil Australia Resources Company Pty Ltd. I-27

80 APPENDIX I FINANCIAL INFORMATION OF THE GROUP On 15 July 2011, the Company entered into four guaranteed leases ( the Lease Guarantees ). According to the Lease Guarantees, the Company irrevocably and unconditionally provided the charterers, successors and transferees of the four companies listed above with guarantee (1) for the four companies to fulfil their respective obligations under the lease term, and (2) to secure 30% of amounts payable to charterers under lease term. According to the term of the Lease Guarantees and taking into account the possible increase in the value of the lease commitments and the percentage of shareholdings hold by the Company in the four companies listed above, the amount of leases guaranteed by the Company is limited to USD8,200,000 (approximately RMB53,248,000). The guarantee period is limited to that of the lease period, which is twenty years. (iv) On 9 March 2013, one of the Group s cargo vessels CSB Talent had a broken bollard caused by strong wind at the dock and collided with several parked vessels nearby, which resulted in damage of the floating dock and other facilities. In March 2014, claims on damage caused by the collision amounted to an aggregate of RMB173,865,000. Since the Company had been insured with PICC Property and Casualty Company Limited (Guangzhou Branch) and The London Steam Ship Owners Mutual Insurance Association Limited, all compensation will be borne by the insurance companies. As at 31 December 2015, the Group was still in the process of settling all the issues concerned. (v) On 23 December 2013, five oil tankers of the Group, Danchi, Baichi, Daiqing 71, Daiqing 72 and Ruijintan, extracted oil from Bohaiyouyihao. This act was sued by a group of plaintiffs for ocean pollution. As at 23 April 2014, claims on damage caused by ocean pollution amounted to an aggregate of RMB47,452,000. Since the Company had been insured with PICC Property and Casualty Company Limited (Shanghai Branch), the London P&I Club and SKULD, all compensation will be borne by the insurance companies. As at 31 December 2014, the Group was still in the process of settling all the issues concerned. On 3 November 2015, the court approved the plaintiffs to withdraw the claims after an arbitration on 28 August (vi) At the 2014 seventh Board meeting held on 30 June 2014, the Company approved the ship building contracts, time charters agreements and supplementary construction contract signed by three joint ventures of the Company for the Yamal LNG project. To secure the obligation of the ship building contracts, time charters agreements and supplementary construction contracts, the Company provides corporate guarantees to the shipbuilders, Daewoo Shipbuilding & Marine Engineering Co., Ltd. and DY Maritime Limited. The total aggregate liability of the Company under the corporate guarantees is limited to USD490,000,000 (approximately RMB3,181,864,000). In addition, the Company provides owner s guarantees to the charterer, YAMAL Trade Pte. Ltd. The total aggregate liability of the Company under the owner s guarantees is limited to USD6,400,000 (approximately RMB41,559,000). I-28

81 APPENDIX I FINANCIAL INFORMATION OF THE GROUP (vii) At the 2015 sixth Board meeting held on 28 April 2015, the Company approved CS Bulk guarantees not more than 50% of the total debt of Guangzhou Development Shipping Co., Limited, a joint venture of the Group, including loan and accrued interest limited to approximately RMB26,250,000, where the guarantee was unconditional and non-cancellable. (16) Foreign exchange risk management The Group operates internationally and is exposed to foreign exchange risk arising from various currency exposures, primarily with respect to United States Dollar ( USD ) and Hong Kong Dollar ( HKD ) against RMB. Foreign exchange risk arises from future commercial transactions, recognised assets and liabilities. As at 31 December 2015, if USD and HKD had weakened or strengthened by 1% against RMB with all other variables held constant, post-tax profit for the year would have been RMB52,885,000 (2014: RMB175,485,000) higher/lower, mainly as a result of foreign exchange gains or losses on translation of USD and HKD denominated trade and bills receivables, prepayments, deposits and other receivables, pledged bank deposits, cash and cash equivalents, trade and bills payables, other payables and accruals, interest-bearing bank and other borrowings and other loans. (17) Cash flow and fair value interest rate risk management The Group s income and operating cash flows are substantially independent of changes in market interest rates as the Group has no significant interest-bearing assets. The Group s exposures to changes in interest rates are mainly attributable to its interest-bearing bank and other borrowings, other loans and obligations under finance leases. Borrowings at fixed rates expose the Group to fair value interest rate risk. Borrowings at floating rates expose the Group to cash flow interest rate risk. To minimise its interest expenses, the Group entered into interest rate swaps from time to time to mitigate the interest rate risk. As at 31 December 2015, if interest rates on borrowings had been 100 basis points higher/lower with all other variables held constant, the Group s post-tax profit for the year would have been RMB211,388,000 (2014: post-tax profit of RMB165,076,000) lower/higher mainly as a result of higher/lower interest expenses on floating rate borrowings. 5. OTHERS (1) Fleet expansion projects In 2015, the Group has achieved further improvement in its fleet expansion. In 2015, the cash outflow from investment activities of the Group was approximately RMB2.037 billion which has been paid for construction of new vessels, transformation of old vessels and capital increases into joint ventures of the Company, including capital expenditure of approximately RMB1.843 billion paid for the purchase of new vessels by the Group. I-29

82 APPENDIX I FINANCIAL INFORMATION OF THE GROUP In terms of fleet expansion, 8 new dry bulk vessels with a total capacity of approximately 516,000 deadweight tonnes have been delivered for use in As at 31 December 2015, the composition of the Group s fleet is as follows: Number of vessels Deadweight tonnes Average age ( 000) (years) Oil Tankers 66 7, Dry bulk vessels 100 9, Total , (2) Material asset disposals In 2015, the Group disposed of 36 vessels with an aggregate capacity of 1,329,000 deadweight tonnes, including 1 oil tanker of 13,000 deadweight tonnes and 35 dry bulk vessels of 1,316,000 deadweight tonnes respectively. 6. OUTLOOK AND HIGHLIGHTS FOR 2016 (1) Competitive landscape and development trend in the industry In 2016, the international economic environment remains complex, world economic growth is expected to rebound slightly, slow growth is expected in the next few years or will become the norm. Against the back drop of new normal global economy, lack of market demand for transportation, overcapacity situation in the short term is difficult to be substantially improved. Oil transport market, the 2016 international oil prices will remain low in which the international crude oil transport demand is expected to grow about 3%. With almost two years of slow growth (in the international tanker capacity), it will usher in a small peak delivery, tanker capacity growth is expected to be around 6%, including an increase in VLCC 6.9%, increase in product tankers 5.4%, were higher than demand growth. Thus, the oil transport market in 2016 will be weaker than that in In respect to dry bulk market, in 2016 the global dry bulk shipping demand growth will be about 0.6% whilst the global capacity is expected to grow 2.8%, well below the growth in demand; our destocking efforts will further increase, iron ore, coal demand will shrink further. To this end, in 2016 domestic and international dry bulk shipping market will remain at low level. (2) Development strategies of the Company Faced with a tough market environment, under the leadership of the Board, the Company will capture the favorable opportunity of oil and gas sector reform to adhere to the strategic guidance, innovation-driven, and three stronger than closely enhance the promotion corporate strategic management and control capability, ability to resist risks, sustainable development and core competitiveness. I-30

83 APPENDIX I FINANCIAL INFORMATION OF THE GROUP (3) Operational plans In 2016, the Group expects to add 5 new oil tankers and dry bulk vessels with a total tonnage of 150,000 deadweight tonnes of shipping capacity, and 3 new LNG vessels with a total shipping capacity of 525,000 cubic meters. It is anticipated that 171 oil tankers and dry bulk vessels in effective use throughout the whole year will be 17 million deadweight tonnes, and 3 LNG vessels in effective use throughout the whole year will be 525,000 cubic meters. Based on the market conditions of the domestic and international shipping industry in 2016, and taking into account of the delivery of new vessels, the Group s major operating plans in 2016 are as follows: completion of shipment turnover volume of billion tonne-nautical miles, representing a decrease of 3.8% year-on-year; operating revenue of RMB13.0 billion is expected to be realised, representing an increase of 2.0% year-on-year; operating costs of RMB10.7 billion, representing an increase of 3% year-on-year. (4) Work initiatives of the Company To cope with the current market situation, the Group will implement the following initiatives in 2016: A. Increase the quality, efficiency and go all out to maintain growth. In 2016, the company will release the full bonus of reform, lay the quality and efficiency battle, go all out to maintain growth, and make efforts to complete the management indicators issued by the Board of Directors. In terms of oil shipment business, the Company will make full use of the advantages of economies of scale after the Dalian Ocean fleet restructuring, team work advantage, efficient synergies and further enhance the market competitiveness. In the internal transport market, the Company will seize the opportunity to open the domestic oil market, the initiative to undertake the role of coordinator of the market, and strive to maintain market order; further innovate with the port, execute the the business model of co-ownership, and actively promote the transit of oil to import logistics solutions provider transformation; put the competing concept, with domestic counterparts to strengthen exchange routes, supply swap, swap their positions, improve shipping efficiency. In foreign trade transport market, the Company will stick to the firm implementation of the going out strategy; vigorously implement the Strategically follow, followed by the domestic petrochemical enterprises Globalisation management, according to their needs to adjust the fleet structure, opening up new routes, chart joint management, develop cooperation projects, speed up the strategic layout of globalisation; the full implementation of diversification strategy to promote market diversification, customer diversification, diversification of routes and management of pluralism. In terms of bulk shipment business, the Company will realise three changes : First, from maintaining the scale to destocking, according to the actual production to firmly cut excess capacity and redundancy, based on the orders in hand do postponement, sublease, modifications, and other disposal plans to effectively resolve excess capacity, the capacity I-31

84 APPENDIX I FINANCIAL INFORMATION OF THE GROUP to maintain a reasonable scale. The second is transforming from the ship-centric to supply-centric, and actively carry out global marketing, to expand the proportion of freight for improvement. Third, from bulk cargo marine transportation to diversified operation mode, nurture on shore business links, increase extension services, increase the intensity of commodity trade, develop new economic growth point. In terms of LNG shipment business, the Company will, based on the cooperation with China National Petroleum Corporation, China Petrochemical Corporation and China National Offshore Oil Corporation, the 3 state-owned oil companies, strive to establish a leading LNG transport fleet, and through international joint bid to expand the international market and improve the international influence. The Company will continue to promote people-oriented culture, improve staff quality, and cultivate human resources needed for the development of enterprises, build a leading project development and LNG ship management team. B. Adhere to a high starting point, high standard, high-quality, high efficiency to complete the reform and reorganisation. The Company will, in accordance with the Group s restructuring reform plan, strive to complete the restructuring of the Company in the first half of this year. After the completion of the restructuring, the Company will become a specialised tanker company with the world s top one tanker fleet. C. Implement the responsibility to ensure safety and prevent operational risks. In 2016, the Company will adhere to the safety of personnel, safety equipment, safety standards, environmental security, security management as the core of the strategic objectives, and implement safe production responsibility system so as to enhance company core competencies on safety. In addition, the Company will pay close attention to macro-economic changes, and take the path of sound operation. To this end, the Company will strictly control the scale of investment in shipbuilding, strictly control the debt ratio, maintain a good grasp of charter operations, prevention and control of operational risks. D. Strengthen funds management and expand financing channels to secure development funds and strive for reduction of capital costs. According to the new vessel delivery plans, the capital expenditure of the Company in 2016 will be approximately RMB2.5 billion. In this connection, the Company will further strengthen cooperation with banks, fully utilise both domestic and international markets and reasonably use financial instruments to secure the required capital funds, and will continuously enhance operating benefits and efficiency of capital operations, reduce financing costs and maintain a relatively sound financial structure, so as to prevent financial risk and capital risk practicably. E. Adhere to the costs-come-first and continue to improve operating efficiency and costs reduction and control level. In the background of strict environment with continuously depressed market, the Company will actively control costs and enhance comprehensive competitiveness. In 2016 the Company will take advantage of the comprehensive strength with significantly increasing capacity of Chinese Ocean Shipping Group after the reorganisation, and seek greater concessions while negotiating with global suppliers for I-32

85 APPENDIX I FINANCIAL INFORMATION OF THE GROUP purchasing of shipping materials. In addition, the Company will fully utilise the current favorable opportunity of low oil prices, and scientifically and reasonably complete well fuel locking and purchasing work; the Company will strive for breakthrough in management and control of various costs items such as crew expenses, vessel repair charges, port charges, to create an advantage of low costing. F. Strengthen talent development and team building so as to mobilise the enthusiasm of the staff. The Company will research and develop a plan for building a team of talent corresponding to and according to our planning for fleet development and the development need of various business segments. The Company will strengthen the building of an international talent team, cultivating a number of high-quality pioneering and innovative personnel with international vision and the ability to work independently so as to secure the manpower for fleet development. 7. OTHER SIGNIFICANT EVENTS (1) Results, dividends and closure of the H Share register The H share register of members of the Company will be closed from Thursday, 21 April 2016, to Friday, 20 May 2016, both days inclusive, during which period no transfer of H shares will be effected and registered. Shareholders whose names appear on the H share register of members of the Company on Friday, 20 May 2016 will be eligible to attend and vote at the annual general meeting of the Company. In order to be entitled to attend and vote at the annual general meeting of the Company, all duly completed transfer forms accompanied by the relevant share certificates must be lodged with the share registrar of the Company s H shares, Hong Kong Registrars Limited at Shops , 17th Floor, Hopewell Centre, 183 Queen s Road East, Wanchai, Hong Kong not later than 4:30 p.m. on Wednesday, 20 April To ascertain shareholders entitlement to the proposed final dividend, the H share register of members of the Company will be closed from Friday, 3 June 2016 to Monday, 13 June 2016, both days inclusive, during which period no transfer of H shares will be effected and registered. Shareholders whose names appear on the Company s H share register of members on Monday, 13 June 2016 will be qualified for the proposed final dividend. In order to qualify for the proposed final dividend, shareholders must lodge all duly completed transfer forms accompanied by the relevant share certificates with the share registrar of the Company s H shares, Hong Kong Registrars Limited at Shops , 17th Floor, Hopewell Centre, 183 Queen s Road East, Wanchai, Hong Kong not later than 4:30 p.m. on Thursday, 2 June The proposed final dividend (the payment of which is subject to the shareholders approval at the forthcoming annual general meeting) is to be payable on or before Friday, 29 July 2016 to shareholders whose names appear on the H share register of members of the Company on Monday, 13 June (2) Medical insurance scheme As required by the regulations of the PRC local government effective from 1 July 2001, the Company participates in a defined contribution medical insurance scheme organised by PRC social security authorities. Under the scheme, the Company is required to make monthly contributions at the I-33

86 APPENDIX I FINANCIAL INFORMATION OF THE GROUP rate of 12% of the total basic salaries of the employees. In addition, pursuant to the aforementioned regulations, the contributions are accounted for as staff welfare payables accrued by the Company. The Company has no obligation for the payment of medical benefits beyond such contributions to the registered insurance companies. Since 1 July 2010, the Company has developed a defined medical insurance scheme according to the spirit of the State to advocate the establishment of a multi-level enterprise medical security system and of the Notice on Enterprise Income Tax Policies Relating to Defined Contribution Retirement Insurance and Defined Medical Insurance (Cai Shui [2009] No. 27). Under the scheme, the Company shall make a provision of 5% of the total salary of employees, which shall be deposited into a special account for defined medical insurance fund. (3) Pension and Enterprise annuity schemes (i) PRC (other than Hong Kong) Pension scheme The Group is required to contribute to a pension scheme (the Scheme ) for its eligible employees. Under the Scheme, the Group s retirement benefit obligations to its existing retired and future retiring employees except for the medical expenses to retired employees, are limited to its annual contributions equivalent to the range of 18% to 22% (2014: 18% to 22%) of the basic salaries of the Group s employees. Contributions made by the Group to the Scheme for the Reporting Period amounted to RMB28,741,000 (2014: RMB62,425,000). Enterprise annuity scheme In 2008, after the resolution held between the representatives of the Group s Labour Union and the Board, a scheme on the enterprise annuity has been set up. The annuity scheme confirms that the employer s contributions will be 5% of the total staff costs of previous year. The employees contributions will be 1.25% of their income from previous year and the employer s contributions for the management staff should not be five times more than the staff average. The enterprise annuity scheme is effective as on 1 January According to the scheme, actual amount incurred as labour cost in 2015 amounted to RMB7,408,000 (2014: RMB12,197,000). The Group has no further obligations beyond the annual contributions. In the opinion of the Directors, the Group did not have any significant liabilities beyond the above contributions in respect of the retirement benefits of its employees. (ii) Hong Kong The Group operates a Mandatory Provident Fund Scheme ( MPF Scheme ) under the Hong Kong Mandatory Provident Fund Schemes Ordinance for employees employed in Hong Kong. The MPF Scheme is a defined contribution retirement scheme administered by independent trustees. Under I-34

87 APPENDIX I FINANCIAL INFORMATION OF THE GROUP the MPF Scheme, the employer and its employees are each required to make contributions to the MPF Scheme at 5% (2014: 5%) of the employees relevant income, subject to a cap of monthly relevant income of HKD25,000 from 1 June 2012 to 31 May 2014 and HKD30,000 effective as on 1 June Contributions to the MPF Scheme vest immediately. Contributions made by the Group to the MPF Scheme for the Reporting Period amounted to RMB931,000 (2014: RMB4,766,000). (4) Directors and supervisors interests and short positions in shares and underlying shares of the Company As at 31 December 2015, none of the Directors, supervisors, chief executives or, to the best knowledge of the Directors, their associates had registered an interest or short position in the shares and underlying shares of the Company or any of its associated corporations (within the meaning of Part XV of the Securities and Futures Ordinance (the SFO )) that was required to be recorded pursuant to Section 352 of the SFO, or otherwise required to be notified to the Company and The Stock Exchange of Hong Kong Limited pursuant to the Model Code for Securities Transactions by Directors of Listed Issuers (the Model Code ) as set out in Appendix 10 to the Listing Rules. (5) Purchase, sale or redemption of the Company s listed securities During the Reporting Period, neither the Company nor any of its subsidiaries had purchased, sold or redeemed any of the Company s listed securities, except that the Company redeemed the convertible bonds and a batch of corporate bonds. For details on the redemption, please refer to note 14 under the heading of 5. FINANCIAL ANALYSIS. (6) Compliance with the Corporate Governance Code The Board is committed to the principles of corporate governance for a value-driven management that is focused on enhancing shareholders value. In order to enhance independence, accountability and responsibility, the posts of chairman of the Board and the chief executive officer are assumed by different individuals so as to maintain independence and balanced views. In the opinion of the Directors, save as disclosed below, the Company has complied with the code provisions of the Corporate Governance Code as set out in Appendix 14 of the Listing Rules throughout the year ended 31 December 2015, except for the deviation in respect of the attendance of the chairman of the Board and independent non-executive Directors at the general meetings of the Company as set out in Code Provision E.1.2 and A.6.7. Under code provision E.1.2, the chairman of the Board should attend the annual general meeting and invite the chairmen of the Audit Committee, Remuneration and Appraisal Committee, Nomination Committee and any other committees (as appropriate) to attend. However, in the annual general meeting held on 18 June 2015 ( 2015 AGM ), Chairman Mr. Xu Lirong was unable to attend the 2015 AGM as he had other business commitments. Mr. Han Jun, executive Director and general manager of the Company, chaired the 2015 AGM on behalf of the chairman. Further, Mr. Ruan Yongping and Mr. Wang Wusheng, both being independent non-executive Directors and chairman of each of the Audit Committee and Nomination Committee at the time of the 2015 AGM were invited to attend the 2015 AGM to answer any question from the shareholders concerning the Company s corporate I-35

88 APPENDIX I FINANCIAL INFORMATION OF THE GROUP governance. As provided for in code provision A.6.7, independent non-executive Directors and other non-executive Directors should attend general meetings and develop a balanced understanding of the views of shareholders. Mr. Zhang Jun, Mr. Ip Sing Chi and Mr. Wang Guoliang, the independent non-executive Directors, were unable to attend the 2015 AGM due to prior business commitments. In addition to the 2015 AGM, the independent non-executive Directors, Mr. Ruan Yongping and Mr. Ip Sing Chi, were unable to attend the extraordinary general meetings of the Company held on 28 December 2015 due to prior business commitments. The Company will keep its corporate governance practices under continuous review to ensure their consistent application and will continue to improve our practices having regard to the latest developments including any new amendments to the Code. The Company has established four professional committees under the Board, including the Audit Committee, Remuneration and Appraisal Committee, Strategy Committee and the Nomination Committee with defined terms of reference. (7) Audit Committee The Company has established an audit committee to review the financial reporting procedures and internal control and to provide guidance thereto. The audit committee of the Company comprises four independent non-executive Directors. The audit committee of the Company has reviewed the annual results of the Company for the Reporting Period. (8) Remuneration and Appraisal Committee The remuneration and appraisal committee of the Company comprised of four independent non-executive Directors of the Company. The remuneration and appraisal committee of the Company has adopted terms of reference which are in line with the Corporate Governance Code contained in Appendix 14 of the Listing Rules. (9) Compliance with the Model Code as set out in Appendix 10 to the Listing Rules The Company has adopted a code of conduct regarding Directors securities transactions in accordance with the required standard set out in the Model Code. Following specific enquiries made with the Directors, supervisors and chief executive of the Company, the Company confirms that each of them has complied with the Model Code during the Reporting Period. (10) Employees The adjustments of employee remuneration is calculated in accordance with the Company s turnover and profitability and is determined by assessing the correlation between the total salary paid and the economic efficiency of the Company. Under this mechanism, management of employees I-36

89 APPENDIX I FINANCIAL INFORMATION OF THE GROUP remuneration will be more efficient while employees will be motivated to work hard to bring encouraging results for the Company. Save for the remuneration policy disclosed above, the Company does not maintain any share option scheme for its employees and the employees do not receive any bonus. The Company regularly provides its administrative personnel with training on various subjects, including operation management, foreign languages, computer skills, industry know-how and policies and laws. Such training may be in different forms, such as seminars, site visits and study tours. As at 31 December 2015, the Company had 6,269 employees (as at 31 December 2014: 8,805 employees). During the Reporting Period, the total staff cost was approximately RMB1,732 million (2014: approximately RMB1,844 million). (11) Events after Reporting Period The following are the significant events after Reporting Period: (i) On 29 March 2016, the Board announced that the Company entered into an asset transfer agreement with China Ocean Shipping (Group) Company and China COSCO Bulk Shipping (Group) Co., Ltd which has superseded and replaced the framework agreement announced on 11 December 2015; and entered into a compensation agreement with China Ocean Shipping (Group) Company which has superseded and replaced the compensation agreement announced on 11 December 2015, pursuant to which the parties have agreed that the consideration of acquisition of Dalian Ocean Shipping Company Limited is RMB6,628,455,200, and the consideration of disposal of CS Bulk is RMB5,392,221,600. (ii) Pursuant to the resolution passed at the meeting of the Board on 29 March 2016, the Board passed the Resolution on Changes in Accounting Estimates to change the estimation of the residual value of the vessels. The net residual value of vessels is changed from USD420/LDT to USD280/LDT, which were adopted with effect from 1 January (12) Update of the Articles of Association In light of the completion of the early redemption of the RMB3.95 billion A share convertible bonds by the Company on 13 February 2015, as well as the conversion of the convertible bonds prior to such date, the total number of shares of the Company changed to 4,032,032,861 (registered capital being RMB4,032,032,861). Further details of such capital changes are set out in the Company s announcements dated 8 January 2015, 9 January 2015, 10 February 2015 and 22 June The Company has updated its articles of association to reflect the above capital changes. I-37

90 APPENDIX I FINANCIAL INFORMATION OF THE GROUP REVIEW OF OPERATING RESULTS DURING THE REPORTING PERIOD In 2014, facing the complicated market environment, the Group continued to deepen the strategy of major clients, great co-operation and comprehensive services under the right leadership of the Board, and actively innovated business ideas and models, obtaining new breakthroughs and achievements in various areas such as management improvement, marketing, reducing cost and increasing efficiency as well as safety management, significantly improving the operating conditions of the Company and maintaining our overall stable development trend. In 2014, the volume of cargoes shipped by the Group was 182 million tonnes, dropped by 1.9% year-on-year; transport turnover were billion tonne-nautical miles, increased by 10.9% year-on-year; revenue derived from operations (after business tax and surcharge) was RMB billion, increased by 8.2% year-on-year; operating cost was RMB billion, dropped by 5.5% year-on-year. The profit attributable to owners of the Company was RMB309 million and the basic earnings per share for 2014 was RMB9.09 cents. (1) Revenue from Principal Operations In 2014, overall details of the Group s principal operations by products transported and geographical regions were as follows: Principal Operations by Products Transported Industry or Product Description Increase/ (decrease) in revenue as compared with 2013 Increase/ (decrease) in operating costs as compared with 2013 Increase/ (decrease) in gross profit margin as compared with 2013 Gross profit Revenue Operating costs margin (RMB 000) (RMB 000) (%) (%) (%) (%) Oil shipments 5,164,370 4,359, Coal shipments 2,374,115 2,388, Iron ore shipments 2,883,053 2,228, Other dry bulk shipments 465, , Vessel chartering 1,387,056 1,400, Total 12,273,849 10,885, I-38

91 APPENDIX I FINANCIAL INFORMATION OF THE GROUP Principal Operations by Geographical Regions Regions Increase/ (decrease) in revenue as Revenue compared to 2013 (RMB 000) (%) Domestic shipment 4,607, International shipment 7,666, (1) Shipping business Oil shipments In 2014, in adherence to the major clients and great co-operation strategy, China Shipping Tanker Co., Limited ( China Shipping Tanker ), a wholly-owned subsidiary of the Company actively innovated operation ideas and business models, with continuous improvement in transportation efficiency and remarkable achievement in cost efficiency. For domestic oil shipment, the Company actively innovated the model of cooperation with shippers, significantly improving the shipping efficiency and effectiveness of the domestic oil shipment fleet. In 2014, with the great support of China Shipping, our controlling shareholder, the Company actively carried out integration of tanker assets, and through China Shipping Tanker completed the acquisition of 20% and 20% equity interest in Shanghai Beihai Shipping Company Limited ( Beihai Shipping ) from Sinochem International Corporation and Shanghai Shipping (Group) Company respectively. Seizing the opportunities of capital injection into Beihai Shipping, the Company actively promoted all-round cooperation with China National Offshore Oil Corporation and Beihai Shipping. In 2014, domestic offshore oil of the Company recorded a year-on-year growth rate of 9.7% and gross profit of RMB500 million despite a year-on-year decrease in revenue of 6%. In 2014, the Company recorded gross profit for domestic crude oil shipment of RMB660 million and continued to maintain its leading position (about 52% market share) in domestic crude oil shipping market. Meanwhile, in the face of rapid downturn of domestic refined oil market in recent years, particularly the structural shrinkage of market for big vessels over ten thousand tonnes, the Company adopted a strategic exit strategy while exploiting the complementary strengths in the domestic and foreign markets to timely adjust allocation of domestic and foreign oil shipment capacities, hence the gross profit from domestic refined oil shipment increased by approximately RMB60 million despite the decrease in revenue of RMB83 million. For international oil shipment, the Company significantly optimized the cargo-owner structure, market structure and route structure through active promotion of diversification strategy; and continued to optimise speed with the best economic benefit by strengthened analysis of budget and final accounts of voyage. In 2014, the Company increased investment in the West African routes and third-country shipment, with the proportion of revenue from West African routes increased to 30% this year from 7.5% last year, while the proportion of third-country shipment increase to 22% this year from 7.5% last year, thereby reducing reliance of VLCC fleet on the Middle East - Far East routes. As a result, the consolidated income and risk resistant ability of VLCC fleet have improved significantly with operating efficiency significantly better than the market level. In 2014, the Company s VLCC fleet recorded gross profit of RMB102 million, significantly reducing loss of RMB759 million as compared to I-39

92 APPENDIX I FINANCIAL INFORMATION OF THE GROUP In 2014, the Group achieved a shipping volume of approximately billion tonne-nautical miles of oil, representing an increase of approximately 2.4% year-on-year; revenue derived from oil transportation was approximately RMB550 million, representing an increase of 2.1% year-on-year. An analysis of the transportation volume and revenue in terms of product types is as follows: Transportation volume by types In 2014 In 2013 (billion tonnenautical miles) Increase/ Decrease (billion tonnenautical miles) (%) Domestic Crude oil Refined oil International Crude oil Refined oil Total Revenue by shipments types Increase/ In 2014 In 2013 Decrease (RMB million) (RMB million) (%) Domestic 1,988 2, Crude oil 1,720 1, Refined oil Vessel charting ,020.0 International 3,512 3, Crude oil 2,020 1, Refined oil 1,213 1, Vessel chartering Total 5,500 5, I-40

93 APPENDIX I FINANCIAL INFORMATION OF THE GROUP (2) Shipping business Dry bulk shipments For domestic bulk cargo shipment, in 2014, China Shipping Bulk Carrier Co., Limited ( CS Bulk ) strengthened marketing on domestic big customers by advanced arrangement of COA contract negotiations early in the year, and strived to increase the fulfilment rate of the contracts. In 2014, CS Bulk signed COA contracts for domestic dry bulk cargoes with a shipping volume of 56.5 million tonnes. Meanwhile, it actively innovated the pricing model of contracts through various pricing models such as fixed freight rates and index linked pricing according to the wishes of customers to ensure that the COA contracts are fulfilled basically as scheduled. In market downturn, taking a more market-oriented and flexible pricing mechanism is in the best interests of the Company as a whole. International dry bulk shipment became another major business highlight of the Company in The Company continued to strengthen development of international dry bulk market and further optimised the structure of offshore cargo supply, achieving significant improvement in offshore operation. The turnover of international dry bulk shipment handled in the year was billion tonnes-nautical miles, and the operating revenue was RMB4.155 billion, representing an increase of 23.7% and 33.4% respectively over the same period in 2013; the Company realized gross profit of RMB586 million and gross margin of 14.1%, increased by 4.8 percentage points year-on-year. For very large ore carriers ( VLOC ) fleet operation, the Company relied on long-term COA shipment contracts to finalize source of cargoes in advance, ensuring the smooth operation of all 14 VLOCs. In 2014, importation of million tonnes of iron ores was completed with a revenue of RMB2.61 billion, a year-on-year increase of 8.7% and 22.9%, respectively. A gross profit of RMB680 million was realized, representing an increase of RMB280 million and a gross margin of 26.3%, which played an important role in ensuring the Company s benefits. In terms of small and medium fleet, fully aware of the slowing growth in coastal coal transportation, CS Bulk further strengthened market segment research and judgment, actively adjusted the supply structure, focused on development of food markets, ore markets and steel material markets, increased solicitation for imported coal and fertilizers, and vigorously develop the markets in Pacific, Atlantic, America, West Asia and India. In 2014, total volume of international and domestic non-coal cargo shipment was million tonnes, representing 40.5% of the total volume of dry bulk cargo shipment, an increase of 7.2% year-on-year. Furthermore, the Company strengthened the efforts on international chartering of vessels and leased out three Capesize vessels by seizing a high market rate. Through a series of effective measures, the Company s international dry bulk cargo fleet has achieved significant improvement in operating efficiency, with the daily profit margins of the Capesize and Panamax vessels of the Company much higher than those of international markets in the corresponding periods. I-41

94 APPENDIX I FINANCIAL INFORMATION OF THE GROUP In 2014, the Group achieved a shipping volume of approximately billion tonne-nautical miles of dry bulk cargo, representing an increase of approximately 18.7% year-on-year; operating revenue derived from dry bulk cargo transportation was approximately RMB6.774 billion, representing an increase of 13.8% year-on-year. An analysis of the transportation volume and revenue in terms of product types is as follows: In 2014 In 2013 (billion tonnenautical miles) Increase/ Decrease (billion tonnenautical miles) (%) Domestic Coal Iron ore Others International Coal Iron ore Others Total Increase/ In 2014 In 2013 Decrease (RMB million) (RMB million) (%) Domestic 2,619 2, Coal 1,933 2, Iron ore Others Vessel chartering International 4,155 3, Coal Iron ore 2,606 2, Others Vessel chartering Total 6,774 5, Note: Other dry bulk cargoes include metal ore, non-metallic ore, steel, cement, timber, grain, fertilizer and so on except for coal and iron ore. I-42

95 APPENDIX I FINANCIAL INFORMATION OF THE GROUP (3) Progress made in LNG shipments In recent years, domestic LNG markets experienced rapid development, accounting for an increasing proportion in the structure of energy consumption, while the rapid development of China s LNG importation has provided huge strategic opportunities for the Company to expand its LNG transportation. The Company is actively studying on the implementation of national economic policies for energy conservation and clean energy development, and is strengthening coordination with major oil companies to go all out for promotion of LNG project development. In 2014, the Company continued to proceed with its LNG business. On the one hand, it grasped existing project development while steadily pushing forward the phase I vessel construction of the Mobil DES project and the APLNG project, and actively implemented the tender bidding of the APLNG project phase II vessel construction. On the other hand, the Company actively explored new projects, and participated in the bidding of YAMAL LNG project jointly with Japanese company Mitsui O.S.K. Lines, Limited ( MOL ), and has successfully signed a basket of contracts for three LNG vessels in phase I of such project in July COSTS AND EXPENSES ANALYSIS While achieving well in transportation operations, the Company has seriously and consistently implemented the various requirements of the Board on further enhancing management, cost reduction and efficiency improvement. Starting on operational management and overall budget management, cost management and control was further strengthened and all types of various costs and expenses were effectively under control. In 2014, transportation cost of RMB10.89 billion was incurred, representing a decrease of 5.5% year-on year, while ensuring notable improvement in the operating profit of the Company. The composition of the main operating costs is as follows: Increase/ Item In 2014 In 2013 Decrease (RMB 000) (RMB 000) (%) Composition ratio in 2013 Fuel cost 4,555,800 4,818, % 41.9% Port cost 1,107,320 1,302, % 10.2% Sea crew cost 1,499,667 1,657, % 13.8% Lubricants expenses 223, , % 2.1% Depreciation 1,842,974 1,641, % 16.9% Insurance expenses 238, , % 2.2% Repair expenses 351, , % 3.2% Charter cost 516, , % 4.7% Provision for onerous contracts 107, , % 1.0% Others 442, , % 4.0% Total 10,885,620 11,524, % 100.0% I-43

96 APPENDIX I FINANCIAL INFORMATION OF THE GROUP Fuel cost was the most important cost control item for shipping enterprises. In 2014, the Company take advantage of fluctuating and descending in international oil prices and further enhanced our research and judgment over fuel market, which actively implemented operation at shipping speed with the best economic effect and put more effort into energy saving management to explore reduction and control point. In the meantime, we improved technology energy saving control over key parts such as oil in bulk heating/cabin cleaning/inert air filling through adopting various efficiency measures, as such, the Company achieved further achievement in fuel cost control. In 2014, while the transportation turnover volume of the Company increased by 10.9% year-on-year, the fuel consumption volume was 1,171,200 tonnes, representing a decrease of 1.1% year-on-year; and average fuel consumption decreased from 3.05kg/1,000 nautical miles in 2013 to 2.72 kg/1,000 nautical miles, decreasing by 10.8% year-on-year, the utilization efficiency of fuel has been improved significantly. In 2014, the Company incurred fuel costs of RMB4.556 billion, representing a decrease of 5.5% year-on-year and accounting for 41.9% of the costs of transportation costs. Regarding sea crew costs, in 2014, the Group implemented reform of its crew management system by entering into sea crew management agreements with China Shipping for the provision of sea crew and related services to the Group, which enabled the Group to reduce crew costs of approximately RMB157 million in In addition, the Group further strengthened communication and coordination with ports, insurance companies and P&I Clubs. As a result, actual expenditures on port charges and insurance fees of the Group decreased by RMB196 million and RMB13.45 million respectively in In 2014, the Group incurred depreciation of RMB1.843 billion, representing an increase of 12.3% year-on-year. Such increases were due to: (1) 13 new vessels with a total capacity of million dead weight were delivered during the Reporting Period; (2) effective from 1 January 2014, the Group adjusted the residual values of vessels from USD470 (approximately RMB2,960) per light displacement ton to USD420 (approximately RMB2,560) per light displacement ton. As a result of these changes in accounting estimates, the depreciation increased by approximately RMB57 million in OPERATING RESULTS OF THE JOINT VENTURES AND THE ASSOCIATES In 2014, the Group has recognised its profits in its joint ventures of approximately RMB206 million, representing an increase of 85.6% as compared with that of the same period in In 2014, the 5 joint ventures achieved a shipping volume of billion tonne-nautical miles, representing a decrease of 23.5% as compared with the same period in The operating revenue achieved by the 5 joint ventures in 2014 was approximately RMB8.493 billion, representing a decrease of 9.0% as compared to that of the same period in 2013, and the net profit realised by the 5 joint ventures in 2014 was approximately RMB326 million, representing an increase of 100.0% as compared to that of the same period in As at 31 December 2014, the 5 joint ventures owned 82 bulk vessels with a total capacity of 4.58 million deadweight tonnes and 10 vessels under construction with the capacity of 475,000 deadweight tonnes. I-44

97 APPENDIX I FINANCIAL INFORMATION OF THE GROUP The operating results achieved by the 5 joint ventures in 2014 are as follows: Company name Interest held by the Group 2014 Shipping volume 2014 Operating revenue 2014 Net profit/loss (billion tonne nautical miles) (RMB 000) (RMB 000) Shenhua Zhonghai Marine Co., Limited 49% ,380, ,198 Shanghai Times Shipping Co., Limited 50% ,270,631 22,698 Shanghai Friendship Marine Co., Limited 50% ,616 1,056 Huahai Petrol Transportation & Trading Co., Limited 50% ,382 14,485 Guangzhou Development Shipping Co., Limited 50% ,367 20,467 In 2014, the net profit achieved by China Shipping Finance Co., Limited ( CS Finance ), a non-shipping joint venture, with 25% interest held by the Company, was approximately RMB213 million. In 2014, the Group has recognised its profits in its associates of approximately RMB91 million. In 2014, 1 associate achieved a shipping volume of billion tonne-nautical miles. The operating revenue achieved by the associate in 2014 was approximately RMB1.218 billion, and the net profit realised by the associate in 2014 was approximately RMB425 million. As at 31 December 2014, the associate owned 7 bulk vessels with a total capacity of 0.59 million deadweight tonnes. The operating results achieved by the associate in 2014 are as follows: Company name Interest held by the Group 2014 Shipping volume 2014 Operating revenue 2014 Net profit/loss (billion tonne nautical miles) (RMB 000) (RMB 000) Beihai Shipping 40% ,217, ,434 I-45

98 APPENDIX I FINANCIAL INFORMATION OF THE GROUP 4. FINANCIAL ANALYSIS (1) Net cash inflow The net cash inflow from operating activities of the Group increased from approximately RMB1,429,279,000 for the year ended 31 December 2013 to approximately RMB3,157,049,000 for the year ended 31 December 2014, representing an increase of approximately 120.9%. (2) Capital commitments Group Company RMB 000 RMB 000 RMB 000 RMB 000 Authorised and contracted for: Construction and purchases of vessels (Note 1) 5,430,061 9,586,595 Equity Investments (Note 2) 539, , , ,868 5,969,729 10,179, , ,868 The Group and the Company had capital commitments as at 31 December 2014, of which RMB1,112,199,000 (2013: RMB5,980,812,000) from the Group and RMB539,668,000 (2013: RMB592,868,000) from the Company will be due within one year. Note: (1) According to the construction or purchase agreements entered into by the Group from January 2007 to December 2014, these capital commitments will fall due in 2015 to (2) Included capital commitments in respect of equity investments is commitment to invest in joint venture, Shenhua Zhonghai Marine Co., Limited of RMB539,668,000 (2013: RMB592,868,000). In addition to the above, the Group s share of the capital commitments of its associates which are contracted for but not provided amounted to RMB486,298,000 (2013: RMB895,929,000). The Group s share of the capital commitments of its joint ventures, which are contracted for but not provided amounted to RMB3,225,137,000 (2013: RMB1,296,397,000); which are authorised but not contracted for amounted to RMB Nil (2013: RMB4,900,000). I-46

99 APPENDIX I FINANCIAL INFORMATION OF THE GROUP (3) Capital structure The Group s and Company s net debt-to-equity ratio at 31 December 2014 and 2013 was as follows: Group Company RMB 000 RMB 000 RMB 000 RMB 000 Total borrowings 41,211,060 33,603,578 15,830,407 17,878,629 Less: Cash and cash equivalents (2,449,240) (1,919,204) (517,755) (487,558) Net debt 38,761,820 31,684,374 15,312,652 17,391,071 Total equity 22,647,729 22,211,877 21,165,727 20,975,375 Debt to equity ratio 171% 143% 72% 83% (4) Cash and cash equivalents Cash at banks generates interest income at floating rates based on daily bank deposit rates. Short-term fixed deposits are deposited for various periods of between one day to three months depending on the immediate cash requirements of the Group, and interest income shall accrue at the respective short-term fixed deposit rates. The carrying amounts of the cash and cash equivalents approximate to their fair values. Included in cash and cash equivalents is an amount of RMB696,892,000 (2013: RMB792,008,000) of bank balance deposited with CS Finance, a joint venture of the Group. Pledged bank deposits represent the deposits pledged to bank to secure banking facilities granted to the Group, deposits amounting to RMB611,900,000 (2013: RMBNil) have been pledged to secure short term bank loans and are therefore classified as current assets. The pledged bank deposits will be released upon the settlement of relevant bank borrowing. Cash and cash equivalents are denominated in the following foreign currencies: Group Company RMB 000 RMB 000 RMB 000 RMB 000 USD 1,579,382 1,043,235 16,489 79,898 SGD 910 1,866 HKD 11,182 1, Others I-47

100 APPENDIX I FINANCIAL INFORMATION OF THE GROUP Pledged bank deposits are denominated in the following foreign currency: Group Company RMB 000 RMB 000 RMB 000 RMB 000 USD 611, ,900 (5) Trade and bills receivables Group Company RMB 000 RMB 000 RMB 000 RMB 000 Trade and bills receivables 1,735,214 1,647,728 2,553 1,312 Trade receivables from associates, joint ventures and fellow subsidiaries 11, ,557 Trade and bills receivables 1,746,263 1,750,285 2,553 1,312 The carrying amounts of trade and bills receivables approximate to their fair values. The trade receivables due from associates, joint ventures and fellow subsidiaries are unsecured, non-interest bearing and under normal credit period as other trade receivables. I-48

101 APPENDIX I FINANCIAL INFORMATION OF THE GROUP An ageing analysis of the trade and bills receivables at the end of the Reporting Period, based on the invoice date, is as follows: Group Balance Percentage Balance Percentage RMB 000 % RMB 000 % 1-3 months 1,503, ,559, months 131, , months 58, , months 47, , years 4,668 1,507 1,746, ,750, Company Balance Percentage Balance Percentage RMB 000 % RMB 000 % 1-3 months 2, , years , , No impairment loss is provided for the trade and bills receivables that are neither past due nor impaired because these receivables are within credit period granted to the respective customers and the management considers the default rate is low for such receivables based on historical information and past experience. In determining the recoverability of a trade and bills receivables, the Group considers any change in credit quality of the trade and bills receivables from the date credit was initially granted up to the end of the Reporting Period. In view of the good settlement history of those receivables of the Group which are past due but not impaired for the year, the directors of the Company consider that no allowance is required. Included in trade and bills receivables are debts with carrying amount of approximately RMB242,644,000 (2013: RMB190,779,000) which are past due as at the end of the Reporting Period for which the Group had not provided for impairment loss as there has not been a significant change in credit quality and the amounts are still considered recoverable (2013: RMB Nil). I-49

102 APPENDIX I FINANCIAL INFORMATION OF THE GROUP Ageing of trade and bills receivables which are past due but not impaired: Group Company RMB 000 RMB 000 RMB 000 RMB months 190, , months 47,443 34, Over 1 year 4, , , The Group normally allows a credit period of 30 to 120 days to its major customers. In view of the fact that the Group s trade and bills receivables relate to a large number of diversified customers, there is no significant concentration of credit risk. Trade and bills receivables are non-interest-bearing. Receivables that were past due but not impaired relate to a number of independent customers that have a good track record with the Group. Based on past experience, management believes that no impairment allowance is necessary in respect of these balances as there has not been a significant change in credit quality and the balances are considered fully recoverable. The Group does not hold any collateral over these balances. The carrying amounts of the trade and bills receivables are denominated in the following foreign currencies: Group Company RMB 000 RMB 000 RMB 000 RMB 000 USD 968, ,395 1,893 AUD 2 I-50

103 APPENDIX I FINANCIAL INFORMATION OF THE GROUP (6) Prepayments, deposits and other receivables Group Company RMB 000 RMB 000 RMB 000 RMB 000 Prepayments 139,850 67,484 6,350 4,611 Deposits and other receivables 316, ,515 38,081 49,984 Due from fellow subsidiaries 185, ,294 Due from joint ventures 74,565 65,000 50,000 50,217 Due from associates 3,427 Due from related parties - Due from joint ventures of ultimate holding company 16,971 24,275 - Due from joint venture of a fellow subsidiary 76,153 39,606 Due from subsidiaries 10,289,076 5,135, , ,174 10,383,507 5,240,479 The amounts due from fellow subsidiaries, related parties and subsidiaries are unsecured, non-interest bearing and repayable on demand. Included in amounts due from subsidiaries amount to RMB3,500,000,000 are unsecured and interest bearing at fixed rate of 3.60% to 4.50% or at variable rate 5% to 20% discount to the People s Bank of China ( PBC ) Benchmark interest rate. The carrying amounts of the prepayments, deposits and other receivables of the Group and Company are denominated in the following foreign currencies Group Company RMB 000 RMB 000 RMB 000 RMB 000 USD 483, ,021 16,975 1,889,812 AUD 22,820 64, JPY 1,914 2,390 Others 36,638 38, I-51

104 APPENDIX I FINANCIAL INFORMATION OF THE GROUP (7) Trade and bills payables Group Company RMB 000 RMB 000 RMB 000 RMB 000 Trade and bills payables 472, ,149 2,824 1,614 Due to ultimate holding company 147 Due to joint ventures 860 1,125 Due to fellow subsidiaries 377, , ,853 Due to related parties - Due to joint ventures of fellow subsidiaries 129,759 47,173 - Due to joint ventures of ultimate holding company 9,576 25,320 Due to subsidiaries 8,720 8, ,669 1,542,733 11,791 20,155 The carrying amounts of trade and bills payables approximate to their fair values. The trade payables due to ultimate holding company, joint ventures, fellow subsidiaries, related parties and subsidiaries are unsecured, non-interest bearing and repayable on demand The carrying amounts of trade and bills payables are denominated in the following foreign currencies. Group Company RMB 000 RMB 000 RMB 000 RMB 000 USD 619, ,249 8, HKD 36,944 1,969 JPY 2,283 1,885 EUR 6, Others 9,458 9,514 I-52

105 APPENDIX I FINANCIAL INFORMATION OF THE GROUP An ageing analysis of the trade and bills payables at the end of the Reporting Period, based on the invoice date, is as follows: Group Balance Percentage Balance Percentage RMB 000 % RMB 000 % 1-3 months 710, ,388, months 129, , months 51, , months 66, , years 24, ,889 Over 2 years 9, , , ,542, Company Balance Percentage Balance Percentage RMB 000 % RMB 000 % 1-3 months 2, , months months months 6, years 6, , Over 2 years 2, , , I-53

106 APPENDIX I FINANCIAL INFORMATION OF THE GROUP The trade and bills payables are non-interest-bearing and are normally settled in 1-3months. Group Company RMB 000 RMB 000 RMB 000 RMB 000 Accruals 41,906 53,067 3,676 5,631 Other payables (57,484) 139,616 73,250 (131,164) Due to ultimate holding company 17,647 88,207 17,135 88,207 Due to fellow subsidiaries 97, , ,398 Due to joint ventures 4,962 2, Due to subsidiaries 81, , , , , ,637 The carrying amounts of other payables and accruals approximate to their fair values. Accruals and other payables are non-interest-bearing and are normally settled in 1-3months. The amounts due to ultimate holding company, fellow subsidiaries, joint ventures and subsidiaries are unsecured, non-interest bearing and repayable on demand. The carrying amounts of other payables and accruals are denominated in the following foreign currencies: Group Company RMB 000 RMB 000 RMB 000 RMB 000 USD 314, ,323 2,400 41,726 HKD 3,412 25,333 4,327 Others 1,937 56,364 3,553 I-54

107 APPENDIX I FINANCIAL INFORMATION OF THE GROUP (9) Provision for onerous contracts Group Company RMB 000 RMB 000 RMB 000 RMB 000 As at 1 January 349,694 33,436 Utilised during the year (175,850) (17,158) Provision for the year 107, ,694 45,547 33,436 Exchange realignment As at 31 December 281, ,694 61,875 33,436 Current portion of provision for onerous contracts 142, ,287 32,317 17,158 Non-current portion of provision for onerous contracts 139, ,407 29,558 16, , ,694 61,875 33,436 As at 31 December 2014, the Group has a provision of RMB281,815,000 (2013: RMB349,694,000) for onerous contracts relating to the non-cancellable chartered-in oil tankers and dry bulk vessel contracts. As at 31 December 2014, the committed charterhire expenses of non-cancellable chartered-in oil tankers and dry bulk vessel contracts with lease term expiring over 24 months from the end of the Reporting Period and with period not being covered by chartered-out oil tankers and dry bulk vessels contracts of which management cannot reliably assess their onerous contracts amounted to approximately RMB2,709,313,000 (2013: RMB3,031,793,000). I-55

108 APPENDIX I FINANCIAL INFORMATION OF THE GROUP (10) Derivative financial instruments Group RMB 000 RMB 000 Carried at fair value Cash flow hedges: - Interest rate swap agreements Assets Non-current portion 151,027 Liabilities Current portion (1,940) Non-current portion (291,553) (4,689) (291,553) (6,629) As at 31 December 2014, the Group held thirty-one (2013: thirty-two) interest rate swap agreements, the total notional principal amount of the outstanding interest rate swaps agreements was USD609,800,282 (approximately RMB3,731,368,000) (2013: USD651,133,615 (approximately RMB3,969,869,893)). The interest rate swap agreements, with maturity in 2016, 2031 and 2032 are designated as cash flow hedges in respect of the bank borrowings with a floating interest rate. During the year ended 31 December 2014, the floating rates of the bank loan were Libor plus 0.42%, 0.45% or 2.2% (2013: Libor plus 0.42%, 0.45% or 2.2%). The gains/(losses) for the interest rate swap agreements during the year are as follows: RMB 000 RMB 000 Net (loss)/gain included in the hedging reserve (436,415) 157,491 Hedge loan interest included in finance costs (3,386) (6,216) Total (loss)/gain on cash flow hedges interest rate swap agreements (439,801) 151,275 On 28 January 2014, the Group released one of interest rate swap agreements with Citibank, N.A., Hong Kong, the notional principal amount of the interest rate swap agreement was USD41,333,333 prior to maturity in January I-56

109 APPENDIX I FINANCIAL INFORMATION OF THE GROUP (11) Notes, interest-bearing bank and other borrowings (a) The Group s notes, interest-bearing bank and other borrowings are analysed as follows: Group Company Annual effective interest Maturity (%) RMB 000 RMB 000 RMB 000 RMB 000 Current liabilities (i) Bank loans Secured Unsecured 5% to 10% discount to the PBC Benchmark interest rate, 3 months Libor, 3 months Libor %, Libor % to 2.15%, 3.50% to 4.73% ,926,196 1,627, ,900 Libor % to 4.00%, 9% to 10% discount to the PBC Benchmark interest rate, PBC Benchmark interest rate, 3 months Libor, 3 months Libor % to 2.20%, 4.50% ,030,944 1,575, , ,752 5,957,140 3,203, , ,752 (ii) Notes Unsecured 3.90% ,998,949 2,998,949 (iii) Other borrowings Secured 6.00%, 5% discount to the PBC Benchmark interest rate ,160 6,630 Unsecured 10% discount to the PBC Benchmark interest rate, 2.50% to 6.00%, Libor +1.60% to 2.90% ,032,790 2,356,307 1,100,000 1,000,000 2,285,950 2,362,937 1,100,000 1,000,000 Notes, interest-bearing bank and other borrowings - current portion 8,243,090 8,565,055 1,911,900 4,486,701 I-57

110 APPENDIX I FINANCIAL INFORMATION OF THE GROUP Group Company Annual effective interest Maturity (%) RMB 000 RMB 000 RMB 000 RMB 000 Non-current liabilities (i) Bank loans Secured Unsecured 5% to 10% discount to the PBC Benchmark interest rate, 3 months Libor +2.20%, Libor +0.38% to 2.15%, 4.27% to 4.73% ,295,416 8,109,880 10% to 20% discount to the PBC Benchmark interest rate, PBC Benchmark interest rate, Libor % to 1.85%, 3 months Libor %, 1.68% to 6.00% ,388,464 2,092,182 1,800,000 18,683,880 10,202,062 1,800,000 (ii) Other borrowings Secured 5% discount to the PBC Benchmark interest rate , ,700 Unsecured 10% discount to the PBC Benchmark interest rate, 3.60% to 6.51%, 6 months Libor % ,611,923 5,072,790 4,000,000 5,000,000 4,741,463 5,210,490 4,000,000 5,000,000 Notes, interest- bearing bank and other borrowings - non-current portion 23,425,343 15,412,552 5,800,000 5,000,000 The Group s bank and other borrowings are secured by pledges or mortgages of the Group s 48 vessels (2013: 34 vessels) and 13 vessels under construction (2013: 4 vessels under construction) with total net carrying value of RMB24,149,221,000 (2013: RMB16,299,120,000) as at 31 December Collateralised borrowings are secured by trade receivables of RMBNil (2013: RMB504,705,000). Bank deposits of RMB611,900,000 (2013: RMBNil) have been pledged to secure short-term bank loan. The pledged bank deposits will be released upon the settlement of relevant bank borrowing. The carrying value of the Group s and the Company s notes, interest-bearing bank and other borrowings approximate to their fair values. Except for secured bank loans of RMB12,470,966,000 (2013: RMB9,598,438,000), unsecured bank loans of RMB6,978,985,000 (2013: RMB2,947,739,000) and unsecured other borrowings of RMB611,923,000 (2013: RMB426,767,000) which are denominated in USD, all borrowings are denominated in RMB. I-58

111 APPENDIX I FINANCIAL INFORMATION OF THE GROUP (b) As at 31 December 2014, the Group s notes, interest-bearing bank and other borrowings were repayable as follows: Group Company RMB 000 RMB 000 RMB 000 RMB 000 Analysed into: (i) Bank loans: Within one year or on demand 5,957,140 3,203, , ,752 In the second year 2,689,239 1,675,888 In the third to fifth year, inclusive 10,204,923 3,886,845 1,800,000 Over five years 5,789,718 4,639,329 24,641,020 13,405,231 2,611, ,752 (ii) Notes: Within one year or on demand 2,998,949 2,998,949 (iii) Other borrowings: Within one year or on demand 2,285,950 2,362,937 1,100,000 1,000,000 In the second year 8,670 2,079,420 2,000,000 In the third to fifth year, inclusive 4,640,993 3,026,010 4,000,000 3,000,000 Over five years 91, ,060 7,027,413 7,573,427 5,100,000 6,000,000 31,668,433 23,977,607 7,711,900 9,486,701 Included in other borrowings represent an amount of RMB1,421,790,000 (2013: RMB1,658,930,000) were borrowed from CS Finance, a joint venture of the Group. As at 31 December 2014, the current and non-current portion of this borrowing amounted to RMB1,370,990,000 (2013: RMB1,532,140,000) and RMB50,800,000 (2013: RMB126,790,000) respectively. Included in other borrowings represent an amount of RMB5,411,923,000 (2013: RMB5,400,000,000) were borrowed from the Company s ultimate holding company. As at 31 December 2014, the current and non-current portion of this borrowing amounted to RMB800,000,000 (2013: RMB400,000,000) and RMB4,611,923,000 (2013: RMB5,000,000,000) respectively. Included in current portion of other borrowings represent an amount of RMBNil (2013: RMB426,767,000) were borrowed from China Shipping (Hong Kong) Holdings Co., Limited, a fellow subsidiary of the Company. I-59

112 APPENDIX I FINANCIAL INFORMATION OF THE GROUP (c) Details of the notes as at 31 December 2014 are as follows: Group and Company RMB 000 RMB 000 Principal amount 3,000,000 3,000,000 Notes issuance cost (8,245) (8,245) Proceeds received 2,991,755 2,991,755 Accumulated amortisation 8,245 7,194 Redemption of notes (3,000,000) 2,998,949 Notes with principal amount of RMB3,000,000,000 was issued by the Group to investors on 3 August The notes carried a fixed interest yield of 3.90% per annum and were issued at a price of 100 per cent of its principal amount, resulting in no discount on the issue. The notes become interest bearing since 4 August 2009, payable annually in arrears on 4 August of each year. The notes have been fully redeemed on 3 August 2014 (12) Other Loans Group RMB 000 RMB 000 Baosteel Resources International Company Limited ( Baosteel Resources International ) 410, ,206 Kantons International Investment Limited ( Kantons International ) 306, ,453 Shanghai Puyuan Shipping Co., Limited 107, ,297 MOL 138,140 63,132 Petrochina International Co., Limited 12,286 10, , ,108 Less: current portion of other loans (44,714) (29,874) Non-current portion of other loans 930, ,234 I-60

113 APPENDIX I FINANCIAL INFORMATION OF THE GROUP Included in loan from Baosteel Resources International represents an amount of USD67,130,000 (approximately RMB410,784,000) (2013: USD69,580,000 (approximately RMB424,206,000)) was provided to Hong Kong Hai Bao Shipping Co., Limited to finance the construction of vessels and daily operation. The loan is unsecured, bears interest at 3.5% (2013: 3.5%) per annum and repayable in According to the contract signed between East China Shipping Investment Co., Limited ( ELNG ) and its non-controlling shareholder, Kantons International, USD5,885,854 (approximately RMB36,015,000) (2013: USD3,069,517 (approximately RMB18,714,000)) was provided to ELNG to finance the vessels construction projects being carried out by the associates held by ELNG. The loan is unsecured, bearing interest at approximately 3.3% over 3 months Libor and have to repay within 20 years after such vessels construction projects completed. According to the contract signed between China Energy Shipping Investment Co., Limited ( China Energy ) and its non-controlling shareholder, Kantons International, USD44,248,019 (approximately RMB270,754,000) (2013: USD20,295,349 (approximately RMB123,739,000)) were provided to China Energy to finance the vessels construction projects being carried out by the subsidiaries of China Energy. The loans are unsecured, bearing interest at approximately 2.2% over 3 months Libor and have to repay within 20 years after such vessels construction projects completed. According to the contract signed between CS Puyuan Marine Co., Limited ( CS Puyuan ) and its non-controlling shareholder, Shanghai Puyuan Shipping Co., Limited, USD17,597,200 (approximately RMB107,681,000) (2013: USD17,107,200 (approximately RMB104,297,000)) was provided to CS Puyuan to finance the daily operation. The loans are unsecured, non-interest bearing and repayable in 2015 and According to the contracts signed between China Energy and its non-controlling shareholder of subsidiaries, MOL, USD22,575,542 (approximately RMB138,140,000) (2013: USD10,354,792 (approximately RMB63,132,000)) were provided to China Energy to finance the vessels construction projects being carried out by the subsidiaries of China Energy. The loans are unsecured, bearing interest at approximately 2.2% over 3 months Libor and have to repay within 15 years after such vessels construction projects completed. According to the contract signed between North China LNG Shipping Investment Co., Limited ( NLNG ) and its non-controlling shareholder, Petrochina International Co., Limited, USD2,007,839 (approximately RMB12,286,000) (2013: USD1,643,393 (approximately RMB10,020,000)) was provided to NLNG to finance the vessels construction projects being carried out by the associates held by NLNG. The loan is unsecured, bearing interest at approximately 4.9% over 3 months Libor and have to repay within 20 years after such vessels construction projects completed. I-61

114 APPENDIX I FINANCIAL INFORMATION OF THE GROUP (13) Obligations Under Finance Leases It is the Group s policy to lease certain of its vessels under finance leases, with lease terms of 10 years. Interest rates underlying all under finance leases are fixed at 5.90% per annum. Minimum lease payments Group Present value of minimum lease payments RMB 000 RMB 000 RMB 000 RMB 000 Amounts payable under finance leases - Within one year 68,977 68,977 43,979 41,479 - In more than one year but not more than two years 68,977 68,977 46,630 43,979 - In more than two years but not more than five years 206, , , ,543 - More than five years 219, , , , , , , ,935 Less: future finance charges (116,335) (143,836) Present value of lease obligations 448, ,935 Less: Amount due within one year shown under current liabilities (43,979) (41,479) Amount due after one year 404, ,456 The Group s obligations under finance leases are secured by charges over the leased assets. I-62

115 APPENDIX I FINANCIAL INFORMATION OF THE GROUP (14) Bonds payable Group and Company RMB 000 RMB 000 Convertible bonds 3,145,147 3,424,692 Corporate bonds 4,973,360 4,967,236 8,118,507 8,391,928 Less: current portion of bonds payable (4,143,383) Non-current portion of bonds payable 3,975,124 8,391,928 (a) Convertible bonds The Company s A-share convertible bonds amounting to RMB3,950,000,000 were issued on 1 August 2011, with a term of 6 years, by issuing 39,500,000 number of bonds at a nominal value of RMB100 each. The convertible bonds are convertible into A-shares of the Company at anytime between six months after the date of issue of the convertible bonds and the maturity date of the convertible bonds, being 2 February 2012 to 1 August 2017, at initial conversion price of RMB8.70 per share. On 17 May 2012, the Company declared a 2011 final dividend of RMB0.10 per share (before tax). According to the terms of issuance of the convertible bonds and relevant regulations by China Securities Regulatory Commission, the Company changed the conversion price from RMB8.70 per share to RMB8.60 per share effective from 1 June If the convertible bonds have not been converted, they will be redeemed at 105% of par value within five trading days after the maturity of the convertible bonds. The convertible bonds bear interest at 0.5% for the first year, 0.7% for the second year, 0.9% for the third year, 1.3% for the fourth year, 1.6% for the fifth year and 2% for the sixth year. The interests are payable annually in arrears on 1 August of each year starting from Within the last two years of the convertible bonds, if the closing price of A-share is traded at lower of 70% of the initial conversion price for thirty consecutive trading days, the convertible bonds holders are entitled a one-off right to request the Company to redeem the convertible bonds wholly or partially at par, with interest accrued on that day. The Company is entitled to redeem the convertible bonds wholly at par plus accrued interest if: (i) the closing price of the Company s shares is at or higher than 130% of the initial conversion price for any fifteen trading days in thirty consecutive trading days from issuance of the bonds; or (ii) the aggregate par value of the outstanding convertible bonds is less than RMB30,000,000 at any time from issuance of the convertible bonds. I-63

116 APPENDIX I FINANCIAL INFORMATION OF THE GROUP The convertible bond was split into liability (including the value of closely-related early redemption option and callable option) and equity components of RMB3,039,329,000 and RMB873,043,000 respectively upon initial recognition by recognising the liability component at its fair value and attributing the residual amount to the equity component. The liability component is subsequently carried at amortised cost and equity component is recognised in the convertible bonds equity reserve. The effective interest of the liability component is 5.6% per annum. On 12 August 2014, the Company passed a special resolution to approve the downward adjustment to the conversion price from RMB8.60 per share to RMB6.24 per share in accordance with the terms of issuance of the convertible bonds, which adjustment became effective on 14 August As the closing price of the A Shares had been equal to or higher than 130% of the conversion price of the convertible bonds (being RMB6.24 per share) for at least 15 trading days out of the 30 consecutive trading days between 26 November 2014 and 8 January 2015, the Board had on 8 January 2015 resolved to redeem all outstanding convertible bonds in accordance with the specified redemption procedures. On 13 February 2015, the Company completed its redemption of all outstanding convertible bonds. The convertible bonds were delisted from the Shanghai Stock Exchange on 13 February The movement of the liability component of the convertible bonds for the year is set out below: RMB 000 Carrying amount as at 1 January ,267,823 Interest charge 184,541 Interest paid (27,650) Conversion during the year (22) Carrying amount as at 31 December ,424,692 Interest charge 192,486 Interest paid (35,586) Conversion during the year (436,445) Carrying amount as at 31 December 2014 (Current portion) 3,145,147 The fair value and effective interest rate of the liability component of the convertible bonds as at 31 December 2014 is RMB3,145,147,000 (2013: RMB3,424,692,000) and 5.6% (2013: 5.6%) per annum respectively. Interest expense of RMB192,486,000 (2013: RMB184,541,000) has been recognised in profit or loss in respect of the convertible bonds for the year ended 31 December I-64

117 APPENDIX I FINANCIAL INFORMATION OF THE GROUP (b) Corporate bonds (i) The movement of the corporate bonds for the year is set out below: RMB 000 Carrying amount at initial recognition 4,961,395 Interest charge 5,841 Balance as at 31 December ,967,236 Interest charge 6,124 Balance as at 31 December ,973,360 Current portion of corporate bonds 998,236 Non-current portion of corporate bonds 3,975,124 4,973,360 As at 31 December 2014, the balances of bonds payable are as follows: Issue date Term of the bond Total principal value Book value of bond At 31 December 2013 Interest charge At 31 December 2014 RMB 000 RMB 000 RMB 000 RMB 000 RMB August years 1,000, , ,319 2, ,236 3 August years 1,500,000 1,487,100 1,488,561 1,095 1,489, October years 1,500,000 1,488,600 1,490,249 1,478 1,491, October years 1,000, , , ,741 5,000,000 4,959,500 4,967,236 6,124 4,973,360 The Company issued 2 batches of corporate bonds on 3 August The first batch is three-year corporate bonds with a principal value of RMB1 billion, carrying an annual interest rate of 4.20% and matures on 3 August The issuing price was 100 per cent of principal value, resulting in no discount on the issue. Interest on the bonds is paid annually. The second batch is ten-year corporate bonds with a principal value of RMB1.5 billion, carrying an annual interest rate of 5.00% and matures on 3 August The issuing price was 100 per cent of principal value, resulting in no discount on the issue. Interest on the bonds is paid annually. I-65

118 APPENDIX I FINANCIAL INFORMATION OF THE GROUP The Company issued 2 batches of corporate bonds on 29 October The first batch is seven-year corporate bonds with a principal value of RMB1.5 billion, carrying an annual interest rate of 5.05% and matures on 29 October The issuing price was 100 per cent of principal value, resulting in no discount on the issue. Interest on the bonds is paid annually. The second batch is ten-year corporate bonds with a principal value of RMB1 billion, carrying an annual interest rate of 5.18% and matures on 29 October The issuing price was 100 per cent of principal value, resulting in no discount on the issue. Interest on the bonds is paid annually. (15) Contingent Liabilities (i) In August 2011, one of the Group s cargo vessels Bihuashan collided with Li Peng 1, which caused Li Peng 1 to sink afterwards. The Group has set up a Limitation of Liability for Maritime Claims Fund amounting to RMB22,250,000. Since the Group had been insured, all compensations will be borne by the insurance company. As at 31 December 2014, the Group was still in the process of settling all the issues concerned. (ii) In January 2012, fuel leakage occurred in one of the Group s tanker Daiqing 75 during its voyage in Bohai Sea of the PRC. As at 31 December 2014, claims on damage caused by the fuel leakage amounted to an aggregate of RMB19,370,000 plus court costs. Of which, RMB11,250,000 had been fully settled by insurance companies. Since the Company had been insured with PICC Property and Casualty Company Limited and West of England Insurance Services (Luxembourg) S.A., all compensations will be borne by the insurance companies. As at 31 December 2014, the Group was still in the process of settling all the issues concerned. (iii) ELNG, a non wholly-owned subsidiary of the Company, holds 30% equity interests in each of Aquarius LNG Shipping Limited ( Aquarius LNG ) and Gemini LNG Shipping Limited ( Gemini LNG ), and NLNG, a non wholly-owned subsidiary of the Company, holds 30% equity interests in each of Capricorn LNG Shipping Limited ( Capricorn LNG ) and Aries LNG Shipping Limited ( Aries LNG ). Each of these four companies above entered into ship building contracts for the construction of one LNG vessel. After the completion of the LNG vessels, the four companies would, in accordance with time charters to be signed, lease the LNG vessels to the following charterers: Company name Charterer Aquarius LNG Gemini LNG Aries LNG Capricorn LNG Papua New Guinea Liquefied Natural Gas Global Company LDC Papua New Guinea Liquefied Natural Gas Global Company LDC Mobil Australia Resources Company Pty Ltd. Mobil Australia Resources Company Pty Ltd. I-66

119 APPENDIX I FINANCIAL INFORMATION OF THE GROUP On 15 July 2011, the Company entered into four guaranteed leases ( the lease guarantees ). According to the Lease Guarantees, the Company irrevocably and unconditionally provided the charterers, successors and transferees of the four companies listed above with guarantee (1) for the four companies to fulfil their respective obligations under the lease term, and (2) to secure 30% of amounts payable to charterers under lease term. According to the term of the lease guarantees and taking into account the possible increase in the value of the lease commitments and the percentage of shareholdings by the Company in the above four companies, the amount of lease guaranteed by the Company is limited to USD8.2 million (approximately RMB50.18 million). The guarantee period is limited to that of the lease period, which is 20 years. (iv) On 9 March 2013, one of the Group s cargo vessels CSB Talent had a broken bollard caused by strong wind at the dock and collided with several parked vessels nearby, which resulted in damage of the floating dock and other facilities. In March 2014, the claims on damage caused by the collision amounted to an aggregate of RMB173,865,000. Since the Company had been insured with PICC Property and Casualty Company Limited (Guangzhou Branch) and The London Steam Ship Owners Mutual Insurance Association Limited, all compensation will be borne by the insurance companies. As at 31 December 2014, the Group was still in the process of settling all the issues concerned. (v) On 23 December 2013, five of the Group s oil tankers Danchi, Baichi, Daiqing 71, Daiqing 72 and Ruijintan extracted oil from Bohaiyouyihao. This act was sued by a group of plaintiffs for ocean pollution. As at 23 April 2014, claims on damage caused by ocean pollution amounted to an aggregate of RMB47,452,000. Since the Company had been insured with PICC Property and Casualty Company Limited (Shanghai Branch), the London P&I Club and SKULD, all compensation will be borne by the insurance companies. As at 31 December 2014, the Group was still in the process of settling all the issues concerned. (vi) At the 2014 seventh Board meeting held on 30 June 2014, the Company approved the ship building contracts, time charter agreements and supplemental construction contract signed by three joint ventures of the Company for the Yamal LNG project. To secure the obligation of the ship building contracts, time charter agreements and supplemental construction contracts, the Company provides corporate guarantees to the shipbuilders, Daewoo Shipbuilding & Marine Engineering Co., Ltd. and DY Maritime Limited. The total aggregate liability of the Company under the corporate guarantees is limited to USD490,000,000 (approximately RMB2,998,310,000). In addition, the Company provides owner s guarantees to the charterer, YAMAL Trade Pte. Ltd. The total aggregate liability of the Company under the owner s guarantees is limited to USD6,400,000 (approximately RMB39,162,000). I-67

120 APPENDIX I FINANCIAL INFORMATION OF THE GROUP (16) Foreign exchange risk management The Group operates internationally and is exposed to foreign exchange risk arising from various currency exposures, primarily with respect to United States Dollar ( USD ) and Hong Kong Dollar ( HKD ) against RMB. Foreign exchange risk arises from future commercial transactions, recognised assets and liabilities. At 31 December 2014, if USD and HKD had weakened or strengthened by 1% against RMB with all other variables held constant, post-tax profit for the year 2014 would have been RMB175,485,000 (2013: post-tax loss RMB154,289,000) higher/lower (2013: lower/higher), mainly as a result of foreign exchange gains or losses on translation of USD and HKD denominated trade receivables and payables and cash and cash equivalents. The Group does not have significant exposure to foreign exchange risk. (17) Cash flow and fair value interest rate risk management The Group s income and operating cash flows are substantially independent of changes in market interest rates as the Group has no significant interest-bearing assets. The Group s exposures to changes in interest rates are mainly attributable to its borrowings. Borrowings at floating rates expose the Group to cash flow interest rate risk. Borrowings at floating rates expose the Group to fair value interest rate risk. To minimize its interest expenses, the Group entered into interest rate swaps from time to time to mitigate the interest rate risk. At 31 December 2014, if interest rates on borrowings had been 100 basis points higher/lower with all other variables held constant, the Group s post-tax profit for the year would have been RMB165,076,000 (2013: Group s post-tax loss RMB100,108,000) lower/higher (2013: higher/lower), the Company s post-tax loss for the year would have been RMB15,000,000 (2013: RMB3,658,000) higher/lower, mainly as a result of higher/lower interest expenses on floating rate borrowings. 5. OTHERS (1) Fleet expansion projects In 2014, the Group has achieved further improvement in its fleet expansion. In 2014, the cash outflow from investment activities of the Group was approximately RMB9.164 billion which has been paid for construction of new vessels, transformation of old vessels and capital increases into joint ventures of the Company, including capital expenditure of approximately RMB6.638 billion paid for the purchase of new vessels by the Group. I-68

121 APPENDIX I FINANCIAL INFORMATION OF THE GROUP In terms of fleet expansion, 2 new oil tankers with a total capacity of approximately 430,000 deadweight tonnes and 11 new bulk vessels with a total capacity of approximately 1,022,000 deadweight tonnes have been delivered for use in As at 31 December 2014, the composition of the Group s fleet is as follows: Number of vessels Deadweight tonnes Average age ( 000) (years) Oil Tankers 67 7, Dry bulk vessels , Total , (2) Material asset disposals In 2014, the Group disposed of 26 vessels of an aggregate of 867,000 deadweight tonnes, including 9 oil tankers of 308,000 deadweight tonnes and 17 bulk vessels of 559,000 deadweight tonnes respectively. 6. EMPLOYEES As at the end of 2014, the Company had approximately 8,805 employees. Adjustment of employee remuneration are calculated in accordance with the Company s turnover and profitability and is determined by assessing the correlation between the total salary paid and the economic efficiency of the enterprise. Under this mechanism, management of employees remuneration will be more efficient while employees will be motivated to work hard to bring encouraging results of the Company. Save for the remuneration disclosed above, the Company does not maintain any share option scheme for its employees and the employees do not enjoy any bonus. The Company regularly provides for its administrative personnel training on various subjects, including operation management, foreign languages, computer skills, industry knowhow and policies and laws. These training maybe in different forms, such as seminars, site visits and study tours. In 2014, the total staff costs was RMB1,843,502,000 (2013: RMB1,901,438,000). 7. OUTLOOK AND HIGHLIGHTS FOR 2015 (1) Competitive landscape and development trend in the industry The international economic condition in 2015 is expected to remain complicated and variable, and while the growth of global economy is likely to be rebounded narrowly, it s difficult to achieve obvious turnaround from the overall weak recovery trend, and it is anticipated that low growth rate may become a normal trend in the next few years. Global trading growth will likely be restrained by the fragile economy growth rate. I-69

122 APPENDIX I FINANCIAL INFORMATION OF THE GROUP Against the backdrop of global economy entering into the new normal and insufficient market demand of transportation, the over-capacity issue is unlikely to achieve substantial improvement in the short term, it is expected that the overall international shipping market will remain at a low level. Nonetheless, it is expected that the international oil prices closely-related to operation of shipping enterprises will also remain at a low level in 2015 due to oversupply, thus likely relieving the cost pressure of shipping enterprises. At the same time, the transportation demand of oil shipping market will be driven by low international oil prices, which will be beneficial to large oil tankers such as VLCC and Suez. (2) Development strategies of the Company Above conditions and factors include both pros and cons to shipping industry. Faced with a rapid developed market environment, the Company will capture the favorable opportunity of continued low international oil prices, actively research and judge over the market and timely adjust operating strategy, and the Company will further deepen reform and innovation as well as excellent operation for enhancement of our risk-resistant ability, sustainable development capability and core competitiveness. (3) Operational plans In 2015, the Group expects to add 8 new dry bulk vessels with a total tonnage of 516,000 deadweight tonnes of shipping capacity. It is anticipated that the total shipping capacity in effective use throughout the whole year will be million deadweight tonnes, representing an increase of 1.3% year-on-year. Based on the market conditions of the domestic and international shipping industry in 2015, and taking into account of the delivery of new vessels, the Group s major operating plans in 2015 are as follows: completion of shipment turnover volume of 439 billion tonne-nautical miles, representing an increase of 2.1% year-on-year; revenue of RMB12.5 billion is expected to be realized, representing an increase of 1.8% year-on-year; operating costs of RMB9.8 billion, representing a decrease of 10% year-on-year. (4) Work initiatives of the Company To cope with the current market situation, the Group will implement the following initiatives in 2015: A. Strengthen safety development to ensure safety development of the enterprise. We will firmly instill the working philosophy of redline awareness and bottom line mind-set, and will continue to improve safety production system establishment, strictly implement safety production responsibility system, and enhance accountability. We will implement the vessel comprehensive management system at full force with general control and two-ways as main body and supported by care and support our crews, and establish a safety management prevention and pre-control, in order to reduce the risk and control the risk, and establish safety management as our core competiveness to drive safety development of the enterprise. I-70

123 APPENDIX I FINANCIAL INFORMATION OF THE GROUP B. Innovative operating philosophy and model to realize a new breakthrough in operating level. Facing tough market conditions, the Group will continue to adhere to the strategy of major clients, great co-operation and comprehensive services, increase service awareness continuously and strive to satisfy customer needs and create values for customers actively. In 2015, for oil shipment operations, cooperation with the top three domestic petroleum companies will be strengthened continuously, further create a new cooperation system, so as to consolidate and enhance market share in costal crude oil; meanwhile, utilizing the joint advantages of domestic and offshore trading markets to establish a scientific market research and judgment mechanism; utilizing the opportunity of international market improvement to strengthen the adjustment in shipping routes structure; grabbing the VLCC fixed loading at high level to scientifically plan the term leasing ratio, so as to strive for increasing profitability and stabilizing market fluctuation. For bulk cargo shipment operations, the Company will actively response to the major trend of adjustment in PRC economic structure and energy structure, and increase the structure of cargo sources. The Company will focus on improving the pricing mechanism and contract performance mechanism for COA contracts, improve customer management, consolidate benefits from associated companies, strengthen communication with senior staff of partners, and maintain good cooperation results with associated companies. Meanwhile, the Group will make good use of the unified platform for bulk cargo operations to allocate shipping capacities reasonably between long-term chartering and spot market contracts, further improve the market share of offshore shipment operations. For LNG shipment operations, the first vessel of ExxonMobil DSE project cooperated with MOL was delivered for use in January 2015, it symbolized the China Shipping LNG project transportation entering into a substantive operating stage. In 2015, the Company will steadily progress various tasks of existing projects, and ensure the shipping construction and ancillary works will be successfully progressed of Mobil DES project, APLNG project and phase I of YAMAL project; on the other hand, the Company will further enhance the integrated capabilities on LNG project development, vessel construction management, business management, bank financing, crew, vessel management and talent cultivation, in order to safeguard the LNG market for the two major groups, China Petrochemical Corporation and China National Petroleum Corporation, and actively develop cooperation with other LNG importers. C. Accelerate fleet structure adjustment and increase competitiveness of fleet. The Company will firmly capture the strategic opportunity of The 21st Century Maritime Silk Road established by PRC, focus on establishment of medium-long term development planning of fleet, complete well disposal of old and obsolete vessels and construction and delivery of big vessels, and, through continuous fleet optimization, actively pursue fleet upgrade and technology upgrade to develop the fleet towards the direction of large-size, modernize and low-carbon operations, thereby enhancing the overall competitiveness of the fleet. D. Adhere to the costs-come-first and continue to improve operating efficiency and costs reduction and control level. In the background of strict environment with continuously I-71

124 APPENDIX I FINANCIAL INFORMATION OF THE GROUP depressed market, the completion among the enterprises will be tended to cost competition. In this connection, we need to actively implement low cost strategy, strengthen the philosophy of cost control in all our employees, and persistently to enhance cost competiveness. In 2015, the Company will further sort out the key links and system of cost control, continue to improve comprehensive energy saving mechanism, strengthen evaluation, analysis and decision-making mechanism of fuel cost control, fully utilize the current favorable opportunity of low oil prices, as well as scientifically and reasonably complete well fuel locking and purchasing; while the Company will continue to enhance its communication and coordination with suppliers, strive for breakthrough in management and control of various costs items such as crew expenses, vessel repair charges, port charges, to create an advantage of low costing. E. Strengthen funds management and expand financing channels to secure development funds and strive for reduce capital costs. According to the new vessel delivery plans, the capital expenditure of the Company in 2015 and 2016 will be approximately RMB4.37 billion and RMB1.84 billion, respectively. In this connection, the Company will further strengthen cooperation with banks, fully utilize both domestic and international markets and reasonably use financial instruments to secure the required capital funds, and will continuously enhance operating benefits and efficiency of capital operations, reduce financing costs and maintain a relatively sound financial structure, so as to prevent financial risk and capital risk practicably. F. Strengthen talent development and team building. The Company will research and develop a plan for building a team of cadre corresponding to and according to our planning for fleet development and the development need of various business segments and intensify our efforts to introduce and develop talents. Moreover, the Company will also continuously improve the business level and capability of staff and secure the manpower for fleet development through active exploration and establishment of an enduring effective mechanism for education and training. I-72

125 APPENDIX I FINANCIAL INFORMATION OF THE GROUP REVIEW OF OPERATING RESULTS DURING THE REPORTING PERIOD In 2013, faced with a challenging market environment, the Group firmly adhered to innovative thinking and mode of operation. By actively implementing transformation and development and further deepening its strategy of major clients, great co-operation and comprehensive services, new breakthroughs and results were obtained in the areas of safety management, marketing, cost reduction, efficiency enhancement and management improvement, maintaining an overall trend of stable development. During the Reporting Period, the volume of freight shipping turnover completed by the Group was billion tonne-nautical miles, representing an increase of 5.6% year-on-year. Revenue from operations (after business tax and surcharge) was RMB billion, representing an increase of 2.6% year-on-year. Operating costs amounted to RMB billion, representing an increase of 2.4% year-on-year. The loss attributable to owners of the Company was RMB 2,234 million, and basic loss per share were RMB (1) Revenue from Principal Operations In 2013, overall details of the Group s principal operations by products transported and geographical regions were as follows: Principal Operations by Products Transported Industry or Product Description Increase/ (decrease) in revenue as compared with 2012 Increase/ (decrease) in operating costs as compared with 2012 Increase/ (decrease) in gross profit margin as compared with 2012 Gross profit Revenue Operating costs margin (RMB 000) (RMB 000) (%) (%) (%) (%) Oil shipments 5,388,805 5,770, % -3.6% -0.7% -3.2% Coal shipments 2,698,142 2,708, % -0.1% -5.0% 5.1% Iron ore shipments 2,455,750 2,125, % 14.0% 16.7% -2.1% Other dry bulk shipments 801, , % 32.2% 19.7% 12.0% Total 11,344,152 11,524, % 2.6% 2.4% 0.2% I-73

126 APPENDIX I FINANCIAL INFORMATION OF THE GROUP Principal Operations by Geographical Regions Regions Increase/ (decrease) in revenue as Revenue compared to 2012 (RMB 000) (%) Domestic shipment 4,899, % International shipment 6,445, % (a) Shipping business Oil shipments In 2013, facing the persistently sluggish market and a growing competitive trend, the Company adopted the all-staff marketing concept and established a quick response team to marketing to fully implement the strategy of major clients, great co-operation and comprehensive services and achieved good results. In 2013, the market share of the Company in the domestic crude oil shipping market was approximately 54% and continued to maintain its leading position in the coastal oil shipment market. In the international oil shipment market, the Company continued to leverage on the complementary advantages between domestic and international trade and achieved a notable result. By capturing the opportunity of the short-term increase of the international white oil freight rates and the demand for shipping capacity arising from the resumption of production at the Penglai 19-3 oilfield, the Company adjusted the allocation of domestic and international shipping capacities on a timely basis and realized a substantial reduction in losses of approximately RMB160 million in the international white oil and the small dirty tanker markets. The annual operating earnings derived from the VLCC fleet of the Company outperformed market level in I-74

127 APPENDIX I FINANCIAL INFORMATION OF THE GROUP In 2013, the Group achieved a shipping volume of approximately billion tonne-nautical miles of oil, representing a decrease of approximately 2.1% year-on-year; revenue derived from oil transportation was approximately RMB5,389 million, representing a decrease of 3.6% year-on-year. An analysis of the transportation volume and revenue in terms of product types is as follows: Transportation volume by types In 2013 In 2012 (billion tonnenautical miles) (billion tonnenautical miles) Increase/ Decrease (%) Domestic % Crude oil % Refined oil % International % Crude oil % Refined oil % Total % Revenue by shipments types Increase/ In 2013 In 2012 Decrease (RMB million) (RMB million) (%) Domestic 2,058 2, % Crude oil 1,758 1, % Refined oil % International 3,331 3, % Crude oil 1,663 2, % Refined oil 1,668 1, % Total 5,389 5, % I-75

128 APPENDIX I FINANCIAL INFORMATION OF THE GROUP (b) Shipping business Dry bulk shipments In 2013, the Group continued to strengthen its marketing activities to develop new customers actively and increased efforts to push ahead joint projects. New progress has been made. In 2013, the Company signed domestic bulk freight COA contracts of 53,430,000 tonnes by adopting annual fixed rates, quarterly pricing and monthly pricing rates. The amount of executed annual freight rate represented approximately 16% of the contracted shipment volume. In a sluggish market, a more market-oriented and more flexible pricing mechanism is in the better interest of the Company as a whole. Offshore dry bulk cargo shipment became another bright spot in the Group s operation. In 2013, the offshore dry bulk cargo shipment turnover volume accounted for over 60% in the total dry bulk cargo shipment turnover, and realized an outstanding performance by achieving shipment profit of approximately RMB320 million. The fleet of very large ore carriers (VLOC), comprising 8 VLOC vessels of 230,000 tonnes for each and 6 VLOC vessels of 300,000 tonnes for each, completed a shipping volume of 20,530,000 tonnes, representing an increase of 22.7% year-on-year, and realized an operating revenue of RMB1,720 million and shipment profits of RMB540 million from completed voyages, creating an important stabilizing effect on the Group s economic returns. In 2013, the Group achieved a shipping volume of approximately billion tonne-nautical miles of dry bulk cargo, representing an increase of approximately 13.6% year-on-year; operating revenue derived from dry bulk cargo transportation was approximately RMB5.955 billion, representing an increase of 9.0% year-on-year. An analysis of the transportation volume and revenue in terms of product types is as follows: Transportation volume by types In 2013 In 2012 (billion tonnenautical miles) Increase/ Decrease (billion tonnenautical miles) (%) Domestic % Coal % Iron ore % Others % International % Coal % Iron ore % Others % Total % I-76

129 APPENDIX I FINANCIAL INFORMATION OF THE GROUP Revenue by shipments types Increase/ In 2013 In 2012 Decrease (RMB million) (RMB million) (%) Domestic 2,841 2, % Coal 2,093 2, % Iron ore % Others % International 3,114 2, % Coal % Iron ore 2,120 1, % Others % Total 5,955 5, % Note: Other dry bulk cargoes include metal ore, non-metallic ore, steel, cement, timber, grain, fertilizer and so on except for coal and iron ore. (c) Progress made in LNG shipments In 2013, the Group continued to promote the LNG shipments. While making steady progress in the establishment of the Mobil DES project, its joint project with Mitsui OSK Lines (MOL), it had also entered into a basket agreement in relation to 6 LNG vessels for phase 1 of the Sinopec APLNG Shipment Project successfully in April I-77

130 APPENDIX I FINANCIAL INFORMATION OF THE GROUP 2. COSTS AND EXPENSES ANALYSIS While achieving well in transportation operations, the Company has seriously and consistently implemented the various requirements of the Board on further enhancing management, cost reduction and efficiency improvement. Starting on operational management and overall budget management, cost management and control was further strengthened and all types of various costs and expenses were effectively under control. In 2013, transportation cost of RMB11,524 million was incurred, representing an increase of 2.4% year-on year, while ensuring notable increase in the operating profit. The composition of the main operating costs is as follows: Increase/ Item In 2013 In 2012 Decrease (RMB 000) (RMB 000) (%) Composition ratio in 2013 Fuel cost 4,818,839 5,303, % 41.8% Port cost 1,302,820 1,106, % 11.3% Labor cost 1,657,039 1,545, % 14.4% Lubricants expenses 223, , % 2.0% Depreciation 1,641,748 1,448, % 14.2% Insurance expenses 251, , % 2.2% Repair expenses 289, , % 2.5% Charter cost 612, , % 5.3% Provision for onerous contracts 349, % Others 377, , % 3.3% Total 11,524,839 11,252, % 100.0% Fuel cost was the most important item among all under cost control. International oil prices presented a fluctuating trend in 2013, the WTI prices averaged daily at USD98 per barrel. The Company achieved significant cost reduction by adopting measures including locking oil purchases, operating at shipping speed with the best economic effect, participating in the establishment of an offshore centralized fuel purchasing platform through shareholding acquisition and implementing a cross-department comprehensive energy saving new mechanism. In 2013, while the turnover volume increased by 5.6% year-on-year, the fuel consumption volume was 1,184,500 tonnes, representing a minor increase of 0.6% year-on-year; and fuel costs was approximately RMB4,819 million, accounting for 41.8% of the transportation costs; average fuel consumption was 2.88 kg/1,000 nautical miles, decreased by 4.6% year-on-year; and the average prices of fuel consumed by the Group is RMB4,068 per tonne, decreasing by 9.8% year-on-year. In 2013, the Company has achieved a gain of nearly RMB313 million under its dedicated efforts through locking oil purchases and operating at economic shipping speed. I-78

131 APPENDIX I FINANCIAL INFORMATION OF THE GROUP 3. OPERATING RESULTS OF THE JOINT VENTURES In 2013, the Group has recognised its profits in its joint ventures of approximately RMB111 million, representing a decrease of 62.2% as compared with that of the same period in In 2013, the 5 joint ventures achieved a shipping volume of billion tonne-nautical miles, representing an increase of 34.6% as compared with the same period in The operating revenue achieved by the 5 joint ventures in 2013 was approximately RMB9,329 million, representing an increase of 32.6% as compared to that of the same period in 2012, and the net profit realized by the 5 joint ventures in 2013 was approximately RMB163 million, representing a decrease of 70.1% as compared to that of the same period in As at 31 December 2013, the 5 joint ventures owned 80 bulk vessels with a total capacity of 4,160,000 deadweight tonnes and 22 vessels under construction with the capacity of 1,185,000 deadweight tonnes. The operating results achieved by the 5 joint ventures in 2013 are as follows: Company name Interest held by the Group 2013 Shipping volume (billion tonne nautical miles) 2013 Operating revenue 2013 Net profit /(loss) (RMB 000) (RMB 000) Shenhua Zhonghai Marine Co., Limited 49% 1, ,086, ,380 Shanghai Times Shipping Co., Limited 50% ,638,341 (118,453) Shanghai Friendship Marine Co., Limited 50% ,396 (15,470) Huahai Petrol Transportation & Trading Co., Limited 50% ,753 8,642 Guangzhou Development Shipping Co., Limited 50% ,146 14,545 In 2013, the net profit achieved by China Shipping Finance Co., Limited ( CS Finance ), a non-shipping joint ventures, with 25% interest held by the Company, was approximately RMB165 million. I-79

132 APPENDIX I FINANCIAL INFORMATION OF THE GROUP 4. FINANCIAL ANALYSIS (1) Provision for onerous contracts Group Company RMB 000 RMB 000 As at 1 January Provision for the year 349,694 33,436 As at 31 December 349,694 33,436 Less: current portion of provision for onerous contracts (175,287) (17,158) Non-current portion of provision for onerous contracts 174,407 16,278 As at 31 December 2013, the Group has a provision of RMB349,694,000 for onerous contracts relating to the non-cancellable chartered-in oil tankers and dry bulk vessel contracts. As at 31 December 2013, the committed charterhire expenses of non-cancellable chartered-in oil tankers and dry bulk vessel contracts with lease term expiring over 24 months from the end of the reporting period and with period not being covered by chartered-out oil tankers and dry bulk vessels contracts of which management cannot reliably assess their onerous contracts, amounted to approximately RMB3,031,793,000. (2) Net cash inflow The net cash inflow from operating activities of the Group decreased from approximately RMB891,308,000 for the year ended 31 December 2012 to approximately RMB1,429,279,000 for the year ended 31 December 2013, representing an increase of approximately 60.4%. (3) Capital commitments Group Company RMB 000 RMB 000 RMB 000 RMB 000 Authorised and contracted for: Construction and purchases of vessels (Note 1) 9,586,595 6,742,053 2,245,880 Equity Investments (Note 2) 592,868 1,029, ,868 1,029,703 10,179,463 7,771, ,868 3,275,583 I-80

133 APPENDIX I FINANCIAL INFORMATION OF THE GROUP The Group and the Company had capital commitments as at 31 December 2013, of which RMB5,980,812,000 (2012: RMB6,742,053,000) from the Group and RMB592,868,000 (2012: RMB2,245,880,000) from the Company will be due within one year. Notes: (1) According to the construction or purchase agreements entered into by the Group from January 2007 to December 2013, these capital commitments will fall due in 2014 to (2) Included capital commitments in respect of equity investments is commitment to invest in joint ventures, Shenhua Zhonghai Marine Co., Limited of RMB592,868,000 (2012: RMB1,029,668,000) and a subsidiary, China Energy Shipping Investment Co., Limited ( China Energy ) of RMBNil (2012 : RMB35,000) respectively. In addition to the above, the Group s share of the capital commitments of its associates which are contracted for but not provided amounted to RMB895,929,000 (2012: RMB1,561,350,000). The Group s share of the capital commitments of its joint ventures, which are contracted for but not provided amounted to RMB1,296,397,000 (2012: RMB2,353,458,000); which are authorised but not contracted for amounted to RMB4,900,000 (2012: RMB1,286,211,000). (4) Capital structure The Group s and Company s net debt-to-equity ratio at 31 December 2013 and 2012 was as follows: Group Company RMB 000 RMB 000 RMB 000 RMB 000 Total borrowings 33,603,578 31,158,949 17,878,629 18,154,979 Less: Cash and cash equivalents (1,919,204) (3,285,745) (487,558) (1,278,982) Net debt 31,684,374 27,873,204 17,391,071 16,875,997 Total equity 22,211,877 24,385,563 20,975,375 21,728,801 Debt to equity ratio 143% 114% 83% 78% I-81

134 APPENDIX I FINANCIAL INFORMATION OF THE GROUP (5) Cash and cash equivalents Cash at banks generates interest income at floating rates based on daily bank deposit rates. Short-term fixed deposits are deposited for various periods of between one day to three months depending on the immediate cash requirements of the Group, and interest income shall accrue at the respective short term fixed deposit rates. The carrying amounts of the cash and cash equivalents approximate their fair values. Included in cash and cash equivalents is an amount of RMB792,008,000 (2012: RMB1,437,942,000) of bank balance deposited with CS Finance, a joint venture of the Group. Cash and cash equivalents are denominated in the following currencies: Group Company RMB 000 RMB 000 RMB 000 RMB 000 RMB 871,540 2,377, ,746 1,174,135 USD 1,043, ,247 79, ,979 SGD 1,866 4,731 HKD 1,722 3, Others ,919,204 3,285, ,558 1,278,982 I-82

135 APPENDIX I FINANCIAL INFORMATION OF THE GROUP (6) Notes, interest-bearing bank and other borrowings (a) The Group s notes, interest-bearing bank and other borrowings are analysed as follows: Group Company Annual effective interest Maturity (%) RMB 000 RMB 000 RMB 000 RMB 000 Current liabilities (i) Bank loans Secured Libor + 0.4% to 1.7%, 6.46% ,627,229 1,069,328 Unsecured Libor + 0.6% to 4%, 3 months Libor, 3 months Libor +1.3%, 6.55% ,575,940 1,678, , ,550 3,203,169 2,747, , ,550 (ii) Notes Unsecured 3.9% ,998,949 2,998,949 (iii) Other borrowings Secured 6.46% ,630 18,657 Unsecured 10% discount to the People s Bank of China ( PBC ) Benchmark interest rate, 4.86% to 6.51%, Libor +1.6% ,356,307 1,428,740 1,000,000 1,300,000 2,362,937 1,447,397 1,000,000 1,300,000 Notes, interest-bearing bank and other borrowings - current portion 8,565,055 4,194,889 4,486,701 1,928,550 I-83

136 APPENDIX I FINANCIAL INFORMATION OF THE GROUP Group Company Annual effective interest Maturity (%) RMB 000 RMB 000 RMB 000 RMB 000 Non-current liabilities (i) Bank loans Secured 3 months Libor +2.2%, Libor +0.4% to 1.7%, 6.46% ,109,880 8,327,379 Unsecured Libor +1.55% to 1.85%, 6.55% ,092,182 1,257,236 10,202,062 9,584,615 (ii) Notes Unsecured 3.9% ,997,211 2,997,211 (iii) Other borrowings Secured 6.46% , ,663 Unsecured 10% discount to the PBC Benchmarkinterest rate, 4.12% to 6.51% ,072,790 5,436,590 5,000,000 5,000,000 5,210,490 5,625,253 5,000,000 5,000,000 Notes, interest-bearing bank and other borrowings - non-current portion 15,412,552 18,207,079 5,000,000 7,997,211 The Group s bank loans are secured by pledges or mortgages of the Group s 34 vessels (2012: 31 vessels) and another 4 vessels under construction (2012: 6 vessels under construction) with total net carrying value of RMB16,299,120,000 (2012: RMB16,073,385,000) as at 31 December Collateralised borrowings are secured by trade receivables of RMB504,705,000 (2012: RMBNil). The carrying value of the Group s and the Company s notes, interest-bearing bank and other borrowings approximate their fair values. Except for secured bank loans of RMB9,598,438,000 (2012: RMB8,924,947,000), unsecured bank loans of RMB2,947,739,000 (2012: RMB1,964,098,000) and unsecured other borrowings of RMB426,767,000 (2012: RMB628,550,000) which are denominated in USD, all borrowings are denominated in RMB. I-84

137 APPENDIX I FINANCIAL INFORMATION OF THE GROUP (b) At 31 December 2013, the Group s notes, interest-bearing bank and other borrowings were repayable as follows: Group Company RMB 000 RMB 000 RMB 000 RMB 000 Analysed into: (i) Bank loans: Within one year or on demand 3,203,169 2,747, , ,550 In the second year 1,675,888 1,254,148 In the third to fifth year, inclusive 3,886,845 3,595,355 Over five years 4,639,329 4,735,112 13,405,231 12,332, , ,550 (ii) Notes: Within one year or on demand 2,998,949 2,998,949 In the second year 2,997,211 2,997,211 2,998,949 2,997,211 2,998,949 2,997,211 (iii) Other borrowings: Within one year or on demand 2,362,937 1,447,397 1,000,000 1,300,000 In the second year 2,079,420 86,554 2,000,000 In the third to fifth year, inclusive 3,026,010 2,407,994 3,000,000 2,000,000 Over five years 105,060 3,130,705 3,000,000 7,573,427 7,072,650 6,000,000 6,300,000 23,977,607 22,401,968 9,486,701 9,925,761 I-85

138 APPENDIX I FINANCIAL INFORMATION OF THE GROUP Included in other borrowings represent an amount of RMB1,658,930,000 (2012: RMB562,930,000) were borrowed from CS Finance, a joint venture of the Group. As at 31 December 2013, the current and non-current portion of this borrowing amounted to RMB1,532,140,000 (2012: RMB59,200,000) and RMB126,790,000 (2012: RMB503,730,000 ) respectively. Included in other bor rowings represent an amount of RMB5,400,000,000 (2012: RMB6,300,000,000) were borrowed from the Company s ultimate holding company. As at 31 December 2013, the current and non-current portion of this borrowing amounted to RMB400,000,000 (2012: RMB1,300,000,000) and RMB5,000,000,000 (2012: RMB5,000,000,000) respectively. Included in other borrowings represent an amount of RMB426,767,000 (2012: RMBNil) were borrowed from China Shipping (Hong Kong) Holdings Co., Limited ( CSHK ), a fellow subsidiary of the Company. As at 31 December 2013, the current portion of this borrowing amounted to RMB426,767,000 (2012: RMBNil). (c) Details of the notes at 31 December 2013 are as follows: Group and Company RMB 000 RMB 000 Principal amount 3,000,000 3,000,000 Notes issuance cost (8,245) (8,245) Proceeds received 2,991,755 2,991,755 Accumulated amortisation 7,194 5,456 2,998,949 2,997,211 Notes with principal amount of RMB3,000,000,000 was issued by the Group to investors on 3 August The notes carried a fixed interest yield of 3.90% per annum and were issued at a price of 100 per cent of its principal amount, resulting in no discount on the issue. The notes become interest bearing since 4 August 2009, payable annually in arrears on 4 August of each year. The notes will mature on 3 August I-86

139 APPENDIX I FINANCIAL INFORMATION OF THE GROUP (7) Other loans Group RMB 000 RMB 000 Baosteel Resources International Company Limited ( Baosteel Resources International ) 424, ,318 Kantons International Investment Limited ( Kantons International ) 142,453 12,574 Shanghai Puyuan Shipping Co., Limited ( Shanghai Puyuan ) 104,297 76,993 Mitsui O.S.K. Lines, Limited ( MOL ) 63,132 Petrochina International Co., Limited 10, , ,763 Less: current portion of other loans (29,874) Non-current portion of other loans 714, ,763 Included in loan from Baosteel Resources International represents an amount of USD69,580,000 (2012: USD69,580,000) was provided to Hong Kong Hai Bao Shipping Co., Limited to finance the construction of vessels and daily operation. The loan is unsecured, bears interest at 3.5% (2012: 3%) per annum and repayable in 2014 and According to the contract signed between East China LNG Shipping Investment Co., Limited ( ELNG ) and its non-controlling shareholder, Kantons International, USD3,069,517 was provided to ELNG to finance the vessels construction projects being carried out by the associates held by ELNG. The loan is unsecured, bearing interest at approximately 3.3% over 3 months Libor and have to repay within 20 years after such vessels construction projects completed. According to the contract signed between China Energy and its non-controlling shareholder, Kantons International, USD20,295,349 were provided to China Energy to finance the vessels construction projects being carried out by the subsidiaries of China Energy. The loans are unsecured, bearing interest at approximately 2.2% over 3 months Libor and have to repay within 20 years after such vessels construction projects completed. According to the contract signed between CS Puyuan Marine Co., Limited ( CS Puyuan ) and its non-controlling shareholder, Shanghai Puyuan, USD17,107,200 was provided to CS Puyuan to finance the daily operation. The loans are unsecured, non-interest bearing and repayable in 2015 and I-87

140 APPENDIX I FINANCIAL INFORMATION OF THE GROUP According to the contracts signed between China Energy and its non-controlling shareholder of subsidiaries, MOL, USD10,354,792 were provided to China Energy to finance the vessels construction projects being carried out by the subsidiaries of China Energy. The loans are unsecured, bearing interest at approximately 2.2% over 3 months Libor and have to repay within 15 years after such vessels construction projects completed. According to the contract signed between North China LNG Shipping Investment Co., Limited ( NLNG ) and its non-controlling shareholder, Petrochina International Co., Limited, USD1,643,393 was provided to NLNG to finance the vessels construction projects being carried out by the associates held by NLNG. The loan is unsecured, bearing interest at approximately 4.9% over 3 months Libor and have to repay within 20 years after such vessels construction projects completed. (8) Bonds payable Group and Company RMB 000 RMB 000 Convertible bonds 3,424,692 3,267,823 Corporate bonds 4,967,236 4,961,395 8,391,928 8,229,218 (a) Convertible bonds The Company s A-share convertible bonds amounting to RMB3,950,000,000 were issued on 1 August 2011, with a term of 6 years, by issuing 39,500,000 number of bonds at a nominal value of RMB100 each. The convertible bonds are convertible into A-shares of the Company at anytime between six months after the date of issue of the convertible bonds and the maturity date of the convertible bonds, being 2 February 2012 to 1 August 2017, at initial conversion price of RMB8.7 per share. On 17 May 2012, the Company declared a 2011 final dividend of RMB0.1 per share (before tax). According to the terms of issuance of the convertible bonds and relevant regulations by China Securities Regulatory Commission, the Company changed the conversion price from RMB8.7 per share to RMB8.6 per share effective from 1 June If the convertible bonds have not been converted, they will be redeemed at 105% of par value within five trading days after the maturity of the convertible bonds. The convertible bonds bear interest at 0.5% for the first year, 0.7% for the second year, 0.9% for the third year, 1.3% for the fourth year, 1.6% for the fifth year and 2% for the sixth year. The interests are payable annually in arrears on 1 August of each year starting from I-88

141 APPENDIX I FINANCIAL INFORMATION OF THE GROUP Within the last two years of the convertible bonds, if the closing price of A-share is traded at lower of 70% of the initial conversion price for thirty consecutive trading days, the convertible bonds holders are entitled a one-off right to request the Company to redeem the convertible bonds wholly or partially at par, with interest accrued on that day. The Company is entitled to redeem the convertible bonds wholly at par plus accrued interest if: (i) the closing price of the Company s shares is at or higher than 130% of the initial conversion price for any fifteen trading days in thirty consecutive trading days from issuance of the Bonds; or (ii) the aggregate par value of the outstanding convertible bonds is less than RMB30,000,000 at any time from issuance of the convertible bonds. The convertible bond was split into liability (including the value of closely-related early redemption option and callable option) and equity components of RMB3,039,329,000 and RMB873,043,000 respectively upon initial recognition by recognising the liability component at its fair value and attributing the residual amount to the equity component. The liability component is subsequently carried at amortised cost and equity component is recognised in the convertible bonds equity reserve. The effective interest of the liability component is 5.6% per annum. The movement of the liability component of the convertible bonds for the year is set out below: RMB 000 Carrying amount at 1 January ,110,598 Interest charge 176,978 Interest paid (19,750) Conversion during the year (3) Carrying amount at 31 December ,267,823 Interest charge 184,541 Interest paid (27,650) Conversion during the year (22) Carrying amount at 31 December ,424,692 The fair value and effective interest rate of the liability component of the convertible bonds at 31 December 2013 is RMB3,424,692,000 (2012: RMB3,267,823,000) and 5.6% (2012: 5.6%) per annum respectively. Interest expense of RMB184,541,000 (2012: RMB176,978,000) has been recognised in profit or loss in respect of the convertible bonds for the year ended 31 December I-89

142 APPENDIX I FINANCIAL INFORMATION OF THE GROUP (b) Corporate bonds i. The movement of the corporate bonds for the year is set out below: 2013 RMB 000 Carrying amount at initial recognition 4,959,500 Interest charge 1,895 Balance as at 31 December ,961,395 Interest charge 5,841 Balance as at 31 December ,967,236 As at 31 December 2013, the balances of bonds payable are as follows: Issue date Term of the bond Total principal value Book value of bond At 31 December 2012 Interest charge At 31 December 2013 RMB 000 RMB 000 RMB 000 RMB 000 RMB August years 1,000, , ,527 2, ,319 3 August years 1,500,000 1,487,100 1,487,519 1,042 1,488, October years 1,500,000 1,488,600 1,488,844 1,405 1,490, October years 1,000, , , ,107 5,000,000 4,959,500 4,961,395 5,841 4,967,236 The Company issued 2 batches of corporate bonds on 3 August The first batch is three-year corporate bonds with a principal value of RMB1 billion, carrying an annual interest rate of 4.20% and matures on 3 August The issuing price was 100 per cent of principal value, resulting in no discount on the issue. Interest on the bonds is paid annually. The second batch is ten-year corporate bonds with a principal value of RMB1.5 billion, carrying an annual interest rate of 5.00% and matures on 3 August The issuing price was 100 per cent of principal value, resulting in no discount on the issue. Interest on the bonds is paid annually. I-90

143 APPENDIX I FINANCIAL INFORMATION OF THE GROUP The Company issued 2 batches of corporate bonds on 29 October The first batch is seven-year corporate bonds with a principal value of RMB1.5 billion, carrying an annual interest rate of 5.05% and matures on 29 October The issuing price was 100 per cent of principal value, resulting in no discount on the issue. Interest on the bonds is paid annually. The second batch is ten-year corporate bonds with a principal value of RMB1 billion, carrying an annual interest rate of 5.18% and matures on 29 October The issuing price was 100 per cent of principal value, resulting in no discount on the issue. Interest on the bonds is paid annually. (9) Obligations under finance leases It is the Group s policy to lease certain of its vessels under finance leases, with lease terms of 10 years. Interest rates underlying all such finance leases are fixed at 5.90% per annum. Minimum lease payments Group Present value of minimum lease payments RMB 000 RMB 000 RMB 000 RMB 000 Amounts payable under finance leases - Within one year 68,977 41,479 - In more than one year but not more than two years 68,977 43,979 - In more than two years but not more than five years 206, ,543 - More than five years 288, , , ,935 Less: future finance charges (143,836) Present value of lease obligations 489,935 Less: Amount due within one year shown under current liabilities (41,479) Amount due after one year 448,456 I-91

144 APPENDIX I FINANCIAL INFORMATION OF THE GROUP The Group s obligations under finance leases are secured by charges over the leased assets. (10) Contingent Liabilities (a) In August 2011, one of the Group s dry bulk cargo vessels Bihuashan collided with Li Peng 1, which caused Li Peng 1 sunk afterwards. The Group is in a progress of setting up a Limitation of Liability for Maritime Claims amounting to a total sum of RMB23,120,000. Since the Group had been insured, all compensations will be borne by the insurance company. As at 31 December 2013, the Group was still in the process of settling all the issues concerned. (b) In January 2012, fuel leakage occurred in one of the Group s oil tanker Daiqing 75 during its voyage in Bohai Sea of the PRC. As at 31 December 2013, claims on damage caused by the fuel leakage amounted to an aggregate of RMB11,000,000. Since the Company had been insured with PICC Property and Casualty Company Limited and West of England Insurance Services (Luxembourg) S.A., all compensations will be borne by the insurance companies. As at 31 December 2013, the Group was still in the process of settling all the issues concerned. (c) ELNG, a non wholly-owned subsidiary of the Company, holds 30% equity interests in each of Aquarius LNG Shipping Limited ( Aquarius LNG ) and Gemini LNG Shipping Limited ( Gemini LNG ), and NLNG, a non wholly-owned subsidiary of the Company, holds 30% equity interests in each of Capricorn LNG Shipping Limited ( Capricorn LNG ) and Aries LNG Shipping Limited ( Aries LNG ). Each of these four companies above entered into Ship Building Contracts for the construction of one LNG vessel each. After the completion of the LNG vessels, four companies would, in accordance with time charters to be signed, lease the LNG vessels to the following Charterers: Company name Charterer Aquarius LNG Gemini LNG Aries LNG Capricorn LNG Papua New Guinea Liquefied Natural Gas Global Company LDC Papua New Guinea Liquefied Natural Gas Global Company LDC Mobil Australia Resources Company Pty Ltd. Mobil Australia Resources Company Pty Ltd. On 15 July 2011, the Company entered into four guaranteed leases ( the lease guarantees ). According to the lease guarantees, the Company irrevocably and unconditionally provided the charterers, successors and transferees of the four companies listed above with guarantee (1) for the four companies to fulfil their respective obligations under the lease term, and (2) to secure 30% of amounts payable by the four companies to charterers under lease term. According to the term of lease guarantees and taking into account of the possible increase in the value of the lease commitments and the percentage of shareholdings by the Company in the above four companies, the amount of lease guaranteed by the Company is limited to USD8.2 million (approximately RMB50 million). I-92

145 APPENDIX I FINANCIAL INFORMATION OF THE GROUP The guarantee period is limited to that of the lease period, which is 20 years. (d) On 9 March 2013, one of the Group s cargo vessels CSB Talent had a broken bollard caused by strong wind at the dock and collided with several parked vessels nearby, which resulted in damage of the floating dock and other facilities. As at 10 July 2013, the claims on damage caused by the collision amounted to an aggregate of RMB95,000,000. Since the Company had been insured with PICC Property and Casualty Company Limited (Guangzhou Branch) and The London Steam Ship Owners Mutual Insurance Association Limited, all compensation will be borne by the insurance companies. As at 31 December 2013, the Group was still in the process of setting all the issues concerned. (11) Foreign exchange risk management The Group operates internationally and is exposed to foreign exchange risk arising from various currency exposures, primarily with respect to United States Dollar ( USD ) and Hong Kong Dollar ( HKD ) against RMB. Foreign exchange risk arises from future commercial transactions, recognised assets and liabilities. At 31 December 2013, if USD and HKD had weakened or strengthened by 1% against RMB with all other variables held constant, post-tax loss for the year 2013 would have been RMB154,289,000 (2012: post-tax profit RMB140,559,000) lower/higher (2012: higher/lower), mainly as a result of foreign exchange gains or losses on translation of USD and HKD denominated trade receivables and payables and cash and cash equivalents. The Group does not have significant exposure to foreign exchange risk. (12) Cash flow and fair value interest rate risk management The Group s income and operating cash flows are substantially independent of changes in market interest rates as the Group has no significant interest-bearing assets. The Group s exposures to changes in interest rates are mainly attributable to its borrowings. Borrowings at floating rates expose the Group to cash flow interest rate risk. Borrowings at floating rates expose the Group to fair value interest rate risk. To minimize its interest expenses, the Group entered into interest rate swaps from time to time to mitigate the interest rate risk. At 31 December 2013, if interest rates on borrowings had been 100 basis points higher/lower with all other variables held constant, the Group s post-tax loss for the year would have been RMB100,108,000 (2012: post-tax profit RMB163,840,000) higher/lower (2012: lower/higher), the Company s post-tax loss for the year would have been RMB3,658,000 (2012: post-tax profit RMB40,250,000) higher/lower (2012: lower/higher), mainly as a result of higher/lower interest expenses on floating rate borrowings. I-93

146 APPENDIX I FINANCIAL INFORMATION OF THE GROUP 5. OTHERS (1) Fleet expansion projects In 2013, the Group has achieved further improvement in its fleet expansion. In 2013, the cash outflow from investment activities of the Group was approximately RMB4.1 billion which has been paid for construction of new vessels, transformation of old vessels and capital increases into joint ventures of the Company, including capital expenditure of approximately RMB3.740 billion paid for the purchase of new vessels by the Group. In terms of fleet expansion, 6 new oil tankers with a total capacity of approximately 640,000 deadweight tonnes and 18 new bulk vessels with a total capacity of approximately 1,730,000 deadweight tonnes have been delivered for use in As at 31 December 2013, the composition of the Group s fleet is as follows: Number of vessels Deadweight tonnes Average age ( 000) (years) Oil Tankers 74 7, Dry bulk vessels 133 9, Total , (2) Material asset disposals In 2013, the Group disposed of 12 vessels of an aggregate of 619,000 deadweight tonnes, including 9 oil tankers of 523,000 deadweight tonnes and 3 bulk vessels of 96,000 deadweight tonnes respectively. 6. EMPLOYEES As at the end of 2013, the Company had approximately 7,536 employees. Adjustment of employee remuneration are calculated in accordance with the Company s turnover and profitability and is determined by assessing the correlation between the total salary paid and the economic efficiency of the enterprise. Under this mechanism, management of employees remuneration will be more efficient while employees will be motivated to work hard to bring encouraging results of the Company. Save for the remuneration disclosed above, the Company does not maintain any share option scheme for its employees and the employees do not enjoy any bonus. The Company regularly I-94

147 APPENDIX I FINANCIAL INFORMATION OF THE GROUP provides for its administrative personnel training on various subjects, including operation management, foreign languages, computer skills, industry knowhow and policies and laws. These training maybe in different forms, such as seminars, site visits and study tours. In 2013, the total staff costs was RMB1,901,438,000 (2012: RMB1,816,541,000). 7. OUTLOOK AND HIGHLIGHTS FOR 2014 (1) Competitive landscape and development trend in the industry In 2014, the global economy has been recovering slowly. The international trade is likely to rebound from the sluggish situation, and it is anticipated that low growth rate may become a normal trend in the next few years. The overall economy of China is stable, and it is anticipated that the full year GDP growth rate will be around 7.5%, implying the economy continues to operate within a reasonable range. For the shipping market, the oversupply condition of shipping capacities has not been resolved fundamentally. The international shipping market as a whole is expected to remain in a sluggish condition, a sustainable recovery may need some more time. The supply and demand conditions in the international dry bulk cargo market tend to improve in a favorable direction, and the BDI may surpass the average level of The overall freight rate level in the international oil shipment market may be slightly higher than the level in (2) Development strategies of the Company Facing changes in the market, the Company will adhere to the guiding principles of planning for changes and new developments, developing under a transformed model and in an innovative manner in On the basis of increased cooperation with large customers, the Group will adapt to the development trend of large vessels and low carbon operations to make scientific and reasonable adjustment to the fleet structure so as to improve core competitiveness. The Company currently has 40 old vessels of over 20 years of age with capacity of approximately 1,306,000 deadweight tonnes. The Company will further optimize its fleet structure step-by-step by timely disposing old vessels with high fuel consumption, small tonnage and low market competitiveness. (3) Operational plans In 2014, the Group expects to add 20 new vessels with a total tonnage of 1,920,000 deadweight tonnes of shipping capacity, including 2 oil tankers of 430,000 deadweight tonnes, 18 bulk vessels of 1,490,000 deadweight tonnes. It is anticipated that the total shipping capacity in effective use throughout the whole year will be million deadweight tonnes, representing an increase of 5.7% year-on-year. I-95

148 APPENDIX I FINANCIAL INFORMATION OF THE GROUP Based on the market conditions of the domestic and overseas shipping industry in 2014, and taking into account of the delivery of new vessels, the Group s major operating plans in 2014 are as follows: completion of shipment turnover volume of billion tonne-nautical miles, representing an increase of 26.2% year-on-year; revenue of RMB billion is expected to realize, representing an increase of 26.4% year-on-year; operating costs of RMB billion, representing an increase of 10.2% year-on year. (4) Work initiatives of the Company To cope with the current market situation, the Group will implement the following initiatives in 2014: (a) Enhance marketing efforts, deepen the cooperation with major customers and strengthen customer management and customer services. Facing tough market conditions, the Company will continue to adhere to the strategy of majorclients, great co-operation and comprehensive services, increase service awareness continuously and strive to satisfy customer needs and provide value added services actively, in order to enhance the executive capability on management of major clients and increase development efforts to expand the market customer base. In 2014, for oil shipment operations, cooperation with the top three domestic petroleum companies will be strengthened continuously, with the focus on protecting the market shares on coastal crude oil and domestic offshore oil and fully utilizing the joint advantages of domestic and offshore trading markets to increase revenue. For bulk cargo shipment operations, the Company will focus on improving the pricing mechanism and contract performance mechanism for COA contracts, improve customer management, consolidate benefits from associated companies, maintain good cooperation results with associated companies, while make good use of the unified platform for bulk cargo operations to allocate shipping capacities reasonably between long-term chartering and spot market contracts, increase the market share of offshore shipment operations and improve the structure of cargo sources. For LNG shipment operations, the Company will leverage on the opportunities arising from the APLNG and Mobil projects to enhance comprehensively the integrated capabilities on LNG project development, vessel construction management, business management, bank financing, crew and vessel management, in order to safeguard the LNG market for the two major groups, Sinopec and PetroChina, and actively develop cooperation with other LNG importers. (b) Accelerate fleet structure adjustment and proceed with fleet structure optimization at a steady pace. The Company will capture the favorable opportunity provided by the planning of the State government to boost the shipping industry to dispose of old and obsolete vessels with high fuel consumption, small tonnage and weak market competitiveness in a timely manner. At the same time, research and judgment on the markets will be strengthened, closely monitor new technological innovations on vessel building, expand the I-96

149 APPENDIX I FINANCIAL INFORMATION OF THE GROUP fleet size as appropriate, continue to pursue energy saving and cost reduction through technologies, further develop the fleet towards the direction of large-size, technology-oriented and low-carbon operations, optimize the structure of shipping capacities continuously and enhance the overall competitiveness of the fleet. (c) Further implementation of overall budget management and drive cost reduction and efficiency improvement at full force. In 2014, the Group will use overall budget management as an important means to enhance the management level of the enterprise. The comprehensive energy saving mechanism will be further strengthened and improved. While fuel saving measures such as locking oil purchases and implementing economic shipping speed will be implemented continuously, such concepts and models will gradually cover the management and control of various cost items such as crew expenses, vessel repair charges, port charges, to create an advantage of low costing. (d) Expand financing channels to secure development funds. According to the new vessel delivery plans, the capital expenditure of the Company from 2014 to 2015 is approximately RMB6.887 billion and RMB2.537 billion respectively. Meanwhile, the associated and joint venture companies of the Group have strong demands for capital increases. In this connection, the Company will further strengthen cooperation with banks to secure the required capital funds by scientific and reasonable use of financial instruments, reduce finance costs, enhance operating benefits and efficiency of capital operations continuously, maintain a relatively sound financial structure, and prevent financial risk and capital risk practicably. (e) Further advance the strategy of developing an enterprise on the basis of talents to ensure the availability oftalents for the sustainable development of the Company. The Company will strive to develop itself as a learning-based and innovative enterprise, accelerate the paradigm shift, knowledge update and structural optimization of the shipping crew and onshore teams, so as to provide a strong support for transformation and development of the Company. (f) Continue to strengthen safety development and ensure safety development of the enterprise. The Group will further strengthen the appraisals on safe production responsibilities, with focus on collision avoidance, pirate prevention and pollution prevention, and further improve the safety management system to establish the safety standards. II. WORKING CAPITAL Taking into account the financial resources available to the Group and Dalian Ocean Group, including internally generated funds and the available banking facilities, and the terms of the Proposed Transactions, the Directors of the Company are of the opinion that the Group and Dalian Ocean Group has sufficient working capital for its requirement for at least 12 months from the date of this circular. App1B.30 I-97

150 APPENDIX I FINANCIAL INFORMATION OF THE GROUP III. INDEBTEDNESS OF THE ENLARGED GROUP 1. Borrowings and Indebtedness At the close of business on 29 February 2016, being the latest practicable date for the purpose of this indebtedness statement prior to printing of this circular, the total outstanding interest-bearing bank and other borrowings, other loans and corporate bonds of the Enlarged Group are as follows: App1B.28(1) App1B.28(2) App1B.28(3) Total Secured Unsecured RMB 000 RMB 000 RMB 000 Interest-bearing bank and other borrowings 32,759,522 10,990,514* 21,769,008 Other loans 814, ,597 Corporate bonds 3,978,488 3,978,488 * Secured by pledges of the Enlarged Group s vessels and vessels under construction. 2. Contingent Liabilities App1B.28(4) At the close of business on 29 February 2016, the Enlarged Group has the following significant contingent liabilities and guarantees: (i) East China LNG Shipping Investment Co. Ltd., a non wholly-owned subsidiary of the Company, holds 30% equity interests in each of Aquarius LNG Shipping Limited ( Aquarius LNG ) and Gemini LNG Shipping Limited ( Gemini LNG ), and North China LNG Shipping Investment Co. Ltd., a non wholly-owned subsidiary of the Company, holds 30% equity interests in each of Capricorn LNG Shipping Limited ( Capricorn LNG ) and Aries LNG Shipping Limited ( Aries LNG ). Each of these four companies entered into ship building contracts for the construction of one LNG vessel. After the completion of the LNG vessels, the four companies would, in accordance with time charters agreements to be signed, lease the LNG vessels to the following charterers: Company Name Aquarius LNG Gemini LNG Aries LNG Capricon LNG Charterer Papua New Guinea Liquefied Natural Gas Global Company LDC Papua New Guinea Liquefied Natural Gas Global Company LDC Mobil Australia Resources Company Pty Ltd. Mobil Australia Resources Company Pty Ltd. I-98

151 APPENDIX I FINANCIAL INFORMATION OF THE GROUP On 15 July 2011, the Company entered into four guaranteed leases (the Lease Guarantees ). According to the Lease Guarantees, the Company irrevocably and unconditionally provided the charterers, successors and transferees of the four companies listed above with guarantee (1) for the four companies to fulfil their respective obligations under the lease term, and (2) to secure 30% of amounts payable to charterers under lease term. According to the term of the Lease Guarantees and taking into account the possible increase in the value of the lease commitments and the percentage of shareholdings by the Company in the above four companies, the amount of lease guaranteed by the Company is limited to USD8.2 million (approximately RMB54 million). The guarantee period is limited to that of the lease period, which is 20 years. (ii) At the seventh Board meeting of 2014 held on 30 June 2014, the Company approved the ship building contracts, time charter agreements and supplemental construction contracts signed by three joint ventures of the Company for the Yamal LNG project. To secure the obligation of the ship building contracts, time charter agreements and supplemental construction contracts, the Company provides corporate guarantees to the shipbuilders, Daewoo Shipbuilding & Marine Engineering Co., Ltd. and DY Maritime Limited. The total aggregate liability of the Company under the corporate guarantees is limited to USD490,000,000 (approximately RMB3,207,148,000). In addition, the Company provides owner s guarantees to the charterer, YAMAL Trade Pte. Ltd. The total aggregate liability of the Company under the owner s guarantees is limited to USD6,400,000 (approximately RMB41,889,000). (iii) On 20 February 2011, one oil tanker of Dalian Ocean, Yang Mei Hu, during the time of berthing and loading in Mohammedia port, clashed the dock bollard. On 23 February 2011, the dock authority applied for the detention of Yang Mei Hu in the local court of Morocco and required Dalian Ocean to provide estimated losses in the amount of Dirham55 million (approximately RMB37 million) for security. In March 2011, after the protection and indemnity club of Yang Mei Hu provided appropriate security according to the Yang Mei Hu membership certificate underwriting agreement, Yang Mei Hu left the port. In April 2014, the dock authority filed suit in the local court of Morocco and required Dalian Ocean to compensate the loss in the amount of Dirham17,380,000 and Euro2,062,000 (in total approximately RMB26,300,000). Since Dalian Ocean had been insured, all compensations will be borne by the insurance companies, except for a maximum of USD15,000 (approximately RMB98,000), according to the membership certificate underwriting agreement. As at 29 February, 2016, Dalian Ocean was still in the process of setting all issues concerned. I-99

152 APPENDIX I FINANCIAL INFORMATION OF THE GROUP Save as aforesaid or as otherwise disclosed herein, and apart from intra-group liabilities and normal trade payables in the ordinary course of business, as at the close of business on 29 February 2016, the Enlarged Group did not have any debt securities issued and outstanding or agreed to be issued, bank overdrafts, loans or other similar indebtedness, liabilities under acceptances (other than normal trade bills) or acceptance credits, mortgages, charges, finance lease or hire purchase commitments, guarantees or other material contingent liabilities. The Directors confirmed that no material changes in the indebtedness and contingent liabilities of the Enlarged Group since 29 February 2016 up to and including the Latest Practicable Date. IV. MATERIAL ADVERSE CHANGE App1B.32 The Directors confirm that there has been no material adverse change in the financial or trading position of the Group since 31 December 2015, being the date to which the latest published audited accounts of the Company have been made up. V. FINANCIAL AND TRADING PROSPECTS LR14.69(6) App1B.29(1) The Enlarged Group will, through the Proposed Transactions, further expand its oil shipment and LNG shipment businesses to create a globally leading energy transportation fleet in terms of transportation capacities, strengthen its ability to counter the business cycle of the conventional shipping business and its financial stability and enhance its overall profitability. In order to achieve these goals, the Enlarged Group will utilize its enhanced fleet capacity following the Dalian Ocean Acquisition, continue to control and reduce operating costs, seek greater discounts from global suppliers for procurement of shipping materials and take advantage of the low oil prices by locking on long-term fuel purchase contracts. The Company expects to start to realize the benefits aforesaid after the completion of the Dalian Ocean Acquisition. With a significantly increased fleet size, the Enlarged Group will be able to meet differentiated demand requirements from customers in every shipping region of the world. The Enlarged Group will be able to flexibly apply a variety of operating plans such as contract of affreightment and time chartering, which increases its loading ratio and reduces its unit shipping cost. The Enlarged Group will also coordinate and centralize the procurement of all relevant resources, which helps to optimize its purchasing decision-making process, improve its vendor management system and enhance its negotiation capability. Furthermore, the Enlarged Group will improve its financial management, expand its financing channels and reduce its capital costs. According to its new vessel delivery plans, the capital expenditure of the CS Development in 2016 will be approximately RMB2.5 billion. In this regard, the Enlarged Group will strengthen its relationship with commercial banks, secure necessary funds from both domestic and international financial markets and through the use of various financial instruments. Meanwhile, the Enlarged Group will enhance its capital efficiency, reduce its financing costs and maintain a sound financial structure. Additionally, the Enlarged Group will monitor and anticipate macro-economic changes by strictly controlling the capital expenditure in shipbuilding and its debt ratio, improving its charter operations, and enhance its operational risk management. I-100

153 APPENDIX I FINANCIAL INFORMATION OF THE GROUP For its oil shipment business, the Enlarged Group will enhance its position in the oil shippment market by building a specialised crude oil and refined oil transportation fleet and continue to cooperate with the top three domestic petroleum companies. The Enlarged Group will strive to enhance its sustainable profitability and financial stability by establishing a scientific market research mechanism, timely adjusting its shipping route structure and improving its term leasing ratio. From cost saving aspect, the Enlarged Group will effectively realize the cost synergy generated from consolidating and optimizing internal resources for oil shipment after the Dalian Ocean Acquisition. For its LNG shipment business, the Enlarged Group will enhance its LNG project development, vessel construction management, business management, bank financing and vessel management. The Enlarged Group will also establish strong alliances with the two major LNG importers in China, lock in long-term and stable revenues and effectively counter cyclical fluctuations in the oil shippment market. According to its new vessel delivery plans, CS Development expects to add three new LNG vessels with a total shipping capacity of 525,000 cubic meters in Additionally, by effectively integrating its domestic and international resources and coordinating and centralizing the procurement of resources, the Enlarged Group will improve its overall operating efficiency, enhance its international competitiveness and gradually realize its global layout strategy. Such integration of resources will also significantly enhance the Enlarged Group s bargaining power for various cost items, improve the efficiency of its resource utilisation, and effectively reduce its procurement costs. Furthermore, the Enlarged Group will continue to strengthen talent team building and enhance the competitiveness of its staff by optimising human resources, remedying the insufficiency in its tanker crew and satisfying the demand for future expansion of the fleet scale as well as the strategic need for a global route layout. I-101

154 APPENDIX II FINANCIAL INFORMATION OF DALIAN OCEAN GROUP BUSINESS OVERVIEW Dalian Ocean is principally engaged in the liquid bulk transportation business, which includes the coastal and ocean shipping of crude oil, refined oil, LNG and LPG. As of 31 December 2015, Dalian Ocean owned and operated over 40 vessels on the water, including oil tankers of VLCC, Suezmax, Aframax and Panamax classes and LPG carriers, with an aggregate carrying capacity of more than nine million deadweight tons. Dalian Ocean has actively developed international customers, strengthened its strategic cooperation with international cargo owners and expanded its business to more than 300 ports of 70 countries and regions around the world. FINANCIAL OVERVIEW The summary of audited historical consolidated statements of profit or loss for 2013, 2014 and 2015 set forth below is derived from the consolidated financial statement of Dalian Ocean, including the notes thereto, which is set forth in Appendix III The Accountant s Report of Dalian Ocean. The financial statement of Dalian Ocean has been prepared in accordance with HKFRSs. II-1

155 APPENDIX II FINANCIAL INFORMATION OF DALIAN OCEAN GROUP Consolidated statements of profit or loss Year ended 31 December (in millions of RMB) Revenue 3, , ,820.4 Costs of services (4,181.1) (4,173.4) (3,718.4) Gross (loss)/profit (573.4) (46.9) 1,101.9 Investment and other income Other gains and losses (19.4) (114.0) (167.3) Selling expenses (5.4) (5.0) Administrative expenses (228.3) (211.7) (235.7) Other expenses (22.9) (33.2) (33.2) (Loss)/profit from operations (802.0) (176.2) Finance costs (251.8) (263.8) (254.5) Share of profits of joint ventures (Loss)/profit before tax (934.9) (317.9) Income tax expense (9.7) (86.0) (8.3) (Loss)/profit for the year (944.6) (403.9) Attributable to: Owners of Dalian Ocean (909.5) (373.2) Non-controlling interests (35.1) (30.7) 4.0 (944.6) (403.9) II-2

156 APPENDIX II FINANCIAL INFORMATION OF DALIAN OCEAN GROUP FINANCIAL POSITION Total assets of Dalian Ocean were RMB14,599.1 million, RMB15,192.1 million and RMB17,238.8 million as at 31 December 2013, 2014 and 2015, respectively. Total assets primarily comprised property, plant and equipment, which primarily comprised vessels owned and operated by Dalian Ocean. As at 31 December 2013, 2014 and 2015, total liabilities of Dalian Ocean were RMB11,088.2 million, RMB11,539.4 million and RMB11,129.2 million, respectively, which primarily comprised borrowings. Borrowings primarily comprised bank loans. The net assets of Dalian Ocean totaled RMB3,511.0 million, RMB3,652.6 million and RMB6,109.6 million as at 31 December 2013, 2014 and 2015, respectively. LIQUIDITY AND FINANCIAL RESOURCES AND CAPITAL STRUCTURE App16-32(1) App16-32(2) App16-32(10) As at 31 December 2013, 2014 and 2015, Dalian Ocean recorded current liabilities of RMB3,229.8 million, RMB2,909.2 million and RMB3,948.1 million, respectively, and had gearing ratios (calculating by dividing total debt by total assets) of 76.0%, 76.0% and 65.0%, respectively. BUSINESS PERFORMANCE App16-32(6) Dalian Ocean is principally engaged in the liquid bulk transportation business. Dalian Ocean does not expect any upcoming changes in its industries or in the market conditions or new products and services to be introduced that would have an impact on its performance, turnover or margins. The Year Ended 31 December 2015 Compared to the Year Ended 31 December 2014 Revenue Total revenue for the year ended 31 December 2015 was RMB4,820.4 million, representing an increase of RMB693.9 million from RMB4,126.5 million for the year ended 31 December Such increase was primarily due to an increase in chartered income. Cost of Services Cost of services for the year ended 31 December 2015 was RMB3,718.4 million, representing a decrease of RMB455.0 million from RMB4,173.4 million for the year ended 31 December Such decrease was primarily attributable to a decrease in fuel expenses as a result of (i) decrease in oil prices and (ii) decreased consumption of fuels due to conversion of some vessels from self-operation to time charter. II-3

157 APPENDIX II FINANCIAL INFORMATION OF DALIAN OCEAN GROUP Gross (Loss)/Profit As a result of the foregoing, gross profit for the year ended 31 December 2015 was RMB1,101.9 million, compared with a gross loss of RMB46.9 million for the year ended 31 December Investment and Other Income Investment and other income for the year ended 31 December 2015 was RMB254.0 million, representing an increase of RMB19.3 million from RMB234.7 million for the year ended 31 December Such increase was primarily due to an increase in dividend income. Other Gains and Losses Other gains and losses for the year ended 31 December 2015 was a loss of RMB167.3 million, representing an increase of RMB53.3 million from a loss of RMB114.0 million for the year ended 31 December Such increase was primarily due to an increase in net foreign exchange losses. Selling Expenses Selling expenses for the year ended 31 December 2015 was nil, representing a decrease of RMB5.0 million from RMB5.0 million for the year ended 31 December The selling expenses of Dalian Ocean for the year ended 31 December 2014 was primarily incurred by its former subsidiary, Dalian International Ocean Building Hotel Co., Ltd. ( Dalian Hotel ). Dalian Ocean s selling expenses was nil for the year ended 31 December 2015, as Dalian Hotel s results of operation was no longer consolidated into Dalian Ocean s consolidated financial statements. Administrative Expenses Administrative expenses for the year ended 31 December 2015 was RMB235.7 million, representing an increase of RMB24.0 million from RMB211.7 million for the year ended 31 December Such increase was primarily attributable to an increase in (i) total salary and social insurance expenses as a result of stronger financial performance and (ii) professional fees in connection with Dalian Ocean s reorganization. Other Expenses Other expenses remained stable at RMB33.2 million for the years ended 31 December 2015 and Finance Costs Finance costs for the year ended 31 December 2015 was RMB254.5 million, representing a decrease of RMB9.3 million from RMB263.8 million for the year ended 31 December Such decrease primarily reflected a decrease in the average balance of borrowings. II-4

158 APPENDIX II FINANCIAL INFORMATION OF DALIAN OCEAN GROUP Share of Profits of Joint Ventures Share of profits of joint ventures for the year ended 31 December 2015 was RMB151.3 million, representing an increase of RMB29.3 million from RMB122.0 million for the year ended 31 December The share of profits of joint ventures of Dalian Ocean was primarily derived from its equity interest in China LNG Shipping (Holdings) Limited ( China LNG Shipping ). The increase in share of profits of joint venture was mainly due to an increase in the profit of China LNG Shipping. Income Tax Expenses Income tax expenses for the year ended 31 December 2015 was RMB8.3 million, representing a decrease of RMB77.7 million from RMB86.0 million for the year ended 31 December Such decrease primarily reflected a decrease in the amount of deferred tax. (Loss)/Profit for the Year As a result of the foregoing, Dalian Ocean recorded a profit for the year of RMB808.1 million for the year ended 31 December 2015, compared with a loss for the year of RMB403.9 million for the year ended 31 December The Year Ended 31 December 2014 Compared to the Year Ended 31 December 2013 Revenue Total revenue for the year ended 31 December 2014 was RMB4,126.5 million, representing an increase of RMB518.8 million from RMB3,607.7 million for the year ended 31 December Such increase was primarily due to an increase in chartered income. Cost of Services Cost of services for the year ended 31 December 2014 was RMB4,126.4 million, representing a decrease of RMB54.7 million from RMB4,181.1 million for the year ended 31 December Such decrease was primarily attributable to a decrease in fuel expenses as a result of decrease in oil prices. Gross Loss As a result of the foregoing, gross loss for the year ended 31 December 2014 was RMB46.9 million, representing a decrease of RMB526.5 million from RMB573.4 million for the year ended 31 December Investment and Other Income Investment and other income for the year ended 31 December 2014 was RMB234.7 million, representing an increase of RMB187.3 million from RMB47.4 million for the year ended 31 December Such increase was primarily due to an increase in the amount of government subsidies recognized as other income in the year. II-5

159 APPENDIX II FINANCIAL INFORMATION OF DALIAN OCEAN GROUP Other Gains and Losses Other gains and losses for the year ended 31 December 2014 was a loss of RMB114.0 million, representing an increase of RMB94.6 million from a loss of RMB19.4 million for the year ended 31 December Such increase was primarily due to net foreign exchange losses of RMB6.7 million for the year ended 31 December 2014, compared with net foreign exchange gains of RMB50.9 million for the year ended 31 December Selling Expenses Selling expenses for the year ended 31 December 2014 was RMB5.0 million, representing a decrease of RMB0.4 million from RMB5.4 million for the year ended 31 December Such decrease was primarily attributable to a decrease in the advertising expenses and staff costs of Dalian Hotel. Administrative Expenses Administrative expenses for the year ended 31 December 2014 was RMB211.7 million, representing a decrease of RMB16.6 million from RMB228.3 million for the year ended 31 December Such decrease was primarily attributable to a decrease in (i) the property tax of Dalian Hotel and (ii) depreciation and amortization expenses. Other Expenses Other expenses for the year ended 31 December 2014 was RMB33.2 million, representing an increase of RMB10.3 million from RMB22.9 million for the year ended 31 December Such increase was primarily attributable to an increase in provision for freight receivables. Finance Costs Finance costs for the year ended 31 December 2014 was RMB263.8 million, representing an increase of RMB12.0 million from RMB251.8 million for the year ended 31 December Such increase primarily reflected an increase in the average balance of borrowings. Share of Profits of Joint Ventures Share of profits of joint ventures for the year ended 31 December 2014 was RMB122.0 million, representing an increase of RMB3.1 million from RMB118.9 million for the year ended 31 December Such increase was mainly due to an increase in the profit of China LNG Shipping. Income Tax Expenses Income tax expenses for the year ended 31 December 2014 was RMB86.0 million, representing an increase of RMB76.3 million from RMB9.7 million for the year ended 31 December Such increase primarily reflected an increase in the amount of deferred tax. II-6

160 APPENDIX II FINANCIAL INFORMATION OF DALIAN OCEAN GROUP Loss for the Year As a result of the foregoing, loss for the year ended 31 December 2014 was RMB403.9 million, representing an increase of RMB540.7 million from RMB944.6 million for the year ended 31 December FOREIGN EXCHANGE RISK App16-32(11) Dalian Ocean has minimal exposure to foreign currency risk as most of its business transactions, assets and liabilities are principally denominated in RMB. Dalian Ocean currently does not have a foreign currency hedging policy in respect of foreign currency transactions, assets and liabilities. Dalian Ocean will monitor its foreign currency exposure closely and will consider hedging significant foreign currency exposure should the need arise. CHARGE ON ASSETS App16-32(8) As at 31 December 2013, 2014 and 2015, the carrying amount of property, plant and equipment pledged as security for Dalian Ocean s bank loans amounted to approximately RMB5,296.7 million, RMB4,756.9 million and RMB4,566.9 million, respectively. As at 31 December 2013, 2014 and 2015, the carrying amount of investment properties pledged as security for Dalian Ocean s bank loans amounted to approximately RMB78.3 million, RMB74.5 million and nil, respectively. CONTINGENT LIABILITIES App16-32(12) As at 31 December 2013, 2014 and 2015, Dalian Ocean did not have any significant contingent liabilities. SIGNIFICANT INVESTMENTS, MATERIAL ACQUISITIONS AND DISPOSALS App16-32(4) App16-32(5) For the years ended 31 December 2013, 2014 and 2015, Dalian Ocean did not have any significant investments, material acquisitions or disposals. EMPLOYEES AND REMUNERATION POLICY App16-32(7) As at 31 December 2013, 2014 and 2015, Dalian Ocean had 4,261, 5,296 and 5,284 employees, respectively. For the year ended 31 December 2013, 2014 and 2015, Dalian Ocean incurred total staff costs of RMB590.6 million, RMB610.6 million and RMB610.6 million, respectively. Dalian Ocean s salary and remuneration policy is determined by reference to, among other things, employee performance, working experience and prevailing market rates. No share option scheme has been adopted for employees of Dalian Ocean. In order to ensure that Dalian Ocean s employees remain competitive in the relevant industries, Dalian Ocean has adopted training programs for its employees. FUTURE PLANS FOR SIGNIFICANT INVESTMENTS OR CAPITAL ASSETS App16-32(9) Dalian Ocean has no future plans for material investments or capital assets in the coming year. II-7

161 APPENDIX III THE ACCOUNTANT S REPORT OF DALIAN OCEAN The following is the text of a report, prepared for the sole purpose of inclusion in this circular, received from the independent reporting accountants, RSM Hong Kong, Certified Public Accountants, Hong Kong. LR14.69(4)(a)(i) 29th Floor Lee Garden Two 28 Yun Ping Road Causeway Bay Hong Kong App1B.31(1) The Board of Directors China Shipping Development Company Limited Room A , No. 188 Ye Sheng Road, China (Shanghai) Pilot Free Trade Zone, PRC 22 April 2016 Dear Sirs, We set out below our report on the financial information (the Financial Information ) of Dalian Ocean Shipping Co., Ltd (the Target PRC Company ) and its subsidiaries (hereinafter collectively referred to as the Target PRC Group ) for each of the three years ended 31 December 2015 (the Relevant Periods ) for inclusion in the circular dated 22 April 2016 issued by China Shipping Development Company Limited (the Company ) in connection with the proposed acquisition of 100% equity interest in the Target PRC Company (the Circular ). The Target PRC Company was incorporated in the People s Republic of China (the PRC ) as a state-owned enterprise on 1 January 1978 under the name Dalian Ocean Shipping Company (the Former Company ) which was a direct wholly-owned subsidiary of China Ocean Shipping (Group) Company. The Target PRC Company is principally engaged in tanker shipping business which provides oil and gas shipping services covering oil tanker shipping, LNG shipping and LPG shipping etc. Pursuant to the Approval of Enterprise Transformation of Dalian Ocean Shipping Company on Corporate Restructuring and Related State-owned Property Transfer without Compensation, the Former Company transformed to a Company with limited liability under the name of the Target PRC Company on 24 December As at the date of this report, the Target PRC Company has the following subsidiaries: Name of subsidiaries Place of incorporation and operation Registered and paid up capital Percentage of ownership interest directly held by the Target PRC Company Principal activity (Dalian Ocean Foreign Labour Service Cooperation Co., Ltd*) The PRC RMB6,000, % Provision of shipping agency and management services III-1