KSL Holdings Limited (incorporated in the Cayman Islands with limited liability)

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2 IMPORTANT If you are in any doubt about any of the contents of this prospectus, you should obtain independent professional advice. KSL Holdings Limited (incorporated in the Cayman Islands with limited liability) LISTING ON THE GROWTH ENTERPRISE MARKET OF THE STOCK EXCHANGE OF HONG KONG LIMITED BY WAY OF PLACING Number of Placing Shares : 102,800,000 Placing Shares (comprising 51,400,000 New Shares to be offered by our Company and 51,400,000 Sale Shares to be offered by the Selling Shareholder) Placing Price : HK$0.60 per Placing Share (payable in full on application plus brokerage of 1%, SFC transaction levy of % and Stock Exchange trading fee of 0.005%) Nominal value : HK$0.01 per Share Stock code : 8170 Sponsor Bookrunner and Lead Manager Hong Kong Exchanges and Clearing Limited, The Stock Exchange of Hong Kong Limited and Hong Kong Securities Clearing Company Limited take no responsibility for the contents of this prospectus, 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 prospectus. A copy of this prospectus, having attached thereto the documents specified in the paragraph headed Documents delivered to the Registrar of Companies and available for inspection in Appendix VI to this prospectus, has been registered by the Registrar of Companies in Hong Kong as required under section 342C of the Companies (Winding Up and Miscellaneous Provisions) Ordinance. The Securities and Futures Commission and the Registrar of Companies in Hong Kong take no responsibility as to the contents of this prospectus or any other documents referred to above. Pursuant to the termination provisions contained in the Underwriting Agreement in respect of the Placing Shares, the Lead Manager has the right in certain circumstances, at its sole and absolute discretion, to terminate the obligations of the Underwriter pursuant to the Underwriting Agreement at any time prior to 8:00 a.m. (Hong Kong time) on the date when dealings in the Shares first commence on the Stock Exchange (such first dealing date is currently expected to be on Friday, 5 December 2014). Further details of the terms of the termination provisions are set out in the section headed Underwriting Grounds for termination in this prospectus. It is important that you refer to that section for further details. Prior to making an investment decision, prospective investors should consider carefully all of the information set out in this prospectus, including the risk factors set out in the section headed Risk factors in this prospectus. 28 November 2014

3 CHARACTERISTICS OF GEM GEM has been positioned as a market designed to accommodate companies to which a higher investment risk may be attached than other companies listed on the Stock Exchange. Prospective investors should be aware of the potential risks of investing in such companies and should make the decision to invest only after due and careful consideration. The greater risk profile and other characteristics of GEM mean that it is a market more suited to professional and other sophisticated investors. Given the emerging nature of companies listed on GEM, there is a risk that securities traded on GEM may be more susceptible to high market volatility than securities traded on the Main Board and no assurance is given that there will be a liquid market in the securities traded on GEM. i

4 EXPECTED TIMETABLE 2014 (Note 1) Announcement of the level of indication of interests in the Placing to be published on our Company s website ( and the website of the Stock Exchange at (Note 2)...Thursday, 4 December Allotment of Placing Shares to placees (or their designated person(s))...thursday, 4 December Despatch of share certificates for the Placing Shares into CCASS (Note 3 and 4)... onorabout Thursday, 4 December Dealings in the Shares on GEM to commence...friday, 5 December Notes: 1. All times refer to Hong Kong local time and date. If there is any change to the above expected timetable, our Company will make a separate announcement to inform investors accordingly. Details of the structure of the Placing, including its conditions, are set out in the section headed Structure and conditions of the Placing in this prospectus. 2. None of our Company s website or any of the information contained in our Company s website forms part of this prospectus. 3. The share certificates are expected to be issued in the name of HKSCC Nominees Limited or in the name of the placee(s) or their agent(s) as designated by the Underwriter. Share certificates for the Placing Shares to be distributed via CCASS are expected to be deposited into CCASS on or about Thursday, 4 December 2014 for credit to the respective CCASS Participant s stock accounts designated by the Underwriter, the placees or their agents, as the case may be. No temporary documents or evidence of title will be issued. 4. Share certificates for the Placing Shares will only become valid certificates of title at 8:00 a.m. (Hong Kong time) on the Listing Date (such date is currently expected to be on Friday, 5 December 2014) provided that (i) the Placing becomes unconditional in all respects and (ii) the right of termination as described in the section headed Underwriting Grounds for termination in this prospectus has not been exercised thereto and has lapsed. Pursuant to the force majeure provisions contained in the Underwriting Agreement in respect of the Placing, the Lead Manager has the right in certain circumstances, subject to its sole and absolute opinion, to terminate the obligations of the Underwriter under the Underwriting Agreement at any time prior to 8:00 a.m. (Hong Kong time) on the Listing Date (which is currently expected to be on Friday, 5 December 2014). Further details of the terms of the force majeure provisions are set out in the section headed Underwriting in this prospectus. ii

5 CONTENTS You should rely only on the information contained in this prospectus to make your investment decision. Our Company has not authorised anyone to provide you with information that is different from what is contained in this prospectus. Any information or representation not contained or made in this prospectus must not be relied on by you as having been authorised by our Company, the Sponsor, the Lead Manager, any of the Underwriter, any of their respective directors, affiliates, employees or representatives or any other person or party involved in the Placing. CHARACTERISTICS OF GEM... i EXPECTED TIMETABLE... ii Page CONTENTS... iii SUMMARY... 1 DEFINITIONS AND GLOSSARY OF TECHNICAL TERMS FORWARD-LOOKING STATEMENTS RISK FACTORS INFORMATION ABOUT THIS PROSPECTUS AND THE PLACING DIRECTORS AND PARTIES INVOLVED IN THE PLACING CORPORATE INFORMATION INDUSTRY OVERVIEW REGULATORY OVERVIEW HISTORY AND DEVELOPMENT BUSINESS DIRECTORS AND SENIOR MANAGEMENT RELATIONSHIP WITH CONTROLLING SHAREHOLDERS SUBSTANTIAL SHAREHOLDERS SHARE CAPITAL FINANCIAL INFORMATION FUTURE PLANS AND USE OF PROCEEDS UNDERWRITING STRUCTURE AND CONDITIONS OF THE PLACING iii

6 CONTENTS Page APPENDIX I ACCOUNTANTS REPORT... I-1 APPENDIX II UNAUDITED PRO FORMA FINANCIAL INFORMATION... II-1 APPENDIX III PROPERTY VALUATION... III-1 APPENDIX IV SUMMARY OF THE CONSTITUTION OF THE COMPANY AND CAYMAN ISLANDS COMPANY LAW... IV-1 APPENDIX V STATUTORY AND GENERAL INFORMATION... V-1 APPENDIX VI DOCUMENTS DELIVERED TO THE REGISTRAR OF COMPANIES AND AVAILABLE FOR INSPECTION... VI-1 iv

7 SUMMARY This summary aims to give you an overview of the information contained in this prospectus. As this is a summary, it does not contain all the information that may be important to you. You should read this prospectus in its entirety before you decide to invest in the Placing Shares. There are risks associated with any investment. Some of the particular risks in investing in the Placing Shares are set out in the section headed Risk factors in this prospectus. You should read that section carefully before you decide to invest in the Placing Shares. Various expressions used in this summary are defined in the section headed Definitions in this prospectus. BUSINESS OVERVIEW We are principally engaged in the provision of engineering consulting, contracting and project management services in Hong Kong with a focus on geotechnical engineering works. Geotechnical engineering is a branch of civil engineering concerned with the study and modification of soil and rocks. The geotechnical engineering works in which we participated as a consultant, contractor and/or project manager during the Track Record Period included foundation design and construction works for building construction projects, excavations and structural designs for the construction of underground facilities, site formation works and landslip preventive works. Set out below is an overview of our business model: (a) Engineering consulting In respect of our engineering consulting service, we mainly assist our customers in (i) developing cost-effective engineering designs, including structural and geotechnical details, drawings and calculations primarily concerning how a structure or foundation should be constructed; and (ii) obtaining necessary approvals in respect of the engineering designs developed by us from the relevant Government authorities or their appointed consultants before the relevant works can commence at work sites pursuant to the requirements of the Buildings Ordinance or other relevant rules and regulations. After obtaining the approval and depending on our agreements with individual customers, we may also be required to supervise the works of the contractors appointed by our customers where we would send our own personnel to the work sites to monitor the works and provide advices to our customers if necessary with a view to ensuring that the works performed by the contractors conform to our engineering design. Customers for our engineering consulting service mainly include contractors and developers of various property development and civil engineering projects in Hong Kong, who, according to our Directors as well as the IPSOS Report, seldom possess a strong in-house engineering design team for geotechnical engineering works and therefore often require external consultants, such as our Group, for developing engineering designs and obtaining necessary approval thereof. 1

8 SUMMARY Revenue from our engineering consulting service is mainly derived from consultancy fees for our service. Costs of our engineering consulting service mainly include salaries of our staff directly related to the provision of our engineering consulting service. (b) Contracting In respect of our contracting service, we mainly undertake foundation and related geotechnical works of various property development and civil engineering projects in Hong Kong as a contractor. We mainly undertake projects with an original engineering design that, in our opinion, is capable of being changed to a more cost-effective one. We would estimate both the cost of implementing the original engineering design and the reduced cost of implementing the more cost-effective engineering design. We would then offer a contracting fee quotation to our customer that would generally be lower than the estimated cost based on the original engineering design, but would still allow us a substantial profit margin based on the more cost-effective engineering design. In doing so, we and our customer would both benefit because our customer would incur lower construction costs while we would achieve substantial profit margin. It should be noted that the profit margin that we will be able to achieve in respect of each contracting project may vary, primarily depending on the materiality of the change in the engineering design that we are able to develop as compared with the original engineering design, which in turn depends on the different engineering circumstances pertaining to each project. We leverage on the expertise of our team of in-house engineering staff for the preparation of the more cost-effective engineering designs and obtaining approval for such designs from the relevant Government authorities or their appointed consultants. We engage further subcontractors to perform the site works based on our engineering designs. We also send our own personnel to the work site to manage and supervise the works. We do not maintain our own direct labours or machinery for performing site works. Customers for our contracting service mainly include contractors of foundation and/or other geotechnical works for various property development and civil engineering projects in Hong Kong who subcontract a portion or all of the foundation and/or other geotechnical works to other contractors such as our Group. Revenue from our contracting service mainly represents our contracting fee income. Costs in relation to our contracting service mainly include staff costs of our engineering staff involved as well as subcontracting charges incurred by us. Construction materials and other supplies required for the performance of works are usually provided by our customers directly to our subcontractors or procured by our subcontractors directly without our involvement. (c) Project management In respect of our project management service, we are generally responsible for (i) the overall planning and management of the work schedules of different contractors appointed by our customers at work sites, as well as the logistical arrangements of the workers, materials, machinery and other resources required at work sites, with a view to ensuring smooth and timely completion of the works; and/or (ii) providing technical advice and supervision in respect of the site works performed by our customers and/or their appointed subcontractors, with a view to ensuring that the site works conform to the engineering designs approved by the relevant Government authorities or their appointed consultants. We mainly undertake projects involving foundation and related geotechnical works with respect to our project management service. 2

9 SUMMARY Customers for our project management service mainly include contractors of foundation and/or other geotechnical works for various property development and civil engineering projects in Hong Kong, who, according to our Directors as well as the IPSOS Report, often do not have sufficient in-house project managers and site personnel who are adequately experienced to supervise and ensure the smooth and timely completion of site works and may therefore seek assistance from external firms such as our Group for project management. Revenue from our project management service mainly represents our project management fee income. Costs of our project management service mainly include staff costs in relation to staff directly related to the provision of our project management service. The following table sets forth a breakdown of our revenue during the Track Record Period by business segments: FY2013 FY2014 Revenue % Revenue % HK$ 000 HK$ 000 Engineering consulting 31, , Contracting 9, , Project management 4, , Others (Note) , , Note: Our Group is also engaged in the publishing of technical books and the organisation of continuing professional development courses, seminars and conferences on topics related to civil engineering. These activities are intended for the promotion of our Group s professional image and reputation and are therefore regarded by our Directors as our marketing activities. Nevertheless, as a result of these activities, revenue is derived from admission fees for attending our courses, seminars and conferences, administrative fees for organising courses, seminars and conferences for the HKIE or other institutions, as well as sales of technical books. We pursue both private and public sector projects. Public sector projects refer to projects that originate from the Government or its related organisations or corporations while private sector projects refer to projects that are not public sector projects. During the Track Record Period, the proportion of our revenue derived from private and public sector projects remained relatively stable: FY2013 FY2014 Revenue % Revenue % HK$ 000 HK$ 000 Private sector projects 34, , Public sector projects 11, , Others , ,

10 SUMMARY During the Track Record Period, all of our projects were priced at fixed costs (i.e. priced based on a pre-agreed fixed scope of work). We may accept customers requests for variation in the scope of work on the basis that a supplemental quotation for additional fee is agreed upon. During the Track Record Period, we recorded revenue attributable to variation orders and such revenue was recognised on the basis that it had been agreed with customers. During the Track Record Period, we did not experience any dispute by our customers on the amount of fees payable to us for variation orders. As of the Latest Practicable Date, all of our revenue and trade receivables recorded during the Track Record Period that were attributable to variation orders had been fully settled by our customers to us. During the Track Record Period, suppliers of goods and services which were specific to our business and were required on a regular basis to enable us to continue to carry on our business included: (i) subcontractors engaged by us to perform site works based on our engineering designs in respect of our contracting business; (ii) external consultants engaged by us to provide technical advice on our engineering designs when we consider it necessary or appropriate to do so for the sake of prudence; (iii) certain external firms which temporarily assigned some of their employees to us on secondment (usually for a period of up to 12 month for each seconded employee) for our engineering consulting and project management businesses in order to alleviate the workload of our engineering staff and site personnel (where we were required to pay secondment fees to such external firm but we were not responsible for the salary of the seconded staff); (iv) supplier of drafting services mainly for the preparation of technical drawings in order to alleviate the workload of our draftsmen; and (v) suppliers of other miscellaneous goods and services required for our business operations. The following table sets forth a breakdown of our total purchases from our suppliers during the Track Record Period by nature: FY2013 FY2014 HK$ 000 % HK$ 000 % Subcontracting charges 3, , Consultancy fees , Secondment fees Drafting fees Other purchases , , SALES AND MARKETING During the Track Record Period, all of our new businesses were obtained through direct invitation for quotation by customers, which is considered by our Directors to be attributable to our well-established presence and professional reputation in the geotechnical engineering industry in Hong Kong. In addition, in 2001, we started publishing technical books and organising continuing professional development courses, seminars and conferences on topics related to civil engineering. These activities are intended for the promotion of our professional image and reputation and the further enhancement of our presence in the geotechnical engineering industry in Hong Kong. 4

11 SUMMARY COMPETITIVE STRENGTHS According to the IPSOS Report, the total revenue of the construction engineering design and consulting service industry in Hong Kong amounted approximately HK$4.5 billion in Based on the revenue of our Group s engineering consulting business of approximately HK$31.3 million in FY2013 and approximately HK$39.1 million in FY2014, it is estimated that our Group s market share in the construction engineering design and consulting service industry in Hong Kong is less than 1%. According to the IPSOS Report, the availability of construction and civil engineering projects in Hong Kong is expected to grow in the coming years as a result of, among others, the Ten Major Infrastructure Projects announced by the Government, Government s initiative to increase housing land supply, rising demand for office space, etc. Further details are set out in the section Industry overview in this prospectus. Our Directors believe that we compete favourably with our competitors in view of our competitive strengths, including (i) our well-established presence in the geotechnical engineering industry in Hong Kong as we commenced our business in 1997; (ii) our professional reputation in Hong Kong for developing cost-effective engineering designs for geotechnical engineering works, which is consistent with the findings of the IPSOS Report; (iii) our strong in-house team of engineering staff for developing cost-effective engineering designs for our engineering consulting business and our contracting business; (iv) our ability to achieve substantial profit margin in our contracting business by changing an original engineering design of a project to a more cost-effective one by leveraging on our in-house team of engineers. We believe that the engineering designs developed by our in-house team of engineering staff are of high quality. During the Track Record Period, the approval rates in respect of the engineering designs submitted by us to the relevant Government authorities or their appointed consultants were as follows: FY2013 FY2014 Approval rate upon our first submission (note) in respect of our: - Engineering consulting business Over 98% Over 99% - Contracting business 100% 100% Note: Approval rate is calculated as the number of approvals obtained upon our first submission divided by our total number of first submissions of designs during the financial year. During the Track Record Period, those designs that had not been approved upon our first submission were all subsequently approved in our amended submissions. 5

12 SUMMARY BUSINESS STRATEGIES We intend to pursue the following key business strategies: (i) further developing our contracting business by making use of additional financial resources available after receiving the net proceeds from the Placing, as the aggregate number and size of projects that we are able to undertake in our contracting business hinges on the amount of our available working capital in view of the time lags that often exist between making payments to our subcontractors and receiving payments from our customers and the possible requirements for surety bonds; (ii) further strengthening our in-house team of engineering staff by recruiting additional qualified and experienced engineers in order to cope with our business development and our plan to further develop for our contracting business and by providing more training opportunities to our engineering staff; and (iii) developing more efficient in-house computer programs for use in developing engineering designs for our engineering consulting and contracting businesses. CONCENTRATION OF CUSTOMERS AND SUPPLIERS Our top five customers accounted for approximately 65.2% and 64.8% of our total revenue for each of FY2013 and FY2014 respectively. Our top five customers are not obligated in any way to continue to provide us with new businesses in the future at a level similar to that in the past or at all. In addition, our top five suppliers accounted for approximately 84.0% and 82.8% of our total purchases for each of FY2013 and FY2014 respectively. If any of our top suppliers were to substantially reduce the amount of goods or services provided to us or to terminate the business relationship with us entirely, there can be no assurance that we would be able to identify new suppliers in replacement. Nevertheless, despite our concentration of customers and suppliers, our Directors consider that we are not reliant on any single customer or supplier for reasons set out in the sections Business Customers Customer concentration and Business Suppliers Supplier concentration in this prospectus. RISK FACTORS Potential investors are advised to carefully read the section Risk factors in this prospectus before making any investment decision in the Placing Shares. Some of the more particular risk factors include: (i) any increase in our engineering staff costs and any change in the availability of engineering staff may adversely affect our competitiveness and profitability; (ii) we may be exposed to professional indemnity liabilities; (iii) our pricing is determined based on the estimated time and costs involved in a project which may deviate from the actual time and costs involved and any material inaccurate estimation may adversely affect our financial results; (iv) we are reliant on the availability of construction and geotechnical engineering projects in Hong Kong; (v) failure to properly supervise site works as a Registered Specialist Contractor may result in prosecution or disciplinary action; and (vi) our Group is dependent on key personnel and there is no assurance that our Group can retain them. 6

13 SUMMARY KEY OPERATIONAL AND FINANCIAL DATA The following table sets forth our key financial information and ratios during the Track Record Period: For FY2013/ As at 31 July 2013 HK$ 000 For FY2014/ As at 31 July 2014 HK$ 000 Results of operations Revenue 45,678 63,413 Gross profit 28,645 41,727 Profit before income tax 21,486 29,909 Profit and total comprehensive income for the year attributable to owners of our Company 17,923 24,958 Financial position Non-current assets 15,922 15,697 Current assets 23,352 52,525 Non-current liabilities 171 Current liabilities 11,402 15,221 Net current assets 11,950 37,304 Total equity 27,872 52,830 Cash flows Operating profits before working capital changes 23,387 31,900 Net cash generated from operating activities 6,691 4,368 Net cash used in investing activities (2,586) (1,207) Net cash used in financing activities (589) (526) Key financial ratios Gross profit margin - Engineering consulting 63.7% 62.4% - Contracting 50.5% 61.7% - Project management 83.0% 82.1% - Overall 62.7% 65.8% Net profit margin 39.2% 39.4% Return on equity 64.3% 47.2% Return on assets 45.6% 36.6% Current ratio Trade receivables turnover days Trade payables turnover days Gearing ratio

14 SUMMARY Our revenue increased by approximately 38.8% from approximately HK$45.7 million for FY2013 to approximately HK$63.4 million for FY2014, mainly due to the increase in the general demand for our services as a result of the increase in the amount of general building works and civil engineering works in Hong Kong as well as our focus on pursuing contracting and project management projects of larger scale and higher income in view of the business opportunities available to us, coupled with our increase in project management and site personnel to cope with our business growth. Our financial position remained healthy during the Track Record Period with current ratio of approximately 2.0 as at 31 July 2013 and approximately 3.5 as at 31 July 2014 and gearing ratio of approximately 0.2 as at 31 July 2013 and approximately 0.1 as at 31 July 2014 mainly due to the cash flows generated from our business operations. Please refer to the section Financial information in this prospectus for a further discussion and analysis of our financial information. CONTROLLING SHAREHOLDER Immediately following completion of the Placing and the Capitalisation Issue and not taking into account any Shares that may be issued pursuant to the exercise of any options that may be granted under the Share Option Scheme, our Company will be owned as to (i) 75% by Sonic Solutions, which is an investment holding company incorporated in the BVI and wholly and directly owned by Dr. Li; and (ii) 25% by public Shareholders. Dr. Li is the founder of our Group, the chairman of the Board and an executive Director. Dr. Li does not, directly or indirectly, carry on, participate or engage in, nor is he otherwise interested in, any other business which is or may be in competition with the business of our Group. Please refer to the section Directors and senior management in this prospectus for the biographical information of Dr. Li. NON-COMPLIANCES We have previously been involved in a number of non-compliance matters on various occasions, including non-compliance with certain conditions and terms of Government leases and occupation permits with respect to prescribed land use as well as certain statutory requirements in the Predecessor Companies Ordinance with respect to matters such as timely adoption of audited accounts, and the Inland Revenue Ordinance (Chapter 112 of the Laws of Hong Kong) with respect to timely filings of notifications in relation to commencement and cessation of employment. For details, please refer to the section Business Non-compliance in this prospectus. 8

15 SUMMARY DIVIDEND POLICY For FY2013 and FY2014, we did not declare any dividends to our then shareholder. In September 2014, we declared interim dividends in the aggregate amount of HK$22,590,000 to Dr. Li. All dividends declared had been fully paid in September 2014 and we financed the payment of such dividends by offsetting an equivalent amount due from Dr. Li. The declaration and payment of future dividends will be subject to the decision of the Board having regard to various factors, including but not limited to our operation and financial performance, profitability, business development, prospects, capital requirements, and economic outlook. It is also subject to the approval of our Shareholders as well as any applicable laws. The historical dividend payments may not be indicative of future dividend trends. We do not have any predetermined dividend payout ratio. PLACING STATISTICS Number of Placing Shares : 102,800,000 Placing Shares (comprising 51,400,000 New Shares to be offered by our Company and 51,400,000 Sale Shares to be offered by the Selling Shareholder) Placing Price : HK$0.60 per Placing Share (excluding brokerage, Stock Exchange trading fee and SFC transaction levy) Market capitalisation of the Shares upon completion of the Placing and the Capitalisation Issue Unaudited pro forma adjusted combined net tangible assets of our Group attributable to owners of our Company per Share : HK$246,720,000 : HK$0.19, or, if the effect of the interim dividends of HK$22,590,000 declared and paid in September 2014 was taken into account, HK$0.14 (Please refer to the section Unaudited pro forma adjusted combined net tangible assets in Appendix II to this prospectus for the bases and assumptions in calculating the unaudited pro forma adjusted combined net tangible assets per Share) 9

16 SUMMARY FUTURE PLANS AND USE OF PROCEEDS The net proceeds to be received by us from the Placing based on the Placing Price of HK$0.60 per Share, after deducting related expenses to be borne by us, are estimated to be approximately HK$22.2 million. Our Directors presently intend that the net proceeds will be applied as follows: approximately HK$15.0 million (approximately 67.7% of the net proceeds), HK$5.0 million (approximately 22.5% of the net proceeds) and HK$2.0 million (approximately 9.0% of the net proceeds) will be used for further developing our contracting business, further strengthening our in-house team of engineering staff and developing more efficient in-house computer programs respectively, with the intended timing of the deployment of the proceeds as follows: From the Latest Practicable Date to 31 July 2015 From 1 August 2015 to 31 January 2016 From 1 February 2016 to 31 July 2016 From 1 August 2016 to 31 January 2017 From 1 February 2017 to 31 July 2017 Total HK$ million HK$ million HK$ million HK$ million HK$ million HK$ million Further developing our contracting business Further strengthening our in-house team of engineering staff Developing more efficient in-house computer programs approximately HK$0.2 million (approximately 0.8% of the net proceeds) will be used as our general working capital. LISTING EXPENSES Our Directors estimate that the total amount of expenses in relation to the Listing is approximately HK$17.3 million. Our Company and the Selling Shareholder will each bear half of the listing expenses. Of the amount of approximately HK$8.7 million to be borne by us, approximately HK$2.7 million is directly attributable to the issue of the Placing Shares and is expected to be accounted for as a deduction from equity upon Listing. The remaining amount of approximately HK$6.0 million, which cannot be so deducted, will be charged to profit or loss. Of the approximately HK$6.0 million that will be charged to profit or loss, nil and approximately HK$4.0 million have been charged during each of FY2013 and FY2014 respectively, and approximately HK$2.0 million is expected to be incurred for the year ending 31 July Expenses in relation to the Listing are non-recurring in nature. We do not expect that the listing expenses to be recognised will have a material adverse impact on our net profit for the year ending 31 July

17 SUMMARY RECENT DEVELOPMENT Subsequent to the Track Record Period and up to the Latest Practicable Date, we have continued to focus on the development of our engineering consulting, contracting and project management businesses in Hong Kong. Based on our unaudited management accounts for the one month ended 31 August 2014, our revenue was approximately HK$4.8 million, representing an increase of approximately 54.0% from approximately HK$3.1 million for the corresponding period in the preceding financial year, which was mainly due to an significant increase in our project management income as we allocated more resources in seeking new business opportunities in this business segment; our costs of staff directly related to the provision of our services was approximately HK$1.4 million, representing an increase of approximately 40.5% from approximately HK$1.0 million for the corresponding period in the preceding financial year, which was mainly due to an increase in the number of our employees as well as salary raise; and our gross profit margin was approximately 67.9% for the one month ended 31 August 2014, representing an increase of approximately 13.6% from approximately 54.3% for the corresponding period in the preceding financial year, which was mainly because an significant increase in our revenue for the one month ended 31 August 2014 was attributable to our project management business, which typically has a higher profit margin than that of our engineering consulting business, while the majority of our revenue for the one month ended 31 August 2013 was attributable to our engineering consulting business. As at the Latest Practicable Date, we had a total of 60 projects in progress (including projects that have commenced but not completed as well as projects that have been awarded to us but not yet commenced). The following table sets out the amount of revenue expected to be recognised in respect of such projects in progress: Engineering Project consulting Contracting management HK$ 000 HK$ 000 HK$ 000 Amount of revenue: expected to be recognised after the Latest Practicable Date but before 31 July ,268 56,310 4,700 expected to be recognised after 31 July , ,721 56,810 5,200 It should be noted that our cost of sales may increase when our revenue increases and there is no assurance that our Group will be able to maintain similar overall gross profit margin. 11

18 SUMMARY All financial information disclosed under this sub-section headed Recent development has been reviewed by HLB Hodgson Impey Cheng Limited, our reporting accountants. One of our business strategies is to further develop our contracting business. Shareholders and potential investors should note that the profit margin that we will be able to achieve in respect of each contracting project may vary, primarily depending on the materiality of the change in the engineering design that we are able to develop as compared with the original engineering design, which in turn depends on the different engineering circumstances pertaining to each project. As such, there is no guarantee that when we undertake more contracting projects in the future in accordance with our business strategy, our profit margin can be maintained at a level similar to that achieved by us during the Track Record Period. In addition, we may incur higher subcontracting charges following our plan to undertake projects of larger scales and contract sums, which may result in a decrease in our gross profit margin. In particular, with respect to the contracting project that remained on-going as at 31 July 2014 (being project 4 as referred to in the section Business Our services Projects undertaken during the Track Record Period Contracting projects in this prospectus), the total amount of revenue recognised and expected to be recognised by us is HK$65 million (which is the highest compared with other contracting projects with revenue contribution to us during the Track Record Period), and the actual amount of subcontracting fees agreed with subcontractor engaged by us for the project is HK$44.4 million, therefore giving an approximate gross profit margin of about 31.7%, which is considerably lower than the gross profit margin of our contracting business of approximately 50.5% for FY2013 and approximately 61.7% for FY2014. It should be noted that such project may have a significant impact on our gross profit margin after the Track Record Period given its large contract sum as compared with the total amount of revenue expected to be recognised after the Track Record Period in respect of our projects in progress. Shareholders and potential investors should therefore note that there may be possible adverse impact on our gross profit margin as a result of the above. Nevertheless, our Directors confirm that subsequent to the Track Record Period and up to the date of this prospectus, there has been no material adverse change in the financial or trading position or prospects of our Group. 12

19 DEFINITIONS AND GLOSSARY OF TECHNICAL TERMS In this prospectus, unless the context otherwise requires, the following expressions have the following meanings. Articles or Articles of Association associate(s) Authorized Person(s) Board Bookrunner or Lead Manager Building Authority Buildings Department Buildings Ordinance BVI CAGR the articles of association of our Company adopted on 19 November 2014 and as amended from time to time, a summary of which is set out in Appendix IV to this prospectus has the meaning ascribed to it under the GEM Listing Rules a person whose name is on the authorized persons register kept under section 3(1) of the Buildings Ordinance as an architect, an engineer, or a surveyor the board of Directors Orient Securities Limited, a licensed corporation under SFO to carry on type 1 (dealing in securities) and type 4 (advising on securities) regulated activities, being the underwriter, the bookrunner and the lead manager to the Placing has the meaning ascribed to it under the Buildings Ordinance and, as at the Latest Practicable Date, means the Director of Buildings of the Government the Buildings Department of the Government the Buildings Ordinance (Chapter 123 of the Laws of Hong Kong) the British Virgin Islands compounded annual growth rate Capitalisation Issue the issue of 308,400,000 Shares to be made upon capitalisation of certain sums standing to the credit of the share premium account of our Company referred to in the paragraph headed 3. Written resolutions of the sole Shareholder passed on 19 November 2014 under the paragraph headed A. Further information about our Company in Appendix V to this prospectus CCASS CCASS Clearing Participant CCASS Custodian Participant the Central Clearing and Settlement System established and operated by HKSCC a person permitted to participate in CCASS as a direct clearing participant or general clearing participant a person permitted to participate in CCASS as a custodian participant 13

20 DEFINITIONS AND GLOSSARY OF TECHNICAL TERMS CCASS Investor Participant a person admitted to participate in CCASS as an investor participant who may be an individual or joint individuals or a corporation CCASS Participants a CCASS Clearing Participant, a CCASS Custodian Participant or a CCASS Investor Participant close associate(s) Companies Law Companies Ordinance Companies (Winding Up and Miscellaneous Provisions) Ordinance has the meaning ascribed to it under the GEM Listing Rules the Companies Law (as revised) of the Cayman Islands, as amended, modified and supplemented from time to time the Companies Ordinance (Chapter 622 of the Laws of Hong Kong), which came into effect on 3 March 2014, as amended, modified and supplemented from time to time the Companies (Winding Up and Miscellaneous Provisions) Ordinance (Chapter 32 of the Laws of Hong Kong), as amended, supplemented or otherwise modified from time to time Company and our Company KSL Holdings Limited, a company incorporated in the Cayman Islands as an exempted company with limited liability on 17 July 2014 connected person(s) Controlling Shareholders core connected person(s) CRPD Director(s) Dr. Li engineering design has the meaning ascribed to it under the GEM Listing Rules has the meaning ascribed to it under the GEM Listing Rules and in the case of our Company, means collectively, Sonic Solutions and Dr. Li has the meaning ascribed to it under the GEM Listing Rules Centre For Research & Professional Development Limited, a company incorporated in Hong Kong on 11 April 2001 with limited liability and an indirect wholly-owned subsidiary of our Company upon completion of the Reorganisation the director(s) of our Company Dr. Li Kai Shun ( ), an executive Director, the chairman of the Board and one of the Controlling Shareholders includes structural and geotechnical details, drawings and calculations primarily concerning how a structure or foundation should be constructed FY2013 the financial year ended 31 July

21 DEFINITIONS AND GLOSSARY OF TECHNICAL TERMS FY2014 the financial year ended 31 July 2014 GEM GEM Listing Rules geotechnical engineering Government Group, we, us or our HKICPA the Growth Enterprise Market of the Stock Exchange the Rules Governing the Listing of Securities on the Growth Enterprise Market of the Stock Exchange, as amended, modified and supplemented from time to time the branch of civil engineering concerned with the study and modification of soil and rocks, which are applied to situations including but not limited to foundation design and construction works for building construction projects, excavations and structural designs for the construction of underground facilities, site formation works and landslip preventive works the government of Hong Kong our Company and its subsidiaries at the relevant time or, where the context otherwise requires, in respect of the period prior to our Company becoming the holding company of its present subsidiaries pursuant to the Reorganisation, its present subsidiaries and the businesses operated by such subsidiaries Hong Kong Institute of Certified Public Accountants HKIE The Hong Kong Institution of Engineers, which was established under the Hong Kong Institution of Engineers Ordinance (Chapter 1105 of the Hong Kong laws) HKSCC Hong Kong Securities Clearing Company Limited, a wholly-owned subsidiary of Hong Kong Exchanges and Clearing Limited HKSCC Nominees HK$ or HKD and cents Hong Kong or HK Hong Kong Branch Share Registrar Housing Department HKSCC Nominees Limited Hong Kong dollars and cents respectively, the lawful currency of Hong Kong the Hong Kong Special Administrative Region of the People s Republic of China Tricor Investor Services Limited The Housing Department of the Government 15

22 DEFINITIONS AND GLOSSARY OF TECHNICAL TERMS independent third party(ies) IPSOS IPSOS Report ISO ISO 9001 an individual(s) or a company(ies) who or which is/are independent and not connected with (within the meaning of the GEM Listing Rules) any Directors, chief executive or substantial Shareholders (within the meaning of the GEM Listing Rules) or our Company, its subsidiaries or any of their respective associates and not otherwise a connected person of our Company IPSOS Hong Kong Limited, an independent market research agency a market research report commissioned by us and prepared by IPSOS on the overview of the industries in which our Group operates an acronym for a series of quality management and quality assurance standards published by International Organisation for Standardization, a non-government organization based in Geneva, Switzerland, for assessing the quality systems of business organizations one of the quality assurance system standards published by ISO KSL Engineering KSL Engineering Limited ( ), a company incorporated in Hong Kong on 27 February 2009 with limited liability and an indirect wholly-owned subsidiary of our Company upon completion of the Reorganisation KSL Enterprises Latest Practicable Date Legal Counsel Listing KSL Enterprises Limited, a company incorporated in the BVI with limited liability on 8 July 2014, which is a directly wholly-owned subsidiary of our Company and the intermediate holding company of our Group upon completion of the Reorganisation 19 November 2014, being the latest practicable date prior to the printing of this prospectus for the purpose of ascertaining certain information in this prospectus prior to its publication Chan Chung, barrister-at-law of Hong Kong listing of the Shares on GEM Listing Date the date, expected to be on or about Friday, 5 December 2014, on which dealings in the Shares first commence on GEM 16

23 DEFINITIONS AND GLOSSARY OF TECHNICAL TERMS Memorandum of Association or Memorandum New Shares the memorandum of association of our Company adopted on 19 November 2014 and as amended from time to time 51,400,000 new Shares to be offered by our Company for subscription at the Placing Price under the Placing Placing the conditional placing of the Placing Shares by the Underwriter on behalf of our Company and the selling shareholder for cash at the Placing Price with professional, institutional and individual investors as described in the section headed Structure and conditions of the Placing in this prospectus Placing Price HK$0.60 per Placing Share (excluding brokerage, Stock Exchange trading fee and SFC transaction levy) Placing Shares Predecessor Companies Ordinance Quantity Surveyor Registered Geotechnical Engineer Registered Professional Engineer Registered Specialist Contractor Registered Structural Engineer the 102,800,000 Shares (comprising New Shares to be offered by our Company and Sale Shares to be offered by the Selling Shareholder) being offered for subscription at the Placing Price pursuant to the Placing the predecessor Companies Ordinance (Chapter 32 of the Laws of Hong Kong) as in force from time to time before 3 March 2014 Mr. Lee Yiu Ming, an independent registered professional surveyor in the quantity surveying division registered under the Surveyors Registration Ordinance (Chapter 417 of the Laws of Hong Kong), who is engaged at the request of the Sponsor to provide cost estimates in relation to certain engineering designs a person whose name is on the geotechnical engineers register kept under section 3(3A) of the Buildings Ordinance from time to time a person whose name is on the register of registered professional engineers established and maintained under section 7 of the Engineers Registration Ordinance (Chapter 409 of the Laws of Hong Kong) a person whose name is on the register of specialist contractors maintained under section 8A of the Buildings Ordinance from time to time a person whose name is on the structural engineers register kept under section 3(3) of the Buildings Ordinance from time to time 17

24 DEFINITIONS AND GLOSSARY OF TECHNICAL TERMS Reorganisation Sale Shares the corporate reorganisation arrangements implemented by our Group in preparation for the Listing which is more particularly described in the section headed History and development of this prospectus 51,400,000 Shares to be offered by the Selling Shareholder for purchases at the Placing Price under the Placing Selling Shareholder Sonic Solutions, being the Shareholder who offers 51,400,000 Shares for purchases under the Placing SFC SFO Share(s) Shareholder(s) the Securities and Futures Commission of Hong Kong the Securities and Futures Ordinance (Chapter 571 of the Laws of Hong Kong), as amended, modified and supplemented from time to time ordinary share(s) with nominal value of HK$0.01 each in the share capital of our Company, which are to be traded in Hong Kong dollars and listed on GEM holder(s) of the Share(s) Share Option Scheme the share option scheme conditionally adopted by our Company on 19 November 2014, the principal terms of which are summarized in the section headed Statutory and General Information Share Option Scheme in Appendix V to this prospectus Sonic Solutions Sponsor Stock Exchange Sonic Solutions Limited, one of our Controlling Shareholders and a company incorporated in the BVI on 3 July 2014 with limited liability and wholly owned by Dr. Li Messis Capital Limited, the sponsor for the Listing and a licensed corporation to engage in type 1 (dealing in securities) and type 6 (advising on corporate finance) regulated activities under the SFO The Stock Exchange of Hong Kong Limited subsidiary(ies) has the meaning ascribed thereto in section 2 of the Companies Ordinance Substantial Shareholder has the meaning ascribed thereto in the GEM Listing Rules and details of our Substantial Shareholders are set out in the section headed Substantial Shareholders in this prospectus 18

25 DEFINITIONS AND GLOSSARY OF TECHNICAL TERMS surety bond a bond issued by a bank to guarantee the satisfactory completion of a project by a contractor such that if the contractor fails to perform according to requirements in the contract, the contractor s customer is guaranteed compensation for any monetary loss up to the amount of the surety bond Takeovers Code The Codes on Takeovers and Mergers and Share Buy-backs, as amended, modified and supplemented from time to time Track Record Period the two years ended 31 July 2014 Underwriter Underwriting Agreement VLA sq.ft. the underwriter of the Placing whose name is set out in the section headed Underwriting Underwriter in this prospectus the conditional underwriting agreement relating to the Placing entered into on 28 November 2014 among our Company, the Selling Shareholder, the executive Directors, the Controlling Shareholders, the Sponsor, the Lead Manager and the Underwriter relating to the Placing, particulars of which are summarised in the section headed Underwriting in this prospectus Victor Li & Associates Limited ( ) (formerly known as Victor Li & Associates Limited ( )), a company incorporated in Hong Kong on 30 May 1996 with limited liability and an indirect wholly-owned subsidiary of our Company upon completion of the Reorganisation square foot % per cent 19

26 FORWARD-LOOKING STATEMENTS This prospectus contains forward-looking statements that are, by their nature, subject to significant risks and uncertainties. In some cases the words such as aim, anticipate, believe, estimate, expect, going forward, intend, may, plan, potential, predict, propose, seek, should, will, would and other similar expressions are used to identify forward-looking statements. These forward-looking statements include, without limitation, statements relating to: our Group s business and operating strategies and plans of operation; the amount and nature of, and potential for, future development of our Group s business; our Company s dividend distribution plans; the regulatory environment as well as the general industry outlook for the industry in which our Group operate; future developments in the industry in which our Group operate; and the trend of the economy of Hong Kong, the United States, the PRC and the world in general. These statements are based on several assumptions, including those regarding our Group s present and future business strategy and the environment in which our Group will operate in the future. Our Group s future results could differ materially from those expressed or implied by such forward-looking statements. In addition, our Group s future performance may be affected by various factors including, without limitation, those discussed in the sections headed Risk factors and Financial information of this prospectus. Should one or more risks or uncertainties stated in the aforesaid sections materialise, or should any underlying assumptions to prove incorrect, actual outcomes may vary materially from those indicated. Prospective investors should therefore not place undue reliance on any of the forward-looking statements. All forward-looking statements contained in this prospectus are qualified by reference to the cautionary statements as set out in this section. In this prospectus, statements of, or references to, our Group s intentions or those of any of our Directors are made as at the date of this prospectus. Any such intentions may change in light of future developments. 20

27 RISK FACTORS Potential investors should carefully consider all of the information set out in this prospectus and, in particular, should consider the following risks and special consideration associated with an investment in our Company before making any investment decision in relation to the Placing Shares. If any of the possible events as described below, or any other risk factors or uncertainties that our Company is unaware of, materialises, our Group s business, financial position and prospects could be materially and adversely affected and the trading prices of the Shares could decline due to any of these risks, and you may lose all or part of your investment. RISKS RELATING TO OUR BUSINESS Any increase in our engineering staff costs and any change in the availability of engineering staff may adversely affect our competitiveness and profitability In our engineering consulting business, we leverage on the expertise of our in-house team of engineering staff in developing cost-effective engineering designs for our customers. In our contracting business, we leverage on the expertise of our in-house team of engineering staff in changing the original engineering design to a more cost-effective one in order for us to achieve substantial savings and profit margin. As such, we consider that our in-house team of engineering staff is crucial to the day-to-day operations and the continuing success of our Group. For each of FY2013 and FY2014, our staff costs for staff directly involved in the provision of our services amounted to approximately HK$11.8 million and HK$14.1 million, representing approximately 69.1% and 64.1% of our total cost of sales, respectively. Such staff costs primarily represent salaries and benefits incurred in respect of our engineering staff. According to the IPSOS Report, the average salary of engineering staff in Hong Kong have increased from an estimated HK$33,250 per month in 2009 to an estimated HK$38,750 per month in 2013, representing a CAGR of about 4.0%, mainly due to the intense competition from the PRC and Macau markets for experienced and qualified engineering staff. As stated in the IPSOS Report, it is anticipated that the average salary of engineering staff per month in Hong Kong will further increase in the next few years. 21

28 RISK FACTORS The following sensitivity analysis illustrates the impact of hypothetical fluctuations in our staff costs (in respect of our staff who are directly involved in the provision of our services) on our profits during the Track Record Period. The hypothetical fluctuation rates are set at 2% and 7%, which correspond to the approximate minimum and maximum year-on-year fluctuations in average salary of engineering staff in Hong Kong from 2009 to 2013 as shown in the IPSOS Report and are therefore considered reasonable for the purpose of this sensitivity analysis: Hypothetical fluctuations in our staff costs (in respect of staff who are directly involved in the provision of our services) +2% +7% -2% -7% HK$ 000 HK$ 000 HK$ 000 HK$ 000 Change in profit before tax FY2013 (235) (824) FY2014 (281) (986) Change in profit after tax FY2013 (197) (688) FY2014 (235) (823) Our costs of engineering staff may be affected by the demand and supply of engineers in Hong Kong as well as other economic factors such as inflation rate and general standard of living. There is no guarantee that the supply of engineers in Hong Kong will remain stable. In the event that we fail to retain our existing engineering staff and/or recruit sufficient and capable engineering staff in a timely manner for our existing or future projects and/or there is a significant increase in our staff costs, our operations and profitability may be materially and adversely affected. We may be exposed to professional indemnity liabilities As mentioned in the section headed Regulatory Overview Professional Standards, there is no professional body governing our Group s business and there is no professional standards or requirements applicable to our Group s business. However, claims in respect of our engineering consulting business may be made against us when third parties allege that they have sustained financial losses due to our breach of duty in our profession as consulting engineers by reason of negligent act, error or omission committed or allegedly committed by us. In addition, one of our business strategies is to further develop our contracting business by undertaking more contracting projects in the future. In respect of our contracting business, in addition to taking up the role as a contractor, we would change the engineering design to a more cost-effective one, thereby effectively also performing the role of a consulting engineer in the preparation of the engineering design. As such, when we undertake more contracting projects, our exposure to potential professional indemnity liabilities would also increase due to our potential breach of duty by reason of negligent act, error or omission committed or allegedly committed by us. 22

29 RISK FACTORS Despite the operation procedures of our engineering consulting business that conform to the ISO 9001 quality standards and requirements (which are discussed in further detail in the section Business Quality assurance in this prospectus), there is no assurance that these measures can completely eliminate the possibility of the negligence, error or omission caused by our employees. Although our Group did not experience any actual or threatened claims in relation to professional indemnity during the Track Record Period, there is no assurance that there will not be any such claims against us in the future. Professional indemnity insurance policy has been taken out by our Group to cover our potential exposure in this regard, details of which are set out in the section Business Insurance in this prospectus. However, any claims made against us may have an adverse impact on our Group s reputation and may expose our Group to potential professional indemnity liabilities to the extent not covered by insurance policy, in which case our business operations and financial position may be adversely and materially affected. Our pricing is determined based on the estimated time and costs involved in a project which may deviate from the actual time and costs involved and any material inaccurate estimation may adversely affect our financial results. In addition, in respect of our contracting business, we may not always be able to successfully change an engineering design to a more cost-effective one and obtain the relevant approval, in which case we may incur a significantly reduced profit margin or even a loss We need to estimate the time and costs involved in a project in order to determine our fee. There is no assurance that the actual amount of time and costs would not exceed our estimation during the performance of our projects. The actual amount of time and costs incurred in completing a project may be adversely affected by many factors, including adverse weather conditions, accidents, unforeseen site conditions such as unexpected difficult geological or sub-soil conditions, departure of key engineering staff involved in the project, delays in obtaining the necessary approvals in respect of the engineering designs from the relevant Government authorities or their appointed consultants, and other unforeseen problems and circumstances. Any material inaccurate estimation in the time and costs involved in a project may adversely affect our profit margin and results of operations. In addition, in respect of our contracting service, we mainly undertake projects with an original engineering design that, in our opinion, are capable of being changed to a more cost-effective one. In doing so, we would be able to charge our customer a contracting fee which is slightly lower than the cost that our customer would otherwise have to incur by adopting the original design but would still allow us to achieve a substantial profit margin if we are able to successfully change the engineering design to a more cost-effective one. We leverage on the expertise of our team of in-house engineering staff for the preparation of a more cost-effective engineering design and obtaining approval of such design from the relevant Government authorities or their appointed consultants. However, there is no assurance that we will always be able to successfully change an original engineering design to a more cost-effective one and obtain approval in respect thereof. Any failure by us to successfully change an original engineering design to a more cost-effective one and obtain approval in respect thereof would lead to a significantly reduced profit margin, or even a loss, to be incurred by us in respect of the project and could therefore materially and adversely affect our financial performance. 23

30 RISK FACTORS There are risks associated with our future plan to further develop our contracting business due to our potential failure to obtain new contracting projects, variation in profit margin, and the likely requirement for surety bonds One of our business strategies is to further develop our contracting business by undertaking more contracting projects in the future. However, there is no assurance that our Group will be able to obtain new contracting projects. Our ability to obtain new contracting projects depend on factors such as the availability of construction and geotechnical engineering projects in Hong Kong, our reputation in the industry and our relationship with existing and potential customers. If we are unable to obtain new contracting projects, our future plan to further develop our contracting business may not be successful, which may in turn affect our business and financial positions. In addition, the profit margin that we will be able to achieve in respect of each contracting project may vary, primarily depending on the materiality of the change in the engineering design that we are able to develop as compared with the original engineering design, which in turn depends on the different engineering circumstances pertaining to each project. As such, there is no guarantee that when we undertake more contracting projects in the future in accordance with our business strategy, our profit margin can be maintained at a level similar to that achieved by us during the Track Record Period. In addition, we may incur higher subcontracting charges following our plan to undertake projects of larger scales and contract sums, which may result in a decrease in our gross profit margin. In particular, with respect to the contracting project that remained on-going as at 31 July 2014 (being project 4 as referred to in the section Business Our services Projects undertaken during the Track Record Period Contracting projects in this prospectus), the total amount of revenue recognised and expected to be recognised by us is HK$65 million (which is the highest compared with other contracting projects with revenue contribution to us during the Track Record Period), and the actual amount of subcontracting fees agreed with subcontractor engaged by us for the project is HK$44.4 million, therefore giving an approximate gross profit margin of about 31.7%, which is considerably lower than the gross profit margin of our contracting business of approximately 50.5% for FY2013 and approximately 61.7% for FY2014. It should be noted that such project may have a significant impact on our gross profit margin after the Track Record Period given its large contract sum as compared with the total amount of revenue expected to be recognised after the Track Record Period in respect of our projects in progress. Shareholders and potential investors should therefore note that there may be possible adverse impact on our gross profit margin as a result of the above. Furthermore, in respect of construction projects in Hong Kong, it is not uncommon for contractors to be required to arrange with banks to provide surety bonds in the amount of certain percentage (usually 10%) of the contract sum to their customers. A surety bond serves to guarantee the satisfactory completion of the works to be performed by the contractor such that if the contractor fails to perform according to requirements in the contract, the customer is guaranteed compensation for any monetary loss up to the amount of the surety bond. A contractor is usually required to pay up the full amount of the surety bond to a bank in order for the bank to issue the surety bond to the contractor s customer. The amount is usually released back to the contractor after project completion. During the Track Record Period, we only undertook projects which did not have surety bonds requirements because providing surety bonds would lock up a substantial portion of our financial resources for a prolonged period of time. However, our Directors consider that only undertaking 24

31 RISK FACTORS projects without surety bonds requirements would limit our choice of business opportunities and would undermine our ability in further developing our contracting business. As such, in further developing our contracting business and having regard to our available financial resources, our Directors intend to undertake more projects in the future, including those with surety bonds requirements. It is currently intended that approximately HK$15 million of the net proceeds to be received by us from the Placing will be earmarked for satisfying potential customers requirements for surety bonds. Such amount, when paid up for arranging surety bonds, may therefore be locked up for a prolonged period of time, depending on the duration of the relevant contracting projects, and may affect our cash flows and financial position if we fail to properly manage our liquidity position. In addition, amount paid up for arranging surety bonds may not be released back to us if we fail to satisfactorily complete the works in accordance with the requirements in the relevant contracts, in which case our reputation, results of operations and financial positions may be adversely and materially affected. Our top five customers accounted for a substantial portion of our revenue Our top five customers accounted for approximately 65.2% and 64.8% of our total revenue for each of FY2013 and FY2014 respectively. In particular, approximately 20.2% and 34.4% of our total revenue were attributable to our largest customer for each of FY2013 and FY2014 respectively. Our top five customers are not obligated in any way to continue to provide us with new businesses in the future at a level similar to that in the past or at all. If any of these top customers were to substantially reduce the volume and/or the value of new businesses to us or to terminate the business relationship with us entirely, there can be no assurance that we would be able to secure new businesses from other customers for replacement. In addition, there can be no assurance that new businesses secured from other customers for replacement, if any, would be on commercially comparable terms. As such, our operations and financial performance may be adversely affected. We are reliant on the availability of construction and geotechnical engineering projects in Hong Kong Our business performance are generally affected by the number and availability of construction and geotechnical engineering projects in Hong Kong, which in turn are affected by various factors, including but not limited to the general economic conditions in Hong Kong, changes in government policies relating to Hong Kong property markets, the general conditions of property markets in Hong Kong, and the amount of investment in the construction of new infrastructure and improvement of existing infrastructure. Unfavourable changes in these factors may result in a significant decrease in the number of geotechnical projects available in Hong Kong in general. For instance, an economic downturn in Hong Kong, an outbreak of epidemic disease, and/or adverse government policies on the property markets in Hong Kong may lead to a significant decline in the number of construction projects of buildings and/or underground facilities in Hong Kong, thereby resulting in a decline in the number of geotechnical projects available involving the design and construction of building foundations and/or excavation and structural designs for underground facilities. There is no assurance that the number of construction and geotechnical engineering projects in Hong Kong will not decrease in the future. In the event that the availability of geotechnical works decreases as a result of the decrease in the number of construction and geotechnical engineering projects in Hong Kong, our business in general and our results of operations may be adversely and materially affected. 25

32 RISK FACTORS Failure to properly supervise site works as a Registered Specialist Contractor may result in prosecution or disciplinary action KSL Engineering, our operating subsidiary carrying on our contracting and project management businesses, has completed the registrations as a Registered Specialist Contractor in the site formation category and the foundation category. Under section 9 of the Buildings Ordinance, a person is required to appoint a Registered Specialist Contractor to carry out specialized works (such as foundation and site formation works). Some of our customers may appoint KSL Engineering to act as a Registered Specialist Contractor pursuant to the requirement of section 9 of the Buildings Ordinance. The duties of a Registered Specialist Contractors are: (i) to provide continuous supervision to the carrying out of the works; (ii) to notify the Building Authority of any contravention of the regulations that would result from carrying out the works; and (iii) to comply generally with the Buildings Ordinance. If we are appointed by our customer to act as a Registered Specialist Contractor and we fail to properly supervise the carrying out of the site works pursuant to the requirements of the Buildings Ordinance, we and our Directors may be subject to prosecution or disciplinary action, details of which are set out in the section Regulatory overview C. Law and regulations relating to contractor licensing Sanctions. Although we did not experience any such incidents during the Track Record Period, there is no assurance that no such incidents will occur in the future. In such event, our reputation, business operations and financial position may be materially and adversely affected. Our revenue is mainly derived from projects which are not recurrent in nature and there is no guarantee that our customers will provide us with new businesses Our revenue is typically derived from projects which are non-recurrent in nature. Our customers are under no obligation to award projects to us. As such, there is no guarantee that we will be able to secure new businesses from customers. Accordingly, the number and scale of projects and the amount of revenue we are able to derive therefrom may vary significantly from period to period, and it may be difficult to forecast the volume of future business. During the Track Record Period, the majority of our projects were awarded to us by repeat customers (i.e. customers who had previously awarded projects to us before Track Record Period), who contributed to approximately 84.9% and 90.4% of our total revenue for FY2013 and FY2014 respectively. In addition, all of our new businesses during the Track Record Period were obtained through direct invitation for quotation by customers, which is considered by our Directors to be attributable to our well-established presence and professional reputation in the geotechnical engineering industry in Hong Kong. Accordingly, if we fail to maintain our relationship with our customers or if we are unable to maintain our service quality, professional image or reputation in the industry, our ability to obtain new businesses and thus our business and financial positions may be adversely and materially affected. 26

33 RISK FACTORS Unsatisfactory performance by our subcontractors or unavailability of subcontractors may adversely affect our operations and profitability In respect of our contracting service, we engage subcontractors to perform site works based on our engineering designs and we do not maintain our own direct labours or machinery for performing site works. For each of FY2013 and FY2014, our revenue attributable to our contracting service amounted to approximately HK$9.7 million and HK$12.9 million respectively, while subcontracting charges incurred by us amounted to approximately HK$3.2 million and HK$4.0 million respectively. Notwithstanding our evaluation and selection of subcontractors, there is no assurance that the work quality of our subcontractors can always meet our requirements. Outsourcing exposes us to the risks associated with non-performance, delayed performance or sub-standard performance by our subcontractors. As a result, we may incur additional costs or be subject to liability under the relevant contracts between us and our customers for our subcontractors unsatisfactory performance. Such events could impact upon our profitability, financial performance and reputation. In addition, there is no assurance that our Group will always be able to secure suitable subcontractors when required, or be able to negotiate acceptable fees and terms of service with subcontractors. In such event, our operation and financial position may be adversely affected. Our past revenue and profit margin may not be indicative of our future revenue and profit margin For each of FY2013 and FY2014, our revenue amounted to approximately HK$45.7 million and HK$63.4 million respectively; our gross profit amounted to approximately HK$28.6 million and HK$41.7 million respectively (representing gross profit margin of approximately 62.7% and 65.8% respectively); while our net profit amounted to approximately HK$18.0 million and HK$25.0 million respectively (representing net profit margin of approximately 39.2% and 39.4% respectively. However, such trend of historical financial information of our Group is a mere analysis of our past performance only and does not have any positive implication on and may not necessarily reflect our financial performance in the future. Our future performance will depend on, among other things, our ability to secure new businesses and to control our costs and will be subject to risk factors set out in this section. Profit margins for our engineering consulting, contracting and project management projects may fluctuate from project to project due to factors such as the accuracy of our estimation of our costs when committing to the amount of our fees and the complexity of the project. There is no assurance that our profit margins in the future will remain. Our Group is dependent on key personnel and there is no assurance that our Group can retain them Our Directors believe that our success, to a large extent, is attributable to, among other things, the contribution of each of our executive Directors, namely, Dr. Li, Mr. Tam Yi Shek, Mr. Chan Kin Pong and Mr. Tsang Siu Wah. Details of their expertise and experience are set out in the section Directors and senior management in this prospectus. 27

34 RISK FACTORS Our key personnel as well as their management experience in the geotechnical engineering industry in Hong Kong and their engineering expertise are crucial to our operations and financial performance. In addition, our ability to develop cost-effective engineering designs for our customers of our engineering consulting business and our ability to modify engineering designs in respect of our contracting business are mainly attributable to the knowledge, experience and expertise of our in-house engineering design team in the geotechnical engineering industry in Hong Kong and, in particular, those of Dr. Li, Mr. Tam Yi Shek and Mr. Chan Kin Pong. Furthermore, in order for KSL Engineering to apply for and maintain the registrations as a Registered Specialist Contractor in the site formation and foundation categories, KSL Engineering must have at least one authorised signatory to act for it for the purpose of the Buildings Ordinance and one technical director to carry out certain duties including, among others, providing technical support for the execution of works and ensuring that the works are carried out in accordance with the Building Ordinance. As at the Latest Practicable Date, the roles of authorised signatory and technical director of KSL Engineering were both taken up by Dr. Li. Although we have entered into a service agreement with each of our executive Directors, there could be an adverse impact on our operations should any of our executive Directors terminate his service agreement with us or otherwise cease to serve our Group and appropriate persons could not be found to replace them. There is no assurance that we will be able to attract and retain capable staffs or that they will not resign in the future. Our financial performance is expected to be affected by our Listing expenses Our Directors estimate that the total amount of expenses in relation to the Listing is approximately HK$17.3 million. Our Company and the Selling Shareholder will each bear half of the listing expenses. Of the amount of approximately HK$8.7 million to be borne by us, approximately HK$2.7 million is directly attributable to the issue of the Placing Shares and is expected to be accounted for as a deduction from equity upon Listing. The remaining amount of approximately HK$6.0 million, which cannot be so deducted, will be charged to profit or loss. Of the approximately HK$6.0 million that will be charged to profit or loss, nil and approximately HK$4.0 million have been charged during each of FY2013 and FY2014 respectively, and approximately HK$2.0 million is expected to be incurred for the year ending 31 July Expenses in relation to the Listing are non-recurring in nature. The Board wishes to inform our Shareholders and potential investors that our Group s financial performance for the year ending 31 July 2015 is expected to be so affected by the estimated expenses in relation to the Listing. We are subject to risk in relation to the collectability of our trade receivables and retention receivables In general, we do not grant credit period to our customers. Invoices are immediately due upon issuance to our customers. In addition, a portion of our fees for our contracting projects, normally at 5%, may be withheld by our customers as retention money depending on our agreement with individual customers and is released to us normally 3 months after project completion. As at 31 July 2013 and 31 July 2014, our trade receivables balances were approximately HK$7.6 million and HK$16.5 million respectively. For each of FY2013 and FY2014, our trade receivables turnover days 28

35 RISK FACTORS were approximately 40.0 days and 65.5 days respectively. There can be no assurance that our customers will settle our invoices in a timely manner and in full or that retention money will be released to us by our customers in accordance with the contract terms after project completion. Any difficulty in collecting a substantial portion of our trade receivables or retention receivables could materially and adversely affect our cash flows and financial positions. Cash flow mismatch in respect of our contracting business may lead to liquidity risk In respect of our contracting business, there are often time lags between making payments to our subcontractors and receiving payments from our customers. The extent of such cash flow mismatch is illustrated by the differences between our trade payables turnover days and our trade receivables turnover days. Our subcontractors issue invoices to us typically on a monthly basis in respect of the work done during the month and we would generally settle such invoices in a timely manner in accordance with the payment terms granted by our subcontractors to us, which is generally 30 days from the invoice date. For each of FY2013 and FY2014, our trade payables turnover days were approximately 3.0 days and 13.8 days respectively, details of which are discussed in the section Financial information Trade and other payables in this prospectus. If we choose to pay our subcontractors only after receiving payments from our customers, we will risk our reputation in being able to make payments on a timely manner, which could harm our ability to engage capable and quality subcontractors for our contracting business in the future. On the other hand, we also issue invoices to our customers typically on a monthly basis in respect of the work done during the month. We generally do not grant credit period to our customers and invoices are immediately due upon issuance to our customers. However, there can be no assurance that our customers will settle our invoices in a timely manner and in full or that retention money will be released to us by our customers in accordance with the contract terms after project completion. During the Track Record Period, our trade receivables turnover days were approximately 40.0 days for FY2013 and approximately 65.5 days for FY2014, details of which are discussed in the section Financial information Trade and other receivables in this prospectus. Any difficulty in collecting a substantial portion of our trade receivables or retention receivables could materially and adversely affect our cash flows and financial positions. If we fail to properly manage our exposure from such cash flow mismatch or if we experience any difficulty in collecting a substantial portion of our trade receivables or retention receivables, our cash flows and financial position could be materially and adversely affected. Our top five suppliers accounted for a substantial portion of our purchases During the Track Record Period, suppliers of goods and services which were specific to our business and were required on a regular basis to enable us to continue to carry on our business included: (i) subcontractors engaged by us to perform site works based on our engineering designs in respect of our contracting business; (ii) external consultants engaged by us to provide technical advice on our engineering designs when we consider it necessary or appropriate to do so for the sake of prudence; (iii) certain external firms which temporarily assigned some of their employees to us on secondment; (iv) supplier of drafting services mainly for the preparation of technical drawings; and (v) suppliers of other miscellaneous goods and services required for our business operations. 29

36 RISK FACTORS Our top five suppliers accounted for approximately 84.0% and 82.8% of our total purchases for each of FY2013 and FY2014 respectively. In particular, approximately 34.6% and 34.3% of our total purchases were attributable to our largest supplier for each of FY2013 and FY2014 respectively. If any of our top suppliers were to substantially reduce the amount of goods or services provided to us or to terminate the business relationship with us entirely, there can be no assurance that we would be able to identify new suppliers in replacement. In addition, there can be no assurance that the provision of goods and services from new suppliers in replacement, if any, would be on commercially comparable terms. As such, our operations and financial performance may be adversely affected. We rely on certain computer programs in our business operations In developing engineering designs for our engineering consulting and contracting businesses, we need to rely on certain computer programs for our in-house team of engineering staff to perform certain technical calculations and to devise certain engineering details as well as for our draftsman to prepare technical drawings. We are therefore reliant on such computer programs in our business operations. However, failures or disruptions in our computer programs may occur due to factors including but not limited to computer viruses, electricity failure or other unforeseen problems. There is no assurance that our computer programs will function properly at all times, in which case we may be unable to provide services to our customers in a timely and professional manner, thereby affecting our professional reputation, business operations and financial performance. We have records of non-compliance with certain Hong Kong regulatory requirements We have previously been involved in a number of non-compliance matters on various occasions, including non-compliance with certain conditions and terms of Government leases and occupation permits with respect to prescribed land use as well as certain statutory requirements in the Predecessor Companies Ordinance with respect to matters such as timely adoption of audited accounts, and the Inland Revenue Ordinance (Chapter 112 of the Laws of Hong Kong) with respect to timely filings of notifications in relation to commencement and cessation of employment. For details, please refer to the section Business Non-compliance in this prospectus. All acts pertaining to these non-compliances had ceased as at the Latest Practicable Date. There is no assurance that the relevant authorities would not take any enforcement action against our operating subsidiaries and our Directors in relation to the non-compliance. In the event that such enforcement action is taken, our reputation, cash flow and results of operation may be adversely affected. We may fail to renew our registrations with the Buildings Department as a Registered Specialist Contractor and there is no assurance that we will remain on the Longlist of Consultants for LPM Consultancies and Related Geotechnical Consultancies KSL Engineering, our operating subsidiary carrying on our contracting and project management businesses, has registered with the Buildings Department as a Registered Specialist Contractor under 30

37 RISK FACTORS the categories of foundation works and site formation works as some of our customers may engage us as a Registered Specialist Contractor to undertake and/or supervise foundation or site formation works. Our Directors also consider that such registrations can enhance and promote our professional image. In addition, VLA has been included in the List of Geotechnical Consultants (now known as the Longlist of Consultants for LPM Consultancies and Related Geotechnical Consultancies, where LPM refers to landslip preventive measures) (the Longlist ) maintained by the Geotechnical Engineering Office of the Civil Engineering Department (now known as Civil Engineering and Development Department) of the Government since March Our Directors consider that the Longlist is a highly remarkable reference in the industry for determining the ability and professionalism of geotechnical engineering consulting firms in Hong Kong. The IPSOS Report confirms such view of our Directors. Renewal of the aforementioned registrations with the Buildings Department is required every three years. Pursuant to the Buildings Ordinance, the Building Authority may refuse an application for renewal of registration (a) if he is satisfied that the applicant is no longer suitable (for any reason) for registration on the relevant register; or (b) if the applicant fails to provide relevant information and documentary proof required by the Building Authority. According to the Practice Note for Registered Contractors No. 38 issued by the Buildings Department, in considering an application for renewal of registration, the Building Authority may take into account, among other factors, whether the applicant is inactive in the relevant works and whether the applicant has any conviction, disciplinary or suspension records in respect of labour safety offences, malpractice or misconduct in building works or construction related activities, provisions under the Buildings Ordinance, etc. Although the Legal Counsel advised that he does not foresee any material legal impediment in the renewal of the aforesaid registrations by us, there is no assurance that we will be able to renew such registrations every time in the future. In the event of non-renewal of such registrations or if we fail to remain on the Longlist, our reputation and our ability to obtain future businesses could be materially and adversely affected. Our business strategies may not be successful or be achieved within the expected time frame or within the estimated budget Our key business strategies include further developing our contracting business, further strengthening our in-house team of engineering staff, and developing more efficient in-house computer programs. However, our business strategies may be hindered by risks including but not limited to those mentioned elsewhere in this section. There is no assurance that we will be able to successfully maintain or increase our market share or grow our business successfully after deploying our management and financial resources. Any failure in maintaining our current market position or implementing our plans could materially and adversely affect our business, financial condition and results of operations. 31

38 RISK FACTORS Any legal proceedings to which we may become a party could lead to a material adverse impact on our Group Due to the nature of our business, we may become involved in claims, legal proceedings and investigations relating to, among other things, contractual disputes with customers or subcontractors, labour disputes, employees compensation, and safety, environmental or other legal requirements. Legal proceedings can be time-consuming, expensive, and may divert our management s attention away from the operation of our business. Any claims or legal proceedings to which we may become a party in the future may have a material and adverse impact on our business. Event such as epidemics, natural disasters, adverse weather conditions, political unrest and terrorist attacks could significantly delay, or even prevent us from completing, our projects Our operations are subject to uncertainties and contingencies beyond our control that could result in material disruptions in our operations and adversely affect our business. These include epidemics, natural disasters, fire, adverse weather conditions, political unrest, wars and terrorist attacks. Any such events could cause us to reduce or halt our operation, adversely affect our business operation, increase our costs and/or prevent us from completing our projects, any one of which could materially and adversely affect our business, financial condition and results of operations. RISKS RELATING TO THE INDUSTRY IN WHICH WE OPERATE The construction industry in Hong Kong has been facing the problem of rising construction costs, including the costs of construction workers and construction materials, which may increase our costs of engaging subcontractors According to the IPSOS Report, the construction industry in Hong Kong is suffering from labour shortage, which is exacerbated by an ageing workforce and the lack of skilled talent. The average wage of construction workers in Hong Kong increased from an estimated HK$61.8 per hour in 2009 to an estimated HK$74.7 per hour in 2013, representing a CAGR of approximately 4.9%, mainly due to the growing construction industry in Hong Kong and the shortage of experienced and skillful labour as a number of skilled construction workers are approaching the age of retirement while young people are reluctant to join the construction industry. In addition, according to the IPSOS Report, the costs of key construction materials have also demonstrated a general increasing trend over the past five years. For instance, over the period from 2009 to 2013, the average wholesale price in Hong Kong increased at a CAGR of about 2.1% for steel reinforcements, about 4.6% for cement, and about 4.9% for concrete blocks. The general increases in construction material prices are affected by, among other factors, the strong construction demand in Hong Kong, Macau and the PRC. In respect of our contracting business, we do not maintain our own direct labours and machinery for performing site works and we engage subcontractors to do so based on the engineering designs 32

39 RISK FACTORS developed by us. Fee charged by our subcontractors depend on a number of factors, which generally include their own labour costs and the costs of construction materials. Therefore, if the construction costs in Hong Kong keep increasing, our subcontracting costs may increase in the future, which could materially and adversely affect our business operations and financial conditions. Personal injuries, property damages or fatal accidents may occur at work sites Notwithstanding our occupational health and safety measures that are required to be followed by employees of our Group and our subcontractors, accidents leading to personal injuries, property damages and/or fatal accidents remain an inherent risk at work sites. In addition, notwithstanding the on-site supervision on our subcontractors by our own personnel at work sites, there is no assurance that there will not be any violation of our safety measures or other related rules and regulations by the employees of our Group or our subcontractors. Any such violation may lead to higher probability of occurrences, and/or increased seriousness, of personal injuries, property damages and/or fatal accidents at work sites, which may materially and adversely affect our business operations as well as our financial position to the extent not covered by insurance policies. In addition, any personal injuries and/or fatal accidents to the employees of our Group and our subcontractors may lead to claims or other legal proceedings against our Group. Any such claims or legal proceedings could adversely and materially affect our financial position to the extent not covered by insurance policies. Also, notwithstanding the merits of any such claims or legal proceedings, we need to divert management resources and incur extra costs to handle these matters. Any such claims or legal proceedings could therefore have a material and adverse impact on our business operations. Any changes in environmental requirements may increase our compliance costs Our Group s operations at work sites are subject to certain environmental requirements pursuant to the laws in Hong Kong, including primarily those in relation to air pollution control, noise control, water pollution control and waste disposal. Such regulations may be revised by the Government from time to time. Our Directors confirm that costs in relation to environmental compliance are usually borne by our customers or the main contractor at the work site. Nevertheless, for each of FY2013 and FY2014, we incurred approximately HK$180,000 and nil respectively in relation to the compliance with applicable environmental requirements. Any changes to such regulations and guidelines may increase our cost and burden in complying with them. Certain types of risks are generally not insured Certain types of risks, such as liabilities arising from acts of God or other natural disasters and risks in relation to the collectability of our trade receivables, are generally not insured because they are either uninsurable or it is not cost justifiable to insure against such risks. In the event that an uninsured liability arises, we may suffer losses which may adversely affect our financial position. 33

40 RISK FACTORS RISKS RELATING TO HONG KONG The general economy conditions in Hong Kong may affect our business and financial positions Our performance and financial position is heavily dependent on the state of economy in Hong Kong as we derive our revenue principally from our operations in Hong Kong during the Track Record Period. In the event that there is a downturn in the economy of Hong Kong, our results of operations and financial position may be severely affected. The state of political environment in Hong Kong may affect our business and financial positions Hong Kong is a special administrative region of the PRC and enjoys a high level of autonomy under the principle of one country, two systems according to the Basic Law of Hong Kong. However, we are not in any position to guarantee the implementation of the one country, two systems principle and the level of autonomy as currently in place at the moment. Since our primary operations are substantially located in Hong Kong, any change of such political arrangements may post immediate threat on the stability of the economy in Hong Kong, thereby directly and negatively affecting our results of operations and financial positions. RISKS RELATING TO THE PLACING There has been no prior public market for the Share and the liquidity, market price and trading volume of the Share may be volatile Prior to the Listing, there is no public market for the Shares. The listing of, and the permission to deal in, the Shares on the Stock Exchange do not guarantee the development of an active public market or the sustainability thereof following completion of the Placing. Factors such as variations in our Group s revenues, earnings and cash flows, acquisitions made by our Group or its competitors, industrial or environmental accidents suffered by our Group, loss of key personnel, litigation or fluctuations in the market prices for our services or labours, the liquidity of the market for the Shares, the general market sentiment regarding the industries in which we operate could cause the market price and trading volume of the Shares to change substantially. In addition, both the market price and liquidity of the Shares could be adversely affected by factors beyond our Group s control and unrelated to the performance of our Group s business, especially if the financial market in Hong Kong experiences a significant price and volume fluctuation. In such cases, investors may not be able to sell their Shares at or above the Placing Price. Investors may experience dilution if we issue additional Shares in the future Our Company may issue additional Shares upon exercise of options to be granted under the Share Option Scheme in the future. The increase in the number of Shares outstanding after the issue would result in the reduction in the percentage ownership of the Shareholders and may result in a dilution in the earnings per Share and net asset value per Share. 34

41 RISK FACTORS In addition, we may need to raise additional funds in the future to finance business expansion or new development and acquisitions. If additional funds are raised through the issuance of new equity or equity-linked securities of our Company other than on a pro-rata basis to the existing Shareholders, the shareholding of such Shareholders in our Company may be reduced or such new securities may confer rights and privileges that take priority over those conferred by the Placing Shares. Any disposal by the Controlling Shareholders of a substantial number of Shares in the public market could materially and adversely affect the market price of the Shares There is no guarantee that our Controlling Shareholders will not dispose of their Shares following the expiration of their respective lock-up periods after the Listing. Our Group cannot predict the effect, if any, of any future sales of the Shares by any of the Controlling Shareholders, or that the availability of the Shares for sale by any of the Controlling Shareholders may have on the market price of the Shares. Sales of a substantial number of Shares by any of the Controlling Shareholders or the market perception that such sales may occur could materially and adversely affect the prevailing market price of the Shares. Investors may experience difficulties in enforcing their shareholders rights because our Company is incorporated in the Cayman Islands, and the protection to minority shareholders under the Cayman Islands law may be different from that under the laws of Hong Kong or other jurisdictions Our Company is incorporated in the Cayman Islands and its affairs are governed by the Articles, the Companies Law and common law applicable in the Cayman Islands. The laws of the Cayman Islands may differ from those of Hong Kong or other jurisdictions where investors may be located. As a result, minority Shareholders may not enjoy the same rights as pursuant to the laws of Hong Kong or such other jurisdictions. A summary of the Cayman Islands company law on protection of minorities is set out in the section Cayman Islands Company Law in Appendix IV to this prospectus. Future issues, offers or sale of Shares may adversely affect the prevailing market price of the Shares Future issue of Shares by our Company or the disposal of Shares by any of the Shareholders or the perception that such issues or sale may occur, may negatively impact the prevailing market price of the Shares. We cannot give any assurance that such event will not occur in the future. 35

42 RISK FACTORS Granting options under the Share Option Scheme may affect our Group s result of operation and dilute Shareholders percentage of ownership Our Company may grant share options under the Share Option Scheme in the future. The fair value of the options at the date on which they are granted with reference to the valuer s valuation will be charged as share-based compensation, which may adversely affect our Group s results of operations. Issuance of Shares for the purpose of satisfying any award made under the Share Option Scheme will also increase the number of Shares in issue after such issuance and thus may result in the dilution to the percentage of ownership of the Shareholders and the net asset value per Share. No option has been granted pursuant to the Share Option Scheme as at the Latest Practicable Date. For a summary of the terms of the Share Option Scheme, please see the section Share Option Scheme in Appendix V to this prospectus. RISKS RELATING TO THIS PROSPECTUS Statistics and industry information contained in this prospectus may not be accurate and should not be unduly relied upon Certain facts, statistics, and data presented in the section headed Industry overview and elsewhere in this prospectus relating to the industry in which we operate have been derived, in part, from various publications and industry-related sources prepared by government officials or independent third parties. In addition, certain information and statistics set forth in this section have been extracted from a market research report commissioned by us and prepared by IPSOS, an independent market research agency. Our Company believes that the sources of the information are appropriate sources for such information, and the Sponsor and our Directors have taken reasonable care to extract and reproduce the publications and industry-related sources in this prospectus. In addition, our Company has no reason to believe that such information is false or misleading or that any fact that would render such information false or misleading has been omitted. However, neither our Group, our Directors, the Sponsor, nor any parties involved in the Placing have independently verified, or make any representation as to, the accuracy of such information and statistics. It cannot be assured that statistics derived from such sources will be prepared on a comparable basis or that such information and statistics will be stated or prepared at the same standard or level of accuracy as, or consistent with, those in other publications within or outside Hong Kong. Accordingly, such information and statistics may not be accurate and should not be unduly relied upon. Our Group s future results could differ materially from those expressed or implied by the forward-looking statements Included in this prospectus are various forward-looking statements that are based on various assumptions. Our Group s future results could differ materially from those expressed or implied by such forward-looking statements. For details of these statements and the associated risks, please refer to the section headed Forward-looking statements in this prospectus. 36

43 RISK FACTORS Investors should read this entire prospectus carefully and we strongly caution you not to place any reliance on any information (if any) contained in press articles or other media regarding us and the Placing including, in particular, any financial projections, valuations or other forward looking statement Prior to the publication of this prospectus, there may be press or other media, which contains certain information referring to us and the Placing that is not set out in this prospectus. We wish to emphasise to potential investors that neither we nor any of the Sponsor, the Lead Manager and the Underwriter, the directors, officers, employees, advisers, agents or representatives of any of them, or any other parties (collectively, the Professional Parties ) involved in the Placing has authorised the disclosure of such information in any press or media, and neither the press reports, any future press reports nor any repetition, elaboration or derivative work were prepared by, sourced from, or authorised by us or any of the Professional Parties. Neither we nor any Professional Parties accept any responsibility for any such press or media coverage or the accuracy or completeness of any such information. We make no representation as to the appropriateness, accuracy, completeness or reliability of any such information or publication. To the extent that any such information is not contained in this prospectus or is inconsistent or conflicts with the information contained in this prospectus, we disclaim any responsibility, liability whatsoever in connection therewith or resulting therefrom. Accordingly, prospective investors should not rely on any such information in making your decision as to whether to invest in the Placing Shares. You should rely only on the information contained in this prospectus. 37

44 INFORMATION ABOUT THIS PROSPECTUS AND THE PLACING DIRECTORS RESPONSIBILITY FOR THE CONTENTS OF THIS PROSPECTUS This prospectus, for which our Directors collectively and individually accept full responsibility, includes particulars given in compliance with the Companies (Winding Up and Miscellaneous Provisions) Ordinance, the Securities and Futures (Stock Market Listing) Rules (Chapter 571V of the Laws of Hong Kong) and the GEM Listing Rules for the purpose of giving information with regard to our Company. Our Directors, having made all reasonable enquiries, confirm that to the best of their knowledge and belief, the information contained in this prospectus is accurate and complete in all material respects and not misleading or deceptive and there are no other matters the omission of which would make any statement in this prospectus misleading. FULLY UNDERWRITTEN This prospectus is published in connection with the Placing, which is sponsored by Messis Capital Limited and is managed by the Lead Manager. The Placing Shares are fully underwritten by the Underwriter pursuant to the Underwriting Agreement. For further information about the Underwriter and the placing and underwriting arrangements, please refer to the section headed Underwriting in this prospectus. RESTRICTIONS ON OFFER AND SALE OF THE PLACING SHARES Each person acquiring the Placing Shares will be required to confirm, or be deemed by his/her acquisition of Placing Shares to confirm, that he/she is aware of the restrictions on offers and sales of the Placing Shares described in this prospectus. No action has been taken in any jurisdiction other than Hong Kong to permit the offering of the Placing Shares or the distribution of this prospectus. This prospectus is not an offer or invitation in any jurisdiction in which it is not authorised, and is not an offer or invitation to any person to whom it is unlawful to make an unauthorised offer or invitation. The Placing Shares are offered solely on the basis of the information contained and representations made in this prospectus. No person is authorised in connection with the Placing to give any information or to make any representation not contained in this prospectus, and any information or representation not contained herein must not be relied upon as having been authorised by our Company, the Sponsor, the Lead Manager, the Underwriter, and any of their respective directors or any other persons involved in the Placing. It is expected that, pursuant to the Placing, the Underwriter will conditionally place the Placing Shares on behalf of our Company with investors. STRUCTURE AND CONDITIONS OF THE PLACING The structure and conditions of the Placing is set forth in the section headed Structure and conditions of the Placing in this prospectus. 38

45 INFORMATION ABOUT THIS PROSPECTUS AND THE PLACING APPLICATION FOR LISTING ON GEM Our Company has applied to the Stock Exchange for the listing of, and permission to deal in, the Shares in issue and to be issued pursuant to the Placing (including any Shares which may be issued pursuant to the exercise of any option which may be granted under the Share Option Scheme). No part of the share or loan capital of our Company is listed, traded or dealt in on any stock exchange and save as disclosed herein, no such listing or permission to deal is being or proposed to be sought. A total of 102,800,000 Shares representing 25% of the enlarged issued share capital of our Company immediately following completion of the Placing and the Capitalisation Issue (without taking into account any Shares which may be allotted and issued pursuant to the exercise of any options which may be granted under the Share Option Scheme) will be made available under the Placing. Under section 44B(1) of the Companies (Winding Up and Miscellaneous Provisions) Ordinance, if the permission for the Shares offered under this prospectus to be listed on GEM has been refused before the expiration of three weeks from the date of the closing of the Placing or such longer period not exceeding six weeks as may, within the said three weeks, be notified to our Company for permission by or on behalf of the Stock Exchange, then any allotment made on an application in pursuance of this prospectus shall, whenever made, be void. Pursuant to Rule 11.23(7) of the GEM Listing Rules, at the time of Listing and at all times thereafter, our Company must maintain the minimum prescribed percentage of at least 25% of the issued share capital of our Company in the hands of the public. A total of 102,800,000 Placing Shares representing 25% of the enlarged issued share capital of our Company will be in the hands of the public immediately following completion of the Placing and the Capitalisation Issue and upon Listing. Only securities registered on the branch register of members of our Company kept in Hong Kong may be traded on GEM unless the Stock Exchange otherwise agrees. PROFESSIONAL TAX ADVICE RECOMMENDED Potential applicants for the Placing Shares are recommended to consult their professional advisers if they are in doubt as to the taxation implications of the subscription for, holding, purchase, disposal of or dealing in the Shares or exercising their rights thereunder. It is emphasised that none of our Company, our Directors, the Sponsor, the Underwriter, their respective directors or any other person involved in the Placing accepts responsibility for any tax effects on, or liabilities of, holders of Shares resulting from the subscription for, holding, purchase, disposal of or dealing in the Shares or the exercise of their rights thereunder. 39

46 INFORMATION ABOUT THIS PROSPECTUS AND THE PLACING SHARE REGISTRAR, REGISTRATION AND STAMP DUTY All the Placing Shares will be registered on the Hong Kong branch register of members of our Company in Hong Kong by the Hong Kong Branch Share Registrar. Dealings in the Shares registered on our Company s branch register of members maintained in Hong Kong will be subject to Hong Kong stamp duty. Dealings in the Shares registered on the principal register of members of our Company maintained on the Cayman Islands will not be subject to the Cayman Islands stamp duty. The Shares are freely transferable. Only securities registered on the branch register of members of our Company kept in Hong Kong may be traded on GEM unless the Stock Exchange otherwise agrees. SHARES WILL BE ELIGIBLE FOR ADMISSION INTO CCASS Subject to the approval of the listing of, and permission to deal in, the Shares on GEM and our Company s compliance with the stock admission requirements of HKSCC, the Shares will be accepted as eligible securities by HKSCC for deposit, clearance and settlement in CCASS with effect from the Listing Date or, under contingent situation, any other date as determined by HKSCC. Settlement of transactions between participants of the Stock Exchange is required to take place in CCASS on the second business day after any trading day. All activities under CCASS are subject to the General Rules of CCASS and CCASS Operational Procedures in effect from time to time. All necessary arrangements have been made for the Shares to be admitted into CCASS. If investors are unsure about the details of CCASS settlement arrangement and how such arrangements will affect their rights and interests, they should seek the advice of their stockbroker or other professional adviser. COMMENCEMENT OF DEALINGS IN THE SHARES Dealings in the Shares on GEM are expected to commence on or about Friday, 5 December The Shares will be traded in board lots of 4,000 Shares each. CURRENCY TRANSLATIONS Unless otherwise specified, translations of US$ into HK$ in this prospectus are based on the exchange rate set out below (for the purpose of illustration only): US$1.00: HK$7.80 No representation is made that any amounts in US$ and HK$ can be or could have been converted at the relevant dates at the above exchange rate or any other rates. 40

47 INFORMATION ABOUT THIS PROSPECTUS AND THE PLACING LANGUAGE If there is any inconsistency between this prospectus and the Chinese translation of this prospectus, this prospectus shall prevail. If there is any inconsistency between the Chinese names of the Chinese entities mentioned in this prospectus and their English translation, the Chinese names shall prevail. ROUNDING Certain amounts and percentage figures included in this prospectus have been subject to rounding adjustments. Accordingly, totals of rows or columns of numbers in tables may not be equal to the apparent total of individual items. Where information is presented in thousands or millions of units, amounts may have been rounded up or down. Any discrepancies in any table between totals and sums of amounts listed therein are due to rounding. 41

48 DIRECTORS AND PARTIES INVOLVED IN THE PLACING DIRECTORS Name Residential address Nationality Executive Directors Dr. LI Kai Shun ( ) 2/F, Block A, Shatin Heights 8003 Tai Po Road New Territories Hong Kong Australian Mr. TAM Yi Shek ( ) Flat D, 18/F, Tower 6 Le Point Tseung Kwan O New Territories Hong Kong Chinese Mr. CHAN Kin Pong ( ) Mr. TSANG Siu Wah ( ) Independent non-executive Directors Mr. HO Ho Ming ( ) (former name: HO Wing Hang ( )) Flat 2603, Block P Tin Shing Court Tin Shui Wai New Territories Hong Kong Flat G, 5/F, Block A Grandeur Gardens 3 King Fung Path Tuen Mun New Territories Hong Kong Flat E, 40th Floor Canaryside 8 Shung Shun Street Yau Tong Kowloon Hong Kong Chinese Canadian Chinese Mr. KO Chi Keung ( ) Flat A, 49th Floor, Block 9 Island Resort 28 Siu Sai Wan Road Chai Wan Hong Kong Chinese Mr. ONG Chi King ( ) Flat D, 8th Floor Yee Hoi Mansion 33 Tai Hong Street Lei King Wan Sai Wan Ho Hong Kong Chinese For further information on the profile and background of our Directors, please refer to the section Directors and senior management in this prospectus. 42

49 DIRECTORS AND PARTIES INVOLVED IN THE PLACING PARTIES INVOLVED Sponsor Bookrunner, Lead Manager and Underwriter Legal advisers to our Company Messis Capital Limited A licensed corporation under the SFO to engage in type 1 (dealing in securities) and type 6 (advising on corporate finance) of the regulated activities under the SFO Room 1606, 16th Floor, Tower 2 Admiralty Centre 18 Harcourt Road Hong Kong Orient Securities Limited A licensed corporation under the SFO to carry on type 1 (dealing in securities) and type 4 (advising on securities) regulated activities under the SFO Rooms /F Dah Sing Financial Centre 108 Gloucester Road Wan Chai Hong Kong As to Hong Kong law Loong & Yeung Solicitors, Hong Kong Suites , 20th Floor Jardine House 1 Connaught Place Central, Hong Kong As to Cayman Islands law Appleby Cayman Islands attorneys-at-law Jardine House 1 Connaught Place Central Hong Kong 43

50 DIRECTORS AND PARTIES INVOLVED IN THE PLACING Legal advisers to the Sponsor Legal advisers to the Bookrunner, the Lead Manager and the Underwriter Reporting accountants Property valuer As to Hong Kong law TC & Co. Solicitors, Hong Kong Unit , 22/F Tai Tung Building 8 Fleming Road Wanchai Hong Kong As to Hong Kong law TC & Co. Solicitors, Hong Kong Unit , 22/F Tai Tung Building 8 Fleming Road Wanchai Hong Kong HLB Hodgson Impey Cheng Limited Certified Public Accountants 31/F, Gloucester Tower The Landmark 11 Pedder Street, Central Hong Kong Asset Appraisal Limited Property valuer Room 901 On Hong Commercial Building 145 Hennessy Road Wanchai Hong Kong 44

51 CORPORATE INFORMATION Registered office Headquarters and principal place of business in Hong Kong Company secretary Compliance officer Compliance adviser Authorised representatives Appleby Trust (Cayman) Ltd. Clifton House 75 Fort Street PO Box 1350 Grand Cayman KY Cayman Islands Office A and Office B, 12th Floor Billion Plaza 2 10 Cheung Yue Street Kowloon Hong Kong Mr. LEUNG Cheuk Hei ( ) Certified Public Accountant Flat H, 17th Floor, Block 1 Tivoli Garden Tsing Yi New Territories Hong Kong Dr. LI Kai Shun ( ) 2/F, Block A, Shatin Heights 8003 Tai Po Road New Territories Hong Kong Messis Capital Limited A licensed corporation under the SFO to engage in type 1 (dealing in securities) and type 6 (advising on corporate finance) of the regulated activities under the SFO Room 1606, 16th Floor, Tower 2 Admiralty Centre 18 Harcourt Road Hong Kong Dr. LI Kai Shun ( ) 2/F, Block A, Shatin Heights 8003 Tai Po Road New Territories Hong Kong Mr. TAM Yi Shek ( ) Flat D, 18/F, Tower 6 Le Point Tseung Kwan O New Territories Hong Kong 45

52 CORPORATE INFORMATION Members of Audit Committee Members of Remuneration Committee Members of Nomination Committee Members of Legal Compliance Committee Cayman Islands principal share registrar and transfer office Hong Kong branch share registrar and transfer office Principal bankers Mr. ONG Chi King ( ) (Chairman) Mr.HOHoMing( ) Mr. KO Chi Keung ( ) Mr. KO Chi Keung ( )(Chairman) Mr. TAM Yi Shek ( ) Mr. ONG Chi King ( ) Dr. LI Kai Shun ( ) (Chairman) Mr.HOHoMing( ) Mr. KO Chi Keung ( ) Dr. LI Kai Shun ( ) (Chairman) Mr. LEUNG Cheuk Hei ( ) Mr. ONG Chi King ( ) Appleby Trust (Cayman) Ltd. Clifton House 75 Fort Street PO Box 1350 Grand Cayman KY Cayman Islands Tricor Investor Services Limited Level 22, Hopewell Centre 183 Queen s Road East Hong Kong China Construction Bank (Asia) Corporation Limited Suite , 25th Floor, Tower 6 The Gateway, Harbour City Kowloon Hong Kong The Hong Kong and Shanghai Banking Corporation Limited 673 Nathan Road Mongkok Kowloon Hong Kong Bank of China (Hong Kong) Limited 1 Garden Road Hong Kong Company website (information of this website do not form part of this prospectus) 46

53 INDUSTRY OVERVIEW Certain facts, statistics and data presented in this section and elsewhere in this prospectus have been derived, in part, from various government official publications as well as the commissioned report from IPSOS, an independent third party. Whilst the Directors have taken all reasonable care to ensure that the relevant facts and statistics are accurately reproduced from these official government sources, such facts and statistics have not been independently verified by the Group, the Selling Shareholder or any of its respective affiliates or advisers, nor by the Sponsor, the Bookrunner, the Lead Manager, the Underwriter or any of their affiliates or advisers or any other party involved in the Placing. The Directors have no reason to believe that such facts, statistics and data presented in this section is false or misleading or that any fact has been omitted that would render such facts, statistics and data false or misleading. In this section, other than the IPSOS Report, information regarding the relevant industries has been recited or extracted from certain articles, reports or publications, and their preparations were not commissioned or funded by the Group. The Directors confirm that after taking reasonable care, there is no adverse change in the market information since the date of the IPSOS Report which may qualify, contradict or have an impact on the information in this section of this prospectus. SOURCES OF INFORMATION We commissioned IPSOS, an independent market research consulting firm, to conduct an analysis of, and to report on, the geotechnical engineering industry in Hong Kong for the period from 2009 to A total fee of HK$378,000 was paid to IPSOS for the preparation of the IPSOS Report. The IPSOS Report has been prepared by IPSOS independent of our Group s influence. The information and statistics set forth in this section have been extracted from the IPSOS Report. The payment of such amount was not conditional on our Group s successful listing or on the results of the IPSOS Report. IPSOS has been engaged in a number of market assessment projects in connection with initial public offerings in Hong Kong. IPSOS is part of a group of companies which employs approximately 16,000 personnel worldwide across 85 countries. IPSOS conducts research on market profiles, market sizes and market share and performs segmentation analysis, distribution and value analysis, competitor tracking and corporate intelligence. The IPSOS Report includes information on the geotechnical engineering industry in Hong Kong. The information contained in the IPSOS Report is derived by means of data and intelligence gathering which include: (i) desk research; and (ii) primary research, including interviews with key stakeholders and industry experts including geotechnical engineering companies, main contractors, developers, architects, industry experts and government officials and associations in Hong Kong, etc. Information gathered by IPSOS has been analysed, assessed and validated using IPSOS in-house analysis models and techniques. According to IPSOS, this methodology guarantees a full circle and multilevel information sourcing process, where information gathered can be cross-referenced to ensure accuracy. 47

54 INDUSTRY OVERVIEW All statistics are based on information available as at the date of the IPSOS Report. Other sources of information, including government, trade associations or marketplace participants, may have provided some of the information on which the analysis or data is based. IPSOS developed its estimates or forecasts on the following bases and assumptions: (i) the supply of construction services, including engineering design and consulting service, and geotechnical engineering contracting service, is assumed to be stable over the forecast period; and (ii) it is assumed that there is no external shock such as financial crisis or the wide outbreak of diseases to affect the demand and supply of construction services, including geotechnical engineering services, in Hong Kong during the forecast period. CONSTRUCTION INDUSTRY IN HONG KONG The construction industry accounted for approximately 3.2% to 5.3% (based on the total gross output value of construction works performed by main contractors in Hong Kong) of the total gross domestic products of Hong Kong during the period between 2009 and The total gross output value of construction works performed by main contractors in Hong Kong grew from approximately HK$52.3 billion in 2009 to approximately HK$111.8 billion in 2013, representing a CAGR of approximately 20.9%: HK$ billion Private sector projects Public sector projects Source: The IPSOS Report 48

55 INDUSTRY OVERVIEW The increase in public expenditure on infrastructure in Hong Kong has in particular fueled the growth of the construction industry in recent years. Public expenditure on infrastructure in Hong Kong surged at a CAGR of about 11.8%, from approximately HK$47.7 billion in 2009 to approximately HK$74.6 billion in 2013: HK$ billion Public expenditure on infrastructure Source: The IPSOS Report In general, construction projects in Hong Kong originate from property developers or land owners as well as the Government or its related organisations or corporations. Project owners may engage engineering consulting firms (such as our Group) to prepare engineering designs in relation to different aspects (such as the geotechnical aspects) of the construction works. Some of the engineering consulting firms may be engaged to provide engineering designs for an entire project and they may further engage other engineering consulting firms (such as our Group) to provide engineering designs on certain specialised aspects of the project, such as the geotechnical aspect. Alternatively, project owners may invite contractors (such as our Group and our customers) to submit tenders for carrying out the construction works together with the proposed engineering designs. Before submitting tenders, contractors may engage engineering consulting firms (such as our Group) to assist in the preparation of the engineering designs. After being awarded the contracts, contractors may further subcontract the works to other contractors (such as our Group or other subcontractors engaged by us) and may also require assistance from external firms (such as our Group) for project management services. 49

56 INDUSTRY OVERVIEW GEOTECHNICAL ENGINEERING CONSULTING INDUSTRY IN HONG KONG The total revenue of construction engineering design and consulting service industry in Hong Kong increased from about HK$2.6 billion in 2009 to about HK$4.5 billion in 2013, at a CAGR of approximately 14.8%, and is forecasted to reach HK$5.2 billion in 2014: HK$ billion F Revenue of construction engineering design and consulting service industry Source: The IPSOS Report Such increase was mainly due to (i) the increase in the large scale and complex multi-disciplinary building projects, which included shopping malls, office buildings and club houses, in Hong Kong in the past 5 years; and (ii) the recent rise in public expenditure on infrastructure, which has been driven mainly by transportation projects, including the Hong Kong-Zhuhai-Macau Bridge, Guangzhou-Shenzhen-Hong Kong Express Rail Link, the expansion of railway networks such as the West Island Line and the Shatin to Central Link, as well as new highways such as Tuen Mun-Chek Lap Kok Link and Island Eastern Corridor Link. As of 2013, there were about 145 construction engineering service providers specialized in construction engineering design and consulting services, with the top 5 providers together accounted for approximately 26.1% of the total revenue of the construction engineering design and consulting service industry in Hong Kong in Based on the revenue of our Group s engineering consulting business of approximately HK$31.3 million in FY2013 and approximately HK$39.1 million in FY2014, it is estimated that our Group s market share in the construction engineering design and consulting service industry in Hong Kong is less than 1%. 50

57 INDUSTRY OVERVIEW The IPSOS Report stated, and our Directors concur, that the engineering design and consulting service industry in Hong Kong is fragmented given that there were about 145 service providers specialized in this field in Hong Kong as of The following table sets out the background and market share of the top 5 providers in the industry in 2013 according to the IPSOS Report: Ranking Firm Market share 1 A multinational provider of engineering planning, consulting, architectural and engineering design, and program and construction management services with operations around the world including the Americas, Asia Pacific, the Middle East and Europe 2 A multinational firm of designers, planners, engineers, consultants and technical specialists offering a broad range of professional services including building design, economics and planning, infrastructure design, management consulting and specialist technical services 3 A multinational provider of engineering, construction, and technical services for public agencies and private sector companies around the world, offering a full range of program management, planning, design and engineering, systems engineering and technical assistance, construction and construction management, operations and maintenance, management and operations, information technology, and decommissioning and closure services 4 A multinational provider of technical professional and construction services operating in North America and Caribbean, Europe, Central and South America, Asia Pacific, Africa and the Middle East 5 A Hong Kong-based multi-disciplinary firm offering full range of planning and engineering skills as well as project management, quality assurance, cost control, civil, maritime, infrastructure and environmental projects 8.2% 6.4% 5.4% 3.8% 2.3% 26.1% Construction engineering service providers specialized in construction engineering design and consulting services in Hong Kong compete on, among others, (i) ability to provide quality and cost-effective engineering design and consultancy services; and (ii) relationship with developers and contractors for obtaining new businesses. The key entry barriers for new entrants in respect of the construction engineering design and consulting service industry in Hong Kong include (i) the lack of industry experience and track records in providing quality services; and (ii) the lack of good relationship with developers and contractors in Hong Kong. 51

58 INDUSTRY OVERVIEW GEOTECHNICAL ENGINEERING CONTRACTING AND PROJECT MANAGEMENT INDUSTRY IN HONG KONG The total revenue of the geotechnical engineering contracting and project management services industry in Hong Kong increase from about HK$8.3 billion in 2009 to about HK$23.2 billion in 2013, at a CAGR of approximately 25.1%, and is forecasted to reach about HK$29.5 billion in 2014: HK$ billion F Revenue of geotechnical engineering contracting and project management services industry Source: The IPSOS Report Such increase was mainly due to the rise in the overall demand for foundation, site formation, site investigation and related services, backed by the increasing demand for general building and civil engineering projects in Hong Kong from 2009 to Such projects include the Harbour Area Treatment Scheme, the construction of Tin Shui Wai Hospital and the MTR Southern Island line construction. Based on the revenue of our Group s contracting and project management businesses of approximately HK$13.8 million in FY2013 and approximately HK$24.1 million in FY2014, it is estimated that our Group s market share in the geotechnical engineering contracting and project management industry in Hong Kong is approximately 0.1%. The key entry barriers for new entrants in respect of the geotechnical engineering contracting and project management industry in Hong Kong include: (i) the lack of industry reputation and track records; and (ii) insufficient geotechnical engineering knowledge and experience. 52

59 INDUSTRY OVERVIEW INDUSTRY DRIVERS Our Directors consider that the level of demands for our geotechnical engineering consulting, contracting and project management services depends on the availability of construction and civil engineering projects in Hong Kong as construction and civil engineering projects typically comprise geotechnical elements (such as foundation and site formation works) that require engineering consultants to provide engineering designs, contractors to carry out the site works, and project managers to manage and supervise the site works. During the Track Record Period, our Group undertook both private and public sector projects and we will continue to pursue both private and public sector projects after Listing (see Business Our services Private and public sector projects in this prospectus). According to the IPSOS Report, the availability of private and public sector construction and civil engineering projects in Hong Kong is expected to grow in the coming years as a result of, among others, the following key drivers: Ten Major Infrastructure Projects and Government expenditures on infrastructure The announcement of the Ten Major Infrastructure Projects in 2007 Policy Address was a major contributor to the continual growth in Hong Kong s public expenditure on infrastructure. With an aim to increase Hong Kong s competitiveness and to fuel Hong Kong s economic momentum, these projects boosted the construction demand and created job opportunities in Hong Kong. The Ten Major Infrastructure Projects consisted of South Island Line, Lok Ma Chau Loop, Sha Tin to Central Link, West Kowloon Cultural District, Tuen Mun-Chek Lap Kok Link and Tuen Mun Western Bypass, Kai Tak Development, Guangzhou Shenzhen Hong Kong Express Rail Link, Hong Kong-Zhuhai-Macao Bridge, North East New Territories New Development Areas and Hong Kong-Shenzhen Western Express Line. In recent years, the Government s infrastructure investment has been maintained at high levels, with several construction and transportation projects being carried forward in parallel. From 2009 to 2013, the proportion of the value of infrastructure projects to the total construction value increased from about 23.7% to about 47.0%, mostly attributable to the Ten Major Infrastructure Projects. In addition, according to the Budget, the Government will invest about HK$78.2 billion on infrastructure between 2014 and 2015, in addition to the ongoing Ten Major Infrastructure Projects. Investment in private sector projects is also expected to increase as a result of the increase in Government expenditures on infrastructure and the Ten Major Infrastructure Projects. With the development of public infrastructure, distant districts or remote areas can then be developed as people can travel more conveniently around the city. Investment in building constructions in such areas with infrastructure development is envisaged due to the rising demand for both public and private residential buildings as well as commercial buildings in these newly developed areas. As these projects are yet to hit their peak, it is expected that the demand for services from the construction industry will continue to grow. 53

60 INDUSTRY OVERVIEW Initiatives in increasing housing land supply Owing to the increasing population and the increasing property prices in Hong Kong, the Government strived to increase housing land supply with an aim to stabilize the residential property prices. Since 2010, the Government has resumed the land sale program to increase housing land supply in order to maintain a healthy and sustainable property market. About 34 residential sites will be available for providing approximately 15,500 units in the Land Sale Program; in particular, about 24 out of the 34 residential sites are new sites. In the Policy Address, the Government announced to reserve land for an average of 20,000 residential flats each year in the next decade. This was followed by short and medium term measures in the 2014 Policy Address, which stated that the Government approved the recommendation to increase housing supply, targeting to provide a total of 470,000 units consisting 60% of public housing in the coming decade. According to the 2014 Policy Address, the Government has identified vast tracts of undeveloped land in North New Territories with developmental potential. Consequently, it aims to provide 20,000 public rental housing units and 8,000 home ownership scheme units per year in the next decade, raising the supply of public housing pledged previously by about 36%. In addition, there is also an additional 80 Green Belt sites and Government, Institution or Community (G/IC) site which will be rezoned for residential use to provide about 89,000 units in 2014 to Moreover, the Government planned to develop North East New Territories New Development Areas and Hung Shui Kiu New Development Areas. Such policies will continue to serve as one of the main growth drivers for the construction industry in Hong Kong. Surge in the number of enterprises The increasing number of enterprises in Hong Kong reinforces the rising demand for office space as both local and foreign enterprises are keen on setting up branches in Hong Kong. The number of newly registered local companies reached a new high of about 174,031 in 2013 from about 109,424 in 2009, representing a CAGR of about 12.3%; while newly registered non-hong Kong companies increased at a CAGR of about 3.4% from approximately 683 in 2009 to approximately 780 in As a result, rental prices of commercial and industrial properties were pushed up. Since December 2009, the commercial property rental index (set at 100 for the year 1999) had jumped from about to about in December 2013, up by about 50.4%. The industrial property rental index (set at 100 for year 1999) was up by about 162.6% from about to about over the same period. In the 2013 Policy Address, the Government introduced the initiative to convert government office buildings and sites for commercial use and to revitalize industrial buildings whereby 13 and 49 applications for redevelopment and wholesale conversion respectively had been approved. Moreover, 54

61 INDUSTRY OVERVIEW in the 2014 Policy Address, the Government plans to provide a floor area of about 430,000 square meters for office accommodation under the Kai Tak Development. The prospect of increases in the supply of commercial and industrial properties is expected boost the construction industry in Hong Kong. Bolstering retail sales Due to geographical proximity and favorable currency exchange rate, there is an influx of shoppers from the PRC who favour Hong Kong for shopping, which in turn contributed to the strong growth in retail sales value. From 2009 to 2013, retail sales value grew from approximately HK$274.7 billion to approximately HK$494.5 billion, representing a CAGR of about 15.8%. The increase in the demand also enabled many retailers to expand and open more and bigger stores, which pushed the retail property rental index (set at 100 for the year 1999) from about in December 2009 to about in December 2013, up by about 122.6%. With retail sales value expected to grow further at an estimated of 11.0% and 10.0% in 2014 and 2015 respectively, it is envisaged that there will also be an increase in the demand for retail space. The growth in the demand for more retail spaces attributed to bolstering retail sales will continue to drive the construction industry in Hong Kong. POTENTIAL CHALLENGES Supply and demand of engineering staffs in Hong Kong One of the most significant costs of our engineering consulting, contracting and project management businesses is staff costs, which primarily include salaries and benefits paid to our engineering staffs. The construction engineering design and consulting service industry in Hong Kong experienced an increase in cost due to the rising labor cost in average salary of engineering staff. The average salary of engineering staff in Hong Kong increased from an estimated HK$33,250 per month in 2009 to an estimated HK$38,750 per month in 2013, representing a CAGR of about 4.0%: HK$ per engineering staff per month 45,000 40,000 35,000 30,000 25,000 20,000 15,000 10,000 5, ,250 33,800 35,000 36,150 38, Source: The IPSOS Report 55

62 INDUSTRY OVERVIEW The significant growth in the average salary of engineering staff per month is mainly attributed to the intense competition from the PRC and Macau markets for experienced and qualified engineering staff. The average salary of engineering staff per month in Hong Kong is anticipated to increase furthermore in the next few years. Increasing costs of construction In respect of our contracting business, we do not maintain our own direct labours and machinery for performing site works and we engage subcontractors to do so based on the engineering designs developed by us. Fees charged by our subcontractors depend on a number of factors, which generally include their own labour costs and the costs of construction materials. Labour costs According to the IPSOS Report, the construction industry in Hong Kong is suffering from labor shortage, which is exacerbated by an ageing workforce and the lack of skilled talent. As of May 2014, only about 21.9% of registered laborers were active in the construction industry, coupled with an ageing workforce whereby about 43.8% of registered workers in 2013 were above the age of 50. Wages of construction workers are also affected by the statutory minimum wage. With respect to the Minimum Wage Ordinance, the statutory minimum wage rate has been revised to HK$30 per hour since May 2013, with a potential upward revision to about HK$32 per hour in late As the prescribed minimum hourly wage rate became effective on May 2013, not only did the workers who earned less than the minimum wage level receive a wage increment, but also the ones who earned above it originally. Hence, the increase in labor wage will result in an increase in labor cost to the construction industry in Hong Kong. The average wage of construction workers in Hong Kong increased from an estimated HK$61.8 per hour in 2009 to an estimated HK$74.7 per hour in 2013, at a CAGR of about 4.9%: HK$ per worker per hour Average wage of construction worker per hour Source: The IPSOS Report 56

63 INDUSTRY OVERVIEW The significant rise in the wage of construction workers is attributable to the (i) the growing construction industry; and (ii) the shortage of experienced and skillful labor because a number of skilled construction workers are approaching the age of retirement while young people are reluctant to join the construction industry. Notwithstanding the above, the Legislative Council has funded approximately HK$320 million to support the Hong Kong Construction Industry Council (HKCIC) in strengthening its role in training local construction personnel. The Enhanced Construction Manpower Training Scheme (ECMTS) has set a target of approximately 6,000 semi-skilled workers to be trained by the end of Moreover, the HKCIC has also rolled out the On-The-Job Training Subsidy Scheme which will help to increase productivity levels of workers who have completed their ECMTS. Moreover, most contractors will also have to start paying higher starting salaries to attract young people into the profession and provide generous salary increment to retain experienced professionals who may be lured by higher salaries in Macau and the PRC. Thus, the increasing number of active laborers in the construction industry through increases in salary, new training initiatives and improved image of the industry will act as the attempted solutions to problems like the labor shortage and unstable construction costs. Construction materials Some of the main construction materials required for geotechnical works include steel reinforcements, cement and concrete blocks. The average wholesale price of steel reinforcements in Hong Kong increased from an average of about HK$4,857 per metric tonne in 2009 to an average of about HK$5,282 per metric tonne in 2013, at a CAGR of about 2.1%: HK$ per metric tonne 7,000 6,000 5,000 4,000 3,000 2,000 1,000 0 Jan 2009 Jan 2010 Jan 2011 Jan 2012 Jan 2013 Jan 2014 Source: The IPSOS Report 57

64 INDUSTRY OVERVIEW The average wholesale price of cement in Hong Kong had a substantial growth from an average of about HK$584.1 per metric tonne in 2009 to an average of about HK$698.5 per metric tonne in 2013, representing a CAGR of about 4.6%: HK$ per metric tonne Jan 2009 Jan 2010 Jan 2011 Jan 2012 Jan 2013 Jan 2014 Source: The IPSOS Report The average wholesale prices of concrete blocks in Hong Kong grew from a yearly average of about HK$59.0 to HK$71.0 per square meter from 2009 to 2013, at CAGRs of about 4.9%: HK$ per square meter Jan 2009 Jan 2010 Jan 2011 Jan 2012 Jan 2013 Jan 2014 Source: The IPSOS Report The general increases in construction material prices are affected by, among other factors, the strong construction demand in Hong Kong, Macau and the PRC, which may result in an increase in our subcontracting charges in the future, posing a potential threat to us. 58

65 REGULATORY OVERVIEW THE LAWS AND REGULATIONS OF HONG KONG This section summarises the principal laws and regulations of Hong Kong which are relevant to our business. As this is a summary, it does not contain detailed analysis of the Hong Kong laws which are relevant to our business. A. Laws and Regulations in relation to Construction Labour, Health and Safety Factories and Industrial Undertakings Ordinance (Chapter 59 of the Laws of Hong Kong) The Factories and Industrial Undertakings Ordinance provides for the safety and health protection to workers in an industrial undertaking. Under the Factories and Industrial Undertakings Ordinance, it is the duty of a proprietor of an industrial undertaking to take care of, so far as is reasonably practicable, the health and safety at work of all persons employed by him at the industrial undertaking. The duties of a proprietor extend to include: providing and maintaining plant and work systems that do not endanger safety or health; making arrangements for ensuring safety and health in connection with the use, handling, storage and transport of articles and substances; providing all necessary information, instructions, training and supervision for ensuring safety and health; providing and maintaining safe access to and egress from the workplaces; and providing and maintaining a safe and healthy working environment. A proprietor who contravenes any of these duties commits an offence and is liable to a fine of HK$500,000. A proprietor who contravenes any of these requirements wilfully and without reasonable excuse commits an offence and is liable to a fine of HK$500,000 and to imprisonment for 6 months. Matters regulated under the subsidiary regulations of the Factories and Industrial Undertakings Ordinance, including the Construction Sites (Safety) Regulations, include (i) the prohibition of employment of persons under 18 years of age (save for certain exceptions); (ii) the maintenance and operation of hoists; (iii) the duty to ensure safety of places of work; (iv) prevention of falls; (v) safety of excavations; (vi) the duty to comply with miscellaneous safety requirements; and (vii) provision of first aid facilities. Non-compliance with any of these rules commits an offence and different levels of penalty will be imposed and a contractor guilty of the relevant offence could be liable to a fine up to HK$200,000 and imprisonment up to 12 months. Occupational Safety and Health Ordinance (Chapter 509 of the Laws of Hong Kong) The Occupational Safety and Health Ordinance provides for the safety and health protection to employees in workplaces, both industrial and non-industrial. 59

66 REGULATORY OVERVIEW by: Employers must as far as reasonably practicable ensure the safety and health in their workplaces provision and maintenance of plant and systems of work that are safe and without risks to health; making arrangements for ensuring safety and absence of risks to health in connection with the use, handling, storage or transport of plant or substances; providing all necessary information, instructions, training and supervision for ensuring safety and health; provision and maintenance of a working environment that is safe and without risks to health; and provision and maintenance of means of access to and egress from the workplace that are safe and without any such risks. Failure to comply with any of the above provisions constitutes an offence and the employer is liable on conviction to a fine of HK$200,000. An employer who fails to do so intentionally, knowingly or recklessly commits an offence and is liable on conviction to a fine of HK$200,000 and to imprisonment for 6 months. The Commission for Labour may also issue an improvement notice against non-compliance of this Ordinance or the Factories and Industrial Undertakings Ordinances or suspension notice against activity or condition of workplace which may create imminent risk of death or serious bodily injury. Failure to comply with such notices without reasonable excuse constitutes an offence punishable by a fine of HK$200,000 and HK$500,000 respectively and imprisonment of up to 12 months. Employees Compensation Ordinance (Chapter 282 of the Laws of Hong Kong) The Employees Compensation Ordinance establishes a no-fault and non-contributory employee compensation system for work injuries and lays down the rights and obligations of employers and employees in respect of injuries or death caused by accidents arising out of and in the course of employment, or by prescribed occupational diseases. Under the Employees Compensation Ordinance, if an employee sustains an injury or dies as a result of an accident arising out of and in the course of his employment, his employer is in general liable to pay compensation even if the employee might have committed acts of faults or negligence when the accident occurred. Similarly, an employee who suffers incapacity arising from an occupational disease is entitled to receive the same compensation as that payable to employees injured in occupational accidents. 60

67 REGULATORY OVERVIEW According to Section 24 of the Employees Compensation Ordinance, a principal contractor shall be liable to pay compensation to sub-contractors employees who are injured in the course of their employment to the sub-contractor. The principal contractor is, nonetheless, entitled to be indemnified by the sub-contractor who would have been liable to pay compensation to the injured employee. The employees in question are required to serve a notice in writing on the principal contractor before making any claim or application against such principal contractor. Pursuant to Section 40 of the Employees Compensation Ordinance, all employers (including contractors and subcontractors) are required to take out insurance policies to cover their liabilities both under the Employees Compensation Ordinance and at common law for injuries at work in respect of all their employees (including full-time and part-time employees). Under Section 40(1B) of the Employees Compensation Ordinance, where a principal contractor has undertaken to perform any construction work, it may take out an insurance policy for an amount not less than HK$200 million per event to cover his liability and that of his subcontractor(s) under the Employees Compensation Ordinance and at common law. Where a principal contractor has taken out a policy of insurance under Section 40(1B) of the Employees Compensation Ordinance, the principal contractor and a subcontractor insured under the policy shall be regarded as having complied with Section 40(1) of the Employees Compensation Ordinance. An employer who fails to comply with the Employees Compensation Ordinance to secure an insurance cover is liable on conviction upon indictment to a fine at level 6 (currently at HK$100,000) and imprisonment for 2 years. Employment Ordinance (Chapter 57 of the Laws of Hong Kong) A principal contractor shall be subject to the provisions on sub-contractor s employees wages in the Employment Ordinance. According to Section 43C of the Employment Ordinance, a principal contractor or a principal contractor and every superior sub-contractor jointly and severally is/are liable to pay any wages that become due to an employee who is employed by a subcontractor on any work which the sub-contractor has contracted to perform, and such wages are not paid within the period specified in the Employment Ordinance. The liability of a principal contractor and superior subcontractor (where applicable) shall be limited (a) to the wages of an employee whose employment relates wholly to the work which the principal contractor has contracted to perform and whose place of employment is wholly on the site of the building works; and (b) to the wages due to such an employee for 2 months (such months shall be the first 2 months of the period in respect of which the wages are due). An employee who has outstanding wage payments from sub-contractor must serve a notice in writing on the principal contractor within 60 days after the wage due date. A principal contractor and superior sub-contractor (where applicable) shall not be liable to pay any wages to the employee of the sub-contractor if that employee fails to serve a notice on the principal contractor. 61

68 REGULATORY OVERVIEW Upon receipt of such notice from the relevant employee, a principal contractor shall, within 14 days after receipt of the notice, serve a copy of the notice on every superior sub-contractor to that subcontractor (where applicable) of whom he is aware. A principal contractor who without reasonable excuse fails to serve notice on the superior sub-contractor(s) shall be guilty of an offence and shall be liable on conviction to a fine at level 5 (currently at HK$50,000). Pursuant to Section 43F of the Employment Ordinance, if a principal contractor or superior subcontractor pays to an employee any wages under Section 43C of Employment Ordinance, the wages so paid shall be a debt due by the employer of that employee to the principal contractor or superior subcontractor, as the case may be. The principal contractor or superior sub-contractor may either (1) claim contribution from every superior sub-contractor to the employee s employer or from the principal contractor and every other such superior sub-contractor as the case may be, or (2) deduct by way of setoff the amount paid by him from any sum due or may become due to the sub-contractor in respect of the work that he has sub-contracted. Occupiers Liability Ordinance (Chapter 314 of the Laws of Hong Kong) The Occupiers Liability Ordinance regulates the obligations of a person occupying or having control of premises on injury resulting to persons or damage caused to goods or other property lawfully on the land. The Occupiers Liability Ordinance imposes a common duty of care on an occupier of premises to take such care as in all the circumstances of the case is reasonable to see that the visitor will be reasonably safe in using the premises for the purposes for which he is invited or permitted by the occupier to be there. Immigration Ordinance (Chapter 115 of the Laws of Hong Kong) According to Section 38A of the Immigration Ordinance, a construction site controller (i.e. the principal or main contractor and includes a subcontractor, owner, occupier or other person who has control over or is in charge of a construction site) shall take all practicable steps to (i) prevent having illegal immigrants from being on site or (ii) prevent illegal workers who are not lawfully employable from taking employment on site. Where it is proved that (i) an illegal immigrant was on a construction site or (ii) such illegal worker who is not lawfully employable took employment on a construction site, the construction site controller commits an offence and is liable to a fine of HK$350,000. Minimum Wage Ordinance (Chapter 608 of the Laws of Hong Kong) The Minimum Wage Ordinance provides for a prescribed minimum hourly wage rate (currently set at HK$30 per hour) during the wage period for every employee engaged under a contract of employment under the Employment Ordinance. Any provision of the employment contract which purports to extinguish or reduce the right, benefit or protection conferred on the employee by this Ordinance is void. 62

69 REGULATORY OVERVIEW B. Laws and Regulations in relation to Environmental Protection Air Pollution Control Ordinance (Chapter 311 of the Laws of Hong Kong) The Air Pollution Control Ordinance is the principal legislation in Hong Kong for controlling emission of air pollutants and noxious odour from construction, industrial and commercial activities and other polluting sources. Subsidiary regulations of the Air Pollution Control Ordinance impose control on air pollutant emissions from certain operations through the issue of licences and permits. A contractor shall observe and comply with the Air Pollution Control Ordinance and its subsidiary regulations, including without limitation the Air Pollution Control (Open Burning) Regulation, the Air Pollution Control (Construction Dust) Regulation and the Air Pollution Control (Smoke) Regulations. The contractor responsible for a construction site shall devise, arrange methods of working and carry out the works in such a manner so as to minimise dust impacts on the surrounding environment, and shall provide experienced personnel with suitable training to ensure that these methods are implemented. Asbestos control provisions in the Air Pollution Control Ordinance require that building works involving asbestos must be conducted only by registered qualified personnel and under the supervision of a registered consultant. Noise Control Ordinance (Chapter 400 of the Laws of Hong Kong) The Noise Control Ordinance controls, among others, the noise from construction, industrial and commercial activities. A contractor shall comply with the Noise Control Ordinance and its subsidiary regulations in carrying out construction works. For construction activities that are to be carried out during the restricted hours and for percussive piling during the daytime, not being a general holiday, construction noise permits are required from the Director of the Environmental Protection Department in advance. Under the Noise Control Ordinance, construction works that produce noises and the use of powered mechanical equipment (other than percussive piling) in populated areas are not allowed between 7:00 p.m. and 7:00 a.m. or at any time on general holidays, unless prior approval has been granted by the Director of the Environmental Protection Department through the construction noise permit system. The use of certain equipment is also subject to restrictions. Hand-held percussive breakers and air compressors must comply with noise emissions standards and be issued with a noise emission label from the Director of the Environmental Protection Department. Any person who carries out any construction work except as permitted is liable on first conviction to a fine of HK$100,000 and on subsequent convictions to a fine of HK$200,000, and in any case to a fine of HK$20,000 for each day during which the offence continues. Water Pollution Control Ordinance (Chapter 358 of the Laws of Hong Kong) The Water Pollution Control Ordinance controls the effluent discharged from all types of industrial, manufacturing, commercial, institutional and construction activities into public sewers, 63

70 REGULATORY OVERVIEW rainwater drains, river courses or water bodies. For any industry/trade generating wastewater discharge (except domestic sewage that is discharged into communal foul sewers or unpolluted water to storm drains), they are subject to licensing control by the Director of the Environmental Protection Department. All discharges, other than domestic sewage to a communal foul sewer or unpolluted water to a storm drain, must be covered by an effluent discharge licence. The licence specifies the permitted physical, chemical and microbial quality of the effluent. The general guidelines are that the effluent does not damage sewers or pollute inland or inshore marine waters. According to the Water Pollution Control Ordinance, unless being licensed under the Water Pollution Control Ordinance, a person who discharges any waste or polluting matter into the waters of Hong Kong in a water control zone or discharges any matter, other than domestic sewage and unpolluted water, into a communal sewer or communal drain in a water control zone commits an offence and is liable to imprisonment for 6 months and (a) for a first offence, a fine of HK$200,000; (b) for a second or subsequent offence, a fine of HK$400,000 and (c) in addition, if the offence is a continuing offence, a fine of HK$10,000 for each day during which it is proved to the satisfaction of the court that the offence has continued. Waste Disposal Ordinance (Chapter 354 of the Laws of Hong Kong) The Waste Disposal Ordinance controls the production, storage, collection, treatment, reprocessing, recycling and disposal of wastes. At present, livestock waste and chemical waste are subject to specific controls whilst unlawful deposition of waste is prohibited. Import and export of waste is generally controlled through a permit system. A contractor shall observe and comply with the Waste Disposal Ordinance and its subsidiary regulations, including without limitation the Waste Disposal (Charges for Disposal of Construction Waste) Regulation and the Waste Disposal (Chemical Waste) (General) Regulation. Under the Waste Disposal (Charges for Disposal of Construction Waste) Regulation, construction waste can only be disposed at designated prescribed facilities and a main contractor who undertakes construction work with a value of HK$1 million or above will be required, within 21 days after being awarded the contract, to establish a billing account in respect of that particular contract with the Director of the Environmental Protection Department to pay any disposal charges for the construction waste generated from the construction work under that contract. Under the Waste Disposal (Chemical Waste) (General) Regulation, a person who produces chemical waste or causes it to be produced has to register as a chemical waste producer. Any chemical waste produced must be packaged, labeled and stored properly before disposal. Only a licensed waste collector can transport the waste to a licensed chemical waste disposal site for disposal. Chemical waste producers also need to keep records of their chemical waste disposal for inspection by the Environmental Protection Department. 64

71 REGULATORY OVERVIEW Under the Waste Disposal Ordinance, a person shall not use, or permit to be used, any land or premises for the disposal of waste unless he has a licence from the Director of the Environmental Protection Department. A person who except under and in accordance with a permit or authorisation, does, causes or allows another person to do anything for which such a permit or authorisation is required commits an offence and is liable to a fine of HK$200,000 and to imprisonment for 6 months for the first offence, and to a fine of HK$500,000 and to imprisonment for 2 years for a second or subsequent offence. Dumping at Sea Ordinance (Chapter 466 of the Laws of Hong Kong) Under the Dumping at Sea Ordinance, any waste producer involved in marine dumping and related loading operations are required to obtain permits from the Director of the Environmental Protection. Under the Dumping at Sea Ordinance, a person who except under and in accordance with a permit, does anything or causes or allows another person to do anything for which a permit is needed commits an offence and is liable on conviction to a fine of HK$200,000 and to imprisonment for 6 months on a first conviction; and to a fine of HK$500,000 and to imprisonment for 2 years on a second or subsequent conviction; and in addition, to a further fine of HK$10,000 for each day if the court is satisfied that the operation has continued. Environmental Impact Assessment Ordinance (Chapter 499 of the Laws of Hong Kong) The Environmental Impact Assessment Ordinance is to avoid, minimise and control the adverse environmental impacts from designated projects as specified in Schedule 2 of the Environmental Impact Assessment Ordinance (for example, public utility facilities, certain large-scale industrial activities, community facilities, etc.) through the application of the environmental impact assessment process and the environmental permit system prior to their construction and operation (and decommissioning, if applicable), unless otherwise exempted. According to the Environmental Impact Assessment Ordinance, a person commits an offence if he constructs or operates a designated project as listed in Part I of Schedule 2 of the Environmental Impact Assessment Ordinance (which includes roads, railways and depots, dredging operation, residential and other developments, etc.) or decommissions a designated project listed in Part II of Schedule 2 of the Ordinance without an environmental permit for the project; or contrary to the conditions, if any, set out in the permit. The offender is liable (a) on a first conviction on indictment to a fine of HK$2,000,000 and to imprisonment for 6 months; (b) on a second or subsequent conviction on indictment to a fine of HK$5,000,000 and to imprisonment for 2 years; (c) on a first summary conviction to a fine at level 6 and to imprisonment for 6 months; (d) on a second or subsequent summary conviction to a fine of HK$1,000,000 and to imprisonment for one year, and in any case where the offence is of a continuing nature, the court or magistrate may impose a fine of HK$10,000 for each day on which he is satisfied the offence continued. 65

72 REGULATORY OVERVIEW Public Health and Municipal Services Ordinance (Chapter 132 of the Laws of Hong Kong) Emission of dust from any building under construction or demolition in such manner as to be a nuisance is actionable under the Public Health and Municipal Services Ordinance. Maximum penalty is HK$10,000 (level 3) upon conviction with a daily fine of HK$200. Discharge of muddy water etc. from a construction site is actionable under the Public Health and Municipal Services Ordinance. Maximum fine is HK$5,000 upon conviction. Any accumulation of water on any premises found to contain mosquito larvae or pupae is actionable under the Public Health and Municipal Services Ordinance. Maximum penalty is HK$25,000 (level 4) upon conviction and a daily fine of HK$450. Any accumulation of refuse which is a nuisance or injurious to health is actionable under the Public Health and Municipal Services Ordinance. Maximum penalty is HK$10,000 (level 3) upon conviction and a daily fine of HK$200. Any premises in such a state as to be a nuisance or injurious to health is actionable under the Public Health and Municipal Services Ordinance. Maximum penalty is HK$10,000 (level 3) upon conviction and a daily fine of HK$200. C. Law and Regulations relating to contractor licensing General Building Contractor and Specialist Contractor Under the current contractors registration system in Hong Kong, registered general building contractors are qualified to carry out building works or street works, whereas registered specialist contractors are qualified to carry out specialized works specified in the category in the sub-register in which they are entered. Under Section 8B(2) of the Buildings Ordinance, an applicant for registration as a registered general building contractor or registered specialist contractor must satisfy the Director of Buildings ( Building Authority ) on the following aspects: (a) if it is a corporation, the adequacy of its management structure; (b) the appropriate experience and qualifications of its personnel; (c) its ability to have access to plants and resources; and (d) the ability of the person appointed to act for the applicant for the purposes of the Buildings Ordinance to understand building works and street works through relevant experience and a general knowledge of the basic statutory requirements. 66

73 REGULATORY OVERVIEW In considering each application, the Building Authority is to have regard to the qualifications, competence and experience of the following key personnel of the applicant: (a) a minimum of one person appointed by the applicant to act for the applicant for the purposes of the Buildings Ordinance, hereinafter referred to as an Authorised Signatory ; (b) for a corporation a minimum of one director from the board of directors of the applicant, hereinafter referred to as a Technical Director who is authorised by the board to: (i) have access to plant and resources; (ii) provide technical and financial support for the execution of building works and street works; (iii) make decisions for the company and supervise the Authorised Signatory and other personnel for the purpose of ensuring that the works are carried out in accordance with the Buildings Ordinance; and (c) for a corporation which appoints a director who does not possess the required qualification or experience as Technical Director to manage the carrying out of building works and street works an Other Officer authorised by the board of directors to assist the Technical Director. In addition to the above key personnel, the applicant is also required to demonstrate that it has employed appropriate qualified staff to assist the applicant and the above key personnel to execute, manage and supervise the building works and street works. For registration as a registered specialist contractor, the applicant must satisfy the Building Authority that it has the necessary experience and, where appropriate, professional and academic qualifications, to undertake work in the specialist category and should also demonstrate that it has the access to engaging qualified persons to carry out the relevant specialised duties, e.g. competent person (logging) for ground investigation field works. The Buildings Authority imposes specific requirements on the qualifications and experience of the key personnel of a registered specialist contractor in the foundation works and site formation works categories. The following table summarises the said specific requirements for registered specialist contractor in the site formation works category imposed by the Building Authority: Key personnel Technical director Specific requirements on the key personnel Must have either: 1. at least eight years of experience in managing a building contractor company or equivalent; or 2. a relevant university degree or equivalent qualification and 5 years experience in geotechnical works, of which 3 years was in site formation in Hong Kong. 67

74 REGULATORY OVERVIEW Authorised signatory Must have: 1. a minimum of five years experience in geotechnical works, of which 3 years experience was in local site formation; 2. worked on at least seven site formation projects in Hong Kong for an aggregate period of not less than 18 months; and 3. at least a higher certificate, diploma or equivalent in the relevant field. The following table summarises the said specific requirements for registered specialist contractor in the foundation works category imposed by the Buildings Authority: Key personnel Technical director Specific requirements on the key personnel Must have either: 1. at least eight years of experience in managing a building contractor company or equivalent; or 2. a relevant university degree or equivalent qualification and 5 years experience in building industry, of which 2 years was in foundation. Authorised signatory Must have: Private Sector Foundation and Site Formation Projects 1. a minimum of five years experience in foundation; 2. worked on at least seven site foundation projects in Hong Kong for an aggregate period of not less than 18 months; and 3. at least a higher certificate, diploma or equivalent in the relevant field. Private sector foundation and site formation projects cover projects launched by private developers as well as any other entities not being Hong Kong government departments and statutory bodies, including but not limited to utility companies, charity organisations, and private educational institutions. A contractor who carries out private sector foundation and site formation works is required to register with the Buildings Authority as a registered specialist contractor under the categories of foundation works and site formation works, or appoint a registered specialist contractor under the relevant categories to carry out the specialized works for him. 68

75 REGULATORY OVERVIEW A registered specialist contractor appointed to carry out specialized works is required to, among others, provide continuous supervision to the carrying out of the works in accordance with his supervision plan and to notify the Buildings Authority of any contravention of the regulations what would result from carrying out the works shown in the plan approved by the Buildings Authority for the works. The registration requirements mentioned above are the basic requirements for undertaking private sector foundation and site formation construction projects. Other additional requirements on the main contractors or subcontractors may be imposed by the developers, main contractors, or other entities, as the case may be. Buildings Ordinance (Chapter 123 of the Laws of Hong Kong) Under the Section 14(1) of the Buildings Ordinance, no person shall commence or carry out any building works, including alteration, addition and every kind of building operation, without having obtained approval and consent from the Building Authority. Any person who intends to carry out alteration or addition building works in existing premises is required to appoint an authorized person, and where necessary a registered structural engineer, to prepare and submit plans for the approval of Building Authority under the Buildings Ordinance. He is also required to appoint a registered contractor to carry out the building works. The Building Authority may require that all such building works carried out in such a way that the building will comply with the standards of the Buildings Ordinance. Under the Section 4(1) of the Buildings Ordinance, every person for whom building works or street works are to be carried out shall appoint: (a) an authorised person as the co-ordinator of such building works or street works; (b) a registered structural engineer for the structural elements of such building works or street works if so required under this Buildings Ordinance; and (c) a registered geotechnical engineer for the geotechnical elements of such building works or street works if so required under this Buildings Ordinance. Sanctions Under sections 7, 13 and 40 of the Buildings Ordinance, registered general building contractor, registered specialist contractor, authorised person, registered structural engineer and registered geotechnical engineer will be subject to prosecution or disciplinary action where an offence is committed or when matters justifying the taking of disciplinary action arise. 69

76 REGULATORY OVERVIEW Disciplinary proceedings Pursuant to sections 7 and 13 of the Buildings Ordinance, the matters justifying the taking of disciplinary action include, amongst others, being convicted by any court of an offence related to carrying out his professional duties, being negligent or having misconducted himself in a professional way, having permitted a material deviation from a supervision plan for which he is responsible without reasonable cause and having drawn up a supervision plan that does not comply with the material requirements of the Buildings Ordinance, etc. The disciplinary board may, amongst others, order that the name of such person or the name of the director, officer or person (in the case of the registered general building contractor or registered specialist contractor) be removed from the relevant register, either permanently or for such period as the disciplinary board thinks fit; or order such person or the director, officer or person (in the case of the registered general building contractor or registered specialist contractor) be fined. Prosecution In addition to disciplinary proceedings, registered general building contractor, registered specialist contractor, authorised person, registered structural engineer and registered geotechnical engineer, pursuant to section 40 of the Buildings Ordinance, will be subject to prosecution where an offence is committed. Set out below are some of the offences under section 40 of the Buildings Ordinance:- Pursuant to section 40(2A) of the Buildings Ordinance, registered general building contractor, registered specialist contractor, authorised person, registered structural engineer and registered geotechnical engineer directly concerned with any prescribed inspection or building works or street works shall not: (a) permit or authorize to be incorporated in or used in the carrying out of any such inspection or works any materials which are defective or do not comply with the provisions of the Buildings Ordinance; or any materials which have not been mixed, prepared, applied, used, erected, constructed, placed or fixed in the manner required for such materials under the Buildings Ordinance; (b) diverge or deviate in any material way from any work shown in a plan approved by the Building Authority under the Buildings Ordinance; (c) diverge or deviate in any material way from any works shown in a plan relating to minor works that is required to be submitted to the Building Authority under the simplified requirements; or (d) knowingly misrepresent a material fact in any plan, certificate, form, report, notice or other document given to the Building Authority under the Buildings Ordinance. 70

77 REGULATORY OVERVIEW Failure to comply with any of the above provisions constitutes an offence and they are liable on conviction (a) in the case of a prescribed inspection (other than a prescribed inspection in respect of a window in a building) or building works (other than minor works) or street works, to a fine of HK$1,000,000 and to imprisonment for 3 years; or (b) in the case of a prescribed inspection in respect of a window in a building or minor works, to a fine of HK$500,000 and to imprisonment for 18 months. In addition, any registered general building contractor or registered specialist contractor who contravenes section 9(5)(b) or (6)(b) of the Buildings Ordinance or any authorised person, registered structural engineer and registered geotechnical engineer who contravenes section 4(3)(b) of the Buildings Ordinance, shall be guilty of an offence and shall be liable on conviction to a fine of HK$250,000. However, it shall be a defence in any prosecution for such a contravention for the person charged to prove to the satisfaction of the court that he did not know, nor could reasonably have discovered, the contravention referred to in the charge. Under section 40(2G) of the Buildings Ordinance, where a registered specialist contractor certifies or carries out minor works belonging to a class, type or item for which he is not registered, he shall be guilty of an offence and is liable on conviction to a fine at level 6 and to imprisonment for 6 months; and to a fine of HK$5,000 for each day during which it is proved to the satisfaction of the court that the offence has continued. Any person who knowingly misrepresents a material fact in any report submitted to the Building Authority under section 27C(2)(c) of the Buildings Ordinance shall be guilty of an offence and shall be liable on conviction to a fine of HK$250,000 and to imprisonment for 3 years. Professional standards As advised by the Legal Counsel, there is no professional body governing our Group s business and there is no professional standards or requirements applicable to our Group s business. On the other hand, some of our employees are members of HKIE who are required to conduct themselves in a manner which is becoming to professional engineers. The relevant rules of conduct issued by HKIE are: 1. Rule 1 Responsibility to the Profession: A member of HKIE shall order his conduct so as to uphold the dignity, standing and reputation of the profession. 2. Rule 2 Responsibility to Colleagues: A member of HKIE shall not maliciously or recklessly injure nor attempt to injure whether directly or indirectly the professional reputation of another engineer, and shall foster the mutual advancement of the profession. 3. Rule 3 Responsibility to Employers or Clients: A member of HKIE shall discharge his duties to his employer or client with integrity and in accordance with the highest standards of business ethics. 71

78 REGULATORY OVERVIEW 4. Rule 4 Responsibility to the Public: A member of HKIE shall at all times be governed by the overriding interest of the general public, in particular their environment, welfare, health and safety. According to article 13(4)(d) of the constitution of HKIE ( HKIE Constitution ), if a member of any class shall be found by the board of inquiry to have been guilty of improper conduct, the council of HKIE ( HKIE Council ) may, by a resolution passed at a meeting of HKIE Council at which at least three-fourths of the members thereof present and voting vote in favour of the resolution (i.e. three-fourths of the total number of votes for and against the proposed resolution), order him to be expelled from HKIE, or that his membership be suspended for any period, or that he be reprimanded or admonished and/or that he be removed from the register of members of HKIE kept in accordance with HKIE Constitution and the list of members of HKIE established under HKIE Constitution. 72

79 HISTORY AND DEVELOPMENT OUR CORPORATE HISTORY Overview Our Company was incorporated in the Cayman Islands with limited liability on 17 July Our Company completed the Reorganisation on 19 November 2014 in preparation for the Listing pursuant to which our Company became the holding company of our Group. Details of the Reorganisation are set out in the paragraph headed Reorganisation in this section. Our Group is principally engaged in the provision of engineering consulting, contracting and project management services in Hong Kong. We operate our business through KSL Enterprises, being an investment holding company, and VLA, CRPD and KSL Engineering, all being our operating subsidiaries. These operating subsidiaries were established by Dr. Li, being our Controlling Shareholder, the chairman of the Board and an executive Director, in Hong Kong in 1996, 2001 and 2009 respectively. Before the Reorganisation, all of these operating subsidiaries were wholly-owned by Dr. Li. For further background and relevant industry experience of Dr. Li, please refer to the section Directors and senior management in this prospectus. Major developments and milestones The following table sets out the major developments and milestones of our Group since establishment: Date Event 1996 VLA was incorporated in Hong Kong on 30 May VLA commenced its business in the provision of consulting engineering service in Hong Kong 1998 VLA obtained ISO 9001:1994 certification in respect of its engineering consulting business 1999 VLA was included in the List of Geotechnical Consultants (now known as Longlist of Consultants for LPM Consultancies and Related Geotechnical Consultancies, where LPM refers to landslip preventive measures) maintained by the Geotechnical Engineering Office of the Civil Engineering Department (now known as Civil Engineering and Development Department) of the Government 2001 CRPD was incorporated in Hong Kong on 11 April 2001 and commenced its business in publishing technical books and organising continuing professional development courses, seminars and conferences on topics related to civil engineering 73

80 HISTORY AND DEVELOPMENT 2007 VLA was the structural engineer of the winning team for The Hong Kong Institute of Architects Presidents Prize awarded for the design of the reconstruction of Wong Shek Public Pier in recognition of the excellence in its architecture 2009 KSL Engineering was incorporated in Hong Kong on 27 February 2009 and commenced its business in the provision of contracting and project management services in Hong Kong 2012 VLA obtained ISO 9001:2008 certification in respect of its engineering consulting business 2014 Our Company was incorporated on 17 July 2014 as part of the Reorganisation for the purpose of the Listing Our Group structure and corporate history The following describes the corporate history of our Company and our subsidiaries. Our Company Our Company was incorporated in the Cayman Islands on 17 July 2014 with an authorised share capital of HK$380,000 divided into 38,000,000 Shares. One nil-paid Share was allotted and issued to the subscriber, being an Independent Third Party which was later transferred to Sonic Solutions on 17 July After the aforesaid allotment and issue of Shares, the then issued share capital of our Company was wholly-owned by Sonic Solutions. Sonic Solutions is a company incorporated in the BVI on 3 July 2014 with limited liability which is the holding vehicle of Dr. Li and wholly-owned by Dr. Li. On 19 November 2014, the authorised share capital of our Company was increased from HK$380,000 to HK$20,000,000. On 19 November 2014, as part of the Reorganisation, our Company entered into a sale and purchase agreement with Dr. Li, pursuant to which our Company acquired 1 share in KSL Enterprises which represents its then entire issued share capital from Dr. Li and in consideration, 1 nil paid Share held by Sonic Solutions was credited as fully paid and 51,399,999 Shares were alloted and issued to Sonic Solutions, all credited as fully paid. The above transaction was completed on 19 November 2014 and as a result, KSL Enterprises and VLA, KSL Engineering as well as CRPD became our subsidiaries. As a result of the Reorganisation, our Company became the holding company of our Group, holding through our intermediate holding company, KSL Enterprises which holds our operating subsidiaries, namely, VLA, KSL Engineering as well as CRPD. Our Company and KSL Enterprises are investment holding companies. 74

81 HISTORY AND DEVELOPMENT KSL Enterprises In anticipation of the Placing and the Reorganisation, KSL Enterprises, the intermediate holding company of our Group, was incorporated on 8 July 2014 in the BVI with an authorised share capital of US$50,000 divided into 50,000 shares of US$1.00 each. 1 fully paid share in KSL Enterprises was allotted and issued to Dr. Li on 10 July After the aforesaid allotment of shares, the then entire issued share capital of KSL Enterprises was owned by Dr. Li. On 19 November 2014, pursuant to the sale and purchase agreement entered into between Dr. Li and our Company, Dr. Li transferred his 1 share in KSL Enterprises to our Company, further details of which are stated in the paragraph headed Our Company above. VLA VLA was established by Dr. Li by his personal funds generated from his prior business engagement in Hong Kong on 30 May 1996 with limited liability and an issued share capital of HK$10,000 divided into 10,000 shares. VLA is one of our operating subsidiaries which commenced its business in provision of engineering consulting service in Hong Kong in June On 30 May 1996, two subscribers shares in VLA were allotted and issued to each of Dr. Li and his former spouse ( Ms. Wan ). The following transfers and allotment and issue of shares of VLA were effected: (a) On 31 March 1998, Ms. Wan transferred 1 share in VLA to Mega-Billion Holding Ltd, being a company incorporated in the BVI and owned as to 60% by Dr. Li and 40% by Independent Third Parties and Dr. Li was one of its directors, at a nominal consideration of HK$1.00 which was settled on 31 March (b) On 8 March 2001, Mega-Billion Holding Ltd transferred 1 share in VLA to Research & Development Limited ( R&D Ltd ) (being an investment holding company incorporated in the BVI and (i) wholly owned by Dr. Li from 8 March 2000 to 20 September 2000; (ii) owned by Dr. Li and Ms. Lam Joley as to 80% and 20% respectively from 20 September 2000 to 4 April 2001; and (iii) wholly owned by Dr. Li from 4 April 2001 onwards) at a nominal consideration of HK$1.00 which was settled on 8 March (c) To increase the shareholding of Dr. Li in VLA, on 28 October 2005, 9,998 fully paid shares in VLA were allotted and issued to Dr. Li at par which was settled on 28 October (d) To simplify the shareholding structure of VLA, on 7 November 2005, R&D Ltd transferred 1 share in VLA to Dr. Li at a nominal consideration of HK$1.00 which was settled on 7 November

82 HISTORY AND DEVELOPMENT As a result of the above transfers and allotment and issue of shares, Dr. Li held 10,000 shares in VLA, representing 100% of the then total number of shares in VLA in issue. In anticipation of the Placing and the Reorganisation, on 16 September 2014, KSL Enterprises acquired 10,000 shares in VLA, representing the then total number of shares of VLA in issue, from Dr. Li at nominal consideration of HK$10,000 in cash. The aforesaid acquisition by KSL Enterprises was completed on 16 September 2014 and as a result, VLA became a directly wholly-owned subsidiary of KSL Enterprises. KSL Engineering KSL Engineering was established by Dr. Li by his personal funds generated from his prior business engagement in Hong Kong on 27 February 2009 with limited liability and an issued share capital of HK$10,000 divided into 10,000 shares. KSL Engineering is one of our operating subsidiaries which engages in provision of contracting and project management services in Hong Kong. On 27 February 2009, 10,000 fully paid shares in KSL Engineering were allotted and issued to Dr. Li, representing the then entire issued share capital of KSL Engineering. In anticipation of the Placing and the Reorganisation, on 16 September 2014, KSL Enterprises acquired 10,000 shares in KSL Engineering, representing the then total number of shares of KSL Engineering in issue, from Dr. Li at a nominal consideration of HK$10,000 in cash. The aforesaid acquisition by KSL Enterprises was completed on 16 September 2014 and as a result, KSL Engineering became a directly wholly-owned subsidiary of KSL Enterprises. CRPD CRPD was established by Dr. Li by his personal funds generated from his prior business engagement in Hong Kong on 11 April 2001 with limited liability and an issued share capital of HK$200 divided into 200 shares. CRPD is one of our operating subsidiaries which engages in organising continuing professional development courses, seminars, conferences and publication of technical books. Ltd. On 11 April 2001, two subscribers shares were allotted and issued to each of Dr. Li and R&D 76

83 HISTORY AND DEVELOPMENT The following transfers and allotment and issue of shares of CRPD were effected: (a) To increase the shareholding of R&D Ltd in CRPD, on 25 April 2001, 98 ordinary shares in CRPD were allotted and issued to R&D Ltd at par which was settled on 25 April (b) On 9 January 2002, 60 and 40 fully paid shares in CRPD were respectively allotted and issued at par to R&D Ltd and Fenwood International Corporation, being a company incorporated in the BVI and wholly-owned by an Independent Third Party. (c) On 7 November 2005, R&D Ltd and Fenwood International Corporation respectively transferred 159 and 40 shares in CRPD to Dr. Li at nominal consideration of HK$159 and HK$40 respectively, which were settled on 7 November As a result of the above transfers and allotment and issue of shares, Dr. Li held 200 shares in CRPD, representing 100% of the then total number of shares in CRPD in issue. In anticipation of the Placing and the Reorganisation, on 16 September 2014, KSL Enterprises acquired 200 shares in CRPD, representing the then total number of shares of CRPD in issue, from Dr. Li at nominal consideration of HK$200 in cash. The aforesaid acquisition by KSL Enterprises was completed on 16 September 2014 and as a result, CRPD became a directly wholly-owned subsidiary of KSL Enterprises. REORGANISATION The following chart sets forth the corporate and shareholding structure of our Group immediately prior to the Reorganisation: Dr. Li 100% 100% 100% KSL Engineering (incorporated in HK) VLA (incorporated in HK) CRPD (incorporated in HK) 77

84 HISTORY AND DEVELOPMENT In preparation for the Listing, our Group underwent the Reorganisation, the major steps of which include: (i) Sonic Solutions was incorporated on 3 July 2014 in the BVI and is authorised to issue a maximum of 50,000 shares of US$1.00 each. 1 fully paid ordinary share of Sonic Solutions, representing the entire issued share capital of Sonic Solutions, was allotted and issued to Dr. Li on 14 July (ii) KSL Enterprises was incorporated on 8 July 2014 in the BVI with an authorized share capital of US$50,000 divided into 50,000 shares of US$1 each. 1 fully paid share was allotted and issued to Dr. Li on 10 July After the aforesaid allotment and issue of shares, the then entire issued share capital of KSL Enterprises was owned by Dr. Li. (iii) Our Company was incorporated on 17 July 2014 in Cayman Islands with an authorized share capital of HK$380,000 divided into 38,000,000 shares of HK$0.01 each. One nil-paid Share was allotted and issued to the subscriber to the memorandum and articles of association of our Company, which was later transferred to Sonic Solutions on 17 July After the aforesaid allotment and transfer of Share, the issued share capital of our Company was wholly-owned by Sonic Solutions. (iv) On 16 September 2014, KSL Enterprises acquired 10,000 ordinary shares in KSL Engineering (representing its then entire issued shares), 10,000 ordinary shares in VLA (representing its then entire issued shares) and 200 ordinary shares in CRPD (representing its then entire issued shares) from Dr. Li at nominal consideration of HK$10,000, HK$10,000 and HK$200 respectively. After the aforesaid share transfers, each of KSL Engineering, VLA and CRPD became a wholly-owned subsidiary of KSL Enterprises. (v) On 19 November 2014, our Company entered into a sale and purchase agreement with Dr. Li, pursuant to which our Company acquired 1 share in KSL Enterprises which represent its then entire issued share capital from Dr. Li and in consideration, the 1 nil paid Share held by Sonic Solutions was credited as fully paid and 51,399,999 Shares were allotted and issued to Sonic Solutions, all credited as fully paid. As a result of the Reorganisation, our Company became the holding company of our Group comprising KSL Enterprises and KSL Engineering, VLA and CRPD. As confirmed by our Directors, there were no outstanding options, warrants and/or convertibles in respect of each member of our Group as at the Latest Practicable Date. 78

85 HISTORY AND DEVELOPMENT The following chart sets forth our corporate and shareholding structure immediately following completion of the Reorganisation: Dr. Li 100% Sonic Solutions (incorporated in BVI) (Note 1) 100% Our Company (incorporated in Cayman Islands) 100% KSL Enterprises (incorporated in BVI) 100% 100% 100% KSL Engineering (incorporated in HK) VLA (incorporated in HK) CRPD (incorporated in HK) Note: 1. Sonic Solutions is an investment holding company incorporated in the BVI. Dr. Li is the sole director of Sonic Solutions. 79

86 HISTORY AND DEVELOPMENT The following chart sets forth our corporate and shareholding structure immediately following completion of the Placing and the Capitalisation Issue, taking no account any Shares that may be issued pursuant to the exercise of any options that may be granted under the Share Option Scheme: Dr. Li 100% Sonic Solutions (incorporated in BVI) (Note 1) Public 75% 25% Our Company (incorporated in Cayman Islands) 100% KSL Enterprises (incorporated in BVI) 100% 100% 100% KSL Engineering (incorporated in HK) VLA (incorporated in HK) CRPD (incorporated in HK) Note: 1. Sonic Solutions is an investment holding company incorporated in the BVI. Dr. Li is the sole director of Sonic Solutions. 80

87 BUSINESS OVERVIEW We are principally engaged in the provision of engineering consulting, contracting and project management services in Hong Kong with a focus on geotechnical engineering works. Geotechnical engineering is a branch of civil engineering concerned with the study and modification of soil and rocks. The geotechnical engineering works in which we participated as a consultant, contractor and/or project manager during the Track Record Period included foundation design and construction works for building construction projects, excavations and structural designs for the construction of underground facilities, site formation works and landslip preventive works. Set out below is an overview of our business model: (a) Engineering consulting In respect of our engineering consulting service, we mainly assist our customers in (i) developing cost-effective engineering designs, including structural and geotechnical details, drawings and calculations primarily concerning how a structure or its foundation should be constructed; and (ii) obtaining necessary approvals in respect of the engineering designs developed by us from the relevant Government authorities or their appointed consultants (including the Building Authority in respect of private building works, the Housing Department in respect of public housing development projects, and consultants appointed by the Civil Engineering and Development Department in respect of the Civil Engineering and Development Department s projects) before the relevant works can commence at work sites pursuant to the requirements of the Buildings Ordinance or other relevant rules and regulations. After obtaining the approval and depending on our agreements with individual customers, we may also be required to supervise the works of the contractors appointed by our customers where we would send our own personnel to the work sites to monitor the works and provide advices to our customers if necessary with a view to ensuring that the works performed by the contractors conform to our engineering design. Customers for our engineering consulting service mainly include contractors and developers of various property development and civil engineering projects in Hong Kong, who, according to our Directors as well as the IPSOS Report, seldom possess a strong in-house engineering design team for geotechnical engineering works and therefore often require external consultants, such as our Group, for developing engineering designs and obtaining necessary approval thereof. Revenue from our engineering consulting service is mainly derived from consultancy fees for our service. Costs of our engineering consulting service mainly include salaries of our staff directly related to the provision of our engineering consulting service. 81

88 BUSINESS (b) Contracting In respect of our contracting service, we mainly undertake foundation and related geotechnical works of various property development and civil engineering projects in Hong Kong as a contractor. We mainly undertake projects with an original engineering design that, in our opinion, is capable of being changed to a more cost-effective one. We would estimate both the cost of implementing the original engineering design and the reduced cost of implementing the more cost-effective engineering design. We would then offer a contracting fee quotation to our customer that would generally be lower than the estimated cost based on the original engineering design, but would still allow us a substantial profit margin based on the more cost effective engineering design. In doing so, we and our customer would both benefit because our customer would incur lower construction costs while we would achieve substantial profit margin. We leverage on the expertise of our team of in-house engineering staff for the preparation of the more cost-effective engineering designs and obtaining approval for such designs from the relevant Government authorities or their appointed consultants. We engage further subcontractors to perform the site works based on our engineering designs. We also send our own personnel to the work site to manage and supervise the works. We do not maintain our own direct labours or machinery for performing site works. Customers for our contracting service mainly include contractors of foundation and/or other geotechnical works for various property development and civil engineering projects in Hong Kong who subcontract a portion or all of the foundation and/or other geotechnical works to other contractors such as our Group. Revenue from our contracting service mainly represents our contracting fee income. Costs in relation to our contracting service mainly include staff costs of our engineering staff involved as well as subcontracting charges incurred by us. Construction materials and other supplies required for the performance of works are usually provided by our customers directly to our subcontractors or procured by our subcontractors directly without our involvement. (c) Project management In respect of our project management service, we are generally responsible for (i) the overall planning and management of the work schedules of different contractors appointed by our customers at work sites, as well as the logistical arrangements of the workers, materials, machinery and other resources required at work sites, with a view to ensuring smooth and timely completion of the works; and/or (ii) providing technical advice and supervision in respect of the site works performed by our customers and/or their appointed subcontractors, with a view to ensuring that the site works conform to the engineering designs approved by the relevant Government authorities or their appointed consultants. We mainly undertake projects involving foundation and related geotechnical works with respect to our project management service. 82

89 BUSINESS Customers for our project management service mainly include contractors of foundation and/or other geotechnical works for various property development and civil engineering projects in Hong Kong, who, according to our Directors as well as the IPSOS Report, often do not have sufficient in-house project managers and site personnel who are adequately experienced to supervise and ensure the smooth and timely completion of site works and may therefore seek assistance from external firms such as our Group for project management. Revenue from our project management service mainly represents our project management fee income. Costs of our project management service mainly include staff costs in relation to staff directly related to the provision of our project management service. The following table sets forth a breakdown of our revenue during the Track Record Period by business segments: FY2013 FY2014 Revenue % Revenue % HK$ 000 HK$ 000 Engineering consulting 31, , Contracting 9, , Project management 4, , Others (Note) , , Note: Our Group is also engaged in the publishing of technical books and the organisation of continuing professional development courses, seminars and conferences on topics related to civil engineering. These activities are intended for the promotion of our Group s professional image and reputation and are therefore regarded by our Directors as our marketing activities. Nevertheless, as a result of these activities, revenue is derived from admission fees for attending our courses, seminars and conferences, administrative fees for organising courses, seminars and conferences for the HKIE or other institutions, as well as sales of technical books. MARKET AND COMPETITION Our Directors consider that the level of demands for our geotechnical engineering consulting, contracting and project management services depends on the availability of construction and civil engineering projects in Hong Kong as construction and civil engineering projects typically comprise geotechnical elements (such as foundation and site formation works) that require engineering consultants to provide engineering designs, contractors to carry out the site works, and project managers to manage and supervise the site works. According to the IPSOS Report, the availability of construction and civil engineering projects in Hong Kong is expected to grow in the coming years as a result of, among others, the Ten Major Infrastructure Projects announced by the Government, Government s initiative to increase housing land supply, rising demand for office space, etc. For further information regarding the competitive landscape of the industry in which we operate, please refer to the section Industry overview in this prospectus. 83

90 BUSINESS COMPETITIVE STRENGTHS We believe that our competitive strengths include: Well-established presence We have been operating in the geotechnical engineering industry in Hong Kong since We commenced our engineering consulting business in Hong Kong in 1997 and our contracting and project management businesses in Our Directors believe that throughout our operating history, we have established good and long-standing business relationships with numerous contractors in the geotechnical engineering industry in Hong Kong, including our existing and potential customers and subcontractors. Our business relationship with our top 5 customers for the Track Record Period ranges from approximately 2 to 17 years respectively. The IPSOS Report also confirms that we have built up a strong presence in the geotechnical engineering industry in Hong Kong with an established professional reputation in Hong Kong for developing cost-effective engineering designs and geotechnical engineering works. Based on the above, we consider that we have a well-established presence in the geotechnical engineering industry in Hong Kong. We believe that such well-established presence in the industry and our long-standing business relationships with our existing customers and subcontractors are crucial to the day-to-day operations and future business development of our Group. Professional reputation Our Directors believe that we have established a professional reputation in Hong Kong for developing cost-effective engineering designs for geotechnical engineering works, which is consistent with the findings of the IPSOS Report. VLA has been included in the List of Geotechnical Consultants (now known as the Longlist of Consultants for LPM Consultancies and Related Geotechnical Consultancies, where LPM refers to landslip preventive measures) (the Longlist ) maintained by the Geotechnical Engineering Office of the Civil Engineering Department (now known as Civil Engineering and Development Department) of the Government since March The Longlist is made available to the Works Departments of the Government for selection and engagement of suitable geotechnical consultants to carry out geotechnical projects. According to the information provided by the Geotechnical Engineering Office, as at 23 July 2014, there were 30 companies (including VLA) in the Longlist. Our Directors consider that the Longlist is a highly remarkable reference in the industry for determining the ability and professionalism of geotechnical engineering consulting firms in Hong Kong. The IPSOS Report confirms such view of our Directors. In 2001, for the promotion of our professional image and reputation and the further enhancement of our presence in the geotechnical engineering industry in Hong Kong, we started publishing technical books and organising continuing professional development courses, seminars and conferences on topics related to civil engineering. Since then and up to the Latest Practicable Date, 84

91 BUSINESS we have published 20 technical books and have organised over 20 courses, seminars and conferences. Please refer to the section Business Sales and marketing for further information. According to the IPSOS Report, our publications, courses, seminars and conferences are very popular and highly regarded in the geotechnical engineering industry in Hong Kong based on IPSOS s primary research including interviews with relevant stakeholders in the geotechnical engineering industry in Hong Kong. During the Track Record Period, all of our new businesses were obtained through direct invitation for quotation by customers, which is considered by our Directors to be attributable to our well-established presence and professional reputation in the geotechnical engineering industry in Hong Kong. Strong in-house team of engineering staff In our engineering consulting business, we leverage on the expertise of our in-house team of engineering staff in developing cost-effective engineering designs for our customers. In our contracting business, we leverage on the expertise of our in-house team of engineering staff in changing the original engineering design to a more cost-effective one in order for us to achieve substantial savings and profit margin. As such, we consider that our in-house team of engineering staff are crucial to the day-to-day operations and business performance of our Group. We believe that we have a strong in-house team of engineering staff. Our in-house team of engineering staff (including our engineers who participated in the preparation of engineering designs as well as site personnel who participated in site supervision and management) comprised a total of 24 members as at the Latest Practicable Date (including Dr. Li, Mr. Tam Yi Shek and Mr. Chan Kin Pong, each being our executive Director and senior management member). Among such 24 members of our in-house team of engineering staff, 7 possessed master s degree or above in related disciplines and 2 were pursuing master s degree study as at the Latest Practicable Date. Further information regarding the credentials of the 24 members of our in-house team of engineering staff as at the Latest Practicable Date is set out in the following table: Staff/Title Key credentials 1 Dr. Li (executive Director) See the Directors and senior management Directors section in this prospectus 2 Mr. Tam Yi Shek (executive Director) See the Directors and senior management Directors section in this prospectus 3 Mr. Chan Kin Pong (executive Director) See the Directors and senior management Directors section in this prospectus 85

92 BUSINESS Staff/Title 4 Mr. Tsang Siu Wah (executive Director) Key credentials See the Directors and senior management Directors section in this prospectus 5 Senior engineer Member of HKIE, member of the Institution of Civil Engineers, Bachelor s degree in related discipline 6 Senior engineer Member of HKIE, member of the Institution of Civil Engineers, Master s degree in related discipline 7 Project manager Member of HKIE, member of the Institution of Civil Engineers, Master s degree in related discipline 8 Resident engineer Member of HKIE, member of the Institution of Civil Engineers, Bachelor s degree in related discipline 9 Resident engineer Member of HKIE, Bachelor s degree in related discipline 10 Engineer Bachelor s degree in related discipline 11 Engineer Bachelor s degree in related discipline 12 Assistant engineer Bachelor s degree in related discipline 13 Construction engineer Bachelor s degree in related discipline 14 Site engineer Master s degree in related discipline 15 Site engineer Higher certificate in related discipline 16 General foreman Completed part-time course for qualifying site supervisors as technically competent persons 17 Graduate engineer Bachelor s degree in related discipline 18 Graduate engineer Bachelor s degree in related discipline 19 Graduate engineer Master s degree in related discipline 20 Graduate engineer Bachelor s degree in related discipline 21 Graduate engineer Bachelor s degree in related discipline 22 Graduate engineer Bachelor s degree in related discipline 23 Graduate engineer Bachelor s degree in related discipline 24 Graduate engineer Bachelor s degree in related discipline 86

93 BUSINESS We have entered into a service agreement with each of our executive Directors, namely, Dr. Li, Mr. Tam Yi Shek, Mr. Chan Kin Pong and Mr. Tsang Siu Wah. The key terms of such service agreements are set out in the following table: Duration of the service agreements: Termination clause: Non-competition covenant: 3 years from the date of the Listing subject to retirement by rotation and re-election at annual general meeting of our Company in accordance with the Articles. The service agreements with our executive Directors can be terminated, amongst others, by one party serving two months prior written notice to the other party or in accordance with the relevant laws of Hong Kong. During the period when acting as an executive Director and within 12 calendar months after ceasing to be an executive Director, each of our executive Directors does not and will not engage in any business or be employed in any company whose business, apart from the business of our Company and our subsidiaries, competes or is likely to compete, either directly or indirectly, with the business of our Company and any of our subsidiaries. During the period when acting as an executive Director and within 24 calendar months after ceasing to be an executive Director, each of our executive Directors does not and will not, either directly or indirectly, for himself or any other third party, procure any of our employee (including full-time and part-time) to leave our Group or procure any of our employee (including full-time and part-time) deviates from any terms of employment contracts entered into between our Group and that employee. We believe that the engineering designs developed by our in-house team of engineering staff are of high quality. During the Track Record Period, the approval rates in respect of the engineering designs submitted in relation to our engineering consulting service were as follows: FY2013 FY2014 Approval rate in respect of our engineering consulting service upon our first submission (Note) Over 98% Over 99% Note: Approval rate is calculated as the number of approvals obtained upon our first submission divided by our total number of first submissions of designs during the financial year. 87

94 BUSINESS During the Track Record Period, those designs that had not been approved upon our first submission were all subsequently approved in our amended submissions. According to the IPSOS Report, the approval rates shown in the above table are perceived to be quite remarkable based on IPSOS s primary research including interviews with relevant stakeholders in the geotechnical engineering industry in Hong Kong. Ability to achieve substantial profit margin in our contracting business Our Directors believe that our business model in respect of our contracting business is different from that of most of our competitors and gives us a unique competitive advantage. While many contractors in Hong Kong mainly compete on pricing, timing and quality in performing site works given an engineering design that has already been approved by the relevant Government authorities or their appointed consultants (as they seldom possess a strong in-house engineering design team), we leverage on the expertise of our in-house engineering staff and focus on undertaking projects with an original engineering design that, in our opinion, are capable of being changed to a more cost-effective one. In doing so, we are able to compete with our competitors favorably on pricing but at the same time we are able to achieve substantial profit margins given that we are able to successfully change the engineering design to a more cost-effective one. The IPSOS Report confirms that most of the contractors in Hong Kong mainly compete on pricing, timing and quality in performing site works based on a given engineering design but seldom possess a strong in-house engineering design team to consider the possibility of changing the engineering design with a view to achieving higher profit margin. In addition, based on publicly available information, our Directors note that the gross profit margins of our Group s contracting business during the Track Record Period were notably higher than those of certain other companies which are principally engaged in the contracting business in Hong Kong and which are listed on the Stock Exchange (see Business Our services Projects undertaken during the Track Record Period Contracting projects below for a further discussion in this regard). BUSINESS STRATEGIES Our principal business objective is to further strengthen our position as an established service provider of engineering consulting, contracting and project management in the geotechnical engineering industry in Hong Kong. We intend to achieve our business objective by pursuing the following key strategies: 1. Further developing our contracting business The aggregate number and size of projects that we are able to undertake in our contracting business hinges on the amount of our available working capital because there are often time lags between making payments to our subcontractors and receiving payments from our customers. If we choose to pay our subcontractors only after receiving payments from our customers, we will risk our reputation in being able to make payments on a timely manner, which could harm our ability to engage capable and quality subcontractors for our contracting business in the future. In addition, in respect of construction projects in Hong Kong, it is not uncommon for contractors to be required to arrange with banks to provide surety bonds in the amount of certain percentage (usually 10%) of the contract sum to their customers. A surety bond serves to guarantee the satisfactory completion of the works to be performed by the contractor such that if the contractor fails 88

95 BUSINESS to perform according to requirements in the contract, the customer is guaranteed compensation for any monetary loss up to the amount of the surety bond. A contractor is usually required to pay up the full amount of the surety bond to a bank in order for the bank to issue the surety bond to the contractor s customer. The amount is usually released back to the contractor after project completion. During the Track Record Period, we only undertook projects which did not have surety bonds requirements because providing surety bonds would lock up a substantial portion of our financial resources for a prolonged period of time. However, our Directors consider that only undertaking projects without surety bonds requirements would limit our choice of business opportunities and would undermine our ability in further developing our contracting business. As such, in further developing our contracting business and having regard to our available financial resources, our Directors intend to undertake more projects in the future, including those with surety bonds requirements. Contracting projects that we intend to undertake in the future mainly include those concerning the foundation works for private or public sector property development projects where the original engineering design is, in our opinion, capable of being changed to a more cost-effective one. Our target customers for our contracting business mainly include construction contractors in Hong Kong who are expected to mainly include our repeat customers. It is also intended that approximately 3 new contracting projects (with one or more of which is expected to have surety bond requirement) will be undertaken for each of the financial years ending 31 July 2015, 2016 and 2017 with contract sum of approximately HK$10 million to HK$50 million for each project. Our Directors believe that the net proceeds from the Placing will strengthen our available financial resources, thereby allowing us to undertake more projects by applying a portion of the proceeds mainly for satisfying potential customers surety bonds requirements. 2. Further strengthening our in-house team of engineering staff We consider that a strong in-house team of engineering staff is crucial to our continuing success. In this connection, we intend to expand our in-house team of engineering staff by recruiting additional qualified and experienced engineers in order to cope with our business development and our plan to undertake more projects for our contracting business. In addition, we intend to organise more training courses, seminars and/or conferences which serve as part of our marketing activities (as discussed further in the section Business Sales and marketing below) while simultaneously allow our in-house team of engineering staff to participate and enhance their technical competence on an on-going basis. We also intend to continue to encourage our staff to attend technical seminars and occupational health and safety courses organised by third parties by sponsoring the admission fees. 3. Developing more efficient in-house computer programs In developing engineering designs with respect to our engineering consulting and contracting businesses, we need to rely on certain computer programs for our engineers to perform technical calculations and to devise engineering details as well as for our draftsman to prepare technical drawings. Our Directors consider that well-designed computer programs can expedite these processes, thereby reducing the amount of time required for completion of projects and enhancing our overall efficiency and efficacy. 89

96 BUSINESS The computer programs that we were using during the Track Record Period were either purchased from third party software companies or developed by our engineering staff who possessed programming knowledge. We plan to upgrade some of our engineering computer programs by purchasing from third-party providers. Our Directors also believe that in order to develop and maintain more efficient in-house computer programs, it is necessary to recruit a dedicated in-house information technology officer such that he/she is able to communicate with our in-house engineers and draftsman and to address their requests and recommendations on the design of the computer programs on a continuous and timely basis. We therefore plan to recruit a dedicated in-house information technology officer, to develop our in-house computer programs with a view to achieving higher efficiency, and to continuously maintain and upgrade such computer programs. Implementation of business strategies As at the Latest Practicable Date, we have not identified any target for acquisition and do not have any acquisition plan. For further details on the implementation of the above-mentioned business strategies, please refer to the section Future plans and use of proceeds in this prospectus. OUR SERVICES Engineering consulting service The following diagram summarises the principal steps of our workflow in a typical transaction in respect of our engineering consulting service: Seeking new business opportunity Preliminary assessment and preparation of fee quotation Approximately 2-3 days Review of our fee quotation and engagement Approximately 1-15 days Preparation of engineering design and submission for approval Approximately 1-6 weeks Obtaining approval Approximately 1-2 months Supervision of works (if required) From approximately 3 months to more than 2 years 90

97 BUSINESS Note: The timeframe is calculated on an approximate basis and may vary from project to project depending on the complexity of the project, the requirements of the customer, the approval process of the relevant Government authorities or their appointed consultants, and/or our agreement with the customer on the timeframe for the principal steps. Seeking new business opportunity During the Track Record Period, we secured new engineering consulting businesses mainly through direct invitation for quotations by customers. For further information, please refer to the section Business Sales and marketing in this prospectus. Preliminary assessment and preparation of fee quotation Based primarily on the documents provided by the potential customer, we will perform a preliminary assessment of the site condition and the complexity of developing an engineering design. We will also decide whether to pursue the potential project by reviewing, among other things, our available human resources. Based on our preliminary assessment, we will prepare and send our fee quotation to the potential customer, detailing our proposed scope of work and terms of engagement. Review of our fee quotation and engagement In general, if the potential customer is satisfied with our fee quotation, it will confirm our engagement usually by counter-signing on our fee quotation or by entering into a service agreement with us. For the salient terms of our engagement in a typical transaction, please refer to the section Business Customers Salient terms of a typical transaction. Preparation of engineering design and submission for approval Our in-house team of engineering staff will proceed to develop the engineering design. Depending on the complexity of the project, we may also seek technical advices from external technical consultants on our engineering design for the sake of prudence. Please refer to the section Business Suppliers below for further details in this regard. Our draftsman (referring to our staff members who are responsible for preparing drawings by making use of computer software) will prepare technical drawings based on the engineering design developed by our in-house team of engineering staff. In order to alleviate the workload of our draftsman, we may engage external drafting service provider for the preparation of the technical drawings. Please refer to the section Business Suppliers below for further details in this regard. When the engineering design is ready, we will make submission to the relevant Government authorities or their appointed consultants for approval. Depending on the terms of our engagement, we may issue invoice for the first instalment of our fee upon making the submission. 91

98 BUSINESS Approval by the relevant Government authorities or their appointed consultants The relevant Government authorities or their appointed consultants will decide whether to grant approval for our engineering design. During the Track Record Period, the approval rates in respect of the engineering designs submitted in relation to our engineering consulting service were as follows: FY2013 FY2014 Approval rate in respect of our engineering consulting service upon our first submission (Note) Over 98% Over 99% Note: Approval rate is calculated as the number of approvals obtained upon our first submission divided by our total number of first submissions of designs during the financial year. During the Track Record Period, those designs that had not been approved upon our first submission were all subsequently approved in our amended submissions. According to the IPSOS Report, the approval rates shown in the above table are perceived to be quite remarkable based on IPSOS s primary research including interviews with relevant stakeholders in the geotechnical engineering industry in Hong Kong. Upon obtaining approval, we will generally issue invoice to our customers for the remaining balance of our fee. Supervision of works Depending on our agreements with individual customers, we may also be required to supervise the works of the contractors appointed by our customers where we would send our own personnel to the work sites to supervise the works and provide advice to our customers if necessary with a view to ensuring that the works performed by the contractors conform to our engineering designs. Our consultancy fees in this connection are generally invoiced on a monthly basis throughout the period during which we are required to supervise the works. 92

99 BUSINESS Contracting service The following diagram summarises the principal steps of our workflow in a typical transaction in respect of our contracting service: Seeking new business opportunity Preliminary assessment and preparation of fee quotation Approximately 1-2 weeks Review of our fee quotation and engagement Approximately 1-2 months Preparation of a more cost-effective engineering design and submission for approval Approximately 1-6 weeks Obtaining approval Approximately 1-2 months Engagement of subcontractors Approximately 1-2 weeks Execution of works by our subcontractors and quality assurance review From approximately 3 weeks to more than 2 years Note: The timeframe is calculated on an approximate basis and may vary from project to project depending on the complexity of the project, the requirements of the customer, the approval process of the relevant Government authorities or their appointed consultants, and/or our agreement with the customer on the timeframe for the principal steps. Seeking new business opportunity During the Track Record Period, we secured new contracting businesses mainly through direct invitation for quotation by customers. For further information, please refer to the section Business Sales and marketing in this prospectus. Preliminary assessment and preparation of fee quotation We will perform a preliminary assessment to determine if there is any room for a substantial profit margin by changing the original engineering design to a more cost-effective one. This is usually based on our on-site inspection as well as the documents provided by the potential customer. 93

100 BUSINESS We will also decide on whether to pursue the potential project by reviewing, among other things, the expected complexity in performing the works, the contract size and whether our available working capital is sufficient to cope with the estimated cash flow requirements in undertaking the works and acting as the contractor in view of the possible time lag between receiving payments from our customers and making payments to our subcontractors. If we decide to pursue the potential project after our assessment, we will approach our potential subcontractors for preliminary fee quotation for performing the works based on our preliminary cost-effective engineering design. The feedbacks from the potential subcontractors will form the basis for us to estimate our cost in undertaking the works and preparing a fee quotation to our potential customer. Review of our fee quotation and engagement If the potential customer is satisfied with our fee quotation, it will confirm our engagement usually by counter-signing on our fee quotation or by entering into a service agreement with us. For the salient terms of our engagement in a typical transaction, please refer to the section Business Customers Salient terms of a typical transaction. Preparation of a more cost-effective engineering design and submission for approval Our in-house team of engineering staff will develop the details of our more cost-effective engineering design and our draftsmen will prepare the necessary technical drawings for submission to the relevant Government authorities or their appointed consultants for approval. Similar to the operation of our engineering consulting business, technical advice from external consultants and assistance from external drafting service provider may be required if necessary. Obtaining approval The relevant Government authorities or their appointed consultants will decide on whether to grant approval for our engineering design. During the Track Record Period, the approval rates in respect of the engineering designs submitted in relation to our contracting service were as follows: FY2013 FY2014 Approval rate in respect of our contracting service upon our first submission (Note) 100% 100% Note: Approval rate is calculated as the number of approvals obtained upon our first submission divided by our total number of first submissions of designs during the financial year. Engagement of subcontractor We do not maintain our own direct labours or machinery for performing site works. We will engage further subcontractors to perform site works by entering into subcontracting agreements with them. The agreement between our subcontractor and us generally contains terms and conditions that are mirrored to those contained in the agreement between us and our customer. 94

101 BUSINESS Construction materials and other supplies required for the performance of works are usually provided by our customers directly to our subcontractors or procured by our subcontractors directly without our involvement. We therefore do not maintain inventory of construction materials. Execution of works by our subcontractors and quality assurance review We will send our own personnel to the work site to supervise the works performed by our subcontractor. We will devise an overall planning of the work schedules and the logistical arrangements of the workers, materials, machinery and other resources, with a view to ensuring smooth and timely completion of the works. Our personnel will also review our subcontractors works on an on-going basis to ensure that our subcontractors works conform to our engineering design. Amount of work done by our subcontractor is reviewed by our customer from time to time at work site. In a typical project, we issue invoice to our customer on a monthly basis in respect of the work done during the month. Our subcontractors also issue invoice to us typically on a monthly basis in respect of the work done during the month. Project management service The following diagram summarises the principal steps of our workflow in a typical transaction in respect of our project management service: Seeking new business opportunity Preliminary assessment and preparation of fee quotation Approximately 1-2 weeks Review of our fee quotation and engagement Approximately 1-15 days Provision of project management service From approximately 3 months to more than 2 years Note: The timeframe is calculated on an approximate basis and may vary from project to project depending on the complexity of the project, the requirements of the customer, the approval process of the relevant Government authorities or their appointed consultants, and/or our agreement with the customer on the timeframe for the principal steps. 95

102 BUSINESS Seeking new business opportunity During the Track Record Period, we secured new project management businesses mainly through direct invitation for quotation by customers. For further information, please refer to the section Business Sales and marketing in this prospectus. Preliminary assessment and preparation of fee quotation Based primarily on the documents provided by the potential customer, we will perform a preliminary assessment on the overall complexity of the project. We will also decide on whether to pursue the potential project by reviewing, among other things, our available human resources. Based on our preliminary assessment, we will prepare and send our fee quotation to the potential customer, detailing our proposed scope of work and terms of engagement. Review of our fee quotation and engagement In general, if the potential customer is satisfied with our fee quotation, it will confirm our engagement by counter-signing on our fee quotation or by entering into a service agreement with us. For the salient terms of our engagement in a typical transaction, please refer to the section Business Customers Salient terms of a typical transaction. Provision of project management service Acting as the project manager, we will provide an overall plan as to the work schedules of different contractors appointed by our customers at the work site and as to the logistical arrangements of the workers, materials, machinery and other resources required at the work site, with a view to ensuring smooth and timely completion of the works. We may also send our personnel to our customer s work site to oversee and manage the implementation of such plan. In addition, we may also from time to time provide technical advice and on-site supervision of the site works performed by our customers or their appointed subcontractors to ensure that the site works conform to the engineering designs approved by the relevant Government authorities or their appointed consultants. Our fees for our project management service are generally charged at a pre-agreed fixed rate as stated in our fee quotation and are invoiced on a monthly basis throughout the period during which we are required to act as project manager. 96

103 BUSINESS Projects undertaken during the Track Record Period The following table sets out the number of projects with engagement confirmed during the Track Record Period as well as the number of projects with revenue contribution to us during the Track Record Period: Number of projects with engagement confirmed during Number of projects with revenue contribution to us (Note) FY2013 FY2014 FY2013 FY2014 Engineering consulting Contracting Project management Note: A single project with revenue contribution to us in both FY2013 and FY2014 are counted in both financial years in the above table. Examples include when our engagement with respect to a project was confirmed during FY2013 and the project was partially completed in FY2013 and fully completed in FY2014. Engineering consulting projects We undertook engineering consulting projects of considerably different scales during the Track Record Period. Of our 50 and 89 engineering consulting projects with engagement confirmed during FY2013 and FY2014 respectively, the amount of fees that we charged per project ranged from: Amount of fee charged per engineering consulting project with engagement confirmed during FY2013 FY2014 HK$ 000 HK$ 000 Maximum 3,500 4,200 Minimum 5 5 Average

104 BUSINESS Our average amount of fees charged per engineering consulting project decreased from approximately HK$583,000 for FY2013 to approximately HK$309,000 for FY2014 mainly due to the relatively higher increase in demand for our engineering consulting services in respect of projects of smaller scale in FY2014, as illustrated in the following table which sets forth a breakdown of the number of our engineering consulting projects with engagement confirmed during the Track Record Period by range of fees charged per project: Number of engineering consulting projects with engagement confirmed during FY2013 FY2014 Below HK$50, HK$50,000 to below HK$250, HK$250,000 to below HK$500, HK$500,000 or above Please also refer to the section Financial information for a discussion of our gross profit margin in respect of our engineering consulting business. The following table summarises our top 5 engineering consulting projects with the highest revenue contribution to us for FY2013: Rank Type of customer and project nature Our principal scope of work Amount of revenue recognised for FY2013 % of our total revenue for FY2013 HK$ Contractor for the foundation works of a private residential development project Developing engineering designs for the site formation works and obtaining Building Authority s approval thereof 3, % 2 Developer for a private residential development project Developing engineering designs for the shoring and foundation works; obtaining Building Authority s approval thereof; and supervising the site works to ensure conformity with our engineering designs 2, % 98

105 BUSINESS Rank Type of customer and project nature Our principal scope of work Amount of revenue recognised for FY2013 % of our total revenue for FY2013 HK$ Developer for a private residential development project Developing engineering designs for the shoring and foundation works; obtaining Building Authority s approval thereof; and supervising the site works to ensure conformity with our engineering designs 2, % 4 Contractor for the foundation works of a private residential development project Developing engineering designs for the shoring, foundation and pile cap works and obtaining Building Authority s approval thereof 1, % 5 Contractor for the foundation works of a public housing development project Developing engineering designs for the shoring works and obtaining Housing Department s approval thereof 1, % The following table summarises our top 5 engineering consulting projects with the highest revenue contribution to us for FY2014: Rank Type of customer and project nature Our principal scope of work Amount of revenue recognised for FY2014 % of our total revenue for FY2014 HK$ Contractor for the foundation works of a private residential development project Developing engineering designs for the shoring, foundation and pile cap works and obtaining Building Authority s approval thereof 3, % 99

106 BUSINESS Rank Type of customer and project nature Our principal scope of work Amount of revenue recognised for FY2014 % of our total revenue for FY2014 HK$ Contractor for a private residential development project Developing engineering designs for the shoring, foundation and pile cap works and obtaining Building Authority s approval thereof 3, % 3 Consultant for a cross-border highway bridge construction project Developing engineering design for marine shoring works for the construction of pile caps 2, % 4 Contractor for the foundation works of a private residential development project Developing engineering design for site formation and foundation works and obtaining Building Authority s approval thereof 2, % 5 Developer for a private residential development project Developing engineering designs for the shoring and foundation works; obtaining Building Authority s approval thereof; and supervising the site works to ensure conformity with our engineering designs 1, % 100

107 BUSINESS Contracting projects The following table summarises the key particulars of each of our contracting projects during the Track Record Period: Date of engagement Date of completion Type of customer and nature of project Our principal scope of work Amount of revenue recognised for FY2013 % of total revenue of our Group for FY2013 Amount of revenue recognised for FY2014 % of total revenue of our Group for FY2014 HK$ 000 HK$ 000 October 2012 January 2013 Contractor for the foundation works of a public housing development project Undertaking certain on-site geotechnical testing works (specifically, pumping test works to assess whether the deep excavation to be constructed would be sufficiently water-tight to prevent adverse effects on surrounding structures) as a subcontractor in relation to shoring works 2, % March 2013 October 2013 Contractor for the foundation works of a private residential development project Undertaking driven H-pile works as a subcontractor in relation to the construction of the foundation 7, % 5, % July 2013 July 2014 Contractor for the foundation works of a composite development project Undertaking ground improvement works as a subcontractor in relation to the construction of the foundation 5, % June 2014 Expected May 2015 Contractor for the foundation works of a private composite development project Undertaking jet grouting works as a subcontractor in relation to shoring works 2, % 101

108 BUSINESS In each of the contracting projects mentioned in the above table, we developed an alternative and more cost-effective engineering design for carrying out the works, obtained Building Authority s or Housing Department s approval in respect of our alternative engineering design, and further subcontracted such works to a subcontractor. We did not have any loss making contracting projects during the Track Record Period. Specifically, the key differences between the original engineering designs and our alternative engineering designs as well as the differences between the estimated costs in implementing the original engineering designs (the Original Cost ) and the actual costs incurred by us (or agreed between us and our subcontractor in respect of project 4 in the table below which was still in progress as at the Latest Practicable Date) in implementing our alternative engineering designs (the Actual Cost ) are illustrated in the following table (where the projects are presented in the same order as in the table above): Project Key difference between the original engineering design and our alternative engineering design that led to the cost-effectiveness Original Cost (Note 1) Actual Cost (Note 1) Percentage of cost reduction (Note 2) Total amount of revenue recognised and expected to be recognised by us (Note 3) HK$ 000 HK$ 000 % HK$ The nature of works in the project included pumping test works to assess whether the deep excavation to be constructed would be sufficiently water-tight to prevent adverse effects on surrounding structures as well as the preparation of an assessment report for the pumping test works. In our alternative engineering design, we revised the overall layout of the pump wells and reduced the total number of pump wells required for carrying out the pumping test works. 2 The nature of works in the project was the construction of foundation. In the original engineering design, the foundation works were based on footing, which requires deep excavation. In our alternative engineering design, we revised the foundation scheme in which pile foundation is used in lieu of footing. 1,553 1, % 2,676 43,380 3,928 (Note 4) 32.6% (Note 4) 12,

109 BUSINESS Project Key difference between the original engineering design and our alternative engineering design that led to the cost-effectiveness Original Cost (Note 1) Actual Cost (Note 1) Percentage of cost reduction (Note 2) Total amount of revenue recognised and expected to be recognised by us (Note 3) HK$ 000 HK$ 000 % HK$ The nature of works in the project was ground improvement works involving protection works for a drainage culvert. The original engineering design was based on a type of ground improvement works called jet grouting works. In our alternative engineering design, we replaced the jet grouting works with another type of ground improvement works called bentonite cement grouting works. 4 The nature of works in the project was ground improvement works for the strengthening of soils within a site to reduce ground movement associated with excavation works for basement construction. In the original engineering design, the total volume of soils to be strengthened was more than 40,000 cubic metres. In our alternative engineering design, we revised the construction sequence of the geotechnical works to enable the total volume of soils required to be strengthened to be reduced to approximately 22,000 cubic metres. 6,448 1, % 5,552 66,526 44, % 65,000 Notes: 1. The costs referred to in the above table do not include any markups for profit. The Original Costs were prepared by the Quantity Surveyor, being an independent registered professional quantity surveyor engaged at the request of the Sponsor. 2. The percentage of cost reduction is calculated as Original Cost minus Actual Cost, then divided by Original Cost. 3. The total amount of revenue recognised and expected to be recognised by us included a markup for profit. 4. In respect of project 2 in the above table, we only undertook a portion of the works associated with our alternative engineering design. Therefore, the Actual Cost of approximately HK$3,928,000 incurred by us as shown in the above table were only related to the portion of works undertaken by us and are not directly comparable to the corresponding Original Cost. For comparison purpose, the Quantity Surveyor estimated that the costs in implementing the whole of our alternative engineering design would be approximately HK$29,233,000, which represents a cost reduction of approximately 32.6% as compared with the Original Cost of HK$43,380,

110 BUSINESS As illustrated in the above table, the Actual Cost was lower than the Original Cost in respect of each of our contracting projects during the Track Record Period, with cost reduction ranging from 5.0% to 79.2%. The wide range of percentage of cost reduction was attributable to the materiality of the change in the engineering design developed by us as compared with the original engineering design as a result of the differences in the engineering circumstances pertaining to each of our contracting projects. Our Directors consider that our ability to change the engineering designs and to achieve cost reductions as mentioned above is mainly attributable to the knowledge, experience and expertise of our in-house engineering design team in the geotechnical engineering industry in Hong Kong and, in particular, those of Dr. Li, Mr. Tam Yi Shek and Mr. Chan Kin Pong, each being our executive Director and member of our senior management and whose biographical information are set out in the section Directors and senior management Directors in this prospectus. According to our Directors and the IPSOS Report, contractors in Hong Kong (i.e. our competitors in respect of our contracting business) seldom possess a strong in-house engineering design team for geotechnical engineering works. As such, our Directors believe that our business model in respect of our contracting business and, specifically, our ability to change the engineering designs and to achieve cost reductions as mentioned above, give us a unique competitive advantage. Based on publicly available information, our Directors note that the gross profit margins of our Group s contracting business during the Track Record Period were notably higher than those of certain other companies which are principally engaged in the foundation contracting business in Hong Kong and which are listed on the Stock Exchange. Our Directors consider that our higher profit margins in respect of our contracting business were mainly due to our ability to change an engineering design to a more cost-effective one as discussed above. Project management projects The following table summarises the key particulars of each of our project management projects during the Track Record Period: Date of engagement Date of completion Type of customer and nature of project Our principal scope of work Amount of revenue recognised for FY2013 % of total revenue of our Group for FY2013 Amount of revenue recognised for FY2014 % of total revenue of our Group for FY2014 HK$ 000 HK$ 000 April 2012 May 2013 Contractor for a private redevelopment project in respect of a hotel building Planning and supervising the foundation and related geotechnical construction works 1, % April 2012 October 2012 Contractor for the site formation and foundation works of a private residential development project Planning and providing technical advice for the foundation and related geotechnical construction works % 104

111 BUSINESS Date of engagement Date of completion Type of customer and nature of project Our principal scope of work Amount of revenue recognised for FY2013 % of total revenue of our Group for FY2013 Amount of revenue recognised for FY2014 % of total revenue of our Group for FY2014 HK$ 000 HK$ 000 July 2012 May 2013 Contractor for the piling works of a construction project in respect of a law court building Planning and providing technical advice for the foundation works % July 2012 October 2012 Contractor for a redevelopment project Planning and providing technical advice for the foundation works % August 2012 November 2013 Contractor for a private residential development project Planning and providing technical advice for the foundation works % % February 2013 July 2013 Contractor for site formation works of a private residential development project Supervising the soldier pile installation works performed by our customer % June 2013 June 2013 Contractor for the foundation works of a residential development project Providing technical support for geotechnical works 20 Less than 0.1% June 2013 Expected August 2015 Contractor for a residential development project Planning and supervising the foundation and related geotechnical construction works % 7, % June 2013 October 2013 Contractor for a hotel development project Planning and providing technical advice for the foundation works 1, % January 2014 Expected January 2015 Contractor for a railway tunnel construction project Supervising the pipe piles installation and jet grouting works performed by our customer 1, % April 2014 August 2014 Contractor for a railway tunnel construction project Supervising the pipe piles installation and jet grouting works performed by our customer % Please also refer to the section Financial information for a discussion of our gross profit margin in respect of our project management business. 105

112 BUSINESS Private and public sector projects We pursue both private and public sector projects. Public sector projects refer to projects that originate from the Government or its related organisations or corporations while private sector projects refer to projects that are not public sector projects. During the Track Record Period, the proportion of our revenue derived from private and public sector projects remained relatively stable: FY2013 FY2014 Revenue % Revenue % HK$ 000 HK$ 000 Private sector projects 34, , Public sector projects 11, , Others (Note) , , Note: Others refer to revenue derived from our activities of publishing technical books and organising continuing professional development courses, seminars and conferences. Projects in progress As at the Latest Practicable Date, we had a total of 60 projects in progress (including projects that have commenced but not completed as well as projects that have been awarded to us but not yet commenced). The following table sets out a breakdown of such projects in progress by business segments: Number of projects in progress Contract sum per project Total contract sums of all projects (including amounts recognised and expected to be recognised as revenue) Corresponding amount of revenue expected to be recognised after the Latest Practicable Date Maximum Minimum HK$ 000 HK$ 000 HK$ 000 HK$ 000 Engineering consulting projects 54 8, ,896 22,721 Contracting projects 4 65,000 2,500 99,916 56,810 Project management projects 2 14,300 2,000 16,300 5,200 Total ,112 84,

113 BUSINESS The following table sets out a breakdown of such projects in progress by range of actual/expected completion dates: Engineering consulting Number of projects in progress Contracting Project management Expected to be completed: - from the Latest Practicable Date to 31 January from 1 February 2015 to 31 July after 31 July Total The following table sets out the amount of revenue expected to be recognised in respect of such projects in progress: Engineering Project consulting Contracting management HK$ 000 HK$ 000 HK$ 000 Amount of revenue: - expected to be recognised after the Latest Practicable Date but before 31 July ,268 56,310 4,700 - expected to be recognised after 31 July , ,721 56,810 5,200 Pricing strategy and measures to manage the risk of cost overruns Our pricing is determined on a case-by-case basis having regard to various factors: In respect of our engineering consulting service, such factors generally include (i) the complexity in developing the engineering design; (ii) the estimated amount of time required and the personnel to be involved; (iii) the prices offered to the customer in the past; and (iv) the prevailing market conditions. We may also propose and agree with our customer a bonus payment if we are able to obtain approval for the engineering design that achieves certain technical cost-efficiency in terms of the construction costs and time incurred in implementing the design. 107

114 BUSINESS In respect of our contracting service, such factors generally include (i) the overall cost expected to be incurred in undertaking the project based on the original engineering design; (ii) the feasibility of and the cost expected to be incurred in developing a more cost-effective engineering design and the amount of savings expected to be achieved therefrom; (iii) the difficulties in performing the works including those in relation to possible difficult sub-soil conditions; (iv) the completion time requested by customers; (v) the subcontracting charges expected to be incurred; (vi) the prices offered to the customer in the past; and (vii) the prevailing market conditions. In respect of our project management service, (i) the overall scale and complexity of the project; (ii) the estimated amount of time required and the personnel to be involved; (iii) the prices offered to the customer in the past; and (iv) the prevailing market conditions. For the range of fees that we charged per project, please refer to the section Business Our services Projects undertaken during the Track Record Period above. In general, our pricing in respect of our engineering consulting, contracting and project management projects is largely determined based on the estimated time and costs involved in a project, which may deviate from the actual time and costs involved due to factors such as departure of key engineering staff involved in the project, delays in obtaining the necessary approvals in respect of the engineering design from the relevant Government authorities or their appointed consultants, unforeseen site conditions, accidents, adverse weather conditions, and other unforeseen problems and circumstances. Any material inaccurate estimation may lead to significant cost overruns and may adversely affect our financial results. In addition, in respect of our contracting projects, our ability to achieve a substantial profit margin largely depends on our ability to change the original engineering design to a more cost-effective one and to obtain necessary approval in respect thereof. Any failure by us to successfully change an original engineering design to a more cost-effective one and obtain approval in respect thereof may lead to significant cost overruns, resulting in a significantly reduced profit margin, or even a loss, to be incurred by us in respect of the project. In this connection, our measures to manage the potential risk of cost overruns include: 1. A detailed estimate of time and costs expected to be incurred in a project is prepared on a prudent basis and is reviewed by our senior management before submitting a quotation to customer. 2. A fixed scope of work is to be agreed with customers, based on which our fee quotation is prepared. Customers requests for variation in the scope of work are to be accepted on the basis that a supplemental quotation for additional fee is agreed upon. 3. In respect of our contracting projects, assessment of the feasibility to change an original engineering design to a more cost-effective one is conducted on a prudent basis with active involvement from our senior management. In addition, quotations from potential subcontractors are obtained in respect of our preliminary cost-effective engineering design in order to ascertain our costs expected to be incurred, thereby forming the basis for our fee quotation to our customer. 108

115 BUSINESS During the Track Record Period, all of our projects were priced at fixed costs (i.e. priced based on a pre-agreed fixed scope of work). We may accept customers requests for variation in the scope of work on the basis that a supplemental quotation for additional fee is agreed upon. During the Track Record Period, we recorded revenue attributable to variation orders and such revenue was recognised on the basis that it had been agreed with customers. During the Track Record Period, we did not experience any dispute by our customers on the amount of fees payable to us for variation orders. As of the Latest Practicable Date, all of our revenue and trade receivables recorded during the Track Record Period that were attributable to variation orders had been fully settled by our customers to us. Please refer to the section Financial information in this prospectus for a discussion of our financial performance during the Track Record Period. Retention money In respect of our contracting business, some of our customers may, depending on our agreement with individual customers, hold up a certain percentage of each fee payment made to us, usually at the rate of 5%, as retention money. Retention money withheld will be released to us usually within 3 months after completion of our contracting project. As at 31 July 2013 and 2014, we recorded no retention receivables. This was because (i) in respect of the contracting projects in progress as at 31 July 2013, there were no retention clauses in the relevant agreements with our customers; and (ii) in respect of the contracting project in progress as at 31 July 2014, we had just completed changing the engineering designs but the relevant site works had not commenced as at 31 July Exposure to potential professional indemnity liabilities As mentioned in the section headed Regulatory Overview Professional Standards, there is no professional body governing our Group s business and there is no professional standards or requirements applicable to our Group s business. However, claims in respect of our engineering consulting business may be made against us when third parties allege that they have sustained financial losses due to our breach of duty in our profession as consulting engineers by reason of negligent act, error or omission committed or allegedly committed by us. Please refer to the section Risk factors Risks relating to our business We may be exposed to professional indemnity liabilities in this prospectus. One of our business strategies is to further develop our contracting business by undertaking more contracting projects in the future. In respect of our contracting business, in addition to taking up the role as a contractor, we would change the engineering design to a more cost-effective one, thereby effectively also performing the role of a consulting engineer in the preparation of the engineering design. As such, when we undertake more contracting projects, our exposure to potential professional indemnity liabilities would also increase due to our potential breach of duty by reason of negligent act, error or omission committed or allegedly committed by us. Our Group did not experience any actual or threatened claims in relation to professional indemnity during the Track Record Period. 109

116 BUSINESS Our engineering consulting business is operated under a set of procedures that conform to the ISO 9001 quality standards and requirements. Our Directors consider that such procedures can effectively minimise the risk of negligence, error or omission caused by our employees. Please refer to the section Business Quality assurance in this prospectus for further details. In addition, our Group has taken out professional indemnity insurance policy to cover our potential exposure in this regard. Please refer to the section Business Insurance in this prospectus for further information. Cash flow mismatch associated with our contracting business In respect of our contracting business, there are often time lags between making payments to our subcontractors and receiving payments from our customers. The extent of such cash flow mismatch is illustrated by the differences between our trade payables turnover days and our trade receivables turnover days. Our subcontractors issue invoices to us typically on a monthly basis in respect of the work done during the month and we would generally settle such invoices in a timely manner in accordance with the payment terms granted by our subcontractors to us, which is generally 30 days from the invoice date. For each of FY2013 and FY2014, our trade payables turnover days were approximately 3.0 days and 13.8 days respectively, details of which are discussed in the section Financial information Trade and other payables in this prospectus. If we choose to pay our subcontractors only after receiving payments from our customers, we will risk our reputation in being able to make payments on a timely manner, which could harm our ability to engage capable and quality subcontractors for our contracting business in the future. On the other hand, we also issue invoices to our customers typically on a monthly basis in respect of the work done during the month. We generally do not grant credit period to our customers and invoices are immediately due upon issuance to our customers. However, there is no assurance that our customers will settle our invoices in a timely manner and in full. During the Track Record Period, our trade receivables turnover days were approximately 40.0 days for FY2013 and approximately 65.5 days for FY2014, details of which are discussed in the section Financial information Trade and other receivables in this prospectus. In order to better manage our potential exposure to such liquidity risk, our Group has adopted the following measures: 1. Before undertaking each contracting project, Mr. Leung Cheuk Hei, our financial controller, will prepare an analysis of the forecasted amount and timing of cash inflows and outflows in relation to the project as well as our other liquidity requirements. 2. Our financial controller is also responsible for the overall monitoring of our current and expected liquidity requirements on a monthly basis to ensure that we maintain sufficient financial resources to meet our liquidity requirements. 3. If, based on the regular monitoring of our financial controller, there is any expected shortage of internal financial resources, we would consider different financing alternatives, including but not limited to obtaining adequate committed lines of funding from banks and other financial institutions. 110

117 BUSINESS Computer programs In developing engineering designs for our engineering consulting and contracting businesses, we need to rely on certain computer programs for our in-house team of engineering staff to perform technical calculations and to devise engineering details as well as for our draftsman to prepare technical drawings. The computer programs that we were using during the Track Record Period were either purchased from third party software companies or developed by our engineering staff who possessed programming knowledge. Our Directors consider that well-designed computer programs can enhance our overall efficiency and efficacy. In order to achieve higher overall efficiency and efficacy and to continuously maintain our computer programs in an effective and efficient manner, it is one of our future plans to upgrade our in-house computer programs. Please refer to the section Business Business strategies above and the section Future plans and use of proceeds for further details. Seasonality Our Directors believe that the industry in which we operate does not exhibit any significant seasonality. Licenses and permits As advised by the Legal Counsel, in respect of our provision of engineering consulting, contracting and project management services, we are not required to obtain any requisite licenses, permits or approval other than the business registration. As further advised by the Legal Counsel, under section 9 of the Buildings Ordinance, a person is required to appoint a Registered Specialist Contractor to carry out specialized works (such as foundation and site formation works). The duties of a Registered Specialist Contractors are: (i) to provide continuous supervision to the carrying out of the works; (ii) to notify the Building Authority of any contravention of the regulations that would result from carrying out the works; and (iii) to comply generally with the Buildings Ordinance. In this connection, some of our customers may require us to be registered as a Registered Specialist Contractor in order for them to consider appointing us to undertake geotechnical site works and/or to supervise the works. KSL Engineering, our operating subsidiary carrying on our contracting and project management businesses, has therefore completed the following registrations: Registration Granted by Granted to Date of first registration Date of next renewal Registered Specialist Contractor Site Formation Registered Specialist Contractor Foundation Buildings Department Buildings Department KSL Engineering 19 March March 2016 KSL Engineering 19 March March

118 BUSINESS In addition, our Directors consider that the above registrations can enhance and promote our professional image. In order for KSL Engineering to apply for and maintain the aforementioned registrations as a Registered Specialist Contractor, KSL Engineering must, pursuant to the Practice Note for Registered Contractors No. 38 issued by the Buildings Department, have at least one authorised signatory to act for it for the purpose of the Buildings Ordinance and one technical director to carry out certain duties including, among others, providing technical support for the execution of works and ensuring that the works are carried out in accordance with the Buildings Ordinance. The Building Authority imposes specific requirements on the qualifications and experience of such authorised signatory and technical director. Further information in this connection is disclosed in the section Regulatory overview C. Law and Regulations relating to contractor licensing in this prospectus. As at the Latest Practicable Date, the roles of authorised signatory and technical director of KSL Engineering were both taken up by Dr. Li. Nevertheless, our Directors consider that we are not overly reliant on Dr. Li in this regard because: (i) as at the Latest Practicable Date, we have, in addition to Dr. Li, 4 other employees (including two of our executive Directors, namely, Mr. Tam Yi Shek and Mr. Chan Kin Pong) who meet the relevant requirements imposed by the Building Authority and are eligible to become authorised signatory and technical director of KSL Engineering. On 10 November 2014, we submitted applications to the Buildings Department for Mr. Tam Yi Shek and Mr. Chan Kin Pong to take up the roles of authorised signatory and technical director of KSL Engineering. The Legal Counsel has advised that based on the qualifications and experience of Mr. Tam Yi Shek and Mr. Chan Kin Pong, the Legal Counsel does not foresee any legal impediments in their applications. In addition, we have entered into a service agreement with each of Dr. Li, Mr. Tam Yi Shek and Mr. Chan Kin Pong with non-competition covenant, details of which are disclosed in the section Business Competitive strengths Strong in-house team of engineering staff above; (ii) as mentioned above, as advised by the Legal Counsel, being registered as a Registered Specialist Contractor is not a must for us to carry on our business. The purposes of obtaining such registrations were mainly to satisfy the requests of some of our customers because, as mentioned above, section 9 of the Buildings Ordinance requires them to appoint a Registered Specialist Contractor to carry out specialized works such as foundation and site formation works. As advised by the Legal Counsel, even if we are not a Registered Specialist Contractor, we can still undertake contracting projects and site supervision works provided that we work with a Registered Specialist Contractor (such as when our customer is already a Registered Specialist Contractor or when we subcontract the site works to a subcontractor who is a Registered Specialist Contractor). During the Track Record Period, the amount of our revenue attributable to projects where our customers required us to act 112

119 BUSINESS as a Registered Specialist Contractor (mainly including project management projects where we supervised the relevant site works as a Registered Specialist Contractor pursuant to the requests by our customers) accounted for only a small portion of our total revenue: FY2013 FY2014 Revenue % Revenue % HK$ 000 HK$ 000 Revenue attributable to:- - projects where our customers required us to act as a Registered Specialist Contractor , all other projects 45, , , , If we are appointed by our customer to act as a Registered Specialist Contractor and we fail to properly supervise the carrying out of the site works, we and our Directors may be subject to prosecution or disciplinary action, details of which are set out in the section Regulatory overview C. Law and regulations relating to contractor licensing Sanctions. Nevertheless, we did not experience any such incidents during the Track Record Period and we have also developed and implemented procedures for operating our contracting business for quality assurance. Please also refer to the section Risk factors Risks relating to our business Failure to properly supervise site works as a Registered Specialist Contractor may result in prosecution or disciplinary action in this prospectus. Renewal of the aforementioned registrations is required every three years. Pursuant to the Buildings Ordinance, the Building Authority may refuse an application for renewal of registration (a) if he is satisfied that the applicant is no longer suitable (for any reason) for registration on the relevant register; or (b) if the applicant fails to provide relevant information and documentary proof required by the Building Authority. According to the Practice Note for Registered Contractors No. 38 issued by the Buildings Department, in considering an application for renewal of registration, the Building Authority may take into account, among other factors, whether the applicant is inactive in the relevant works and whether the applicant has any conviction, disciplinary or suspension records in respect of labour safety offences, malpractice or misconduct in building works or construction related activities, provisions under the Buildings Ordinance, etc. We successfully renewed our aforementioned registrations in 2013 since our first registration in The Legal Counsel advised that he does not foresee any material legal impediment in the renewal of the aforesaid registrations by us. 113

120 BUSINESS Recognitions and awards Longlist of Consultants for LPM Consultancies and Related Geotechnical Consultancies VLA has been included in the List of Geotechnical Consultants (now known as the Longlist of Consultants for LPM Consultancies and Related Geotechnical Consultancies, where LPM refers to landslip preventive measures) (the Longlist ) maintained by the Geotechnical Engineering Office of the Civil Engineering Department (now known as Civil Engineering and Development Department) of the Government since March The Geotechnical Engineering Office administers the eligibility for inclusion in the Longlist. The criteria for inclusion in the Longlist include the following: (i) being a company registered in Hong Kong with an office in Hong Kong with resident staff; (ii) having a member of the resident staff who is a Registered Professional Engineer in the geotechnical discipline and who is either a director or a senior geotechnical engineer or above with a minimum of 15 years relevant post-graduate geotechnical experience (5 years of which must be in Hong Kong); (iii) the geotechnical professionals referred to in the above having a track record of geotechnical work in Hong Kong; and (iv) the company having obtained ISO 9001:2008 certification covering geotechnical engineering. The Longlist is updated twice a year and is made available to the Works Departments of the Government for selection and engagement of suitable geotechnical consultants to carry out geotechnical projects. According to the information provided by the Geotechnical Engineering Office, as at 23 July 2014, there were 30 companies (including VLA) in the Longlist. Our Directors consider that the Longlist is a highly remarkable reference in the industry for determining the ability and professionalism of geotechnical engineering consulting firms in Hong Kong. The IPSOS Report confirms such view of our Directors. Presidents Prize awarded by The Hong Kong Institute of Architects VLA was the structural engineer of the winning team for The Hong Kong Institute of Architects Presidents Prize awarded in April 2007 for the design of the reconstruction of Wong Shek Public Pier in recognition of the excellence in its architecture. CUSTOMERS Characteristics of our customers According to the IPSOS Report, construction projects in Hong Kong generally originate from property developers or land owners as well as the Government or its related organisations or corporations. Project owners may engage engineering consulting firms (such as our Group) to prepare engineering designs in relation to different aspects (such as the geotechnical aspects) of the construction works. Some of the project owners may engage an engineering consulting firm to provide engineering designs for an entire project and such firm may further engage other engineering consulting firms (such as our Group) to provide engineering designs on certain specialised aspects of the project, such as the geotechnical aspect. 114

121 BUSINESS Alternatively, project owners may invite contractors (such as our Group and our customers) to submit tenders for carrying out the construction works together with the proposed engineering designs. Before submitting tenders, contractors may engage engineering consulting firms (such as our Group) to assist in the preparation of the engineering designs. After being awarded the contracts, contractors may further subcontract the works to other contractors (such as our Group or other subcontractors engaged by us) and may also require assistance from external firms (such as our Group) for project management services. In respect of our engineering consulting business, our customers mainly include contractors and developers of various property development and civil engineering projects in Hong Kong. Our Directors believe that contractors and developers in Hong Kong seldom possess a strong in-house engineering design team for geotechnical engineering works and therefore often require external consultants, such as our Group, for developing engineering designs and obtaining necessary approvals thereof, which is consistent with the findings of the IPSOS Report. In addition, during the Track Record Period, some of our engineering consulting customers were engineering consulting firms which engaged us for developing engineering designs on the geotechnical aspects of the projects. In general, our Directors believe that our customers may choose to engage us as a consultant when they do not have the relevant in-house expertise and therefore require assistance from external consultants such as our Group for developing engineering designs and obtaining necessary approvals thereof. In respect of our contracting business, our customers mainly include contractors of foundation and/or other geotechnical works for various property development and civil engineering projects in Hong Kong who subcontract a portion or all of the foundation and/or other geotechnical works to other contractors such as our Group. Our Directors believe that customers may choose to engage us as a contractor rather than only as a consultant often because (i) if our customers choose to engage us as a contractor, the risk of failing to change the engineering design will be borne by us because if that happens, we still have to deliver the site works based on the original engineering design without changing our contracting fee; and (ii) if our customers choose to engage us only as a consultant to change the engineering design to a more cost-effective one and then engage a contractor to carry out the site works based on such more cost-effective engineering design, then our customers will bear the risk if we are unable to successfully change the engineering design, in which case our customer will have wasted its time and the consulting fees and will still have to incur a relatively high contracting fee based on the original engineering design. In respect of our project management business, our customers mainly include contractors of foundation works for various property development and civil engineering projects in Hong Kong, who, according to our Directors as well as the IPSOS Report, often do not have sufficient in-house project managers who are adequately experienced to ensure the smooth and timely completion of site works and may therefore seek assistance from external firms such as our Group for project management. In general, our Directors believe that our customers may choose to engage us as a project manager often because they do not have sufficient in-house experienced personnel for project management and may therefore seek assistance from external firms such as our Group for ensuring the smooth and timely completion of site works. Salient terms of a typical transaction Our customers generally place orders with us for every project instead of entering into long-term agreements with us. 115

122 BUSINESS The following paragraphs set forth the salient terms of our engagement in a typical transaction in respect of each of our three business segments. Engineering consulting (i) Scope of work. Our scope of work is specified in detail, which generally includes the preparation of various types of engineering designs, the obtaining of necessary approvals in respect of such designs, and, if required, the supervision of works based on our designs. (ii) Payments. In general, our fees are payable upon obtaining the required approvals in respect of the engineering designs developed by us in accordance with the agreed scope of work. Payment is due upon presentation of invoice. If payments are not settled within one month after the issuance of invoice, we reserve the right to charge an interest at a rate of 3% per annum for overdue payment. Payments should be settled in HK$. Contracting (i) Scope of work. Our scope of work in each engineering consulting contract is specified in detail, which generally include different phases of construction works to be carried out and the expected duration. (ii) Payments. In general, our fees are payable upon issue of invoice. Invoices are issued on a monthly basis for the works done during the month. Payments should be settled in HK$. The terms of engagement of some of our contracting projects during the Track Record Period also contained the following: (iii) Insurance. Apart from the insurance policies that we have taken out (as discussed in the section Business Insurance below), our customers may provide us with additional insurance coverage including employees compensation insurance and contractors all risks insurance. (iv) Retention money. A certain percentage of each fee payment made to us, usually at the rate of 5%, may be withheld by some of our customers as retention money and will be released to us normally within 3 months after project completion. (v) Liquidated damages. Liquidated damages payable by us to our customers due to late performance are specified, which is usually calculated as 0.01% of the contract sum per day with the aggregate amount capped at 1% of the total contract sum. Project management (i) Scope of work. Our scope of work is specified in detail, which generally includes acting as the project manager in administering the site works and/or supervising the site works. 116

123 BUSINESS (ii) Payments. Fees for our project management service are generally charged at a fixed rate on a monthly basis throughout our service period. Top customers Our Directors consider that during the Track Record Period, we are not dependent on any single customer. For each of FY2013 and FY2014, the percentage of our total revenue attributable to our largest customer amounted to approximately 20.2% and 34.4% respectively, while the percentage of our total revenue attributable to our five largest customers combined amounted to approximately 65.2% and 64.8% respectively. Set out below is a breakdown of our revenue by major customers: For FY2013: Rank Customer HK$ 000 % 1 Vicon Construction Co., Ltd ( Vicon ) 9, Sunnic Engineering Ltd and Sunley Engineering & 6, Construction Co., Ltd (collectively, Sunley Companies ) 3 Customer C 5, Vibro (Hong Kong) Ltd ( Vibro ) 5, Kentech Construction Co., Ltd ( Kentech ) 2, Five largest customers combined 29, All other customers 15, Total revenue 45, For FY2014: Rank Customer HK$ 000 % 1 Vicon 21, Sunley Companies 5, Customer C 4, Vibro 4, Kentech 4, Five largest customers combined 41, All other customers 22, Total revenue 63, None of our Directors, their associates, or any Shareholders who owned more than 5% of the share capital of our Company as at the Latest Practicable Date had any interest in any of the five largest customers of our Group during the Track Record Period. 117

124 BUSINESS The table below sets forth the background information of our top customers mentioned in the above table: Customer Principal business activities Location Services provided by us to the customer Year(s) of business relationship Typical credit terms and payment method Vicon Construction contractor Hong Kong Engineering consulting, contracting and project management 2 Due upon presentation of invoice. Usually settled by cheque. Sunley Companies Construction contractor Hong Kong Engineering consulting, contracting and project management 17 Due upon presentation of invoice. Usually settled by cheque. Customer C Property developer Hong Kong Engineering consulting 16 Due upon presentation of invoice. Usually settled by cheque. Vibro Construction contractor Hong Kong Engineering consulting and contracting 15 Due upon presentation of invoice. Usually settled by cheque. Kentech Construction contractor Hong Kong Engineering consulting 15 Due upon presentation of invoice. Usually settled by cheque. Vicon is a private company incorporated in Hong Kong in 2005 with a total share capital paid up or regarded as paid up amounting to HK$30 million according to its latest annual return filed in July 2014 which is available from the Companies Registry of the Government. Each of the Sunley Companies is a wholly-owned subsidiary of CNQC International Holdings Limited (formerly known as Sunley Holdings Limited) ( CNQC ) (stock code: 1240), a company listed on the main board of the Stock Exchange. CNQC had a market capitalisation of more than HK$700 million as at the Latest Practicable Date. According to the latest annual report of CNQC for the year ended 31 March 2014 published on the website of the Stock Exchange, it recorded revenue of approximately HK$1,218 million and net profit of approximately HK$156 million for the year ended 31 March

125 BUSINESS Customer C is a wholly-owned subsidiary of a company listed on the main board of the Stock Exchange. Such company had a market capitalization of more than HK$300 billion as at the Latest Practicable Date. According to the latest annual report of such company for the year ended 30 June 2014 published on the website of the Stock Exchange, it recorded revenue of more than HK$70 billion and net profit of more than HK$30 billion for the year. Vibro is a 99.8%-owned subsidiary of NWS Holdings Limited ( NWS ) (stock code: 659), a company listed on the main board of the Stock Exchange. NWS had a market capitalization of more than HK$50,000 million as at the Latest Practicable Date. According to the latest annual report of NWS for the year ended 30 June 2014 published on the website of the Stock Exchange, it recorded revenue of approximately HK$21,443 million and a profit for the year of approximately HK$4,383 million for the year ended 30 June Kentech is a private company incorporated in Hong Kong in 1995 with a total share capital paid up or regarded as paid up amounting to HK$3.5 million according to its latest annual return filed in February 2014 which is available from the Companies Registry of the Government. Information regarding certain customers who were also our suppliers Vibro as referred to in the above table is also one of our suppliers who temporarily assigned some of its engineering employees to us on secondment. Such arrangement provides benefits to both parties as the seconded employee can assist in our engineering design works and alleviate the workload of our engineering staff on the one hand, and, on the other hand, the seconded employee can gain design experience and skills from us, which can benefit Vibro after the end of the secondment arrangement. Under such arrangement, we are not responsible for the salary of the seconded employee but we are required to pay a secondment fee to Vibro, amounting to approximately HK$160,000 and HK$168,000 for each of FY2013 and FY2014 respectively. As at the Latest Practicable Date, there was one seconded employee under the secondment arrangement between us and Vibro. Further terms and conditions of the secondment agreement between us and Vibro are set out in the section Business Suppliers Salient terms of engagement of suppliers below. Our Directors consider that such secondment fee is fair and reasonable as it is comparable to the cost of hiring an engineering employee with similar experience. In addition, another customer of us (not referred to in the above table), namely, Trevi Construction Company Limited ( Trevi ), was also one of our suppliers. Trevi is a construction contractor and is part of a group of companies with operations in various places around the world. Trevi itself is a private company incorporated in Hong Kong in 1988 with a total paid-up value of shares issued of HK$16 million according to its latest annual return filed in October 2013 which is available from the Companies Registry of the Government. During the Track Record Period, we provided project management services to Trevi (concerning mainly supervision of site works performed by Trevi to ensure that the works conform to the approved engineering designs) and derived revenue of nil and approximately HK$2.0 million for each of FY2013 and FY2014 respectively from Trevi, representing nil and approximately 3.2% of our total revenue for FY2013 and FY2014 respectively. In June 2014, we engaged Trevi as our subcontractor in respect of certain site works for one of our contracting projects. Such site works had not commenced as at 31 July As such, no 119

126 BUSINESS costs attributable to Trevi had been incurred yet for FY2014. We engaged Trevi as our subcontractor to perform site works because we do not maintain our own direct labour and machinery and it is our usual practice to engage subcontractors to perform site works while we consider Trevi suitable and capable for the works in that particular project. Customer concentration Our top five customers accounted for approximately 65.2% and 64.8% of our total revenue for each of FY2013 and FY2014 respectively. In particular, approximately 20.2% and 34.4% of our total revenue were attributable to our largest customer for each of FY2013 and FY2014 respectively. Despite such customer concentration, our Directors consider that we are not reliant on any single customer because: (i) (ii) We experienced a strong demand for our services from a wide range of customers during the Track Record Period and we had to turn down some of our customers requests for quotations and engagements having regard to our available human resources and working capital from time to time. In respect of our contracting business and, to a lesser extent, our project management business, it is not uncommon for a single project to have a relatively large contract sum such that a small number of projects can contribute to a substantial amount of our revenue. Therefore, if we decide to undertake a certain contracting or project management project, the relevant customer may easily become one of our largest customers in terms of revenue contribution to us. (iii) For each of FY2013 and FY2014, our five largest customers in terms of revenue contribution were the same. Some of such customers had long-standing relationship with us and we would therefore try to accommodate their requests for quotations and engagements as far as our resources allowed instead of turning down their requests, resulting in them being our top customers. Some of such customers had awarded projects of relatively large contract sum which remained on-going over FY2013 and FY2014, resulting in them being our top customers. Collection of our trade receivables and retention receivables There is no assurance that our customers will settle our invoices in a timely manner and in full or that retention money will be released to us by our customers in accordance with the contract terms after project completion. Please refer to the section Risk factors Risk relating to our business We are subject to risk in relation to the collectability of our trade receivables and retention receivables for further details. In general, we do not grant credit period to our customers. Invoices are immediately due upon issuance to our customers. In addition, a portion of our fees for our contracting projects, normally at 5%, may be withheld by our customers as retention money depending on our agreement with individual customers and is released to us normally 3 months after project completion in accordance with the terms of our engagement. 120

127 BUSINESS Long-overdue payments (generally meaning trade receivables that remain outstanding for more than 30 days after our date of invoice and retention receivables that are not released within the period agreed in the terms of our engagement) are monitored continuously and evaluated on a case-by-case basis as to the appropriate follow-up actions having regard to the customer s normal payment processing procedures, our relationship with the customer, its history of making payments to us, its financial position as well as the general economic environment. During the Track Record Period, our follow-up actions for recovering long-overdue payments included written payment reminders and active communications with the customers. Other actions included refraining from accepting new projects from customers with long-overdue payments. Please also refer to the section Financial information Net current assets Trade and other receivables in this prospectus for a further discussion and analysis on our trade receivables and retention receivables and our collection periods during the Track Record Period. INVENTORIES Due to the nature of our businesses, we did not maintain any inventories during the Track Record Period. SUPPLIERS Characteristics of our suppliers During the Track Record Period, suppliers of goods and services which were specific to our business and were required on a regular basis to enable us to continue to carry on our business included: (i) subcontractors engaged by us to perform site works based on our engineering designs in respect of our contracting business; (ii) external consultants engaged by us to provide technical advice on our engineering designs when we consider it necessary or appropriate to do so for the sake of prudence; (iii) certain external firms which temporarily assigned some of their employees to us on secondment (usually for a period of up to 12 month for each seconded employee) for our engineering consulting and project management businesses in order to alleviate the workload of our engineering staff and site personnel (where we were required to pay secondment fees to such external firm but we were not responsible for the salary of the seconded staff); (iv) supplier of drafting services mainly for the preparation of technical drawings in order to alleviate the workload of our draftsmen; and (v) suppliers of other miscellaneous goods and services required for our business operations. 121

128 BUSINESS The following table sets forth a breakdown of our total purchases from our suppliers during the Track Record Period by nature: FY2013 FY2014 HK$ 000 % HK$ 000 % Subcontracting charges 3, , Consultancy fees , Secondment fees Drafting fees Other purchases , , Please refer to the section Financial information Principal components of results of operations Cost of sales in this prospectus for a discussion of the fluctuation in our purchases from our suppliers during the Track Record Period as shown in the above table as well as relevant sensitivity analyses in this connection. Salient terms of engagement of suppliers Subcontracting agreements In respect of the engagement of subcontractors, the agreement between our subcontractor and us generally contains terms and conditions that are mirrored to those contained in the agreement between us and our customer. Consultancy agreements During the Track Record Period, we engaged two external consultants to provide technical advice to us, namely, Supplier G and Supplier H. The salient terms of our agreements with each of Supplier G and Supplier H are as follows: (i) Scope of work. The scope of work is specified, which generally include the provision of technical advice to us in relation to our engineering consulting business. (ii) Service fee. In one agreement, a fixed monthly fee is specified. In another agreement, a quarterly fee is specified, subject to adjustments based on the actual amount of time in providing services to us. (iii) Termination. The agreements did not specify a fixed contract period. However, both agreements can be terminated by either party with one month s prior notice. 122

129 BUSINESS Secondment agreements The salient terms of the secondment agreements entered into between us and our suppliers (including Vibro as mentioned in the section Business Customers Information regarding certain customers who were also our suppliers above) during the Track Record Period typically included the following: (i) Seconded employee. A named employee of our supplier is assigned to work for us on secondment for a specified role. (ii) Secondment period. A fixed secondment period, usually up to 12 months, is specified. In addition, some secondment agreements may be early terminated by either party with one month s prior notice. (iii) Secondment fee. A monthly secondment fee payable by us to our supplier is specified. Under the secondment arrangement, we are not responsible for the salary of the seconded employee but we are required to pay a secondment fee to our supplier, which is considered to be fair and reasonable by our Directors as such secondment fee is generally comparable to the cost of hiring a staff with similar experience. In addition, secondment arrangements can provide us with immediately available manpower and reduce our administrative time and costs in recruitment. Drafting service agreement During the Track Record Period, we engaged one external drafting service provider for the preparation of technical drawings in order to alleviate the workload of our draftsmen. The salient terms of the drafting service agreement entered into between us and the external drafting service provider mainly included (i) the scope of work, which is primarily the preparation of technical drawings using specified computer software; and (ii) a specified monthly fee. Neither party committed to a specified engagement period. Top suppliers For each of FY2013 and FY2014, the percentage of our total purchases from our largest supplier amounted to approximately 34.6% and 34.3% of our total purchases respectively, while the percentage of our total purchases from our five largest suppliers combined amounted to approximately 84.0% and 82.8% of our total purchases respectively. 123

130 BUSINESS Set out below is a breakdown of our total purchases from our top suppliers: For FY2013: Rank Supplier HK$ 000 % 1 Supplier A 1, Supplier B 1, Supplier C Supplier D Supplier E Five largest suppliers combined 3, All other suppliers Total purchases 4, For FY2014: Rank Supplier HK$ 000 % 1 Supplier B 2, Supplier F 1, Supplier G Supplier H Supplier C Five largest suppliers combined 5, All other suppliers 1, Total purchases 6, None of our Directors, their associates, or any Shareholders who owned more than 5% of the share capital of our Company as at the Latest Practicable Date had any interest in any of the five largest suppliers of our Group during the Track Record Period. 124

131 BUSINESS Set our below is the background information of our top suppliers mentioned in the above table: Supplier Principal business activities Location Type of goods or services purchased by us from the supplier Year(s) of business relationship Typical credit terms and payment method Supplier A Contractor for foundation and geotechnical works Hong Kong Subcontracting of site works 2 30 days after receipt of invoice by cheque Supplier B Contractor for foundation and geotechnical works Hong Kong Subcontracting of site works 1 30 days after receipt of invoice by cheque Supplier C Contractor for foundation and geotechnical works Hong Kong Subcontracting of site works 5 30 days after receipt of invoice by cheque Supplier D Provision of drafting services for technical drawings Hong Kong Drafting service for technical drawings 4 30 days after receipt of invoice by cheque Supplier E Provision of engineering consulting services Hong Kong Secondment of site supervision staff days after receipt of invoice by cheque Supplier F Contractor for foundation and geotechnical works Hong Kong Subcontracting of site works Less than 1 30 days after receipt of invoice by cheque Supplier G Provision of engineering consulting services Hong Kong Technical consultancy service 2 30 days after receipt of invoice by cheque Supplier H Provision of engineering consulting services Hong Kong Technical consultancy service 2 30 days after receipt of invoice by cheque 125

132 BUSINESS Supplier concentration Our top five suppliers accounted for approximately 83.9% and 82.8% of our total purchases for each of FY2013 and FY2014 respectively. In particular, approximately 34.6% and 34.3% of our total purchases were attributable to our largest supplier for each of FY2013 and FY2014 respectively. Despite such supplier concentration, our Directors consider that we are not reliant on any single supplier because: (a) The most significant cost of our services was our staff costs, particularly the costs of our engineering staff. For each of FY2013 and FY2014, our staff costs for staff directly involved in the provision of our services amounted to approximately HK$11.8 million and HK$14.1 million, representing approximately 69.1% and 64.9% of our total cost of sales, respectively. Our staffs are not regarded as our suppliers. In addition, our Directors consider that we have maintained good relationship with our employees. We have not experienced any significant problems with our employees or any disruption to our operations due to labour disputes nor have we experienced any difficulties in the recruitment and retention of experienced staff or skilled personnel during the Track Record Period. (b) Our most significant purchases from external suppliers were in relation to the engagement of subcontractors for performing site works as we do not maintain our own direct labours and machinery for carrying out site works on our own. During the Track Record Period, we engaged only 4 subcontractors. Despite so, our Directors consider that we are not reliant on any of these subcontractors because (i) during the Track Record Period, we had undertaken only 4 contracting projects (see Business Our services Projects undertaken during the Track Record Period Contracting projects above) and we appointed different subcontractor for each project; and (ii) our Directors consider that supply for similar services is not scarce in the market. (c) Other than the engagement of subcontractors, the amount of our purchases from each of our top suppliers as shown in the above table (i.e. other than Suppliers A, B, C and F who were our subcontractors) was below HK$1 million per supplier per year. (d) In respect of our purchases from other suppliers (other than our subcontractors), our Directors consider that such purchases were either (i) not indispensable for our operations (such as the engagement of external consultants, which was mainly for the sake of prudence rather than due to any statutory requirements or contractual obligations) or (ii) in relation to services that are readily available in the market (such as drafting services for the preparation of technical drawings). Reason for subcontracting arrangement In respect of our contracting service, we engage subcontractors to perform the site works in accordance with our engineering designs and do not maintain our own direct labours or machinery. Our Directors consider that such subcontracting arrangement is in the interest of our Group because 126

133 BUSINESS our expertise lies in developing cost-effective engineering designs as well as supervising and managing the performance of site works. As our expertise does not lie in performing the site works by ourselves, our Directors consider that it is more cost effective for us to engage subcontractors than to maintain our own direct labours and machinery. Basis of selection of subcontractors We maintain an internal list of approved subcontractors. We carefully evaluate subcontractors and decide whether to include them in our list based on a range of factors such as their technical capability, track records, labour resources, sufficiency of equipment and safety performance. When subcontractors are needed for a particular project, we select subcontractors from our list based on their experience relevant to the particular project as well as their availability and fee quotations. Control on subcontractors We send our own personnel to the work site to supervise the works performed by our subcontractors. Our personnel also review our subcontractors works on an on-going basis to ensure that our subcontractors works conform to our engineering design. Such supervision and review procedures include, among others: issuing drawings of the approved engineering designs to the subcontractors and explaining to the subcontractors the details of the works during regular site meetings to enable them to understand and comply with the approved engineering designs; on-going on-site inspection by our project manager and site personnel to ensure compliance by our subcontractors with the approved engineering designs; and where applicable, testing of works completed by our subcontractors, such as loading test of completed foundation or testing of concrete samples. In addition, we require our subcontractors to follow our occupational health and safety measures. We explain our measures to subcontractors before commencement of works and monitor their compliance with such measures on an on-going basis at work sites. For details of such measures, please refer to the section Business Occupational health and safety in this prospectus. SALES AND MARKETING During the Track Record Period, all of our new businesses were obtained through direct invitation for quotation by customers, which is considered by our Directors to be attributable to our well-established presence and professional reputation in the geotechnical engineering industry in Hong Kong. We maintain the relationship with our customers and attract them to provide us with new businesses mainly by ensuring the quality of our services, maintaining our professional image and reputation in the industry, and actively liaising with existing and potential customers from time to time 127

134 BUSINESS for relationship building and management. During the Track Record Period, our sales and marketing activities also included publishing technical books and organising continuing professional development courses, seminars and conferences on topics related to civil engineering, which are intended for the promotion of our professional image and reputation. During the Track Record Period, our success rates for projects quoted were as follows: FY2013 FY2014 Success rate (Note) 83.9% 88.2% Note: Success rate is calculated as the number of projects with engagement successfully confirmed during the financial year divided by the number of quotations sent to customers during the year. During the Track Record Period, the majority of our projects were awarded to us by repeat customers (i.e. customers who had previously awarded projects to us before the Track Record Period). The following table sets forth a breakdown of our revenue by projects awarded by repeat customers and new customers. The proportion of revenue attributable to repeat customers was approximately 84.9% for FY2013 and approximately 90.4% for FY2014, which remained at relatively high level: FY2013 FY2014 Revenue % Revenue % HK$ 000 HK$ 000 Repeat customers 38, , New customers 6, , Others (Note) , , Note: Others refer to revenue derived from our activities of publishing technical books and organising continuing professional development courses, seminars and conferences. The following new customer awarded a project to us during the Track Record Period which was considered to be material (with total contract sum of approximately HK$3.5 million): Background of the customer A private company which is principally engaged in the foundation and substructure construction business in Hong Kong. According to publicly available information published on the website of the Stock Exchange, the holding company of such company was in the process of applying for listing on the Stock Exchange as at the Latest Practicable Date and recorded a consolidated turnover of more than HK$500 million and a net profit of more than HK$50 million for the year ended 31 March Nature of the project awarded to us An engineering consulting project involving the preparation of engineering designs for the foundation and site formation works which commenced in May 2013 and is expected to complete by the end of December

135 BUSINESS Measures to maintain relationship with our customers and to attract them to provide us with new businesses include the following: ensuring that the quality of our services is maintained by observing our quality assurance procedures, recruiting and retaining appropriate and suitable personnel to serve our Group, and providing continuous training to our staff; ensuring that our professional image and reputation in the industry are maintained by providing quality services, publishing technical books and organising continuing professional development courses, seminars and conferences on topics related to civil engineering; and actively liaising with existing and potential customers for securing new businesses. In 2001, we started publishing technical books and organising continuing professional development courses, seminars and conferences on topics related to civil engineering. These activities are intended for the promotion of our professional image and reputation and the further enhancement of our presence in the geotechnical engineering industry in Hong Kong. Since then and up to the Latest Practicable Date, we have published the following technical books: Book title International Standard Book Number (also known as ISBN) Date published The Practice of Geotechnical Engineering in Hong Kong - Stanley Au Volume X May 2001 Design and Construction of Diaphragm Wall (Proceedings) - Seminar on 10 August August 2001 Jack Pile in Hong Kong (Proceedings) - Seminar on 13 March March 2002 Design & Construction of Driven and Jacked Piles March 2003 Case Studies of Jacked Piling in Hong Kong October 2003 Deep Foundation Design & Construction October 2003 Deep Excavations - Selected Topics September 2004 Symposium on Hong Kong Soils (reprinted version) No ISBN March 2004 Blast Loading, Structural Response and Design July 2005 Information & Communications Technology (ICT) Applications in Construction May 2006 Symposium on Hong Kong Soils and Rocks January 2006 Geotechnical and Pavement Engineering - Selected Papers of Professor I K Lee X August 2006 Civil Engineering Practical Notes A-Z August

136 BUSINESS Book title International Standard Book Number (also known as ISBN) Date published Bridging Research & Practice - The VLA Experience November 2008 Proceedings of the VLA Seminar - A Brief Tour of Innovative Reinforced Soil Projects: Bringing Research to Applications June 2009 Roles of Registered Geotechnical Engineer under Buildings Ordinance and Associated Regulations October 2009 The 2nd VLA Seminar New Developments in Jacked Piling March 2011 Techniques for Installation of Jacked H-Piles November 2011 Bridging Research & Practice - The VLA Experience (Volume 2) July 2012 Conference on Foundations: State-of-the-Practice No ISBN July 2013 In addition, we have organised over 20 courses, seminars and conferences. According to the IPSOS Report, our publications, courses, seminars and conferences are very popular and highly regarded in the geotechnical engineering industry in Hong Kong based on IPSOS s primary research including interviews with relevant stakeholders in the geotechnical engineering industry in Hong Kong. QUALITY ASSURANCE VLA, our operating subsidiary carrying on our engineering consulting business, obtained ISO 9001:1994 certification in May 1998 and ISO 9001:2008 certification in December The application for ISO 9001 certification was initiated by ourselves. The relevant criteria and requirements for obtaining ISO 9001 certification include, among others: developing and implementing a quality assurance manual which is consistent with the spirit of the ISO 9001 standard and suits our own businesses; and engaging a certification body accredited by the Hong Kong Accreditation Service of the Innovation and Technology Commission of the Government to review the implementation of the quality assurance manual to its satisfaction. Our engineering consulting business is operated under a set of procedures that conform to the ISO 9001 quality standards. Similar procedures had also been developed and implemented by us for our contracting business and project management business. 130

137 BUSINESS Personnel responsible for our overall quality assurance include Dr. Li, Mr. Tam Yi Shek, Mr. Chan Kin Pong and Mr. Tsang Siu Wah, all being our executive Directors. For details of their biographical information, please refer to the section Directors and senior management Directors in this prospectus. For our quality control measures over our subcontractors, please refer to the section Business Suppliers Control on subcontractors above. During the Track Record Period and up to the Latest Practicable Date, we did not receive any complaint or request for any kind of compensation from our customers due to quality issue in relation to services provided by us or works performed by our subcontractors. OCCUPATIONAL HEALTH AND SAFETY Our occupational health and safety measures that are required to be followed by employees of our Group and our subcontractors include, among others: staff are not allowed to enter a work site unless they are a corporate member of HKIE or they possess the construction industry safety training certificate (also known as the green card); staff are not allowed to enter confined space unless they have completed the required safety training; and staff are required to observe the occupational health and safety measures and policy of the main contractor of the relevant work site. We also sponsor our engineering staff and site personnel to attend occupational health and safety courses. Pursuant to the Employees Compensation Ordinance (Chapter 282 of the Laws of Hong Kong) and our typical agreements with our customers and/or the insurance companies, accidents and injuries involving employees of our Group and our subcontractors during their course of employment are required to be reported to the Department of Labour of the Government and/or our customer and/or the insurance company in accordance with the procedures required by law or the relevant insurance policies. We also maintain an internal record of accidents. Our Directors confirm that during the Track Record Period and up to the Latest Practicable Date, (i) there were no claims against our Group for personal or property damages; (ii) our Group did not experience any significant incidents or accidents in relation to workers safety; and (iii) our Group did not record any non-compliance with the applicable laws and regulations relevant to the work safety and occupational health issues. 131

138 BUSINESS ENVIRONMENTAL COMPLIANCE Our Group s operations at work sites are subject to certain environmental requirements pursuant to the laws in Hong Kong, including primarily those in relation to air pollution control, noise control, water pollution control and waste disposal. For details of the regulatory requirements, please refer to the section Regulatory overview in this prospectus. Our in-house rules contain measures and work procedures governing environmental protection compliance that are required to be followed by our employees and subcontractors. Such measures and procedures include, among others: Area Measures Air pollution control (i) Erection of hoarding along the site boundary with effective dust screens, sheeting or netting if necessary (ii) Watering whenever necessary for any dusty materials before loading and unloading (iii) Dusty load on vehicles to be covered by tarpaulin and vehicle washing facilities to be provided at all site exits to wash away dusty materials from vehicle body and wheels Noise control (i) Idle equipment to be turned off as soon as possible (ii) Installation of noise barriers or enclosures if appropriate (iii) Use of quiet mechanical equipment and plant whenever possible Water pollution control (i) Identification of wastewater discharge points before commencement of works (ii) Site drainage facilities to be installed with regular cleaning and removal of settled sediments (iii) Sedimentation tanks of sufficient capacity to be provided for treatment of effluent prior to discharge Waste disposal (i) General refuse and litter to be stored in enclosed bins or compaction units to be separated from construction or chemical waste (ii) Labeled bins to be provided to allow segregation of recyclable materials whenever possible (iii) Construction waste materials to be segregated into different categories such as reusable construction and demolition materials for re-use on site, and other waste for transportation to landfills 132

139 BUSINESS Our Directors confirm that costs in relation to environmental compliance are usually borne by our customers or the main contractor at the work site. Nevertheless, for each of FY2013 and FY2014, we incurred approximately HK$180,000 and nil respectively in relation to the compliance with applicable environmental requirements. We estimate that our annual cost of compliance going forward will be at a level similar to that during the Track Record Period and consistent with our scale of operation. During the Track Record Period and up to the Latest Practicable Date, we did not record any non-compliance with applicable environmental requirements that resulted in prosecution or penalty being brought against us. INSURANCE During the Track Record Period, we secured insurance policies as set out in the following paragraphs. Our Directors consider that our insurance coverage is adequate and consistent with industry norm having regard to our current operations and the prevailing industry practice. Our Directors confirm that no claims have been made in respect of any of our insurance policies during the Track Record Period and up to the Latest Practicable Date. Professional indemnity insurance We have taken out professional indemnity insurance to cover our potential liability arising from possible claims against us under our engineering consulting projects. As advised by the Legal Counsel, there are no legal or professional requirements for us to do so. In respect of our engineering consulting business, some of our customers require us to secure certain minimum coverage of professional indemnity insurance, while some provide us with professional indemnity insurance coverage, having regard to the project sum and/or the preference of our customers. As such, we consider that the coverage of our professional indemnity insurance is adequate and consistent with industry norm. As our business grows, our exposure to professional indemnity liabilities will increase. Our Directors will continuously review our professional indemnity insurance coverage from time to time to ensure that our coverage is adequate and consistent with the industry norm having regard to our business conditions from time to time. Employees compensation insurance Pursuant to Section 40 of the Employees Compensation Ordinance (Chapter 282 of the Laws of Hong Kong), all employers are required to take out insurance policies to cover their liabilities both under the Employees Compensation Ordinance and at common law for injuries at work in respect of all their employees (including full-time and part-time employees). We have taken out insurance policies in accordance with such requirement. According to section 24 of the Employees Compensation Ordinance, we and our customer are both liable to pay compensation to any injured employees of our subcontractor who are injured in the course of employment to our subcontractor. During the Track Record Period, customers of our contracting business have taken out employees compensation insurance policies pursuant to section 24 of the Employees Compensation Ordinance covering the liabilities of it and its subcontractors. As a result, our subcontractors liabilities are insured by our customer s insurance policy, which is also reflected in the contracts entered into between us and our customers. 133

140 BUSINESS Nevertheless, any compensation paid to the injured employees under the Employees Compensation Ordinance would not exempt our liabilities under common law. Pursuant to the Limitation Ordinance (Chapter 347 of the Laws of Hong Kong), the limitation period for making a claim for personal injury is three years from the date of the industrial accident. On the other hand, pursuant to section 26 of the Employees Compensation Ordinance, the compensation paid to these injured workers under common law will be reduced by the compensation already paid to the injured employee under the Employees Compensation Ordinance. During the Track Record Period and up to the Latest Practicable Date, no industrial accident causing material personal injury or death to our employees or to our subcontractors employees had occurred. Contractors all risks insurance In respect of our contracting business, during the Track Record Period, customers of our contracting business have taken out contractors all risk insurance policies covering our liabilities arising from potential damage to the buildings or structures under our subcontracted works as well as potential bodily injury to third parties or damage to third parties properties as a result of the performance of our subcontracted works. Other insurance coverage In addition, we have also secured insurance coverage against, among other matters, (i) loss, destruction or damage to our owned property caused by fire or lightning; (ii) general office risks including loss or damage to office contents and bodily injury occurring on our office premises; and (iii) loss or damage to our motor vehicles and third-party liability in relation to the use of our motor vehicles. EMPLOYEES Number of employees As at the Latest Practicable Date, we had 34 employees (including our 4 executive Directors but excluding our 3 independent non-executive Directors). All of our employees are stationed in Hong Kong. The following table sets forth a breakdown of the number of our employees by functions: As at 31 July 2013 As at 31 July 2014 As at the Latest Practicable Date (a) Management, administration, accounting and finance staff (b) Engineering staff (c) Draftsman (d) Project management and site personnel Total (Note)

141 BUSINESS Note: The number of employees in each category does not add up to the total number because some of our employees were involved in more than one area of our operations and were therefore counted in more than one category. Specifically, among our 32 employees as at 31 July 2013, 3 were included in both categories (a) and (b); 1 was included in categories (a), (b) and (d); and 8 were included in both categories (b) and (d); among our 32 employees as at 31 July 2014, 3 were included in both categories (a) and (b); 1 was included in categories (a), (b) and (d); and 12 were included in both categories (b) and (d); and among our 34 employees as at the Latest Practicable Date, 3 were included in both categories (a) and (b); 1 was included in categories (a), (b) and (d); and 12 were included in both categories (b) and (d). Relationship with staff Our Directors consider that we have maintained good relationship with our employees. We have not experienced any significant problems with our employees or any disruption to our operations due to labour disputes nor have we experienced any difficulties in the recruitment and retention of experienced staff or skilled personnel during the Track Record Period. Training and recruitment policies We generally recruit our employees from the open market. We mainly place recruitment advertisements for recruitment purpose. We offer training scheme (recognized by the HKIE as Scheme A Training) in geotechnical and structural disciplines for graduate engineers recruited by us. Graduate engineers undergoing Scheme A Training require a shorter duration for application for membership of HKIE (where 3 years of Scheme A Training plus one additional year of relevant work experience are required) than those without Scheme A Training (where 6 years are required before membership application). In addition, we encourage our staff to attend technical seminars organised by us or by other third parties by offering paid leaves and/or sponsoring the admission fees. We also sponsor our engineering staff and site personnel to attend occupational health and safety courses. We intend to use our best effort to attract and retain appropriate and suitable personnel to serve our Group. Our Group assesses the available human resources on a continuous basis and will determine whether additional personnel are required to cope with the business development of our Group. Remuneration policy Our Group entered into separate service contracts with each of our employees in accordance with the applicable labour laws in Hong Kong. 135

142 BUSINESS The remuneration package our Group offers to employees includes salary, bonuses and other cash subsidies. In general, our Group determines employee salaries based on each employee s qualifications, position and seniority. Our Group has designed an annual appraisal system to assess the performance of our employees, which forms the basis of our decisions with respect to salary raises, bonuses and promotions. RESEARCH AND DEVELOPMENT During the Track Record Period and as at the Latest Practicable Date, we did not engage in any research and development activity. INTELLECTUAL PROPERTY As at the Latest Practicable Date, our Group had not applied for registration of or registered any trademark. As at the Latest Practicable Date, our Group is the owner of the following domain names which are material to the business of our Group for use in our system and/or website operations: Registered owner Domain name Registration date Expiry date VLA vla.hk 6 June June 2015 CRPD crpd-hk.com 5 May May 2015 KSL Engineering kslengineering.hk 30 April April 2016 kslholdings.com 6 August August 2016 Save as the above, as at the Latest Practicable Date, we did not have any material intellectual property rights (whether registered or pending registration) that are significant to our business operations or financial positions. PROPERTIES The following table summarises the information regarding our owned property as at the Latest Practicable Date: Address Gross floor area Use of the property Units A, B and C on 7th Floor and Lavatory, Sun Kwong Industrial Building, Tung Chau West Street, Kowloon, Hong Kong Approximately 4,662 sq.ft. The use of such premises during the Track Record Period was related to a non-compliance issue, details of which is disclosed in the section Business Non-compliance below. 136

143 BUSINESS The above property was purchased by us at a consideration of HK$12.8 million (excluding relevant transaction costs) in May 2012 and was pledged as security for bank loan facilities with an outstanding principal amount of approximately HK$5.67 million as at 31 July In October 2014, we have fully repaid such bank loan. As at 31 October 2014, the market value of the above property was approximately HK$16.3 million as assessed by Asset Appraisal Limited, an independent property valuer. For further details of our property interests, please refer to the property valuation set out in Appendix III to this prospectus. For further information regarding our banking facilities, please refer to the section Financial information Indebtedness in this prospectus. The following table summarises the information regarding our leased property as at the Latest Practicable Date: Address Landlord Gross floor area Use of the property Key terms of the tenancy Office A, 12/F Billion Plaza 2, No. 10 Cheung Yue Street, Kowloon, Hong Kong An independent third party 3,323 sq.ft. (Note) For general office and operational use Monthly rental of HK$76,429 with tenancy period up to August 2017 Office B, 12/F Billion Plaza 2, No. 10 Cheung Yue Street, Kowloon, Hong Kong An independent third party 2,009 sq.ft. (Note) For general office and operational use Monthly rental of HK$46,207 with tenancy period up to August 2017 Note: The gross floor area figures are provided by real estate agents. 137

144 BUSINESS NON-COMPLIANCE Our Directors confirm that save as disclosed below under this section Business Non-compliance, we have complied with all applicable laws and regulations in all material respects in Hong Kong (being the principal jurisdiction in which we operate) during the Track Record Period and up to the Latest Practicable Date. Set out below are details of our past non-compliances: Non-compliance with Government leases and occupation permit Particulars of the non-compliance Reason for the non-compliance Remedial action Estimated/actual fine/penalty Breach of the land use conditions set out in the occupation permit of a premises located at Rooms , 12th Floor, Nos Bute Street, Kowloon, Hong Kong ( Premises 1 ), and section 25(1) of the Buildings Ordinance (Chapter 123 of the Laws of Hong Kong) for failure to notify the Buildings Authority regarding the change of land use. VLA, as a tenant, rented the Premises 1 as its office during the period from 1 May 2010 to 31 October 2012 where the Premises 1 are factory for non-domestic use. The breach was not wilful and was due to the inadvertent oversight of the responsible staff and the absence of timely and professional advice at the material time. VLA had moved out of the Premises 1 in October If another property was leased by VLA instead of Premises 1 for use as its office during the relevant period, we would have incurred additional rental expenses amounting to a total of approximately HK$235,000 during the Track Record Period (which was estimated based on the statistics published by the Rating and Valuation Department of the Government regarding the average rents of private office in the district of Yau Ma Tei and Mong Kok during the relevant period). Under section 40(2) and section 40(6) of the Buildings Ordinance, our Group is liable to a maximum fine of HK$100,000 and its directors are liable to a maximum fine of HK$100,000 and imprisonment of two years maximum. As advised by the Legal Counsel, since VLA is no longer in possession of Premises 1, the unlawful use in breach of the occupation permit had ceased. Having considered that the breach was not wilful and that the unlawful use of Premises 1 by VLA had already ceased after October 2012, the Legal Counsel advised that based on his experience, prosecution under these circumstances is uncommon and the risk of being prosecuted for VLA s previous use of Premises 1 is remote and even if there is any prosecution, the chance of an imprisonment sentence being imposed is remote. 138

145 BUSINESS Particulars of the non-compliance Reason for the non-compliance Remedial action Estimated/actual fine/penalty Breach of the land use restrictions set out in the relevant Condition of Exchange of premises located at Units A, B and C on 7th Floor and Lavatories, Sun Kwong Industrial Building, Nos Tung Chau West Street, Kowloon, Hong Kong ( Premises 2 ), the land use conditions set out in the relevant occupation permit and section 25(1) of the Buildings Ordinance for failure to notify the Buildings Authority regarding the change of land use. VLA, as the landlord, used the Premises 2 as its office during the period from 12 October 2012 to 5 September 2014 where land use of the Premises 2 is restricted to general industrial purpose. The breach was not willful and was due to the inadvertent oversight of the responsible staff and the absence of timely and professional advice at the material time. Immediately upon becoming aware of the breach, VLA had moved out of the Premises 2. We intend to lease out Premises 2 after Listing for industrial uses in compliance with the land use conditions set out in the occupation permit of Premises 2. Under section 40(2) and section 40(6) of the Buildings Ordinance, our Group is liable to a maximum fine of HK$100,000 and its directors are liable to a maximum fine of HK$100,000 and imprisonment of two years maximum. According to the relevant Condition of Exchange, the Government is entitled to re-enter the Premises 2 and claim damages against the respective owners. If the occupier does not quit the Premises 2 upon receiving notice of re-entry from the Government, he may also be liable to civil claim by the Government. As at the Latest Practicable Date, VLA had not received any notice of re-entry from the Government in relation to the Premises 2. The Premises 2 is also subject to a deed of mutual convenant which sets out that the building at where the Premises 2 is located is defined as Factory Building. For the breach of the relevant deed of mutual covenant, the incorporated owners or manager of the building could claim against VLA for an injunction restraining the use of Premises 2 as an office by VLA. As advised by the Legal Counsel, having considered that the breach was not wilful and that VLA had ceased to use the Premises 2 as an office and the breaches set out herein above are all stopped, based on his experience, prosecution and/or claim under these circumstances is uncommon and the risk of being prosecuted and/or claimed is remote and even if there is any prosecution, the chance of an imprisonment sentence being imposed is remote. 139

146 BUSINESS Non-compliance with Inland Revenue Ordinance (Chapter 112 of the Laws of Hong Kong) (the Inland Revenue Ordinance ) Relevant section of the ordinance Particulars of the non-compliance Reason for the non-compliance Remedial action Estimated/actual fine/ penalty Non-compliance with section 52(4) of the Inland Revenue Ordinance Failure to submit the notice (Form 56E) regarding commencement of employment of all employees (based on our Group s record kept for the recent 7 years, a total of 79 employees of our Group were involved) which is required to be filed within 3 months after such commencement of employment until 30 June The omission was not willful and due to the inadvertent oversight of the administrative staff responsible for employee records and the absence of timely and professional advice at the material time. The relevant notice for all employees which commenced employment after July 2014 were duly filed within the prescribed time limit. Under the Inland Revenue Ordinance, the maximum penalty for each offence is HK$10,000. As advised by the Legal Counsel, the time limit of prosecution of this kind of default is either in the year of assessment in respect of or during which the offence was committed or within 6 years after the expiration thereof. Accordingly, a total maximum penalty of HK$790,000 may be imposed on our Group in respect of this non-compliance issue. As advised by the Legal Counsel, having considered that the offence is quite minor and technical in nature and was not wilful, based on his experience, prosecution under these circumstances is uncommon and the chance of prosecution is remote and even if there is any prosecution, the chance of maximum sentence being imposed is remote. 140

147 BUSINESS Relevant section of the ordinance Non-compliance with section 52(5) of the Inland Revenue Ordinance Particulars of the non-compliance Late submission of the notice (Form 56F) regarding cessation of employment of all employees (based on our Group s record kept for the recent 7 years, a total of 50 ex-employees of our Group were involved) which is required to be filed within 1 month before the expected date of departure of such employee. Reason for the non-compliance Remedial action Estimated/actual fine/ penalty The omission was not willful and was due to inadvertent oversight of the administrative staff responsible for employee records and the absence of timely and professional advice at the material time. The relevant notice for all employees which ceased employment after September 2014 were duly filed within the prescribed time limit. Under the Inland Revenue Ordinance, the maximum penalty for each offence is HK$10,000. As advised by the Legal Counsel, the time limit of prosecution of this kind of default is either in the year of assessment in respect of or during which the offence was committed or within 6 years after the expiration thereof. Accordingly, a total maximum penalty of HK$500,000 may be imposed on our Group in respect of this non-compliance issue. As advised by the Legal Counsel, having considered that the offence is quite minor and technical in nature and was not wilful, based on his experience, prosecution under these circumstances is uncommon and the chance of prosecution is remote and even if there is any prosecution, the chance of maximum sentence being imposed is remote. 141

148 BUSINESS Non-compliance with the Predecessor Companies Ordinance Relevant section of the ordinance Particulars of the non-compliance Reason for the non-compliance Remedial action Estimated/actual fine/ penalty Non-compliance with section 122 of the Predecessor Companies Ordinance KSL Engineering had failed to lay its profit and loss accounts and balance sheets at its respective annual general meetings in 2012 and 2013 within the prescribed time limit. CRPD had failed to lay its profit and loss accounts and balance sheets at its annual general meeting in 2013 within the prescribed time limit. The omission was not willful and due to the inadvertent oversight of the administrative staff responsible for supervision on secretarial matters and the absence of timely and professional advice at the material time. The audited accounts were either laid before the annual general meeting subsequently held or approved by a written resolution. Our Group had also sought legal advice on whether relief can be obtained from the Court. As advised by the Legal Counsel, based on the recent judgments of the Companies Court, the Court will not grant relief under section 122 of the Predecessor Companies Ordinance because the Court is of the view that such relief has no practical purpose in the context of listing application. Under the Twelfth Schedule of the Predecessor Companies Ordinance, the maximum penalty for each offence is HK$300,000 and imprisonment for 12 months under section 122. As advised by the Legal Counsel, a total maximum penalty of HK$1,800,000 may be imposed on our Group in respect of this non-compliance issue. As advised by the Legal Counsel, prosecution under section 122 of the Predecessor Companies Ordinance is not quite common and the relevant audited financial statements were subsequently approved; based on his experience, prosecution under these circumstances is uncommon and the chance of prosecution thereunder is remote and even if there is any prosecution, the chance of an imprisonment sentence being imposed is remote. Non-compliance with section 645 of the Companies Ordinance and section 158 of the Predecessor Companies Ordinance Failure to provide in one of the boxes indicating the date of appointment of Dr. Li as a director of CRPD on the form D1 filed on 26 April The omission was not willful and due to the inadvertent oversight of the administrative staff responsible for preparing the document and the absence of timely and professional advice at the material time. The relevant amended form was duly filed. Under section 645(6) of the Companies Ordinance, CRPD and every responsible person for CRPD commit an offence and the maximum fine is HK$25,000 for each offence and a maximum daily default fine is of HK$700 for each offence. Under section 158 of the Predecessor Companies Ordinance, CRPD and every officer in default of CRPD commits an offence and a maximum fine is HK$10,000 for each offence and a maximum daily default fine of HK$300 for each offence. 142

149 BUSINESS Relevant section of the ordinance Particulars of the non-compliance Reason for the non-compliance Remedial action Estimated/actual fine/ penalty As advised by the Legal Counsel, under section 900 of the Companies Ordinance and section 351A of the Predecessor Companies Ordinance, there is both a time limit for prosecution of three years. Hence, the Legal Counsel advised that CRPD and its responsible person or officers in default will only be liable for 3 years of continuation of each offence. As advised by the Legal Counsel, a total maximum principle fine of HK$25,000 and a total maximum daily default fine of HK$766,950 may be imposed on our Group in respect of this non-compliance issue. As advised by the Legal Counsel, given it was just an inadvertent mistake and no action has been taken so far since 2001 and an amended form has been filed and based on his experience, prosecution under these circumstances is uncommon and the chance of prosecution is remote. 143

150 BUSINESS Relevant section of the ordinance Non-compliance with section 107(2)(e) of the Predecessor Companies Ordinance and section 664 of the Companies Ordinance Particulars of the non-compliance VLA has failed to include particulars of the total amount of the indebtedness of VLA in respect of all mortgages and charges which are required to be registered with the Companies Registry under the Predecessor Companies Ordinance in the annual returns for 2013 and CRPD has failed to include particulars of the total amount of the indebtedness of CRPD in respect of all mortgages and charges which are required to be registered with the Companies Registry under the Predecessor Companies Ordinance in the annual returns for 2006 to Reason for the non-compliance Remedial action Estimated/actual fine/ penalty The omission was not willful and due to inadvertent oversight of the administrative staff responsible for preparing the document and the absence of timely and professional advice at the material time. The relevant amended annual returns were duly filed. The maximum fine for non-compliance of section 664 of the Companies Ordinance is HK$50,000 and the maximum daily fine is HK$1,000. As advised by the Legal Counsel, a total maximum penalty of HK$1,378,000 may be imposed on VLA in respect of this non-compliance issue. As advised by the Legal Counsel, under section 900 of the Companies Ordinance and section 351A of the Predecessor Companies Ordinance, there is both a time limit for prosecution of three years. The Legal Counsel advised that CRPD will only be liable to 3 years of continuation of each offence. As further advised by the Legal Counsel, since CRPD had no mortgages and/or charges at the material time and it stated General Banking Facilities in the relevant box of the annual returns, it would not be penalised on these incidents. In addition, given errors are inadvertent mistakes, CRPD and its directors/officer would not be charged for giving false information under section 895 of the Companies Ordinance and section 349 of the Predecessor Companies Ordinance. As advised by the Legal Counsel, given amended forms have been filed and based on his experience, prosecution under these circumstances is uncommon and the chance of prosecution is remote and even if there is any prosecution, the chance of maximum sentence being imposed is remote. 144

151 BUSINESS Relevant section of the ordinance Particulars of the non-compliance Reason for the non-compliance Remedial action Estimated/actual fine/ penalty Non-compliance with section 158(4) of the Predecessor Companies Ordinance For VLA, it has late filing for 15 days of the notices reporting the change of residential address of Dr. Li in For CRPD, it has late filing for 1 day of the notice reporting the change of residential address in The omission was not willful and due to inadvertent oversight of the administrative staff responsible for preparing the documents and the absence of timely and professional advice at the material time. The relevant forms were subsequently filed. As advised by the Legal Counsel, each of VLA and CRPD is liable to a maximum fine of HK$10,000 and a maximum daily fine of HK$300 for non-compliance of section 158(4) of the Predecessor Companies Ordinance. As advised by the Legal Counsel, a total maximum penalty of HK$49,600 may be imposed on our Group in respect of this non-compliance issue. The Legal Counsel is of the view that given those late filings are very minor matters and based on his experience, prosecution under these circumstances is uncommon and the chance of prosecution is remote and even if there is any prosecution, the chance of maximum sentence being imposed is remote. As at the Latest Practicable Date, there had not been any prosecution initiated against our Group or our then or current Directors, nor had any of them been subject to any re-entry notice or fine relating the above non-compliances. Our Directors and the Legal Counsel consider that the above non-compliance matters shall not have any material impact on the operations or financial positions of our Group. Having considered that the estimated fines and penalty, if applicable, are immaterial, and that our Controlling Shareholders shall indemnify our Group as mentioned below, no provision for the fines has been made by our Directors in our Group s financial statements. 145

152 BUSINESS Indemnity given by our Controlling Shareholders Our Controlling Shareholders have entered into a deed of indemnity whereby our Controlling Shareholders have agreed to indemnify our Group, subject to the terms and conditions of the deed of indemnity, in respect of any liabilities and losses which may arise as a result of any non-compliance of our Group with the applicable laws, rules or regulations on or before the date on which the Placing becomes unconditional. Further details of the deed of indemnity are set out in the paragraph headed Tax and other indemnities in Appendix V to this prospectus. Internal control measures to prevent the recurrence of non-compliance incidents In order to continuously improve our Group s corporate governance and to prevent recurrence of the abovementioned non-compliances in the future, our Group has, pursuant to the recommendations made by CT Partners Consultants Limited ( CT Partners ), an independent internal control adviser engaged by us as disclosed in the paragraph headed Review by CT Partners below, adopted or will adopt the following measures: 1. With regards to the non-compliance in relation to the Government leases, all lease agreements will be reviewed by the Board, external legal adviser, our company secretary and our accounting department, and we will seek legal advice from external legal advisers before entering into or varying the terms of any lease agreement. Our Directors will be responsible for ensuring that all lease agreements entered into by us have complied with the relevant Hong Kong laws and regulations. 2. With regards to the non-compliance in relation to the use of our owned properties going forward, all provisional sales and purchase agreement in relation to the purchase of properties will be reviewed by the Board, external legal adviser, our company secretary and our accounting department, and we will seek legal advice from external legal advisers before entering into or varying the terms of any provisional sales and purchase agreement. Our Directors will be responsible for ensuring that the use of all self-owned properties complies with the relevant Hong Kong laws and regulations based on the legal advice obtained from external legal advisers. 3. On 11 September 2014, our Directors attended training sessions conducted by our legal advisers as to Hong Kong law on the on-going obligations and duties of a director of a company whose shares are listed on the Stock Exchange. 4. With regards to the non-compliance in relation to Predecessor Companies Ordinance and Inland Revenue Ordinance, our company secretary, Mr. Leung Cheuk Hei, is responsible for keeping the filing register up to date on a monthly basis to ensure ongoing compliance. Our company secretary will report to the audit committee in the future in the event of any non-compliance with the Predecessor Companies Ordinance and Inland Revenue Ordinance. 146

153 BUSINESS 5. Dr. Li and our company secretary, Mr. Leung Cheuk Hei, will be responsible for reviewing and updating our compliance policy and procedures on an annual basis for ensuring that the compliance policy and procedures are up to date in accordance with the regulatory requirements. 6. Regular training given by external legal advisers will be arranged at least annually for all of our Directors, company secretary, financial controller and senior management members so as to discuss and study the relevant regulatory requirements in relation to our responsibilities and duties under the laws and regulations relevant to our business operations. 7. We have engaged Messis Capital Limited as our compliance adviser upon Listing to advise us on compliance matters in accordance with the GEM Listing Rules. 8. We have engaged CT Partners to conduct annual reviews on our internal controls for the 2 financial years after the Listing (i.e., for the financial years ending 31 July 2015 and 2016). We will also consider engaging independent internal control consultant to conduct annual reviews thereafter. Such reviews will focus on the status of implementation of the recommended remedial actions in areas where deficiencies and weaknesses were identified, the effectiveness of our internal control measures implemented, and the standards and effectiveness of our corporate governance, operations and management to ensure our compliance with the Listing Rules and the applicable Hong Kong laws and regulations. 9. On 19 November 2014, we established an audit committee which will implement formal and transparent arrangements to apply financial reporting and internal control principles in accounting and financial matters to ensure compliance with the Listing Rules and all relevant laws and regulations, including timely preparation and laying of accounts. It will also periodically review our compliance status with the Hong Kong laws after the Listing. The audit committee will exercise its oversight by: (i) (ii) reviewing our internal control and legal compliance; discussing the internal control systems with the management of our Group to ensure that the management has performed its duty to have an effective internal control system; and (iii) considering the major investigation findings on internal control matters as delegated by the Board or on its own initiative and the management s response to these findings; 10. We have designated Dr. Li as our compliance officer to assist the Board in assessing and managing risks associated with our operations from time to time to ensure due compliance with laws, rules, regulations in Hong Kong. Dr. Li has served in numerous Government bodies as well as boards and committees of HKIE and other industry organisations and is experienced in the relevant compliance matters in the geotechnical engineering industry in Hong Kong, details of which are disclosed in the section Directors and senior management in this prospectus. In preparation for the Listing, Dr. Li had attended training 147

154 BUSINESS provided by our legal advisers as to Hong Kong law on the on-going obligations and duties of a director of a company whose shares are listed on the Stock Exchange. Dr. Li had also been involved in the review process conducted by CT Partners regarding our internal control systems and supervised the implementation of the recommendations made by CT Partners. Our company secretary, Mr. Leung Cheuk Hei, who is a member of the HKICPA, will report to and assist Dr. Li in overseeing our compliance matters. All of our Directors and senior management members (including Dr. Li and Mr. Leung Cheuk Hei) will participate in regular training given by external legal advisers on the relevant regulatory requirements in relation to our responsibilities and duties under the laws and regulations relevant to our business operations in order to develop and refresh their relevant knowledge and skills. Our Directors are of the view that the above arrangements will enable our Group to ensure our compliance with the relevant legal and regulatory requirements in the future. 11. All of our management and staff are required to report to and/or notify our compliance officer promptly of any non-compliance or potential non-compliance events. 12. Meetings and seminars will be arranged for our management and staff on a quarterly basis to discuss and study regulatory requirements and latest updates thereof applicable to our business operations. 13. On 19 November 2014, we established a legal compliance committee (the Legal Compliance Committee ) for the purpose of assisting in overseeing our compliance with laws and regulations relevant to our operations as well as the adequacy and effectiveness of our regulatory compliance procedures and system. The Legal Compliance Committee comprises (i) Dr. Li, the chairman of the Board and our compliance officer, (ii) Mr. Leung Chuek Hei, our company secretary, and (iii) Mr. Ong Chi King, an independent non-executive Director. Please refer to the paragraph headed Directors and senior management in this prospectus for further details on the qualifications and experience of the members of the Legal Compliance Committee. The Legal Compliance Committee shall: review the effectiveness of our regulatory compliance procedures and system, which will cover all material procedures, including operational and compliance procedures and risk management functions, and consider the adequacy of resources, staff qualifications and experience, training programmes and budget of our regulatory compliance function; advise the audit committee in overseeing our corporate governance functions which include (i) developing and reviewing our policies and practices on corporate governance and make recommendations to our audit committee on a quarterly basis, (ii) reviewing and monitoring the training and continuous professional development of directors and senior management; (iii) reviewing and monitoring our policies and practices on compliance with legal and regulatory requirements; (iv) developing and reviewing the code of conduct and compliance manual applicable to employees and directors; and (v) reviewing our compliance with the Corporate Governance Code set out in Appendix 15 to the GEM Listing Rules and the disclosure in the Corporate Governance Report; 148

155 BUSINESS report to the audit committee for any actual or suspected non-compliance issues on a quarterly basis, and engage external professional advisers, such as lawyers and accountants, to assist in the preparation of recommendations for consideration by our audit committee and for further presentation to the Board if considered appropriate; and review the effectiveness of our on-going measures to prevent future non-compliance incidents and the internal control measures adopted by the audit committee and provides updates on the applicable laws related to our business operations with the assistance of external professional parties including internal control consultant and external legal advisers from time to time. 14. Our Group will seek professional advice and assistance from independent internal control consultants, external legal advisers and/or other appropriate independent professional advisers with respect to matters related to our internal controls and compliance when necessary and appropriate. Review by CT Partners On 15 July 2014, we engaged CT Partners, an independent internal control adviser, to perform a detailed evaluation under the Committee of Sponsoring Organisations of the Treadway Commission s 2013 framework of the adequacy and effectiveness of our Group s internal control system including the areas of financial, operation, compliance and risk management. Following such review and evaluation performed by CT Partners, our Group has implemented all of the recommendations given by CT Partners on our internal control system. CT Partners is a company rendering internal control review services, which has been previously engaged in internal control review projects for a number of companies listed on the Stock Exchange. Besides, the engagement team of CT Partners includes members of the Hong Kong Institute of Certified Public Accountants, a Certified Internal Auditor, a member of the Society of Chinese Accountants & Auditors, a fellow member of the Associations of Chartered Certified Accountants, an associate member of the Association of International Accountants, a member of Canadian Certified General Accountants Association, and an associate of the Taxation Institute of Hong Kong and a Certified Tax Adviser (HK). In relation to the non-compliance incidents mentioned above, CT Partners has reviewed and provided recommendations to our internal control designs for preventing the recurrence of the above-mentioned non-compliance incidents. Key measures adopted and to be adopted by our Group pursuant to the recommendations of CT Partners are disclosed in the section Business Non-compliance Internal control measures to prevent the recurrence of non-compliance incidents above. 149

156 BUSINESS On 18 September 2014, CT Partners performed follow up review in this connection and the result of the follow up review was that our Group did not have significant deficiencies in our internal control design for preventing the recurrence of the abovementioned non-compliance incidents. According to the result of the follow up review by CT Partners, our Directors confirmed that our Group did not have significant deficiencies in our internal control design for preventing the recurrence of the abovementioned non-compliance incidents as at the Latest Practicable Date. View of our Directors and the Sponsor Our Directors consider that the abovementioned non-compliance incidents would not affect the suitability of our executive Directors under Rule 5.01 and 5.02 of the GEM Listing Rules or the suitability of listing of our Company under Rule of the GEM Listing Rules and that the various internal control measures adopted by our Group are adequate and effective having taken into account that (i) our Group has fully rectified all of the non-compliance incidents, if applicable; (ii) our Group has implemented (or will implement where applicable) the abovementioned measures to avoid recurrence of the non-compliance incidents; (iii) there were no recurring of similar non-compliance incidents since the implementation of such measures; and (iv) the non-compliance incidents were unintentional, did not involve any dishonesty or fraudulent act on the part of our executive Directors, and did not raise any question as to the integrity of our executive Directors. The Sponsor, after considering the above and having reviewed the internal control measures and the findings of CT Partners, concurs with the view of our Directors that (a) the various internal control measures adopted by our Group are adequate and effective; and (b) the abovementioned non-compliance incidents would not affect the suitability of our Directors under Rule 5.01 and 5.02 of the GEM Listing Rules and the suitability of listing of our Company under Rule of the GEM Listing Rules. LITIGATION During the Track Record Period and as at the Latest Practicable Date, no member of our Group was engaged in any litigation, claim or arbitration of material importance and no litigation, claim or arbitration of material importance is known to our Directors to be pending or threatened against any member of our Group. 150

157 DIRECTORS AND SENIOR MANAGEMENT DIRECTORS The Board currently consists of 7 Directors comprising 4 executive Directors and 3 independent non-executive Directors. The following table sets out the information regarding the members of the Board: Name Age Date of joining our Group Date of appointment as Director Position Principal responsibilities Relationship with other Director(s) and/or senior management Dr. LI Kai Shun ( ) Mr. TAM Yi Shek ( ) May 1996 (as the founder of our Group) June September July 2014 Executive Director, Chairman of the Board and Compliance Officer Executive Director, Chief Executive Officer and Technical Director Overall business development and financial and strategic planning of our Group Overall management and administration of our business operations Nil Nil Mr. CHAN Kin Pong ( ) August September 2014 Executive Director and Technical Director Overall operation of our engineering consulting business Nil Mr. TSANG Siu Wah ( ) 52 1 July September 2014 Executive Director and Project Manager Overall operation of our project management business and management of site works Nil Mr. HO Ho Ming ( ) November November 2014 Independent non-executive Director Providing Nil independent judgment on our strategy, performance, resources and standard of conduct 151

158 DIRECTORS AND SENIOR MANAGEMENT Name Age Date of joining our Group Date of appointment as Director Position Principal responsibilities Relationship with other Director(s) and/or senior management Mr. KO Chi Keung ( ) November November 2014 Independent non-executive Director Providing Nil independent judgment on our strategy, performance, resources and standard of conduct Mr. ONG Chi King ( ) November November 2014 Independent non-executive Director Providing Nil independent judgment on our strategy, performance, resources and standard of conduct Executive Directors Dr. LI Kai Shun ( ), aged 53, is the founder of our Group. He is the chairman of the Board, an executive Director and our compliance officer and is responsible for the overall business development and financial and strategic planning of our Group. Dr. Li was appointed as an executive Director on 17 July He is also a director of VLA, KSL Engineering and CRPD. Dr. Li graduated from The University of Hong Kong in November 1983 with a bachelor s degree in civil engineering. He obtained a degree of Doctor of Philosophy in civil engineering from The University of New South Wales in December He also obtained a graduate diploma in technology management from The University of New South Wales in December Dr. Li has been a fellow of the Institution of Engineers in Australia since March 1997, a fellow of the Institution of Civil Engineers in the United Kingdom since October 1998, and a fellow of the Hong Kong Institution of Engineers since June Dr. Li has also been a Registered Professional Engineer in the civil and geotechnical discipline since October 1994, an Authorized Person since November 1998, a Registered Structural Engineer since June 1998, and a Registered Geotechnical Engineer since May Prior to founding our Group, Dr. Li had been employed, among others, by Binnie Hong Kong Limited (formerly known as Binnie & Partners International) as an engineer and Mitchell and MarFarlane, Brentnall & Partners International Limited as a senior geotechnical engineer. 152

159 DIRECTORS AND SENIOR MANAGEMENT Dr. Li was a director of Landtech Engineering Company Limited ( ) (formerly known as Top Honour Enterprise Limited ( )) ( Landtech Engineering ), which was incorporated on 13 August 1992 in Hong Kong, prior to its dissolution. Due to cessation of business, Landtech Engineering was struck off and dissolved pursuant to section 291 of the Predecessor Companies Ordinance on 18 January 2002 following a notice of striking off dated 31 August Dr. Li has/had served in the following Government bodies: Government bodies Capacity in which Dr. Li has served Duration Drainage Appeal Board Panel of the Drainage Services Department Member From June 2010 to May 2013 Technical Committee on Code of Practice for Foundation of the Buildings Department Operations Review Committee of the Independent Commission Against Corruption Witness Protection Review Board under the Witness Protection Ordinance (Chapter 564 of the Laws of Hong Kong) Geotechnical Engineer Registration Committee of the Buildings Department Geotechnical Engineer Registration Committee Panel of the Buildings Department Chairman Member Member Member Alternate member Alternate chairman Chairman Member From June 2013 to the present From January 2007 to January 2014 From January 2011 to December 2012 From January 2011 to December 2012 From December 2005 to December 2007 From January 2008 to January 2010 From January 2010 to January 2012 From December 2005 to January

160 DIRECTORS AND SENIOR MANAGEMENT Government bodies Capacity in which Dr. Li has served Duration Review Group on Use of CIRIA C580 Approach for Design of Excavation of the Geotechnical Engineering Office of the Civil Engineering Department of the Government Authorized Persons and Registered Structural Engineers Committee of the Buildings Department Contractors Registration Committee (E) of the Buildings Department Contractors Registration Committee Panel of the Buildings Department Working Group for Drafting of Highways Slope Manual of the Geotechnical Engineering Office of the Civil Engineering Department of the Government Member From 2006 to 2010 Member From 2000 to 2001 Alternate chairman From July 1999 to July 2001 Member From July 1999 to July 2001 Member From 1998 to 2001 Dr. Li has/had also served on the following boards and committees of HKIE and other industry organisations: Boards or committees of HKIE or other industry organizations Capacity in which Dr. Li has served Duration Committee on Drafting Handbook on Code of Practice for Foundation of HKIE Lumb Lecture Organising Committee (jointly established by the Department of Civil Engineering of the Government, The University of Hong Kong, and the Geotechnical Division of HKIE) HKIE Member Member Professional Assessment Assessor From 2009 to the present From 2000 to the present From 2003 to 2004, from 2005 to 2007, from 2008 to 2009 and from 2011 to

161 DIRECTORS AND SENIOR MANAGEMENT Boards or committees of HKIE or other industry organizations Capacity in which Dr. Li has served Duration Geotechnical Discipline Advisory Panel of HKIE Appointed Member From 2004 to 2010 Geotechnical Division of HKIE Committee member From 1995 to 1998 and from 2003 to 2004 Deputy chairman From 2004 to 2005 Chairman From 2005 to 2006 Learned Society Board of HKIE Member From 2005 to 2006 AP/RSE/REG Committee of HKIE Member From 2005 to 2006 Foundation Group of HKIE Member From 2001 to 2005 AP/RSE Committee of HKIE Member From 2002 to 2004 Community Services Committee of HKIE Committee member From 2003 to 2004 Publication Committee of HKIE Member From 1999 to 2002 The HKIE Transactions (a quarterly periodical of HKIE) Editor From 1997 to 2002 Building Division of HKIE Committee member From 1996 to 1999 Vice chairman From 1999 to 2000 Chairman From 2000 to 2001 Editorial Board of Asia Pacific Building and Construction Journal Association of Geotechnical Specialists in Hong Kong Member From 1997 to 2000 Chairman From 1999 to 2000 Dr. Li also has extensive teaching experience including teaching at The University of Hong Kong and the University of New South Wales. He is currently an adjunct professor in the Department of Civil Engineering of The University of Hong Kong. Dr. Li has also published over 200 technical papers, research reports, discussions, books and book chapters on various aspects of civil engineering, including reinforced concrete design, foundation design, surveying, geotechnical reliability, slope stability analysis and deep excavations. 155

162 DIRECTORS AND SENIOR MANAGEMENT Mr. TAM Yi Shek ( ), aged 34, is the chief executive officer of our Group and one of our technical directors who is mainly responsible for the overall management and administration of our business operations. Mr. Tam was appointed as an executive Director on 16 September He has also been appointed as a director of KSL Engineering on 5 November Mr. Tam joined our Group in June 2002 and has accumulated over 12 years of experience in the industry since then. His first position with us was a graduate engineer and was subsequently promoted to the position of (i) senior engineer in September 2006; (ii) associate in May 2012; and (iii) technical director in May Mr. Tam graduated from The University of Hong Kong in December 2002 with a bachelor s degree in civil engineering. He obtained a master s degree in geotechnical engineering from The University of Hong Kong in December He also obtained a degree of bachelor of laws from The University of London in August 2010 through a distance learning program. Mr. Tam has been a chartered engineer registered with the Engineering Council in the United Kingdom since February 2008, a member of the Institution of Civil Engineers in the United Kingdom since December 2007 and a member of HKIE since May Mr. Tam has also been a Registered Professional Engineer in the civil discipline since October 2009 and a Registered Professional Engineer in the geotechnical discipline since October Mr. CHAN Kin Pong ( ), aged 32, is one of our technical directors who is mainly responsible for the overall operation of our engineering consulting business. Mr. Chan was appointed as an executive Director on 16 September He has also been appointed as a director of KSL Engineering on 5 November Mr. Chan joined our Group in August His first position with us was senior engineer and he was subsequently promoted to the position of associate in May 2013 and to the position of technical director in May Prior to joining our Group, Mr. Chan had been employed by (i) C.M. Wong & Associates Limited from January 2012 to July 2012 as a senior engineer; (ii) Meinhardt (C&S) Limited from October 2010 to September 2011 as an engineer; (iii) Hip Shun Construction Company Limited from January 2010 to October 2010 as a project manager; and (iv) Wong Pak Lam & Associates Consulting Engineers & Architects Limited from January 2005 to November 2009 with his last position as engineer. Mr. Chan obtained a bachelor s degree in civil engineering from The University of Hong Kong in December 2004 and a master s degree in civil infrastructural engineering and management from The Hong Kong University of Science and Technology in April Mr. Chan has been a chartered engineer registered with the Engineering Council in the United Kingdom since May 2011, a member of the Institution of Structural Engineers in the United Kingdom since September 2010, a member of HKIE since August 2010, and a member of The Institution of Civil Engineers in the United Kingdom since December Mr. Chan has also been a Registered Professional Engineer in the structural discipline since October

163 DIRECTORS AND SENIOR MANAGEMENT Mr. TSANG Siu Wah ( ), aged 52, is our project manager mainly responsible for the overall operation of our project management business and management of site works. Mr. Tsang was appointed as an executive Director on 16 September Mr. Tsang obtained a certificate issued by Christian Faith College, Kowloon City on 14 July 1980 certifying that he had successfully completed a 5-year secondary course and has reached a satisfactory standard in the college leaving examination. Mr. Tsang possesses more than 20 years of experience in managing civil engineering works in Hong Kong. He joined our Group in July Prior to joining our Group, Mr. Tsang had been employed by (i) K. H. Foundation Limited from May 1985 to August 1989 as a design engineer; (ii) Sunley Engineering & Construction Company Limited from July 1989 to May 2002 as a contracts manager; and (iii) Sunnic Engineering Limited from June 2003 to May 2004 as a construction manager. Independent non-executive Directors Mr.HOHoMing( ) (former name: HO Wing Hang ( )), aged 42, was appointed as an independent non-executive Director on 19 November Mr. Ho is currently an adjunct professor of the Department of Real Estate and Construction at The University of Hong Kong. In addition, Mr. Ho is an honorary associate of the Asia-Pacific Institute of Business of The Chinese University of Hong Kong and an external advisory member of the Departmental Advisory Committee on Applied Mathematics at The Hong Kong Polytechnic University. Mr. Ho has over 16 years of experience in the field of investment banking and credit rating. He was previously employed by Credit Suisse First Boston (Hong Kong) Limited, Merrill Lynch (Asia Pacific) Limited, Bear Stearns Asia Limited, Fitch (Hong Kong) Limited and Universal Credit Rating Group. Mr. Ho graduated from The Hong Kong University of Science and Technology with a degree of bachelor of business administration in information and systems management in November He also obtained a degree of master of business administration from the University of Cambridge, the United Kingdom in May Mr. KO Chi Keung ( ), aged 58, was appointed as an independent non-executive Director on 19 November Mr. Ko has over 22 years working experience in auditing and consultancy. He was employed by Coopers & Lybrand Hong Kong (now known as Pricewaterhousecoopers Hong Kong), Chan, Li, Law & Co and LKY China in his professional career. He is currently the managing partner of LKY China, an accounting and consultancy firm. Mr. Ko was admitted as an associate of The Chartered Association of Certified Accountants in July 1987, an associate of the Australian Society of Certified Practicing Accountants in February 1991, and a fellow of HKICPA in December Mr. Ko is also currently registered with The Taxation Institute of Hong Kong as a Certified Tax Adviser in Mr. Ko graduated from The Chinese University of Hong Kong with a degree of bachelor of business administration in December He also obtained a degree of master of philosophy from Sun Yat-sen University ( ), the PRC in December

164 DIRECTORS AND SENIOR MANAGEMENT Mr. ONG Chi King ( ), aged 41, was appointed as an independent non-executive Director on 19 November He is a member of the Hong Kong Institute of Certified Public Accountants and a fellow member of the Association of Chartered Certified Accountants. Mr. Ong received a bachelor of business administration degree from The Hong Kong University of Science and Technology in Hong Kong in November 1995 and a master s degree in corporate finance from The Hong Kong Polytechnic University in Hong Kong in November Mr. Ong has over 18 years of experience in accounting, finance and company secretarial fields and held senior positions in finance and company secretarial departments in various companies listed on the Stock Exchange. Mr. Ong currently holds the following positions in companies listed on the Stock Exchange: Company Stock code Position currently held by Mr. Ong Yue Da Mining Holdings Limited 629 Company secretary Capital VC Limited 2324 Independent non-executive director China Environmental Resources Group Limited 1130 Independent non-executive director Hong Kong Education (Int l) Investments Limited 1082 Independent non-executive director King Force Security Holdings Limited 8315 Independent non-executive director Larry Jewelry International Company Limited 8351 Independent non-executive director Mr. Ong was a director of Fitness Concept International Holdings Limited prior to its dissolution. The said company was incorporated in the Cayman Islands and was dissolved on 30 June 2005 by striking off due to cessation of business. Disclosure required under Rule 17.50(2) of the GEM Listing Rules Save as disclosed above, each of our Directors confirms with respect to him that: (i) he has not held directorships in the last three years in other public companies the securities of which are listed on any securities market in Hong Kong or overseas; (ii) he does not hold any other position in our Company or any of its subsidiaries; (iii) save as disclosed in the section Further information about Substantial Shareholders, Directors and experts 1. Disclosure of interests in Appendix V to this prospectus, he does not have any interests in the Shares within the meaning of Part XV of the SFO; (iv) there is no other information that should be disclosed for pursuant to Rule 17.50(2) of the GEM Listing Rules; and (v) to the best of the knowledge, information and belief of our Directors having made all reasonable enquiries, there are no other matters with respect to the appointment of our Directors that need to be brought to the attention of our Shareholders. 158

165 DIRECTORS AND SENIOR MANAGEMENT SENIOR MANAGEMENT The following table sets out the information regarding the senior management team of our Group: Name Age Date of joining our Group Position Principal responsibilities Relationship with other Director(s) and/or senior management Dr. LI Kai Shun ( ) May 1996 (as the founder of our Group) Executive Director, Chairman of the Board and Compliance Officer Overall business development and financial and strategic planning of our Group Nil Mr. TAM Yi Shek ( ) June 2002 Executive Director, Chief Executive Officer and Technical Director Overall management and administration of our business operations Nil Mr. CHAN Kin Pong ( ) August 2012 Executive Director and Technical Director Overall operation of our engineering consulting business Nil Mr. TSANG Siu Wah ( ) 52 1 July 2011 Executive Director and Project Manager Overall operation of our project management business and management of site works Nil Mr. LEUNG Cheuk Hei ( ) 29 6 September 2014 Financial Controller and Company Secretary Overseeing our financial reporting, financial planning, treasury, financial control and company secretarial matters Nil Ms. HO Sui Mei ( ) 45 1 August 2001 General Marketing Manager Overall operation of our marketing activities including publication of technical books and organisation of courses, seminars and conferences Nil 159

166 DIRECTORS AND SENIOR MANAGEMENT Dr. LI Kai Shun ( ) is the chairman of the Board, an executive Director and our compliance Officer. Please refer to the section Directors and senior management Directors above for his biographical information. Mr. TAM Yi Shek ( ) is our executive Director, chief executive officer and technical director. Please refer to the section Directors and senior management Directors above for his biographical information. Mr. CHAN Kin Pong ( ) is our executive Director and technical director. Please refer to the section Directors and senior management Directors above for his biographical information. Mr. TSANG Siu Wah ( ) is our executive Director and project manager. Please refer to the section Directors and senior management Directors above for his biographical information. Mr. LEUNG Cheuk Hei ( ), aged 29, is our financial controller and the company secretary of our Company. He is mainly responsible for our financial reporting, financial planning, treasury, financial control and company secretarial matters. Mr. Leung joined us in September Prior to joining us, Mr. Leung was employed by KPMG as an accountant in July 2007 and promoted to manager in October Mr. Leung obtained a bachelor s degree from The University of Hong Kong in December 2007 with a major in economics and finance. Mr. Leung has been a member of the HKICPA since September He has not held any directorship in any public listed company in the past three years. Ms.HOSuiMei( ), aged 45, is our general marketing manager who is in charge of the overall operation of our activities in publishing technical books and organising continuing professional development courses, seminars and conferences. Ms. Ho joined us in August Prior to joining us, she was employed by HKIE as manager conference & seminar from January 1998 to August 2001 where she was involved in the management of regional and international conferences and events. Ms. Ho obtained a higher diploma in public and social administration from The City University of Hong Kong in November 1991 and a master s degree in management from Macquarie University, Australia in June Ms. Ho has not held any directorship in any public listed company in the past three years. COMPANY SECRETARY Mr. Leung Cheuk Hei is the company secretary of our Company. Details of his qualifications and experience are set out in the section Directors and senior management Senior management above. COMPLIANCE OFFICER Dr. Li was appointed as the compliance officer of our Company on 19 November Please refer to the section Directors and senior management Directors in this prospectus for the profile of Dr. Li. 160

167 DIRECTORS AND SENIOR MANAGEMENT REMUNERATION POLICY The executive Director, the independent non-executive Directors and senior management receive compensation in the form of director fees, salaries, benefits in kind and/or discretionary bonuses with reference to those paid by comparable companies, time commitment and the performance of our Group. Our Group also reimburses our Directors and senior management for expenses which are necessarily and reasonably incurred for the provision of services to our Group or executing their functions in relation to the operations of our Group. Our Group regularly reviews and determines the remuneration and compensation packages of our Directors and senior management by reference to, among other things, market level of remuneration and compensation paid by comparable companies, the respective responsibilities of our Directors and the performance of our Group. After Listing, the remuneration committee of our Company will review and determine the remuneration and compensation packages of our Directors with reference to their responsibilities, workload, the time devoted to our Group and the performance of our Group. Our Directors may also receive options to be granted under the Share Option Scheme. REMUNERATIONS OF DIRECTORS AND SENIOR MANAGEMENT The aggregate amount of compensation (including salaries, fees, discretionary bonuses and other allowances and benefits in kind) paid by us for each of FY2013 and FY2014 to Dr. Li (being our sole director during FY2013 and FY2014) was approximately HK$1.9 million and HK$3.2 million respectively. During the Track Record Period, no emoluments were paid by our Group to our Directors as an inducement to join or upon joining our Group or as compensation for loss of office. No Director has waived or agreed to waive any emoluments during the Track Record Period. Under the arrangements currently proposed, conditional upon the Listing, the basic annual remuneration (excluding payment of any discretionary benefits or bonus or other fringe benefits) payable by our Group to each of our Directors will be as follows: HK$ Executive Directors Dr. Li 2,000,000 Mr. TAM Yi Shek 1,200,000 Mr. CHAN Kin Pong 1,200,000 Mr. TSANG Siu Wah 1,000,000 Independent non-executive Directors Mr. HO. Ho Ming 150,000 Mr. KO Chi Keung 150,000 Mr. ONG Chi King 150,

168 DIRECTORS AND SENIOR MANAGEMENT One of our Group s five highest paid individuals during the Track Record Period was Dr. Li, whose emoluments are disclosed above. The emoluments in respect of the remaining four individuals during the Track Record Period are as follows: FY2013 HK$ 000 FY2014 HK$ 000 Salaries and allowances 3,258 3,724 Discretionary bonuses Retirement scheme contributions ,603 4,302 The emoluments fell within the following bands: Number of individuals FY2013 FY2014 Emolument bands (in HK$) Nil - HK$1,000, HK$1,000,001 - HK$1,500, During the Track Record Period, no emoluments were paid by our Group to the above highest paid individuals as (i) an inducement to join or upon joining our Group or (ii) as compensation for loss of office as a director or management of any members of our Group. BOARD COMMITTEES Audit committee Our Company established an audit committee on 19 November 2014 with its written terms of reference in compliance with the GEM Listing Rules. The primary duties of the audit committee are to review and supervise our financial reporting process and internal control system, nominate and monitor external auditors and to provide advice and comments to the Board on matters related to corporate governance. The audit committee of our Company consists of three members, being Mr. ONG Chi King, Mr. HO Ho Ming and Mr. KO Chi Keung. Mr. ONG Chi King currently serves as the chairman of the audit committee. Remuneration committee Our Company established a remuneration committee on 19 November 2014 with its written terms of reference in compliance with the GEM Listing Rules. The primary duties of the remuneration committee are to make recommendations on the remuneration of our Company s senior management and to recommend members of the Board. 162

169 DIRECTORS AND SENIOR MANAGEMENT The remuneration committee of our Company consists of three members, being Mr. KO Chi Keung, Mr. TAM Yi Shek and Mr. ONG Chi King. Mr. KO Chi Keung currently serves as the chairman of the remuneration committee. Nomination committee Our Company established a nomination committee on 19 November 2014 with its written terms of reference by reference to the code provisions of the Corporate Governance Code and Corporate Governance Report set out in Appendix 15 to the GEM Listing Rules. The primary duties of the nomination committee are to make recommendations to the Board regarding candidates to fill vacancies on the Board and/or in senior management. The nomination committee of our Company consists of three members, being Dr. Li, Mr. HO Ho Ming and Mr. KO Chi Keung. Dr. Li currently serves as the chairman of the nomination committee. Legal compliance committee On 19 November 2014, our Company established the Legal Compliance Committee with written terms of reference. The primary duties of the Legal Compliance Committee are to assist in overseeing our compliance with laws and regulations relevant to our business operations and to review the effectiveness of our regulatory compliance procedures and system. The Legal Compliance Committee of our Company consists of three members, being Dr. Li, Mr. Leung Cheuk Hei and Mr. Ong Chi King. Dr. Li currently serves as the chairman of the Legal Compliance Committee. COMPLIANCE ADVISER In accordance with Rule 6A.19 of the GEM Listing Rules, our Company has appointed Messis Capital Limited as its compliance adviser. Pursuant to Rule 6A.23 of the GEM Listing Rules, our Company will consult with and seek advice from the compliance adviser on a timely basis in the following circumstances: (1) before the publication of any regulatory announcement, circular or financial report; (2) where a transaction, which might be a notifiable or connected transaction, is contemplated including share issues and share repurchases; (3) where our Company proposes to use the proceeds of the initial public offering in a manner different from that detailed in the listing document or where the business activities, developments or results of our Company deviate from any forecast, estimate, or other information in the listing document; and (4) where the Stock Exchange makes an inquiry of the listed issuer under Rule of the GEM Listing Rules. 163

170 DIRECTORS AND SENIOR MANAGEMENT The term of appointment of the compliance adviser of our Company shall commence on the Listing Date and end on the date on which our Company complies with Rule of the GEM Listing Rules in respect of the financial results for the second full financial year commencing after the Listing Date and such appointment shall be subject to extension by mutual agreement. 164

171 RELATIONSHIP WITH CONTROLLING SHAREHOLDERS CONTROLLING SHAREHOLDERS OF OUR COMPANY Immediately following the completion of the Capitalisation Issue and the Placing, each of Dr. Li and Sonic Solutions will control more than 30% of the issued share capital of our Company. For the purpose of the GEM Listing Rules, Dr. Li and Sonic Solutions are our Controlling Shareholders. Sonic Solutions is an investment holding company owned as to 100% by Dr. Li, and as at the Latest Practicable Date, it has not commenced any substantive business activities. Each of Dr. Li and Sonic Solutions confirms that, apart from the business operated by members of our Group, he or it and their respective close associates and/or companies controlled by them do not hold or conduct any business which competes, or is likely to compete, either directly or indirectly, with the business of our Group, and would require disclosure pursuant to Rule of the GEM Listing Rules. INDEPENDENCE OF OUR GROUP Having considered the following factors, our Directors believe that our Group is capable of carrying on our Group s business independently from our Controlling Shareholders and their close associates after the Placing: Management and administrative independence The Board consists of 7 Directors, of whom 4 are executive Directors and the remaining 3 are independent non-executive Directors. Dr. Li, being an executive Director and the chairman of the Board, is also the sole director of Sonic Solutions. Save as Dr. Li, none of our Directors or senior management serves any executive or management role in Sonic Solutions. Each of our Directors is aware of his fiduciary duties as a Director which require, among other things, that he acts for the benefit and in the best interests of our Company and does not allow any conflict between his duties as a Director and his personal interest. In the event that there is a potential conflict of interest arising out of any transaction to be entered into between our Group and our Directors or their respective close associates, the interested Director(s) shall abstain from voting at the relevant meetings of the Board in respect of such transactions and shall not be counted in the quorum. In addition, the senior management team of our Group is independent from our Controlling Shareholders. The 3 independent non-executive Directors will also bring independent judgment to the decision-making process of the Board. Most members of the senior management of our Group have, for all or substantially all of the Track Record Period, undertaken senior management supervisory responsibilities in the business of our Group. The responsibilities of the senior management team of our Group include dealing with operational and financial matters, making general capital expenditure decisions and the daily implementation of the business strategy of our Group. This ensures the independence of the daily management and operations of our Group. Further details of our senior management are set out in the section Directors and senior management in this prospectus. 165

172 RELATIONSHIP WITH CONTROLLING SHAREHOLDERS Financial independence Our Company has an independent financial system and makes financial decisions according to our Group s own business needs. We have sufficient capital to operate our business independently, and have adequate internal resources and a strong credit profile to support our daily operations. As at 31 July 2014, save for the mortgage loan for the property owned by VLA and the finance lease for a car owned by KSL Engineering, our Group did not maintain any other borrowings. The bank borrowing in respect of VLA s property was secured, amongst others, by personal guarantee given by Dr. Li as at 31 July 2013 and In October 2014, we had fully repaid such bank borrowing, which was financed by the repayment of amount due from Dr. Li to us. After full repayment of such bank borrowing in October 2014, the aforementioned personal guarantee given by Dr. Li has been released. Our Directors are of the view that there has been sufficient cash flow to support the operation of our business. For the two years ended 31 July 2014, our Group has relied principally on cash generated from operations to carry on our businesses and this is expected to continue after the Placing. Operational independence Our Group has established our own organizational structure made of individual departments, each with specific areas of responsibilities. Our Group did not share our operational resources, such as contractors, customers, marketing, sales and general administration resources with our Controlling Shareholders and/or their close associates during the Track Record Period. Our Group has also established a set of internal controls to facilitate the effective operation of its business. Our Group s customers and suppliers are all independent from our Controlling Shareholders. Our Group does not rely on our Controlling Shareholders or their close associates and has its independent access to customers and suppliers. Our Directors are of the view that our Group is able to operate independently from our Controlling Shareholders after the Listing. Independence of major suppliers Our Directors confirm that none of our Controlling Shareholders, our Directors and their respective associates have any relationship with the major suppliers of our Group (other than the business contacts in the ordinary and usual course of business of our Group) during the Track Record Period. Independence of major customers Our Directors confirm that none of our Controlling Shareholders, our Directors and their respective associates have any relationship with the top five customers of our Group (other than the business contacts in the ordinary and usual course of business of our Group) during the Track Record Period. Our Directors are of the view that our Group does not unduly rely on our Controlling Shareholders and/or their respective associates. Having considered the aforesaid factors, our Directors are satisfied that they are able to perform their roles in our Company independently, and our Directors are of the view that our Group is capable of managing our business independently from our Controlling Shareholders and their respective close associates. 166

173 RELATIONSHIP WITH CONTROLLING SHAREHOLDERS RULE OF THE GEM LISTING RULES Our Controlling Shareholders, our Directors and their respective close associates do not have any interest in a business apart from our Group s business which competes and is likely to compete, directly or indirectly, with our Group s business and would require disclosure under Rule of the GEM Listing Rules. NON-COMPETITION UNDERTAKINGS Dr. Li and Sonic Solutions (each the Covenantor and collectively the Covenantors ) entered into a deed of non-competition dated 19 November 2014 in favour of our Company and our subsidiaries (the Deed of Non-competition ). Pursuant to the Deed of Non-competition, each of the Covenantors has irrevocably and unconditionally undertaken to our Company (for itself and for the benefit of our subsidiaries) that, save and except as disclosed in this prospectus, during the period that the Deed of Non-competition remains effective, he/it shall not, and shall procure that his/its close associates (other than any member of our Group) not to develop, acquire, invest in, participate in, carry on or be engaged, concerned or interested, or otherwise be involved, directly or indirectly, in any business in competition with or likely to be in competition with the existing business activity of any member of our Group within Hong Kong and such other parts of the world where any member of our Group may operate from time to time, save for the holding of not more than 5% shareholding interests (individually or with his/its close associates) in any company listed on a recognised stock exchange and at any time the relevant listed company shall have at least one shareholder (individually or with his/its close associates, if applicable) whose shareholding interests in the relevant listed company is higher than that of the relevant Covenantor (individually or with his/its close associates). Each of the Covenantors further undertakes that if he/it or his/its close associates other than any member of our Group is offered or becomes aware of any business opportunity which may compete with any business opportunity of our Group, he/it shall procure that his/its close associates to promptly notify our Group in writing and our Group shall have a right of first refusal to take up such opportunity. Our Group shall, within 30 days after receipt of the written notice (or such longer period if our Group is required to complete any approval procedures as set out under the GEM Listing Rules from time to time), notify the Covenantor(s) whether our Group will exercise the right of first refusal. Our Group shall only exercise the right of first refusal upon the approval of all independent non-executive Directors who do not have any interest in such opportunity. The relevant Covenantor(s) and the other conflicting Directors (if any) shall abstain from participating in and voting at and shall not be counted as quorum at all meetings of the Board where there is a conflict of interest or potential conflict of interest including but not limited to the relevant meeting of our independent non-executive Directors for considering whether or not to exercise the right of first refusal. Our Company will adopt the following procedures to monitor that the Deed of Non-competition is being observed: (a) our independent non-executive Directors shall review on an annual basis the above undertakings from the Covenantors and to evaluate the effective implementation of the Deed of Non-competition; 167

174 RELATIONSHIP WITH CONTROLLING SHAREHOLDERS (b) (c) each of the Covenantors undertakes to provide any information as is reasonably required by our Group or our independent non-executive Directors, for their annual review, including but not limited to the confirmation from the Covenantors on the compliance of the Deed of Non-competition by the Covenantors and each of their close associates; and our Company shall disclose the decisions on those matters reviewed by our independent non-executive Directors relating to the compliance of the Deed of Non-competition in the annual report of our Company. The undertakings contained in the Deed of Non-competition are conditional upon the Listing Division granting approval for the listing of and permission to deal in the Shares on the Stock Exchange and all conditions precedent under the Underwriting Agreement having been fulfilled (or where applicable, waived) and the Underwriting Agreement not having been terminated in accordance with its terms. If any such condition is not fulfilled on or before the date specified in the Underwriting Agreement (unless such conditions are waived on or before such date) or in any event on or before the date falling 30 days after the date of this prospectus, the Deed of Non-competition shall lapse and cease to have any effect whatsoever and no party shall have any claim against the other under the Deed of Non-competition. The Deed of Non-competition shall terminate on the date on which (i) in relation to any Covenantors, when he/it together with his/its close associates, whether individually or taken together, ceases to be interested in 30% (or such other amount as may from time to time be specified in the GEM Listing Rules as being the threshold for determining a controlling shareholder of a company) or more of the entire issued share capital of our Company provided that the Deed of Non-competition shall continue to be in full force and effect as against the other Covenantors; or (ii) our Shares cease to be listed and traded on the Stock Exchange (except for temporary trading halt or suspension of trading of the Shares on the Stock Exchange due to any reason). As our Controlling Shareholders have given non-competition undertakings in favour of our Company, and other than members of our Group, none of them have interests in other businesses that compete or are likely to compete with the business of our Group, our Directors are of the view that we are capable of carrying on our business independently of our Controlling Shareholders following the Listing. Other than members of our Group, none of our Controlling Shareholders and our Directors or their respective close associates has interests in any business which competes or is likely to compete with the business of our Group. CORPORATE GOVERNANCE MEASURES Our Company will adopt the following measures to strengthen its corporate governance practice and to safeguard the interests of the Shareholders: (a) the Articles provide that a Director shall not vote (nor shall he/she be counted in the quorum) on any resolution of the Board in respect of any contract or arrangement or proposal in which he/she or any of his/her close associates has/have a material interest, and 168

175 RELATIONSHIP WITH CONTROLLING SHAREHOLDERS if he/she shall do so his/her vote shall not be counted (nor shall he/she be counted in the quorum for that resolution), but this prohibition shall not apply to the exceptions as stated in the Articles where such exceptions are consistent with those provided in Appendix 3 to the GEM Listing Rules; (b) our independent non-executive Directors will review, on an annual basis, the compliance with the Deed of Non-competition by our Controlling Shareholders; (c) our Controlling Shareholders undertake to provide all information requested by our Company which is necessary for the annual review by our independent non-executive Directors and the enforcement of the Deed of Non-competition; (d) our Company will disclose decisions on matters reviewed by our independent non-executive Directors relating to compliance and enforcement of the Deed of Non-competition of our Controlling Shareholders in the annual reports of our Company; (e) our Controlling Shareholders will make an annual declaration on compliance with the Deed of Non-competition in the annual report of our Company; (f) our independent non-executive Directors will be responsible for deciding whether or not to allow any Controlling Shareholder and/or his/its close associates to involve or participate in any business in competition with or likely to be in competition with the existing business activity of any member of our Group within Hong Kong and such other parts of the world where any member of our Group may operate from time to time and if so, any condition to be imposed; and (g) our independent non-executive Directors may appoint independent financial adviser and other professional advisers as they consider appropriate to advise them on any matter relating to the Deed of Non-competition or connected transaction(s) at the cost of our Company. Further, any transaction that is proposed between our Group and/or our Controlling Shareholders and their respective close associates will be required to comply with the requirements of the GEM Listing Rules, including, where appropriate, the reporting, annual review, announcement and independent shareholders approval requirements. None of the members of our Group has experienced any dispute with its shareholders or among its shareholders themselves and our Directors believe that each member of our Group has maintained positive relationship with its shareholders. With the corporate governance measures including the measures set out in the section Relationship with Controlling Shareholders Corporate Governance Measures in this prospectus, our Directors believe that the interest of our Shareholders will be protected. 169

176 SUBSTANTIAL SHAREHOLDERS So far as our Directors are aware, the following persons will, immediately following completion of the Capitalisation Issue and the Placing (without taking into account any Shares which may be issued upon the exercise of any option that may be granted under the Share Option Scheme), have interests or short positions in the Shares or underlying Shares which would fall to be disclosed to our Company and the Stock Exchange under the provisions of Divisions 2 and 3 of Part XV of the SFO, or who will be directly or indirectly, interested in 10% or more of the nominal value of any class of share capital carrying rights to vote in all circumstances at general meetings of any other member of our Group: Name Capacity/ Nature of interest Number of Shares held/ interested in Percentage of shareholding immediately following completion of the Capitalisation issue and the Placing Dr. Li (Note 1) Interest in controlled 308,400,000 75% corporation Ms. Lam Joley (Note 2) Interest of spouse 308,400,000 75% Sonic Solutions (Note 1) Beneficial owner 308,400,000 75% Notes: 1. Dr. Li beneficially owns the entire issued share capital of Sonic Solutions and is deemed, or taken to be, interested in all the Shares held by Sonic Solutions for the purposes of the SFO. Dr. Li is the sole director of Sonic Solutions. 2. Ms. Lam Joley is the spouse of Dr. Li and is deemed, or taken to be, interested in all the Shares in which Dr. Li is interested for the purposes of the SFO. Save as disclosed above, our Directors are not aware of any other persons who will, immediately following completion of the Capitalisation Issue and the Placing (without taking into account any Shares which may be issued upon the exercise of any option that may be granted under the Share Option Scheme) have interests or short positions in the Shares or underlying Shares which would fall to be disclosed to us and the Stock Exchange under the provisions of Divisions 2 and 3 of Part XV of the SFO, or who will be directly or indirectly, interested in 10% or more of the nominal value of any class of share capital carrying rights to vote in all circumstances at general meetings of our Company or any other member of our Group. 170

177 SHARE CAPITAL SHARE CAPITAL Without taking into account any Shares which may be issued upon exercise of any option that may be granted under the Share Option Scheme, our share capital immediately following the Capitalisation Issue and the Placing will be as follows: Authorised share capital HK$ 2,000,000,000 Shares 20,000,000 Issued and to be issued, fully paid or credited as fully paid upon completion of the Capitalisation Issue and the Placing: HK$ 51,400,000 Shares in issue at the date of this prospectus 514, ,400,000 Shares to be issued pursuant to Capitalisation Issue 3,084,000 51,400,000 Shares to be issued pursuant to the Placing 514, ,200,000 4,112,000 MINIMUM PUBLIC FLOAT According to Rule 11.23(7) of the GEM Listing Rules, at the time of the Listing and at all times thereafter, our Company must maintain the minimum prescribed percentage of 25% of our Company s issued share capital in the hands of the public. RANKING The Placing Shares will rank pari passu in all respects with all our Shares now in issue or to be issued as mentioned in this prospectus, and, in particular, will qualify in full for all dividends or other distributions declared, made or paid on our Shares in respect of a record date which falls after the date of Listing other than participation in the Capitalisation Issue. CAPITALISATION ISSUE Pursuant to the resolutions of our Shareholders passed on 19 November 2014, subject to the share premium account of our Company being credited as a result of the issue of Placing Shares pursuant to the Placing, our Directors are authorised to allot and issue a total of 308,400,000 Shares credited as fully paid at par to the holders of Shares on the register of members of our Company at the close of business on 19 November 2014 (or as they may direct) in proportion to their respective shareholdings (save that no Shareholder shall be entitled to be allotted or issued any fraction of a Share) by way of capitalisation of the sum of HK$3,084,000 standing to the credit of the share premium account of our Company, and our Shares to be allotted and issued pursuant to this resolution shall rank pari passu in all respects with the existing issued Shares. 171

178 SHARE CAPITAL GENERAL MANDATE TO ISSUE SHARES Subject to the conditions as stated in the paragraph headed Conditions of the Placing in the section headed Structure and conditions of the Placing in this prospectus, our Directors have been granted a general unconditional mandate to allot, issue and deal with Shares and to make or grant offers, agreements or options which might require such Shares to be allotted and issued or dealt with subject to the requirement that the aggregate nominal value of our Shares so allotted and issued or agreed conditionally or unconditionally to be allotted and issued (otherwise than pursuant to a rights issue, or scrip dividend scheme or similar arrangements, or a specific authority granted by our Shareholders) shall not exceed: (a) 20% of the aggregate nominal value of the share capital of our Company in issue immediately following the completion of the Capitalisation Issue and the Placing; and (b) the aggregate nominal value of the share capital of our Company repurchased pursuant to the authority granted to our Directors referred to in the paragraph headed General mandate to repurchase Shares below. This mandate does not cover Shares to be allotted, issued, or dealt with under a rights issue or upon the exercise of the options which may be granted under the Share Option Scheme. This general mandate to issue Shares will remain in effect until the earliest of: (a) the conclusion of our Company s next annual general meeting; (b) the expiration of the period within which our Company s next annual general meeting is required to be held by any applicable laws of the Cayman Islands or the Articles; or (c) it is varied or revoked by an ordinary resolution of our Shareholders at a general meeting. For further details of this general mandate, please refer to the paragraph headed Further information about our Company Written resolutions of the sole Shareholder passed on 19 November 2014 in Appendix V to this prospectus. GENERAL MANDATE TO REPURCHASE SHARES Subject to the conditions as stated in the paragraph headed Conditions of the Placing in the section headed Structure and conditions of the Placing in this prospectus, our Directors have been granted a general unconditional mandate to exercise all our powers to repurchase Shares (Shares which may be listed on the Stock Exchange or on any other stock exchange which is recognised by the SFC and the Stock Exchange for this purpose) with an aggregate nominal value of not more than 10% of the aggregate nominal value of our Company s share capital in issue immediately following the completion of the Capitalisation Issue and the Placing (excluding Shares which may be issued pursuant to the exercise of the options which may be granted under the Share Option Scheme). 172

179 SHARE CAPITAL This mandate only relates to repurchases made on the Stock Exchange, or on any other stock exchange on which the Shares may be listed (and which is recognised by the SFC and the Stock Exchange for this purpose), and made in connection with all applicable laws and regulations and the requirements of the GEM Listing Rules. A summary of the relevant Listing Rules is set out in the paragraph headed Further information about our Company Repurchase of our Shares by our Company in Appendix V to this prospectus. The general mandate to repurchase Shares will remain in effect until the earliest of: (a) the conclusion of our Company s next annual general meeting; or (b) the expiration of the period within which our Company s next annual general meeting is required to be held by any applicable laws of the Cayman Islands or the Articles; or (c) it is varied or revoked by an ordinary resolution of our Shareholders at a general meeting. For further details of this general mandate, please refer to the paragraph headed Further information about our Company Repurchase of our Shares by our Company in Appendix V to this prospectus. CIRCUMSTANCES UNDER WHICH GENERAL MEETING AND CLASS MEETING ARE REQUIRED As a matter of Companies Law, an exempted company is not required by law to hold any general meetings or class meetings. The holding of general meeting or class meeting is prescribed for under the articles of association of a company. Accordingly, we will hold general meetings as prescribed for under our Articles, a summary of which is set out in the section headed Summary of the Constitution of the Company and Cayman Islands Company Law in Appendix IV to this prospectus. SHARE OPTION SCHEME We have conditionally adopted the Share Option Scheme. Details of the principal terms of the Share Option Scheme are summarised in the paragraph headed Share Option Scheme as set out in Appendix V to this prospectus. Our Group did not have any outstanding share options, warrants, convertible instruments, or similar rights convertible into our Shares as at the Latest Practicable Date. 173

180 FINANCIAL INFORMATION You should read this section in conjunction with our Group s audited combined financial information, including the notes thereto, as set out in the accountants report contained in Appendix I to this prospectus. Our Group s combined financial statements have been prepared in accordance with HKFRSs. You should read the entire accountants report and not merely rely on the information contained in this section. The following discussion and analysis contains certain forward-looking statements that reflect the current views with respect to future events and financial performance. These statements are based on assumptions and analyses made by our Group in light of our Group s experience and perception of historical trends, current conditions and expected future developments, as well as other factors that our Group believes are appropriate under the circumstances. However, whether actual outcomes and developments will meet our Group s expectations and projections depend on a number of risks and uncertainties over which our Group does not have control, including but not limited to those discussed below and elsewhere in this prospectus, particularly in the section Risk factors in this prospectus. OVERVIEW We are principally engaged in the provision of engineering consulting, contracting and project management services in Hong Kong with a focus on geotechnical engineering works. In respect of our engineering consulting service, we mainly assist our customers in (i) developing cost-effective engineering designs, including structural and geotechnical details, drawings and calculations primarily concerning how a structure or foundation should be constructed; and (ii) obtaining necessary approvals in respect of the engineering designs developed by us from the relevant Government authorities or their appointed consultants before the relevant works can commence at work sites pursuant to the requirements of the Buildings Ordinance or other relevant rules and regulations. Revenue from our engineering consulting service is mainly derived from consultancy fees for our service. Costs of our engineering consulting service mainly include salaries of our staff directly related to the provision of our engineering consulting service. In respect of our contracting service, we mainly undertake foundation and related geotechnical works of various property development and civil engineering projects in Hong Kong as a contractor. We mainly undertake projects with an original engineering design that, in our opinion, is capable of being changed to a more cost-effective one. We would estimate both the cost of implementing the original engineering design and the reduced cost of implementing the more cost-effective engineering design. We would then offer a contracting fee quotation to our customer that would generally be lower than the estimated cost based on the original engineering design, but would still allow us a substantial profit margin based on the more cost-effective engineering design. In doing so, we and our customer would both benefit because our customer would incur lower construction costs while we would achieve substantial profit margin. We leverage on the expertise of our team of in-house engineering staff for the preparation of the more cost-effective engineering designs and obtaining approval for such designs from the relevant Government authorities or their appointed consultants. We engage further subcontractors to perform the site works based on our engineering designs. We also send our own personnel to the work site to manage and supervise the works. We do not maintain our own direct 174

181 FINANCIAL INFORMATION labours or machinery for performing site works. Revenue from our contracting service mainly represents our contracting fee income. Costs in relation to our contracting service mainly include staff costs of our engineering staff involved in the projects as well as subcontracting charges incurred by us. In respect of our project management service, we are generally responsible for (i) the overall planning and management of the work schedules of different contractors appointed by our customers at work sites, as well as the logistical arrangements of the workers, materials, machinery and other resources required at work sites, with a view to ensuring smooth and timely completion of the works; and/or (ii) providing technical advice and supervision in respect of the site works performed by our customers and/or their appointed subcontractors, with a view to ensuring that the site works conform to the engineering designs approved by the relevant Government authorities or their appointed consultants. Revenue from our project management service mainly represents our project management fee income. Costs of our project management service mainly include staff costs in relation to staff directly related to the provision of our project management service. KEY FACTORS AFFECTING OUR RESULTS OF OPERATIONS AND FINANCIAL CONDITION Our results of operations and financial condition have been and will continue to be affected by a number of factors, including those set out below and in the section Risk factors in this prospectus: Availability of construction and geotechnical engineering projects in Hong Kong Our business performance are affected by the number and availability of construction and geotechnical engineering projects in Hong Kong, which in turn are affected by various factors, including but not limited to the general economic conditions in Hong Kong, changes in government policies relating to Hong Kong property markets, the general conditions of property markets in Hong Kong, and the amount of investment in the construction of new infrastructure and improvement of existing infrastructure. Unfavourable changes in these factors may result in a significant decrease in the number of geotechnical projects available in Hong Kong in general. For instance, an economic downturn in Hong Kong, an outbreak of epidemic disease, and/or adverse government policies on the property markets in Hong Kong may lead to a significant decline in the number of construction projects of buildings and/or underground facilities in Hong Kong, thereby resulting in a decline in the number of geotechnical projects available involving the design and construction of building foundations and/or excavation and structural designs for underground facilities. There is no assurance that the number of construction and geotechnical engineering projects in Hong Kong will not decrease in the future. Any significant increase or decrease in the availability of construction and geotechnical engineering projects in Hong Kong may materially affect our business volume and therefore our results of operations and financial condition. Costs and availability of engineering staff in Hong Kong In our engineering consulting business, we leverage on the expertise of our in-house team of engineering staff in developing cost-effective engineering designs for our customers. In our contracting business, we leverage on the expertise of our in-house team of engineering staff in 175

182 FINANCIAL INFORMATION changing the original engineering design to a more cost-effective one in order for us to achieve substantial savings and profit margin. As such, we consider that our in-house team of engineering staff is crucial to the day-to-day operations and the continuing success of our Group. Our costs of engineering staff may be affected by the demand and supply of engineers in Hong Kong as well as other economic factors such as inflation rate and general standard of living. There is no guarantee that the supply of engineers in Hong Kong will remain stable. Any significant increase or decrease in the overall supply of or demand for engineers in Hong Kong may materially affect the costs of our operations and the quality of our services. In the event that we fail to retain our existing engineering staff and/or recruit sufficient and capable engineering staff in a timely manner for our existing or future projects and/or there is a significant increase in our engineering staff costs, our operations and profitability may be materially and adversely affected. Financial resources required to undertake projects for our contracting business The aggregate number and size of projects that we are able to undertake in our contracting business hinges on the amount of our available working capital because there are often time lags between making payments to our subcontractors and receiving payments from our customers. If we choose to pay our subcontractors only after receiving payments from our customers, we will risk our reputation in being able to make payments on a timely manner, which could harm our ability to engage capable and quality subcontractors for our contracting business in the future. In addition, contracting projects undertaken by us in the future may involve the provision of surety bonds, which will require the use of a substantial amount of our cash resources. Our Directors believe that the net proceeds from the Placing will strengthen our available financial resources and it is therefore one of our business strategies to further develop our contracting business after Listing. Our available financial resources will therefore affect our ability to undertake projects for our contracting business. Performance and availability of our subcontractors In respect of our contracting service, we engage subcontractors to perform site works based on our engineering designs and we do not maintain our own direct labours or machinery for performing site works. Notwithstanding our evaluation and selection of subcontractors, there is no assurance that the work quality of our subcontractors can always meet our requirements. Outsourcing exposes us to the risks associated with non-performance, delayed performance or sub-standard performance by our subcontractors. As a result, we may incur additional costs or be subject to liability under the relevant contracts between us and our customers for our subcontractors unsatisfactory performance. Such events could impact upon our profitability, financial performance and reputation. In addition, there is no assurance that our Group will always be able to secure suitable subcontractors when required, or be able to negotiate acceptable fees and terms of service with subcontractors. In such event, our operation and financial position may also be adversely affected. Accuracy in our estimation of time and costs involved in projects when providing fee quotes We need to estimate the time and costs involved in a project in order to determine our fee. There is no assurance that the actual amount of time and costs would not exceed our estimation during the performance of our projects. The actual amount of time and costs involved in completing a project may be adversely affected by many factors, including adverse weather conditions, accidents, unforeseen 176

183 FINANCIAL INFORMATION site conditions such as unexpected difficult geological or sub-soil conditions, departure of key engineering staff involved in the project, delays in obtaining the necessary approvals in respect of the engineering designs from the relevant Government authorities or their appointed consultants, and other unforeseen problems and circumstances. Any material inaccurate estimation in the time and costs involved in a project may adversely affect our profit margin and results of operations. In addition, in respect of our contracting service, we mainly undertake projects with an original engineering design that, in our opinion, are capable of being changed to a more cost-effective one. In doing so, we would be able to charge our customer a contracting fee which is slightly lower than the cost that our customer would otherwise have to incur by adopting the original design but would still allow us a substantial profit margin if we are able to successfully change the engineering design to a more cost-effective one. We leverage on the expertise of our team of in-house engineering staff for the preparation of a more cost-effective engineering design and obtain approval of such design from the relevant Government authorities or their appointed consultants. However, there is no assurance that we will always be able to successfully change an original engineering design to a more cost-effective one and obtain approval in respect thereof. Any failure by us to successfully change an original engineering design to a more cost-effective one and obtain approval in respect thereof would lead to a significantly reduced profit margin, or even a loss, to be incurred by us in respect of the project and could therefore materially and adversely affect our financial performance. BASIS OF PRESENTATION Our Company was incorporated in the Cayman Islands on 17 July 2014 as an exempted company with limited liability. Pursuant to the Reorganisation, our Company became the holding company of the companies now comprising our Group, details of which are set out in the section Further information about our Company Corporate Reorganisation in Appendix V to this prospectus. Financial information of our Group has been prepared as if our Company had been the holding company of our Group throughout the Track Record Period in accordance with Accounting Guideline 5 Merger Accounting for Common Control Combinations issued by the HKICPA. Preparation of the financial information of our Group is in accordance with the HKFRSs issued by the HKICPA on the basis set out in note 2 to the accountants report contained in Appendix I to this prospectus. CRITICAL ACCOUNTING POLICIES AND ESTIMATES Our Group s financial statements have been prepared in accordance with HKFRSs. Significant accounting policies adopted by our Group are set forth in detail in the accountants report set out in Appendix I to this prospectus. Some of the accounting policies involve subjective judgments, estimates, and assumptions made by our management, all of which are inherently subject to uncertainties. The estimates and the associated assumptions are based on historical data and our experience and factors that we believe to be relevant and reasonable under the circumstances. 177

184 FINANCIAL INFORMATION The following paragraphs summarise the critical accounting policies and estimates applied in the preparation of our Group s combined financial statements. Revenue recognition Revenue comprises the fair value of the consideration received or receivables for the sale of services in the ordinary course of our Group s activities. Revenue is shown after eliminating sales within our Group. (a) Engineering consulting Revenue in respect of our engineering consulting business is recognised when the relevant services are rendered to customers. Specifically, certain performance milestones (such as the submission of the engineering designs developed by us for approval and the obtaining of the approval from the relevant Government authorities or their appointed consultants) are agreed with customers and specified in our quotation or service agreement. Upon completion of such specified performance milestones, revenue is recognised accordingly. Where supervision of site works is also required by our customer, a fixed monthly fee is generally agreed between us and our customers and is generally invoiced on a monthly basis throughout the period during which we are required to supervise the works. Revenue is recognised as it accrues on a pro-rata basis over the number of days of services provided in a month. (b) Contracting Revenue in respect of our contracting business is recognised based on the percentage of completion of the contracts, which is established by reference to the construction works certified by our customer. Generally, certain performance milestones and the associated amount of progress billings are agreed with customers and specified in our quotation or service agreement. Our Group and our customers both perform on-site inspections regularly to review and monitor the progress of the relevant site works performed by our subcontractors and to measure the amount of work done. Usually, we issue invoices to our customer in respect of the work done with reference to the aforesaid on-site inspection and the agreed progress billings. Our customer will then certify the amount of work done and the amount of fees payable to us based on its on-site inspection and measurement. Revenue is then recognised accordingly based on the percentage of completion and the relevant billable amount certified by the customer. (c) Project management Revenue in respect of our project management business is recognised when the relevant services are rendered to customers. Specifically, a fixed monthly fee is generally agreed between us and our customers in respect of our project management services and is generally invoiced on a monthly basis throughout the period during which we are required to provide project management services. Revenue is recognised as it accrues on a pro-rata basis over the number of days of services provided in a month. 178

185 FINANCIAL INFORMATION Construction contracts in progress Construction work-in-progress is valued at cost incurred plus an appropriate proportion of profits after deducting progress payments and allowances for foreseeable losses. Cost comprises construction material costs, labour and overheads expenses incurred in bringing the work-in-progress to its present condition. Our Group presents as an asset the gross amount due from customers for contract work for all contracts in progress for which costs incurred plus recognised profits (less recognised losses) exceed progress billings. Progress billings not yet paid by customers and retention are included within trade and retention receivables. Our Group presents as a liability the gross amount due to customers for contract work for all contracts in progress for which progress billings exceed costs incurred plus recognised profits (less recognised losses). Trade and other receivables Trade receivables are amounts due from customers for services performed in the ordinary course of business. If collection of trade and other receivables is expected in one year or less (or in the normal operating cycle of the business if longer), they are classified as current assets. If not, they are presented as non-current assets. Trade and other receivables are recognised initially at fair value and subsequently measured at amortised cost using the effective interest method, less provision for impairment. Impairment of financial assets Our Group assesses at the end of each reporting period whether there is objective evidence that a financial asset or group of financial assets is impaired. A financial asset or a group of financial asset is impaired and impairment losses are incurred only if there is objective evidence of impairment as a result of one or more events that occurred after the initial recognition of the asset (a loss event ) and that loss event (or events) has an impact on the estimated future cash flows of the financial asset or group of financial assets that can be reliably estimated. Evidence of impairment may include indications that the debtors or a group of debtors is experiencing significant financial difficulty, default or delinquency in interest or principal payments, the probability that they will enter bankruptcy or other financial reorganisation, and where observable data indicate that there is a measurable decrease in the estimated future cash flows, such as changes in arrears or economic conditions that correlate with defaults. 179

186 FINANCIAL INFORMATION For loans and receivables category, the amount of the loss is measured as the difference between the asset s carrying amount and the present value of estimated future cash flows (excluding future credit losses that have not been incurred) discounted at the financial asset s original effective interest rate. The carrying amount of the asset is reduced and the amount of the loss is recognised in profit or loss. If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognised (such as an improvement in the debtor s credit rating), the reversal of the previously recognised impairment loss is recognised in profit or loss. Trade and other payables Trade payables are obligations to pay for goods or services that have been acquired in the ordinary course of business from suppliers. Trade and other payables are classified as current liabilities if payment is due within one year or less (or in the normal operating cycle of the business if longer). If not, they are presented as non-current liabilities. Trade and other payables are recognised initially at fair value and subsequently measured at amortised cost using the effective interest method. Property, plant and equipment Leasehold land classified as finance lease and all other property, plant and equipment are stated at historical cost less accumulated depreciation and accumulated impairment losses, if any. Historical cost includes expenditure that is directly attributable to the acquisition of the items. Subsequent costs are included in the asset s carrying amount or recognised as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to our Group and the cost of the item can be measured reliably. The carrying amount of the replaced part is derecognised. All other repairs and maintenance costs are charged to profit or loss during the financial period in which they are incurred. Leasehold land classified as finance lease commences amortisation from the time when the land interest becomes available for its intended use. Amortisation on leasehold land classified as finance lease and depreciation on other property, plant and equipment is calculated using the straight-line method to allocate their cost to their residual values over their estimated useful lives, as follows: Leasehold properties Over shorter of lease terms and 50 years Leasehold improvement 20% Furniture, fixtures and office equipment 20% Motor vehicles 20% 180

187 FINANCIAL INFORMATION The assets residual values and useful lives are reviewed, and adjusted if appropriate, at the end of each reporting period. An asset s carrying amount is written down immediately to its recoverable amount if the asset s carrying amount is greater than its estimated recoverable amount. Gains and losses on disposals are determined by comparing the proceeds with the carrying amount and are recognised in the combined statement of profit or loss and other comprehensive income. Borrowings Borrowings are classified as current liabilities unless our Group has an unconditional right to defer settlement of the liability for at least 12 months after the end of the reporting period. Borrowings are recognised initially at fair value, net of transaction costs incurred. Borrowings are subsequently carried at amortised cost; any difference between the proceeds (net of transaction costs) and the redemption value is recognised in profit or loss over the period of the borrowings using the effective interest method. Leases Leases in which a significant portion of the risks and rewards of ownership are retained by the lessors are classified as operating leases. Payments made under operating leases (net of any incentives received from the lessors) are charged to the combined statement of profit or loss and other comprehensive income on a straight-line basis over the period of the lease. Our Group leases certain property, plant and equipment. Leases of property, plant and equipment where our Group has substantially all the risks and rewards of ownership are classified as finance leases. Finance leases are capitalised at the lease s commencement at the lower of the fair value of the leased property and the present value of the minimum lease payments. Each lease payment is allocated between the liability and finance charges. The corresponding rental obligations, net of finance charges, are included in other long-term payables. The interest element of the finance cost is charged to the combined statement of profit or loss and other comprehensive income over the lease period so as to produce a constant periodic rate of interest on the remaining balance of the liability for each period. The property, plant and equipment acquired under finance leases is depreciated over the shorter of the useful life of the asset and the lease term. 181

188 FINANCIAL INFORMATION Current and deferred income tax The tax expense for the period comprises current and deferred tax. Tax is recognised in the profit or loss, except to the extent that it relates to items recognised in other comprehensive income or directly in equity. In this case the tax is also recognised in other comprehensive income or directly in equity, respectively. The current income tax charge is calculated on the basis of the tax laws enacted or substantively enacted at the end of each reporting period in the countries where our Group operates and generates taxable income. Management periodically evaluate positions taken in tax returns with respect to situations in which applicable tax regulation is subject to interpretation. It establishes provisions where appropriate on the basis of amounts expected to be paid to the tax authorities. Deferred income tax is recognised, using the liability method, on temporary differences, arising between the tax bases of assets and liabilities and their carrying amounts in the Financial Information. However, the deferred tax liabilities are not recognised if it arises from initial recognition of an asset or liability in a transaction other than a business combination that at the time of the transaction affects neither accounting nor taxable profit or loss. Deferred income tax is determined using tax rates (and laws) that have been enacted or substantively enacted by the end of each reporting period and are expected to apply when the related deferred income tax asset is realised or the deferred taxation liability is settled. Deferred income tax assets are recognised only to the extent that it is probable that future taxable profit will be available against which the temporary differences can be utilised. Deferred income tax assets and liabilities are offset when there is a legally enforceable right to offset current tax assets against current tax liabilities and when the deferred income taxes assets and liabilities relate to income taxes levied by the same taxation authority on either the taxable entity or different taxable entities where there is an intention to settle the balances on a net basis. Government grants Grants from the government are recognised at their fair value where there is a reasonable assurance that the grant will be received and our Group will comply with all attached conditions. Government grants related to costs are deferred and recognised in the combined statement of profit or loss over the period necessary to match them with the costs that they are intended to compensate. 182

189 FINANCIAL INFORMATION SUMMARY OF RESULTS OF OPERATIONS The combined statements of comprehensive income during the Track Record Period are summarised below, which have been extracted from the accountants report set out in Appendix I to this prospectus. FY2013 HK$ 000 FY2014 HK$ 000 Revenue 45,678 63,413 Cost of sales (17,033) (21,686) Gross profit 28,645 41,727 Other income Administrative and other operating expenses (7,096) (11,805) Operating profit 21,667 30,077 Finance costs (181) (168) Profit before income tax 21,486 29,909 Income tax expense (3,563) (4,951) Profit and total comprehensive income for the year attributable to owners of our Company 17,923 24,958 PRINCIPAL COMPONENTS OF RESULTS OF OPERATIONS Revenue Revenue comprises the fair value of consideration received or receivable by us for the provision of services in the ordinary course of our Group s activities. The following table sets forth a breakdown of our revenue by business segments during the Track Record Period: FY2013 FY2014 HK$ 000 % HK$ 000 % Engineering consulting 31, , Contracting 9, , Project management 4, , Others , ,

190 FINANCIAL INFORMATION Revenue in respect of our engineering consulting business is recognised when the related services are rendered to our customer. In a typically engineering consulting project, our consultancy fees are usually charged and recognised as revenue upon submission of the engineering design prepared by us and/or upon approval by the relevant Government authorities or their appointed consultants in respect of the engineering design. Where supervision of site works is also required by our customer, our consultancy fees for site supervision are generally invoiced on a monthly basis throughout the period during which we are required to supervise the works. The following table sets forth a further breakdown of our engineering consulting revenue: FY2013 FY2014 Revenue % Revenue % HK$ 000 HK$ 000 Engineering consulting: - Preparing engineering designs and obtaining necessary approvals only 24, , Preparing engineering designs, obtaining necessary approvals and supervising site works 7, , , , Revenue in respect of our contracting business is recognised based on the percentage of completion of the contracts, which is established by reference to the construction works certified by our customer. In a typical project, we issue invoice to our customer on a monthly basis in respect of the work done during the month. Revenue in respect of our project management business is recognised when the related services are rendered to our customer. Fees for our project management service are generally invoiced on a monthly basis throughout the period during which we are required to act as project manager. Others represent revenue derived from our activities of publishing technical books and organising continuing professional development courses, seminars and conferences on topics related to civil engineering. These activities are intended for the promotion of our Group s professional image and reputation and are therefore regarded by our Directors as our marketing activities. Nevertheless, as a result of these activities, revenue is derived from admission fees for attending our courses, seminars and conferences, administrative fees for organising courses, seminars and conferences for the HKIE or other institutions, as well as sales of technical books. 184

191 FINANCIAL INFORMATION Cost of sales The following table sets forth a breakdown of our cost of sales during the Track Record Period by nature: FY2013 HK$ 000 FY2014 HK$ 000 Consultancy 238 1,489 Depreciation of owned assets Depreciation of leased assets 90 Drafting Motor vehicle expenses Operating lease charges Printing and stationery Secondment fees Staff costs 11,772 14,081 Subcontracting charges 3,185 3,994 Other expenses ,033 21,686 Cost of sales primarily comprises: (i) consultancy fees paid to our external consultants engaged by us to provide technical advice on our engineering designs when we consider it necessary or appropriate to do so for the sake of prudence; (ii) depreciation of owned assets, which mainly represents the depreciation of our owned motor vehicles; (iii) depreciation of leased assets, which mainly represents the depreciation of our motor vehicles under finance lease; (iv) drafting fees paid to an external drafting service provider mainly for the preparation of technical drawings in order to alleviate the workload of our draftsmen; (v) motor vehicle expenses, which mainly represent costs in relation to the use of our motor vehicles; (vi) operating lease charges, which include rental cost of printing machines and other miscellaneous equipment; 185

192 FINANCIAL INFORMATION (vii) printing and stationery costs, which are incurred mainly in connection with the printer service fees and the purchase of printing paper and other stationery for the preparation of technical drawings; (viii)secondment fees, which are fees paid to certain external firms which temporarily assigned some of their employees to us on secondment for our engineering consulting and project management businesses in order to alleviate the workload of our engineering staff and site personnel; (ix) staff costs, which mainly represent the salaries and benefits provided to our engineering staff and site personnel who are directly involved in the provision of our services. The following sensitivity analysis illustrates the impact of hypothetical fluctuations in our staff costs (in respect of staff who are directly involved in the provision of our services) on our profits during the Track Record Period. The hypothetical fluctuation rates are set at 2% and 7%, which correspond to the approximate minimum and maximum year-on-year fluctuations in the average salary of engineering staff in Hong Kong from 2009 to 2013 as shown in the IPSOS Report (see Industry overview Potential challenges Supply and demand of engineering staffs in Hong Kong in this prospectus) and are therefore considered reasonable for the purpose of this sensitivity analysis: Hypothetical fluctuations in our staff costs (in respect of staff who are directly involved in the provision of our services) +2% +7% -2% -7% HK$ 000 HK$ 000 HK$ 000 HK$ 000 Change in profit before tax FY2013 (235) (824) FY2014 (281) (986) Change in profit after tax FY2013 (197) (688) FY2014 (235) (823)

193 FINANCIAL INFORMATION (x) subcontracting charges, which are fees paid to subcontractors engaged by us to perform site works based on our engineering designs in respect of our contracting business. The following sensitivity analysis illustrates the impact of hypothetical fluctuations in our subcontracting charges on our profits during the Track Record Period. The hypothetical fluctuation rates are set at 1% and 18%, which correspond to the approximate minimum and maximum year-on-year fluctuations in the average wage of construction workers and average costs of key construction materials as shown in the IPSOS Report (see Industry overview Potential challenges Increasing costs of construction in this prospectus) and are therefore considered reasonable for the purpose of this sensitivity analysis: Hypothetical fluctuations in our subcontracting charges +1% +18% -1% -18% HK$ 000 HK$ 000 HK$ 000 HK$ 000 Change in profit before tax FY2013 (32) (573) FY2014 (40) (719) Change in profit after tax FY2013 (27) (478) FY2014 (33) (600) Gross profit The table below sets forth a breakdown of our gross profit and gross profit margin during the Track Record Period by business segment: FY2013 FY2014 Revenue Gross profit Gross profit margin Revenue Gross profit Gross profit margin HK$ 000 HK$ 000 % HK$ 000 HK$ 000 % Engineering consulting - Preparing engineering designs and obtaining necessary approvals only 24,207 17, % 33,140 23, % - Preparing engineering designs, obtaining necessary approvals and supervising site works 7,112 2, % 5,982 1, % - Overall 31,319 19, % 39,122 24, % Contracting 9,748 4, % 12,870 7, % Project management 4,071 3, % 11,180 9, % Others % % Overall 45,678 28, % 63,413 41, % 187

194 FINANCIAL INFORMATION Gross profit for each business segment is calculated as segment revenue minus cost of sales allocated to the segment. Segment cost of sales mainly includes: in respect of our engineering consulting business, our staff costs, consultancy fees paid to external consultants engaged by us, secondment fees and costs of external drafting services; in respect of our contracting business, subcontracting charges and our staff costs; in respect of our project management business, our staff costs; and for others (i.e. our activities of publishing technical books and organising continuing professional development courses, seminars and conferences on topics related to civil engineering mainly for marketing purposes), costs in relation to the booking of venues and other miscellaneous expenses. We were able to achieve high gross profit margin because, due to our business nature, we mainly rely on our engineering staff in the provision of our services and we did not require a substantial amount of external goods and services for our daily operations. In addition, as explained in the section Business Competitive strengths Ability to achieve substantial profit margin in our contracting business in this prospectus, we were able to achieve high profit margin for our contracting business because, unlike most of the contractors in Hong Kong which mainly compete on pricing, timing and quality in performing site works given an engineering design that has already been approved by the relevant Government authorities or their appointed consultants, we leverage on the expertise of our in-house engineering staff and focus on undertaking projects with an original engineering design that, in our opinion, are capable of being changed to a more cost-effective one. In doing so, we are able to compete with our competitors favorably on pricing but at the same time are able to achieve substantial profit margins given that we are able to successfully change the engineering design to a more cost-effective one. Please refer to the section Financial information Period-to-period comparison of results of operations below for a discussion of the fluctuation of our gross profit margin during the Track Record Period. Other income The table below sets forth a breakdown of our other income by nature during the Track Record Period: FY2013 HK$ 000 FY2014 HK$ 000 Government grants Others

195 FINANCIAL INFORMATION Our other income mainly comprises: (i) government grants, which are training grants provided by the Government as we sponsored some of our employees to attend training programmes; (ii) others, which mainly include insurance compensation for a traffic accident that took place prior to the Track Record Period involving one of our motor vehicles as well as various miscellaneous items. The aforesaid traffic accident took place in April At the time of the accident, one of our employees was driving our motor vehicle which had left a construction site after work and was hit by a minibus at the back. The minibus driver was subsequently convicted of careless driving. Administrative and other operating expenses The table below sets forth a breakdown of our administrative and other operating expenses by nature during the Track Record Period: FY2013 HK$ 000 FY2014 HK$ 000 Auditors remuneration Building management fee Depreciation of owned assets 1,236 1,457 Entertainment Insurance Listing expenses 3,977 Loss on disposal of property, plant and equipment Operating lease rental on premises 131 Staff costs, including directors emoluments 3,402 4,526 Travelling Other expenses ,096 11,805 Our administrative and other operating expenses mainly comprise: (i) auditors remuneration, which are fees to our auditors; (ii) building management fees, which are fees to the property management company for the general management of the building (i.e. Sun Kwong Industrial Building) in which our owned property is located; (iii) depreciation of owned assets, which is the depreciation of our owned property, leasehold improvement, furniture, fixtures and office equipment; 189

196 FINANCIAL INFORMATION (iv) entertainment expenses, which mainly include costs incurred to maintain relationship with our existing and potential customers and suppliers; (v) insurance expenses, which represent cost for maintaining insurance as disclosed in the section Business Insurance in this prospectus; (vi) listing expenses, which represent expenses in relation to the Listing; (vii) loss on disposal of property, plant and equipment, which represents loss recognised upon disposal of leasehold improvements and motor vehicles at considerations that were lower than the respective book values; (viii)operating lease rental on premises, which represents rental expenses for our rented premises; (ix) staff costs (including directors emoluments), which include salaries and benefits provided to Dr. Li and our administrative staff; and (x) travelling expenses, which represent expenses for travelling incurred by our Directors and staff. Finance costs The following table sets forth a breakdown of our finance costs for the Track Record Period: FY2013 HK$ 000 FY2014 HK$ 000 Interest on finance leases 2 Interest on bank borrowing not wholly repayable within 5 years Our finance costs comprise interest expenses on bank borrowing and finance lease liabilities. Bank borrowings refer to a mortgage loan obtained for the purchase of our owned property located at Units A, B and C on 7th Floor and Lavatory, Sun Kwong Industrial Building, Tung Chau West Street, Kowloon, Hong Kong. Our finance lease liabilities are related to the purchase of our motor vehicles by way of finance lease arrangements. For further details, please refer to the section Financial information Indebtedness in this prospectus. 190

197 FINANCIAL INFORMATION Income tax expense Our Group is subject to Hong Kong profits tax, which has been provided at the rate of 16.5% for the Track Record Period on our estimated assessable profit. During the Track Record Period, our income tax expenses and effective tax rates were as follows: FY2013 HK$ 000 FY2014 HK$ 000 Profit before income tax 21,486 29,909 Income tax expense 3,563 4,951 Effective tax rate 16.6% 16.6% PERIOD-TO-PERIOD COMPARISON OF RESULTS OF OPERATIONS FY2014 compared with FY2013 Revenue Our revenue increased from approximately HK$45.7 million for FY2013 to approximately HK$63.4 million for FY2014, representing an increase of approximately 38.8%. We recorded an increase in revenue derived from all of our three main business segments, namely, engineering consulting, contracting, and project management: FY2013 FY2014 Change HK$ 000 HK$ 000 Engineering consulting 31,319 39, % Contracting 9,748 12, % Project management 4,071 11, % Others (55.4)% Total revenue 45,678 63, % The increases in our revenue in respect of our three main business segments were mainly due to the increase in the general demand for our services as a result of the increases in the amount of general building works and civil engineering works in Hong Kong, which is also shown in the IPSOS Report (see Industry overview Construction industry in Hong Kong in this prospectus). 191

198 FINANCIAL INFORMATION In addition, the increase in our revenue in respect of our engineering consulting business segment was also contributed by: (a) (b) substantial increase in revenue derived from engineering consulting projects that did not require our site supervision service (from approximately HK$24.2 million for FY2013 to approximately HK$33.1 million for FY2014), which was slightly offset by a decrease in revenue derived from projects that involved site supervision (from approximately HK$7.1 million for FY2013 to approximately HK$6.0 million for FY2014), mainly due to the differences in the demand by customers for the scope of our services during the Track Record Period; and the relatively higher increase in demand for our engineering consulting services in respect of projects of smaller scale in FY2014 (while the number of engineering projects of larger scale and higher income had also increased) as discussed in the section Business Our services Projects undertaken during the Track Record Period in this prospectus, while the significant increase in our revenue in respect of our contracting and project management business segments were also contributed by: (a) (b) the increase in major infrastructure and construction projects in Hong Kong, which resulted in more business opportunities being presented to us, which in turn allowed us to focus on pursuing projects of larger scales and higher income (see Business Our services Projects undertaken during the Track Record Period in this prospectus); and in view of the available business opportunities, we recruited more project management and site personnel (see Business Employees in this prospectus) to cope with our business growth, which allowed us to pursue projects of larger scales and higher income. Cost of sales Our cost of sales increased from approximately HK$17.0 million for FY2013 to approximately HK$21.7 million for FY2014, representing an increase of approximately HK$4.7 million or approximately 27.3%. Such increase was mainly attributable to: the increases in our staff costs for staff directly involved in the provision of our services from approximately HK$11.8 million for FY2013 to approximately HK$14.1 million for FY2014, representing an increase of approximately HK$2.3 million or approximately 19.6%, which was mainly as a result of salary raise and increase in bonuses paid in FY2014 to reward staff due to the increased workload as a result of our business growth; the increase in consultancy fees to external technical consultants engaged by us from approximately HK$0.2 million for FY2013 to approximately HK$1.5 million for FY2014, representing an increase of approximately HK$1.3 million or approximately 525.6%, which was mainly because we have engaged an additional external consultant in July 2013 to provide routine technical consultancy service to us in view of our increased business volume in respect of our engineering consulting business and for the sake of prudence; and 192

199 FINANCIAL INFORMATION the increase in subcontracting charges incurred by us from approximately HK$3.2 million for FY2013 to approximately HK$4.0 million for FY2014, representing an increase of approximately HK$0.8 million or approximately 25.4%, which was mainly due to the increase in the amount of site works in respect of our contracting business, as evidenced by the increase in our revenue of our contracting business segment by approximately 32.0%. Gross profit and gross profit margin Our gross profit margin increased from approximately 62.7% for FY2013 to approximately 65.8% for FY2014. Such increase was mainly attributable to: (i) (ii) the substantial increase in our segment revenue of our project management segment as discussed above, while such business segment carries the highest gross profit margin among our three main business segments and such gross profit margin remained relatively stable in FY2013 and FY2014; the increase in our gross profit margin for our contracting business from approximately 50.5% for FY2013 to approximately 61.7% for FY2014, which was mainly due to a contracting project with lower profit margin in FY2013 as such project mainly involved on-site geotechnical testing works (which carry lower gross profit margin due to its nature as advised by our Directors) rather than foundation construction and ground improvement works as in our other contracting projects; coupled with a substantial increase in our segment revenue of our contracting business as discussed above; and (iii) the relatively stable gross profit margin of our engineering consulting business in FY2013 and FY2014 (despite a notable decrease in the gross profit margin in respect of engineering consulting projects that involved supervision of site works from 34.3% in FY2013 to 18.3% in FY2014, which was mainly because in respect of such projects, the proportion of site supervision works (which typically carried lower profit margin) increased relative to designs works (which typically carried higher profit margin) due to the differences in the demand by customers for the scope of our services). Other income Other income increased from approximately HK$118,000 for FY2013 to approximately HK$155,000 for FY2014, representing an increase of approximately 31.4%. Such increase was primarily due to the obtaining of insurance compensation in FY2014 for a traffic accident that took place prior to the Track Record Period involving one of our motor vehicles. For more information regarding the aforesaid traffic accident, please refer to the section Financial information Principal components of results of operations Other income above. Administrative and other operating expenses Our administrative and other operating expenses increased from approximately HK$7.1 million for FY2013 to approximately HK$11.8 million for FY2014, representing an increase of approximately HK$4.7 million or approximately 66.4%. 193

200 FINANCIAL INFORMATION Such increase was primarily due to (i) the Listing expenses of approximately HK$4.0 million incurred in FY2014 as compared to nil in FY2013; and (ii) the increase in our staff costs (including directors emoluments) from approximately HK$3.4 million for FY2013 to approximately HK$4.5 million in FY2014, representing an increase of approximately HK$1.1 million or approximately 33.0%, which was mainly as a result of the increase in the salary and benefits paid to Dr. Li in FY2014. Finance costs Our finance costs decreased from approximately HK$181,000 for FY2013 to approximately HK$168,000 for FY2014, which was mainly due to the decreasing principal amount of our mortgage loan over time after each monthly repayment, coupled with relatively stable interest rates during the Track Record Period. Income tax expense Our income tax expense increased from approximately HK$3.6 million for FY2013 to approximately HK$5.0 million for FY2014, representing an increase of approximately 39.0%. Such increase was generally in line with the increase in our profit before income tax from approximately HK$21.5 million for FY2013 to approximately HK$29.9 million for FY2014, representing an increase of approximately 39.2%. Profit for the year As a result of the aforesaid, our profit and total comprehensive income for the year attributable to owners of our Company increased from approximately HK$17.9 million for FY2013 to approximately HK$25.0 million for FY2014, representing an increase of approximately 39.3%. LIQUIDITY AND CAPITAL RESOURCES Our principal sources of funds have historically been our cash generated from operations, equity contribution from shareholders as well as borrowings. Our primary liquidity requirements are to finance our working capital, fund the payment of interest and principal due on our indebtedness and fund our capital expenditures and growth of our operations. Going forward, we expect these sources to continue to be our principal sources of liquidity, and we may use a portion of the proceeds from the Placing to finance a portion of our liquidity requirements. As at 31 July 2014, we had committed banking facilities of approximately HK$6,029,000 which bore interest at 2.87% to 2.88% per annum while we did not have any undrawn banking facilities. In addition, as at 31 July 2014, we had cash and cash equivalents of approximately HK$7,724,

201 FINANCIAL INFORMATION Cash flows The following table sets forth a summary of our cash flows for the periods indicated: FY2013 HK$ 000 FY2014 HK$ 000 Net cash generated from operating activities 6,691 4,368 Net cash used in investing activities (2,586) (1,207) Net cash used in financing activities (589) (526) Net increase in cash and cash equivalents 3,516 2,635 Cash and cash equivalents at beginning of year 1,573 5,089 Cash and cash equivalents at end of year 5,089 7,724 Cash flows from operating activities Our operating cash inflow is primarily derived from our revenue from the provision of our engineering consulting, contracting and project management services, whereas our operating cash outflow mainly includes payment for staff salaries and benefits, subcontracting charges, as well as other working capital needs. Net cash generated from or used in operating activities primarily consisted of profit before income tax adjusted for depreciation, loss on disposal of property, plant and equipment, interest expenses, and the effect of changes in working capital such as increase or decrease in trade and other receivables, trade and other payables, amount due from a shareholder and amount due to customers for contract works. 195

202 FINANCIAL INFORMATION The following table sets forth a reconciliation of our profit before income tax to the net cash generated from operating activities: FY2013 HK$ 000 FY2014 HK$ 000 Profit before income tax 21,486 29,909 Adjustments for: Depreciation 1,452 1,751 Loss on disposal of property, plant and equipment Interest expense Operating profit before working capital changes 23,387 31,900 Increase in trade and other receivables (4,556) (8,935) Increase in balance with a shareholder (11,659) (17,603) Increase in trade and other payables 1,265 1,396 Increase/(Decrease) in amounts due to customers for contract works 1,779 (1,779) Net cash generated from operations 10,216 4,979 Tax paid (3,525) (611) Net cash generated from operating activities 6,691 4,368 For FY2013, we recorded net cash generated from operating activities of approximately HK$6.7 million, which was primarily attributable to our profit before income tax of approximately HK$21.5 million, negatively adjusted for (i) increase in balance with a shareholder (i.e. Dr. Li) of approximately HK$11.7 million as a result of cash advance from our Group to Dr. Li for Dr. Li s personal use; and (ii) increase in trade and other receivables of approximately HK$4.6 million; which were partially offset by (i) increase in amount due to customers for contract works of approximately HK$1.8 million; (ii) depreciation of approximately HK$1.5 million; (iii) increase in trade and other payables of approximately HK$1.3 million; (iv) loss on disposal of leasehold improvement and motor vehicles of approximately HK$0.3 million; and (v) interest expenses of approximately HK$0.2 million. For FY2014, we recorded net cash generated from operating activities of approximately HK$4.4 million, which was primarily attributable to our profit before income tax of approximately HK$29.9 million, negatively adjusted for (i) increase in balance with a shareholder (i.e. Dr. Li) of approximately HK$17.6 million as a result of cash advance from our Group to Dr. Li for Dr. Li s personal use; (ii) increase in trade and other receivables of approximately HK$8.9 million; and (iii) decrease in amount due to customers for contract works of approximately HK$1.8 million; which were partially offset by (i) depreciation of approximately HK$1.8 million; (ii) increase in trade and other payables of approximately HK$1.4 million; (iii) loss on disposal of a motor vehicle of approximately HK$0.1 million; and (iv) interest expenses of approximately HK$0.2 million. 196

203 FINANCIAL INFORMATION We recorded lower net cash generated from operating activities in FY2014 than in FY2013 despite our higher profit before income tax, which was mainly because of (i) the increase in balance with Dr. Li due to cash advance from our Group to him for his personal use; and (ii) the increase in our trade and other receivables. Further discussion on these items are set out in the section Financial information Net current assets below. Cash flows from investing activities Our cash inflow from investing activities primarily includes cash generated from disposal of property, plant and equipment, whereas our cash outflow from investing activities primarily include cash used in the purchase of property, plant and equipment. For FY2013, we recorded net cash used in investing activities of approximately HK$2.6 million, which was primarily attributable to cash used in our purchase of property, plant and equipment of approximately HK$2.7 million (including mainly leasehold improvement, furniture, fixtures and office equipment, and motor vehicles); slightly offset by cash generated from our disposal of a motor vehicle of approximately HK$130,000. For FY2014, we recorded net cash used in investing activities of approximately HK$1.2 million, which was primarily attributable to cash used in our purchase of property, plant and equipment of approximately HK$1.3 million (including mainly leasehold improvement, furniture, fixtures and office equipment, and motor vehicles); slightly offset by cash generated from our disposal of a motor vehicle of approximately HK$119,000. Cash flows from financing activities During the Track Record Period, our cash flows from financing activities primarily includes cash outflow due to repayment of bank borrowing and finance leases as well as payment of interest expenses. For FY2013, we recorded net cash used in financing activities of approximately HK$589,000, which was primarily attributable to cash used in the repayment of bank borrowing of approximately HK$348,000, repayment of finance lease of approximately HK$60,000, interest paid on bank borrowing of approximately HK$179,000, and interest paid on finance lease of approximately HK$2,000. For FY2014, we recorded net cash used in financing activities of approximately HK$526,000, which was primarily attributable to cash used in the repayment of bank borrowing of approximately HK$358,000 and interest paid on bank borrowing of approximately HK$168,

204 FINANCIAL INFORMATION CAPITAL EXPENDITURES Our capital expenditures primarily consisted of leasehold improvement, purchase of furniture, fixtures and office equipment, and purchase of motor vehicles. We plan to finance future capital expenditures primarily through cash flows generated from our operations. For each of FY2013 and FY2014, we incurred capital expenditures of approximately HK$2.7 million and HK$1.7 million respectively as set out below: FY2013 HK$ 000 FY2014 HK$ 000 Leasehold properties Leasehold improvements 1,801 9 Furniture, fixtures and office equipment 676 1,085 Motor vehicles ,716 1,717 WORKING CAPITAL Our Directors are of the opinion that, taking into consideration our internal resources and the estimated net proceeds from the Placing, we have sufficient working capital for our present requirements for at least 12 months from the date of this prospectus. 198

205 FINANCIAL INFORMATION NET CURRENT ASSETS The following table sets forth the breakdown of our Group s current assets and liabilities as at the dates indicated: As at 31 July 2013 As at 31 July 2014 As at 31 October 2014 HK$ 000 HK$ 000 HK$ 000 (unaudited) Current assets Trade and other receivables 7,553 16,488 16,313 Amounts due from customers for contract work 7,312 Amount due from a shareholder 10,710 28,313 Cash and cash equivalents 5,089 7,724 18,731 Total current assets 23,352 52,525 42,356 Current liabilities Trade and other payables 1,489 2,885 11,372 Amounts due to customers for contract work 1,779 Borrowings 5,996 5, Tax payable 2,138 6,478 8,801 Total current liabilities 11,402 15,221 20,396 Net current assets 11,950 37,304 21,960 As at 31 July 2013, we recorded net current assets of approximately HK$12.0 million. The key components of our current assets as at 31 July 2013 included amount due from a shareholder (i.e. Dr. Li) of approximately HK$10.7 million, trade and other receivables of approximately HK$7.6 million, and cash and cash equivalents of approximately HK$5.1 million. The key components of our current liabilities as at 31 July 2013 included borrowings of approximately HK$6.0 million, tax payable of approximately HK$2.1 million, amounts due to customers for contract work of approximately HK$1.8 million, and trade and other payables of approximately HK$1.5 million. As at 31 July 2014, we recorded net current assets of approximately HK$37.3 million. The key components of our current assets as at 31 July 2014 included amount due from a shareholder (i.e. Dr. Li) of approximately HK$28.3 million, trade and other receivables of approximately HK$16.5 million, and cash and cash equivalents of approximately HK$7.7 million. The key components of our current liabilities as at 31 July 2014 included borrowings of approximately HK$5.9 million, tax payable of approximately HK$6.5 million, and trade and other payables of approximately HK$2.9 million. 199

206 FINANCIAL INFORMATION The increase in our net current assets as at 31 July 2014 compared to that as at 31 July 2013 was mainly due to the increase in our current assets (including cash and cash equivalents, trade and other receivables and cash advance from our Group to Dr. Li) as a result of our business growth in FY2014. Further discussion of the fluctuations in the key components of our net current assets is set forth in the paragraphs below. As at 31 October 2014, being the latest practicable date for ascertaining our net current assets position, we recorded net current assets of approximately HK$22.0 million. The decrease in our net current assets as at 31 October 2014 compared to that as at 31 July 2014 was mainly due to the combined effect of (i) the declaration and payment of interim dividends to Dr. Li, resulting in the decrease in amount due from a shareholder from approximately HK$28.3 million as at 31 July 2014 to nil as at 31 October 2014, which was partially offset by (ii) the increase in cash and cash equivalents generated from our profitable operations. Trade and other receivables Overview Our trade and other receivables as at 31 July 2013 and 2014 amounted to approximately HK$7.6 million and HK$16.5 million respectively, details of which are set out below: As at 31 July 2013 HK$ 000 As at 31 July 2014 HK$ 000 Trade receivables 7,341 15,430 Other receivables, deposits and prepayments 212 1,058 7,553 16,488 Our trade receivables increased from approximately HK$7.3 million as at 31 July 2013 to approximately HK$15.4 million as at 31 July 2014, representing an increase of approximately 110.2%. Such significant increase was primarily due to the combined effect of (i) our business growth as evidenced by our increase in revenue by approximately 38.8% in FY2014 as compared to FY2013; (ii) invoices amounting to approximately HK$5.3 million being issued to customers in the second half of July 2014 as a result of the completion of several projects during the month. Other receivables, deposits and prepayments increased from approximately HK$0.2 million as at 31 July 2013 to approximately HK$1.1 million as at 31 July 2014, representing an increase of approximately 399.1%. Such significant increase was primarily due to the deposits and prepayments arising from the lease of office premises with the relevant tenancy agreements entered into in July 2014 as well as the prepayments for leasehold improvement works for the leased office premises. As at 31 July 2013 and 2014, we recorded no retention receivables. This was because (i) in respect of the contracting projects in progress as at 31 July 2013, there were no retention clauses in the relevant agreements with our customers; and (ii) in respect of the contracting project in progress as at 31 July 2014, we had just completed changing the engineering designs but the relevant site works had not commenced as at 31 July

207 FINANCIAL INFORMATION Trade receivables turnover days The following table sets out our trade receivables turnover days during the Track Record Period: As at 31 July 2013 As at 31 July 2014 Trade receivables turnover days (note) 40.0 days 65.5 days Note: Trade receivables turnover days is calculated based on the average of the beginning and ending balance of trade receivables (not including other receivables, deposits and prepayments) divided by revenue during the year, then multiplied by the number of days of the year (i.e. 365 days for a full year). Our trade receivables turnover days increased from approximately 40.0 days as at 31 July 2013 to approximately 65.5 days as at 31 July Such increase was mainly due to the invoices amounting to approximately HK$5.3 million being issued to customers in the second half of July 2014 as a result of the completion of several projects during the month, leading to a substantial increase in our trade receivables balance as at 31 July Ageing analysis and subsequent settlement In general, we do not grant credit period to our customers and our invoices are immediately due when issued to customers. As at 31 July 2013 and 2014, all of our trade receivables (being approximately HK$7.3 million as at 31 July 2013 and approximately HK$15.4 million as at 31 July 2014) were past due but not impaired. Long-overdue payments (generally meaning trade receivables that remain outstanding for more than 30 days after our date of invoice) are monitored continuously and evaluated on a case-by-case basis as to the appropriate follow-up actions having regard to the customer s normal payment processing procedures, our relationship with the customer, its history of making payments to us, its financial position as well as the general economic environment. During the Track Record Period, our follow-up actions for recovering long-overdue payments included written payment reminders and active communications with the customers. Other actions included refraining from accepting new projects from customers with long-overdue payments. The ageing analysis of the trade receivables based on invoice date is as follows: As at 31 July 2013 HK$ 000 As at 31 July 2014 HK$ days 5,484 10, days 1,100 2, days days 497 2,886 7,341 15,

208 FINANCIAL INFORMATION Our trade receivables aged between 91 days and 365 days increased significantly from approximately HK$497,000 as at 31 July 2013 to approximately HK$2,886,000 as at 31 July 2014, which was mainly due to the combined effect of (i) our business growth as evidenced by our increase in revenue by approximately 38.8% in FY2014 as compared to FY2013; and (ii) the late payment of one of our customers with trade receivables attributable to it amounting to approximately HK$1.8 million as at 31 July The holding company of such customer was in the process of applying for listing on the Stock Exchange in FY2014 and was listed on the main board of the Stock Exchange in the second half of September In mid-september (shortly before it was listed), such customer had settled approximately HK$560,000 of the outstanding trade receivables balance with us. In late September (shortly after it was listed), such customer had fully settled all remaining trade receivables balance with us. Up to 31 October 2014, approximately 94.9% of our trade receivables as at 31 July 2014 had been settled: Trade receivables as at 31 July 2014 Subsequent settlement up to 31 October 2014 HK$ 000 HK$ 000 % 0-30 days 10,299 10, % days 2,105 1, % days % days 2,886 2, % 15,430 14, % We determine provision for impairment of trade receivables on a case-by-case basis having regard to a number of factors, including the ageing of the receivables balance, results of follow-up procedures, our relationship with the customer, its history of making payments to us, its financial position as well as the general economic environment. No provision for impairment loss was recognised in respect of our trade receivables because our Directors are of the view that all trade receivables can be recovered having taken into account, among other factors, that: (i) with respect to trade receivables aged between 0 and 90 days as at 31 July 2014, our Directors consider that the subsequent settlement rates as shown in the above table are in good standing and that the amounts that remain outstanding are recoverable; and (ii) with respect to trade receivables aged between 91 and 365 days, we had actively followed up with the relevant customers and our Directors consider that such trade receivables are recoverable having regard to our relationship with the relevant customers, their business scale and their past payment records. Specifically, with respect to the approximately 202

209 FINANCIAL INFORMATION HK$500,000 that were aged between 91 and 365 days as at 31 July 2014 and that remained outstanding as at 31 October 2014, such amount was aged about 6.5 months as at 31 July 2014 and was due from a construction contractor headquartered in Hong Kong which is jointly owned by a diversified business group operating primarily in Asia and listed on the London Stock Exchange as well as an international infrastructure group operating in over 80 countries around the world and also listed on the London Stock Exchange. Our Directors confirm that there were no disputes from such customer on the outstanding amounts payable to us. In view of the lack of timely responses to our follow-up actions from such customer, further active follow-up actions, including written payment reminders and active communications with it, will continue until full settlement of the outstanding balance. Trade and other payables Our trade and other payables amounted to approximately HK$1.5 million and HK$2.9 million as at 31 July 2013 and 2014 respectively, a breakdown of which is as follows: As at 31 July 2013 HK$ 000 As at 31 July 2014 HK$ 000 Trade payables 275 1,369 Accruals and other payables 1,214 1,516 1,489 2,885 Trade payables mainly represent amounts payable to suppliers such as subcontracting charges, fees for external consultancy services, and fees for external drafting services. Accruals and other payables mainly consist of accruals for (i) staff salaries and allowances; and (ii) utilities. Trade payables increased significantly from approximately HK$0.3 million as at 31 July 2013 to approximately HK$1.4 million as at 31 July 2014, representing an increase of approximately 397.8%. Such increase was mainly because we completed a contracting project in July 2014 and our subcontractor in respect of the project issued invoice to us on 31 July 2014 amounting to approximately HK$975,

210 FINANCIAL INFORMATION Payment terms granted by suppliers to us are generally 30 days from the invoice date of the relevant purchases. The following table sets out the ageing analysis of trade payables based on invoice date as at each reporting date: As at 31 July 2013 HK$ 000 As at 31 July 2014 HK$ days 273 1, days ,369 Up to 31 October 2014, 100% of our trade payables as at 31 July 2014 had been settled. The following table sets out our trade payables turnover days during the Track Record Period: As at 31 July 2013 As at 31 July 2014 Trade payables turnover days (note) 3.0 days 13.8 days Note: Trade payables turnover days is calculated based on the average of the beginning and ending balance of trade payables divided by cost of sales for the year, then multiplied by the number of days of the year (i.e. 365 days for a full year). Our trade payables turnover days increased from approximately 3.0 days as at 31 July 2013 to approximately 13.8 days as at 31 July 2014 mainly because we completed a contracting project in July 2014 and our subcontractor in respect of the project issued invoice to us on 31 July 2014 amounting to approximately HK$975,000, leading to a substantial increase in our trade payables as at 31 July Nevertheless, the calculation of our trade payables turnover days may not be meaningful because: (i) the most significant component of our cost of sales was our staff costs, while our costs incurred in respect of suppliers of other goods and services required for our operations were not significant as compared to our staff costs; and (ii) accruals for staff costs are not included in our trade payables (the numerator for calculating the trade payables turnover days) but a major component of the cost of sales (the denominator) is our staff costs. 204

211 FINANCIAL INFORMATION Amount due from a shareholder Amount due from a shareholder represents amount due from Dr. Li to our Group for Dr. Li s personal use. Such amount was unsecured, non-interest bearing and had no fixed terms of repayment. Such amount has been fully settled in September 2014, partly by Dr. Li s cash repayment to our Group and partly by our declaration and payment of interim dividends to Dr. Li in September 2014, offsetting the balance of the amount due from Dr. Li. Amounts due to/from customers for contract work Amount due to customers for contract work represents construction contracts in progress where our progress billings exceed costs incurred plus recognised profits. Conversely, if costs incurred plus recognised profits exceed progress billings, an amount due from customers for contract work will be recognised as our current assets. The following table sets forth our contracts costs incurred plus recognised profits and our progress billings as at the dates indicated: As at 31 July 2013 HK$ 000 As at 31 July 2014 HK$ 000 Contract costs incurred plus recognised profits 7,072 Less: progress billings 8,851 (1,779) As at 31 July 2014, we had no amounts due to or from customers for contract work recorded on our balance sheet because: (i) among the 3 contracting projects that had revenue contribution to us in FY2014 (see Business Our services Projects undertaken during the Track Record Period Contracting projects in this prospectus), 2 projects had been completed prior to 31 July 2014 and only one remained in progress as at 31 July 2014; and (ii) for the contracting project that remained in progress as at 31 July 2014, we had just completed changing the engineering designs but the relevant construction works had not commenced at work site as at 31 July

212 FINANCIAL INFORMATION INDEBTEDNESS The following table sets forth our Group s indebtedness as at the dates indicated: As at 31 July 2013 As at 31 October 2014 As at 31 July 2014 HK$ 000 HK$ 000 HK$ 000 (unaudited) Current: Borrowings - Bank borrowing 5,996 5,638 - Finance lease liabilities ,996 5, Non-current: Borrowings - Finance lease liabilities ,996 6, Bank borrowing Our bank borrowing refer to a mortgage loan denominated in HK$ which was obtained for the purchase of our owned property located at Units A, B and C on 7th Floor and Lavatory, Sun Kwong Industrial Building, Tung Chau West Street, Kowloon, Hong Kong. Such bank borrowing will mature until 2027 and bear interest at 2.5% per annum above three-month Hong Kong Interbank Offered Rate (also known as HIBOR ). Such bank borrowing was secured by: (a) our owned property with an aggregate net book value of approximately HK$12,768,000 and HK$12,395,000 as at 31 July 2013 and 2014 respectively; and (b) personal guarantee given by Dr. Li as at 31 July 2013 and In October 2014, we have fully repaid such bank borrowing, which was financed by the repayment of amount due from Dr. Li to us. After full repayment of such bank borrowing, the aforementioned personal guarantee given by Dr. Li has been released and we no longer have any outstanding bank borrowing or any unutilised banking facilities. 206

213 FINANCIAL INFORMATION Our Directors confirm that we have not experienced any difficulty in obtaining credit facilities during the Track Record Period and up to the Latest Practicable Date. In addition, our Directors do not expect to encounter any difficulties in obtaining credit facilities in the future having considered (i) our ability to obtain bank borrowings during the Track Record Period; (ii) our profitable operations during the Track Record Period; and (iii) our possession of an owned property located at Units A, B and C on 7th Floor and Lavatory, Sun Kwong Industrial Building, Nos Tung Chau West Street, Kowloon which was no longer subject to any mortgage after the aforesaid full repayment of the bank borrowing and which had a market value of approximately HK$16,300,000 as at 31 October 2014 as disclosed in Appendix III to this prospectus. Our bank borrowing is classified as current liabilities according to the HK Interpretation 5, Presentation of Financial Statements Classification by the Borrower of a Term Loan that Contains a Repayment on Demand Clause issued by the HKICPA. According to the repayment schedule, the bank borrowing is repayable as follows: As at 31 July 2013 As at 31 October 2014 As at 31 July 2014 HK$ 000 HK$ 000 HK$ 000 (unaudited) Within 1 year Between 1 and 2 years Between 2 and 5 years 1,171 1,204 Over 5 years 4,098 3,686 5,996 5,638 Finance lease liabilities Our finance lease liabilities are related to the purchase of our motor vehicles by way of finance lease arrangements, under which our finance lease providers purchased certain motor vehicles from motor vehicle providers and leased back those motor vehicles to our Group at stipulated monthly rents in fixed terms. Under such arrangements, we were given the options to purchase the motor vehicles at a nominal amount at the end of the lease term. 207

214 FINANCIAL INFORMATION The carrying amounts of all finance lease liabilities are denominated in HK$. The following table sets forth details of our finance lease liabilities as at the dates indicated: As at 31 July 2013 As at 31 October 2014 As at 31 July 2014 HK$ 000 HK$ 000 HK$ 000 (unaudited) Gross finance lease liabilities - minimum lease payments Within 1 year Later than 1 year and no later than 2 years Future finance charges on finance leases (15) (10) Present value of finance lease liabilities The present value of our finance lease liabilities is as follows: As at 31 July 2013 As at 31 October 2014 As at 31 July 2014 HK$ 000 HK$ 000 HK$ 000 (unaudited) Within 1 year Later than 1 year and no later than 2 years Our finance lease liabilities are secured by our motor vehicles with an aggregate net book value of nil, approximately HK$360,000 and approximately HK$337,000 as at 31 July 2013 and 2014 and 31 October 2014 respectively. Commitments Our commitments relate to (a) capital commitments in relation to leasehold improvement works at our office premises that were contracted but not provided for in our financial statements; and (b) future minimum lease payments under non-cancellable operating leases in respect of the lease of property for our office use as well as the lease of printing machines. 208

215 FINANCIAL INFORMATION (a) Capital commitments Capital commitments outstanding as at the dates indicated that were not provided for in our financial statements were as follows: As at 31 July 2013 As at 31 October 2014 As at 31 July 2014 HK$ 000 HK$ 000 HK$ 000 (unaudited) Contracted but not provided for: Property, plant and equipment 782 (b) Operating lease commitments our Group as lessee Our total future minimum lease payments under non-cancellable operating leases as at the dates indicated were payable as follows: As at 31 July 2013 As at 31 October 2014 As at 31 July 2014 HK$ 000 HK$ 000 HK$ 000 (unaudited) Not later than 1 year 1,462 1, years 3,209 3,057 4,671 4,519 As at 31 July 2014 and 31 October 2014, our Group was the lessee in respect of (i) a property located at Office A and B, 12th Floor, Billion Plaza 2, No. 10 Cheung Yue Street, Kowloon, Hong Kong for our office use; and (ii) certain printing machines for the printing of technical drawings as well as daily office use. The leases run for an initial period of 3 to 5 years, with an option to renew where all terms are to be renegotiated. Contingent liabilities We had no significant contingent liabilities as at 31 July 2013 and 2014 and 31 October Disclaimer Save as disclosed above in this section Financial information Indebtedness, we did not have, at the close of business on 31 October 2014, any loan capital issued and outstanding or agreed to be issued, bank overdrafts, loans or other similar indebtedness, liabilities under acceptances or acceptance credits, debentures, mortgages, charges, hire purchase commitments, guarantees or other material contingent liabilities. 209

216 FINANCIAL INFORMATION Our Directors confirm that there has not been any material adverse change in our indebtedness since 31 October 2014 and up to the date of this prospectus. Our Directors confirm that (i) our Group has not experienced any difficulty in obtaining bank borrowing or any default in payment on bank borrowing or any breach of finance covenants during the Track Record Period and up to the Latest Practicable Date; (ii) there has not been any material change in our indebtedness and contingent liabilities since 31 October 2014 and up to the date of this prospectus; (iii) our Directors are not aware of any material defaults in payment of our trade and non-trade payables and bank borrowing during the Track Record Period and up to the Latest Practicable Date; (iv) our bank borrowing are subject to standard banking conditions; and (v) our Group has not received any notice from banks indicating that they might withdraw or downsize our banking facilities and none of our Group s banking facilities is subject to the fulfillment of covenants relating to financial ratio requirements or any other material covenants which would adversely affect our Group s ability to undertake additional debt or equity financings. Our Directors further confirm that we had not experienced any material defaults of trade receivables (i.e. trade receivables that were considered to be non-recoverable) or cancellation of orders by our customers during the Track Record Period and up to the Latest Practicable Date. PROPERTY INTERESTS AND PROPERTY VALUATION Asset Appraisal Limited, an independent property valuer, has valued our property interests as of 31 October 2014 and is of the opinion that the aggregate value of our property interests as of such date was HK$16,300,000. The full text of the letter and the valuation certificate issued by Assets Appraisal Limited are set out in Appendix III to this prospectus. The table below shows a reconciliation of the amount of our property interests as reflected in our combined financial information as at 31 July 2014 as set out in Appendix I to this prospectus with the valuation of these properties as at 31 October 2014 as set out in Appendix III to this prospectus: HK$ 000 Net book value of the properties as at 31 July Leasehold properties 12,395 Less: Movements for the three months ended 31 October Depreciation and amortization (93) Net book value of the properties as at 31 October ,302 Net valuation surplus 3,998 Valuation as at 31 October ,

217 FINANCIAL INFORMATION OFF-BALANCE SHEET ARRANGEMENTS AND COMMITMENTS As at the Latest Practicable Date, we did not have any off-balance sheet arrangements or commitments. KEY FINANCIAL RATIOS As at/for the year ended 31 July Revenue growth N/A 38.8% Net profit growth N/A 39.3% Gross profit margin 62.7% 65.8% Net profit margin before interest and tax 47.4% 47.4% Net profit margin 39.2% 39.4% Return on equity 64.3% 47.2% Return on assets 45.6% 36.6% Current ratio Quick ratio Inventories turnover days N/A N/A Trade receivables turnover days Trade payables turnover days Gearing ratio Net debt to equity ratio 0.0 Net cash Interest coverage Revenue growth Our revenue increased from approximately HK$45.7 million for FY2013 to approximately HK$63.4 million for FY2014, representing an increase of approximately 38.8%. Please refer to the section Financial information Period-to-period comparison of results of operations above for the reasons for the increase in our revenue. Net profit growth Our profit and total comprehensive income for the year attributable to owners of our Company increased from approximately HK$17.9 million for FY2013 to approximately HK$25.0 million for FY2014, representing an increase of approximately 39.3%. Please refer to the section Financial information Period-to-period comparison of results of operations above for the reasons for the increase in our net profit. 211

218 FINANCIAL INFORMATION Gross profit margin Gross profit margin is calculated as gross profit divided by revenue of the respective reporting year. Our gross profit margin was approximately 62.7% for FY2013 and approximately 65.8% for FY2014, representing an increase of approximately 3.1%. Please refer to the section Financial information Period-to-period comparison of results of operations above for the reasons for the increase in our gross profit margin. Net profit margin before interest and tax Net profit margin before interest and tax is calculated as profit before finance costs and income tax divided by revenue of the respective year. Our net profit margin before interest and tax was approximately 47.4% for FY2013 and approximately 47.4% for FY2014, which remained relatively stable. Despite our higher gross profit margin in FY2014 than in FY2013, the non-recurring Listing expenses of approximately HK$4.0 million incurred in FY2014 (compared to nil in FY2013) led to our relatively stable net profit margin before interest and tax. Net profit margin Net profit margin is calculated as profit for the year attributable to owners of our Company divided by revenue of the respective year. Our net profit margin was approximately 39.2% for FY2013 and approximately 39.4% for FY2014, which remained relatively stable. Similar to the reason for our relatively stable net profit margin before interest and tax, our relatively stable net profit margin was mainly attributable to the combined effect of our higher gross profit margin and the non-recurring Listing expenses of approximately HK$4.0 million incurred in FY2014 (compared to nil in FY2013). Return on equity Return on equity is calculated as profit for the year attributable to owners of our Company divided by the ending total equity as at the respective reporting date. Our return on equity was approximately 64.3% for FY2013 and approximately 47.2% for FY2014, representing a decrease of approximately 17.1%. Such decrease was mainly due to: (a) our equity base as at 31 July 2014 (of approximately HK$52.8 million) being significantly higher than that as at 31 July 2013 (of approximately HK$27.9 million) as a result of our profitable operation; and 212

219 FINANCIAL INFORMATION (b) a significant portion of our cash generated from our profitable operation was advanced from us to Dr. Li during FY2014 for his personal use and was not put in use to further grow our business operations. Return on assets Return on assets is calculated as profit for the year attributable to owners of our Company divided by the ending total assets as at the respective reporting date. Our return on assets was approximately 45.6% for FY2013 and approximately 36.6% for FY2014, representing a decrease of approximately 9.0%. Such decrease was mainly due to: (a) our significantly higher amount of total assets as at 31 July 2014 (of approximately HK$68.2 million) than as at 31 July 2013 (of approximately HK$39.3 million) in the form of amount due from a shareholder (i.e. Dr. Li), trade and other receivables and cash and cash equivalents, as a result of our profitable operation; and (b) a significant portion of our cash generated from our profitable operation was advanced from us to Dr. Li during FY2014 for his personal use and was not put in use to further grow our business operations. Current ratio Current ratio is calculated as current assets divided by current liabilities as at the respective reporting date. Our current ratio was approximately 2.0 as at 31 July 2013 and approximately 3.5 as at 31 July 2014, representing an increase of approximately 68.5%. Such increase was mainly due to: (a) our significantly higher amount of current assets as at 31 July 2014 (of approximately HK$52.5 million) than as at 31 July 2013 (of approximately HK$23.4 million) in the form of amount due from a shareholder (i.e. Dr. Li), trade and other receivables and cash and cash equivalents, as a result of our profitable operation; and (b) our current liabilities having increased proportionally less than the increase in our current assets because a substantial component of our current liabilities was borrowings, which decreased as at 31 July 2014 as compared to that as at 31 July 2013 as we were not in need of any material debt financing during the Track Record Period in view of the cash flows generated from our profitable operation. Quick ratio Quick ratio is calculated as current assets minus inventories, then divided by current liabilities as at the respective reporting date. 213

220 FINANCIAL INFORMATION Due to our business nature, we did not have any inventories during the Track Record Period. As such, our quick ratio is the same as our current ratio. Inventories turnover days Due to our business nature, we did not have any inventories during the Track Record Period. As such, analysis of inventories turnover days is not applicable. Trade receivables turnover days Trade receivables turnover days is calculated based on the average of the beginning and ending balance of trade receivables divided by revenue during the year, then multiplied by the number of days of the year (i.e. 365 days for a full year). Our trade receivables turnover days increased from approximately 40.0 days as at 31 July 2013 to approximately 65.5 days as at 31 July Please refer to the section Financial information Net current assets Trade and other receivables above for the reasons for the increase in our trade receivables turnover days. Trade payables turnover days Trade payables turnover days is calculated based on the average of the beginning and ending balance of trade payables divided by cost of sales for the year, then multiplied by the number of days of the year (i.e. 365 days for a full year). Our trade payables turnover days increased from approximately 3.0 days as at 31 July 2013 to approximately 13.8 days as at 31 July Please refer to the section Financial information Net current assets Trade and other payables above for the reasons for the increase in our trade payables turnover days. Gearing ratio Gearing ratio is calculated as total borrowings divided by the total equity as at the respective reporting date. Our gearing ratio was approximately 0.2 as at 31 July 2013 and approximately 0.1 as at 31 July 2014, which remained low and showed a slight decrease. Such decrease was mainly due to: (a) our slight decrease in total borrowings as we were not in need of any material debt financing during the Track Record Period in view of the cash flows generated from our profitable operation; and 214

221 FINANCIAL INFORMATION (b) our significantly higher equity base as at 31 July 2014 (of approximately HK$52.8 million) than as at 31 July 2013 (of approximately HK$27.9 million) as a result of our profitable operation. Net debt to equity ratio Net debt to equity ratio is calculated as net debts (i.e. payables incurred not in the ordinary course of business net of cash and cash equivalents) divided by total equity as at the respective reporting date. Our net debt to equity ratio was close to zero as at 31 July 2013 and we were in a net cash position as at 31 July Such change was mainly due to: (a) our slight decrease in total borrowings as we were not in need of any material debt financing during the Track Record Period in view of the cash flows generated from our profitable operation; and (b) our increase in cash and cash equivalents generated from our profitable operation. Interest coverage Interest coverage is calculated as profit before finance costs and income tax divided by finance costs of the respective reporting year. Our interest coverage was approximately times as at 31 July 2013 and approximately times as at 31 July 2014, which remained high and showed a substantial increase. Such increase was mainly because: (a) our finance costs decreased from approximately HK$181,000 for FY2013 to approximately HK$168,000 for FY2014 primarily as a result of the decreasing principal amount of our mortgage loan over time after each monthly repayment, coupled with relatively stable interest rates during the Track Record Period; and (b) our profit significantly increased in FY2014 as compared to that of FY2013 mainly as a result of the increase in our revenue as discussed above. FINANCIAL AND CAPITAL RISK MANAGEMENT Financial risk management Our activities exposed us to a variety of financial risks including interest rate risk, credit risk and liquidity risk. Our overall risk management programme focuses on the unpredictability of financial markets and seeks to minimise potential adverse effects on our financial performance. 215

222 FINANCIAL INFORMATION Interest rate risk Other than bank balances with variable interest rate, we have no other significant interest-bearing assets. We do not anticipate significant impact to interest-bearing assets resulted from the changes in interest rates, because the interest rates of bank balances are not expected to change significantly. Our interest rate risk arises from borrowings. Borrowings issued at variable rates expose our Group to cash flow interest rate risk which is partially offset by cash held at variable rates. We have not hedged our cash flow interest rate risks. As at 31 July 2013 and 2014, if the interest rate on all borrowings had been 100 basis points higher/lower with all other variables held constant, our profit after income tax for the year would have been decreased/increased by approximately HK$52,000 and HK$49,000 respectively, mainly as a result of higher/lower interest expense on borrowings with floating interest rates. Credit risk Credit risk arises mainly from trade and other receivables, amount due from a shareholder and cash and cash equivalents. Our maximum exposure to credit risk in the event of the counterparties failure to perform their obligations as at the reporting dates in relation to each class of recognised financial assets is the carrying amount of those assets as stated in the combined statement of financial position. The credit risk of bank balances is limited because the counterparties are banks with sound credit ratings assigned by international credit-rating agencies. In respect of trade and other receivables, individual credit evaluations are performed on all customers and counterparties. These evaluations focus on the counterparty s financial position, past history of making payments and take into account information specific to the counterparty as well as pertaining to the economic environment in which the counterparty operates. Monitoring procedures have been implemented to ensure that follow-up action is taken to recover overdue debts. In addition, we review the recoverable amount of each individual trade and other receivable balance at the end of each reporting period to ensure adequate impairment losses are made for irrecoverable amounts. As at 31 July 2013 and 2014, there were two and three customers which individually contributed over 10% of our trade and other receivables, respectively. The aggregate amount of trade and other receivables from this customer amounted to 70% and 48% of our total trade and other receivables as at 31 July 2013 and 2014 respectively. 216

223 FINANCIAL INFORMATION Liquidity risk Our policy is to regularly monitor current and expected liquidity requirements and our compliance with debt covenants, to ensure that we maintain sufficient reserves of cash and adequate committed lines of funding from banks and other financial institutions to meet our liquidity requirements in the short and long term. We believe there is no significant liquidity risk as we have sufficient internal resources to fund our operations. The following table details the remaining contractual maturities at the year end dates during the Track Record Period of our financial liabilities, which are based on contractual undiscounted cash flows (including interest payments computed using contractual rates or, if floating, based on rates current at the year end dates during the Track Record Period) and the earliest date we may be required to pay: On demand or within one year Between one and two years Between two and five years Total HK$ 000 HK$ 000 HK$ 000 HK$ 000 At 31 July 2013 Trade and other payables 1,489 1,489 Borrowings (excluding finance lease liabilities) 7,275 7,275 8,764 8,764 At 31 July 2014 Trade and other payables 2,819 2,819 Finance lease liabilities Borrowings (excluding finance lease liabilities) 6,748 6,748 9, ,973 Capital risk management Our primary objectives when managing capital are to safeguard our ability to continue as a going concern, so that we can continue to provide returns for shareholders, to support our stability and growth, to earn a margin commensurate with the level of business and market risks in our operation and to maintain an optimal capital structure to reduce the cost of capital. 217

224 FINANCIAL INFORMATION In order to maintain or adjust the capital structure, we may adjust the amount of dividends paid to shareholders, return capital to shareholders, issue new shares or sell assets to reduce debt. We monitor capital on the basis of the gearing ratio. Please refer to the section Financial information Key financial ratios above for a discussion of our gearing ratio during the Track Record Period. UNAUDITED PRO FORMA ADJUSTED NET TANGIBLE ASSETS The following unaudited pro forma financial information prepared in accordance with paragraph 7.31 of the GEM Listing Rules is for illustrative purposes only, and is set out here to provide investors with further information about how the proposed listing might have affected the net tangible assets of our Group as if the Placing had occurred on 31 July Although reasonable care has been exercised in preparing the said information, prospective investors who read the information should bear in mind that these figures are inherently subject to adjustments and may not give a complete picture of our Group s financial results and positions of the financial periods concerns. The unaudited pro forma adjusted combined net tangible assets of our Group has been prepared, on the basis of the notes set forth below, for the purpose of illustrating the effect of the Placing as if it had taken place on 31 July It has been prepared for illustrative purpose only and, because of its hypothetical nature, may not give a true picture of the financial position of our Group after the Placing or at any future dates. Audited combined net tangible assets of the Group attributable to owners of the Company as at 31 July 2014 Add: Estimated net proceeds from the placing of New Shares Unaudited pro forma adjusted net tangible assets Unaudited pro forma adjusted net tangible assets per Share HK$ 000 HK$ 000 HK$ 000 HK$ (Note 1) (Note 2) (Note 3) Based on the Placing Price of HK$0.60 per Share 52,830 26,152 78, Notes: 1. The audited combined net tangible assets of our Group attributable to owners of our Company as at 31 July 2014 is extracted from the accountants report set out in Appendix I to this prospectus. 2. The estimated net proceeds from the placing of New Shares are based on the Placing Price of HK$0.60 per Share, after deduction of relevant estimated underwriting fees and other related fees and expenses to be borne by us (excluding approximately HK$4.0 million listing-related expenses which have been accounted for prior to 31 July 2014). 218

225 FINANCIAL INFORMATION 3. The unaudited pro forma adjusted net tangible assets per Share are determined after the adjustments as described in Notes 1 and 2 above and on the basis that 411,200,000 Shares are issued and outstanding as set out in the section headed Share Capital in this prospectus. The unaudited pro forma financial information presented above does not take account of any trading or other transactions subsequent to the date of the financial statements included in the unaudited pro forma financial information (i.e. 31 July 2014). In particular, in September 2014, interim dividends of HK$22,590,000 were declared and paid to Dr. Li. Had the effect of such interim dividends of HK$22,590,000 been taken into account, the unaudited pro forma adjusted net tangible assets per Share would become HK$0.14 (assuming Placing Price of HK$0.60 per Share) on the basis that 411,200,000 Shares were in issue and that the aforesaid payment of interim dividends, the Placing and the Capitalisation Issue had been completed on 31 July LISTING EXPENSES Our Directors estimate that the total amount of expenses in relation to the Listing is approximately HK$17.3 million. Our Company and the Selling Shareholder will each bear half of the listing expenses. Of the amount of approximately HK$8.7 million to be borne by us, approximately HK$2.7 million is directly attributable to the issue of the Placing Shares and is expected to be accounted for as a deduction from equity upon Listing. The remaining amount of approximately HK$6.0 million, which cannot be so deducted, will be charged to profit or loss. Of the approximately HK$6.0 million that will be charged to profit or loss, nil and approximately HK$4.0 million have been charged during each of FY2013 and FY2014 respectively, and approximately HK$2.0 million is expected to be incurred for the year ending 31 July Expenses in relation to the Listing are non-recurring in nature. We do not expect that the listing expenses to be recognised will have a material adverse impact on our net profit for the year ending 31 July DIVIDEND POLICY For FY2013 and FY2014, we did not declare any dividends to our then shareholder. In September 2014, we declared interim dividends in the aggregate amount of HK$22,590,000 to Dr. Li. All dividends declared had been fully paid in September 2014 and we financed the payment of such dividends by offsetting an equivalent amount due from Dr. Li. The declaration and payment of future dividends will be subject to the decision of the Board having regard to various factors, including but not limited to our operation and financial performance, profitability, business development, prospects, capital requirements, and economic outlook. It is also subject to the approval of our Shareholders as well as any applicable laws. The historical dividend payments may not be indicative of future dividend trends. We do not have any predetermined dividend payout ratio. 219

226 FINANCIAL INFORMATION DISTRIBUTABLE RESERVES As at 31 July 2014, our aggregate amount of distributable reserves was approximately HK$52,810,000. RELATED PARTY TRANSACTIONS We did not have any significant related party transactions during the Track Record Period save as the amount due from Dr. Li and the personal guarantee given by Dr. Li in our favour for securing our banking facilities. Please refer to the section Financial information Indebtedness above and note 24 to the accountants report set forth in Appendix I to this prospectus for further information. DISCLOSURE REQUIRED UNDER THE GEM LISTING RULES Our Directors confirmed that, as at the Latest Practicable Date, they were not aware of any circumstances which, had they been required to comply with Rules to of the GEM Listing Rules, would have given rise to a disclosure requirement under Rules to of the GEM Listing Rules. NO MATERIAL ADVERSE CHANGE Our Directors confirm that, up to the date of this prospectus, there has been no material adverse change in our financial or trading position or prospects since 31 July 2014, and there is no event since 31 July 2014 which would materially affect the information shown in our combined financial information included in the accountants report set forth in Appendix I to this prospectus. 220

227 FUTURE PLANS AND USE OF PROCEEDS BUSINESS OBJECTIVES AND STRATEGIES Please refer to the section Business Business strategies in this prospectus for our Group s business objectives and strategies. IMPLEMENTATION PLAN Our Group s implementation plans are set forth below for each of the six-month periods until 31 July Investors should note that the implementation plans and their scheduled times for attainment are formulated on the bases and assumptions referred to in the sub-section headed Bases and assumptions below. These bases and assumptions are inherently subject to many uncertainties, variables and unpredictable factors, in particular the risk factors set out in the section Risk factors in this prospectus. Our Group s actual course of business may vary from the business objective set out in this prospectus. There can be no assurance that the plans of our Group will materialise in accordance with the expected time frame or that the objective of our Group will be accomplished at all. Based on our Group s business objective, our Directors intend to carry out the following implementation plans: From the Latest Practicable Date to 31 July 2015 Business strategy Use of proceeds Implementation plan Further developing our contracting business Further strengthening our in-house team of engineering staff HK$5.0 million Undertake more geotechnical engineering projects for our contracting business should we be able to identify and secure suitable business opportunities, with HK$5.0 million earmarked for satisfying potential customers requirements for surety bonds HK$1.4 million Recruit 2 additional middle to senior level engineering staff to cope with our business development and our plan to further develop our contracting business Continue to sponsor our engineering staff to attend technical seminars and occupational health and safety courses organised by third parties 221

228 FUTURE PLANS AND USE OF PROCEEDS Business strategy Use of proceeds Implementation plan Developing more efficient in-house computer programs HK$0.8 million Upgrade our engineering computer programs by purchasing new software from third-party providers Recruit 1 information technology officer to develop in-house engineering computer programs and to continuously maintain and refine such computer programs From 1 August 2015 to 31 January 2016 Business strategy Use of proceeds Implementation plan Further developing our contracting business Further strengthening our in-house team of engineering staff HK$5.0 million Undertake more geotechnical engineering projects for our contracting business should we be able to identify and secure suitable business opportunities, with an additional HK$5.0 million earmarked for satisfying potential customers requirements for surety bonds HK$0.9 million sponsor our engineering staff to attend technical seminars and occupational health and safety courses organised by third parties Organise our own technical seminars as part of our marketing activities while allowing our engineering staff to participate and enhance their technical competence Developing more efficient in-house computer programs HK$0.3 million Develop in-house engineering computer programs and continuously maintain and refine such computer programs by our information technology officer 222

229 FUTURE PLANS AND USE OF PROCEEDS From 1 February 2016 to 31 July 2016 Business strategy Use of proceeds Implementation plan Further developing our contracting business Further strengthening our in-house team of engineering staff HK$5.0 million Undertake more geotechnical engineering projects for our contracting business should we be able to identify and secure suitable business opportunities, with an additional HK$5.0 million earmarked for satisfying potential customers requirements for surety bonds HK$0.9 million Continue to sponsor our engineering staff to attend technical seminars and occupational health and safety courses organised by third parties Organise our own technical seminars as part of our marketing activities while allowing our engineering staff to participate and enhance their technical competence Developing more efficient in-house computer programs HK$0.3 million Develop in-house engineering computer programs and continuously maintain and refine such computer programs by our information technology officer From 1 August 2016 to 31 January 2017 Business strategy Use of proceeds Implementation plan Further developing our contracting business Further strengthening our in-house team of engineering staff Undertake more geotechnical engineering projects for our contracting business should we be able to identify and secure suitable business opportunities HK$0.9 million Continue to sponsor our engineering staff to attend technical seminars and occupational health and safety courses organised by third parties Organise our own technical seminars as part of our marketing activities while allowing our engineering staff to participate and enhance their technical competence 223

230 FUTURE PLANS AND USE OF PROCEEDS Business strategy Use of proceeds Implementation plan Developing more efficient in-house computer programs HK$0.3 million Develop in-house engineering computer programs and continuously maintain and refine such computer programs by our information technology officer From 1 February 2017 to 31 July 2017 Business strategy Use of proceeds Implementation plan Further developing our contracting business Further strengthening our in-house team of engineering staff Undertake more geotechnical engineering projects for our contracting business should we be able to identify and secure suitable business opportunities HK$0.9 million Continue to sponsor our engineering staff to attend technical seminars and occupational health and safety courses organised by third parties Organise our own technical seminars as part of our marketing activities while allowing our engineering staff to participate and enhance their technical competence Developing more efficient in-house computer programs HK$0.3 million Develop in-house engineering computer programs and continuously maintain and refine such computer programs by our information technology officer BASES AND ASSUMPTIONS The business objectives set out by our Directors are based on the following bases and assumptions: our Group will have sufficient financial resources to meet the planned capital expenditure and business development requirements during the period to which our future plans relate; there will be no material change in the funding requirement for each of our Group s future plans described in this prospectus from the amount as estimated by our Directors; there will be no material change in existing laws and regulations, or other governmental policies relating to our Group, or in the political, economic or market conditions in which our Group operates; 224

231 FUTURE PLANS AND USE OF PROCEEDS there will be no material changes in the bases or rates of taxation applicable to the activities of our Group; there will be no disasters, natural, political or otherwise, which would materially disrupt the businesses or operations of our Group; and our Group will not be materially affected by the risk factors as set out under the section headed Risk factors in this prospectus. REASONS FOR THE PLACING The Placing will enhance our Group s capital base and provide our Group with additional capital to implement the future plans set out in the paragraph headed Implementation plan above. USE OF PROCEEDS The net proceeds to be received by us from the Placing based on the Placing Price of HK$0.60 per Share, after deducting related expenses to be borne by us, are estimated to be approximately HK$22.2 million. Our Directors presently intend that the net proceeds will be applied as follows: approximately HK$15.0 million (approximately 67.6% of the net proceeds), HK$5.0 million (approximately 22.5% of the net proceeds) and HK$2.0 million (approximately 9.0% of the net proceeds) will be used for further developing our contracting business, further strengthening our in-house team of engineering staff and developing more efficient in-house computer programs respectively, with the intended timing of the deployment of the proceeds as follows: From the Latest Practicable Date to 31 July 2015 From 1 August 2015 to 31 January 2016 From 1 February 2016 to 31 July 2016 From 1 August 2016 to 31 January 2017 From 1 February 2017 to 31 July 2017 Total HK$ million HK$ million HK$ million HK$ million HK$ million HK$ million Further developing our contracting business Further strengthening our in-house team of engineering staff Developing more efficient in-house computer programs approximately HK$0.2 million (approximately 0.8% of the net proceeds) will be used as our general working capital. 225

232 FUTURE PLANS AND USE OF PROCEEDS Our Directors and the Sponsor consider that the net proceeds to be received by us from the Placing of about HK$22.2 million and our Group s internal resources will be sufficient to finance the business plans of our Group as scheduled up to 31 July To the extent that the net proceeds from the issue of the Placing Shares are not immediately required for the above purpose, it is the present intention of our Directors that such proceeds will be placed on short-term interest bearing deposits or treasury products with authorised financial institutions. We estimate that the Selling Shareholder will receive net proceeds of approximately HK$22.2 million after deduction of underwriting commissions and estimated expenses payable by the Selling Shareholder in relation to the Placing. Our Company will not receive any of the net proceeds from the sale of the Sale Shares by the Selling Shareholder. 226

233 UNDERWRITING UNDERWRITER Orient Securities Limited UNDERWRITING ARRANGEMENTS AND EXPENSES The Underwriting Agreement Pursuant to the Underwriting Agreement, our Company and the Selling Shareholder will conditionally place the Placing Shares with institutional, professional and other investors at the Placing Price subject to the terms and conditions in the Underwriting Agreement and this prospectus. Subject to, among other conditions, the Listing Division of the Stock Exchange granting the listing of and permission to deal in the Shares in issue and to be issued as mentioned in this prospectus and to certain other conditions set out in the Underwriting Agreement being fulfilled, the Underwriter has agreed to subscribe for or purchase or procure subscribers or buyers for the Placing Shares on the terms and conditions under the Underwriting Agreement and in this prospectus. Grounds for termination The Lead Manager shall have the absolute discretion to terminate the arrangements set out in the Underwriting Agreement by notice in writing given to our Company (for itself and on behalf of the Selling Shareholder) at any time prior to 8:00 a.m. (Hong Kong time) on the Listing Date, if there shall develop, occur, exist or come into effect: (a) (b) (c) (d) (e) (f) any new law or regulation or any material change in existing laws or regulations or any change in the interpretation or application thereof by any court or other competent authority in Hong Kong, the Cayman Islands, the BVI or any relevant jurisdiction; or any adverse change (whether or not permanent) in local, national or international stock market conditions; or the imposition of any moratorium, suspension or material restriction on trading in securities generally on the Stock Exchange due to exceptional financial circumstances or otherwise; or any change or development involving a prospective change in taxation or exchange control (or the implementation of any exchange control) in Hong Kong, the Cayman Islands, the BVI or any relevant jurisdiction; or any adverse change in the business or in the financial or trading position of our Group or otherwise; or any change or development (whether or not permanent), or any event or series of events resulting in any change in the financial, legal, political, economic, military, industrial, fiscal, regulatory, market (including stock market) or currency matters or condition in Hong Kong, the Cayman Islands, the BVI or any relevant jurisdiction; or 227

234 UNDERWRITING (g) a general moratorium on commercial banking business activities in Hong Kong, the Cayman Islands, the BVI or any relevant jurisdiction; or (h) any event of force majeure including but without limiting the generality thereof, any act of God, war, riot, public disorder, civil commotion, fire, flood, explosion, epidemic, terrorism, strike or lock-out, natural disaster or outbreak of infectious diseases, which in the reasonable opinion of the Lead Manager: (a) might be materially adverse to the business, financial condition or prospects of our Group taken as a whole; or (b) might have a material adverse effect on the success of the Placing or might have the effect of making any part of the Underwriting Agreement incapable of implementation or performance in accordance with its terms; or (c) makes it inadvisable or inexpedient to proceed with the Placing. Without prejudice to the above, if, at any time prior to 8:00 a.m. (Hong Kong time) on the Listing Date, it comes to the notice of the Lead Manager: (a) any breach of any of the warranties or any other provision of the Underwriting Agreement which is considered, in the reasonable opinion of the Lead Manager, to be material in the context of the Placing; or (b) any matter which, had it arisen immediately before the date of this prospectus and not having been disclosed in this prospectus and the placing letter, would have constituted a material omission in the reasonable opinion of the Lead Manager in the context of the Placing; or (c) any statement contained in this prospectus and the placing letter reasonably considered to be material by the Lead Manager which is discovered to be or becomes untrue, incorrect or misleading and in the reasonable opinion of the Lead Manager to be material in the context of the Placing; or (d) any event, act or omission which in the reasonable opinion of the Lead Manager gives rise or is likely to give rise to any material liability of any of our Company and our Controlling Shareholders pursuant to the indemnities contained in the Underwriting Agreement, the Lead Manager shall be entitled (but not bound) by notice in writing to our Company on or prior to such time to terminate the Underwriting Agreement. 228

235 UNDERWRITING Undertakings Our Company has undertaken to the Stock Exchange that no further shares or securities convertible into equity securities of our Company (whether or not of a class already listed) may be issued or form the subject of any agreement to such an issue within six (6) months from the Listing Date (whether or not such issue of shares or securities will be completed within six (6) months from the Listing Date), except for those permitted in accordance with rule subsections (1) to (5) of GEM Listing Rules. Under the Underwriting Agreement, (a) (i) each of our Controlling Shareholders and the Selling Shareholder undertakes to and covenants with our Company, the Sponsor, the Bookrunner, the Lead Manager, the Underwriter and the Stock Exchange that, save as permitted under the GEM Listing Rules, he/it shall not and shall procure that the relevant registered holders shall not: (A) in the period commencing on the date by reference to which disclosure of the shareholding of our Controlling Shareholders is made in this prospectus and ending on the date which is six months from the Listing Date (the First 6-Month Period ), sell, dispose of, nor enter into any agreement to dispose of or otherwise create any mortgage, charge, pledge, lien, option, restriction, right of first refusal, right of pre-emption, third-party right or interest, other encumbrance or security interest of any kind, or another type of preferential arrangement (including, without limitation, a title transfer or retention arrangement) having similar effect (the Encumbrances ) in respect of any of the Shares which he/it is shown in this prospectus to be the beneficial owner(s); and (B) in the period of six months commencing on the date immediately following the date on which the First 6-Month Period expires, sell, dispose of, nor enter into any agreement to dispose of or otherwise create any Encumbrances in respect of any of the Shares if, immediately following such disposal or upon the exercise or enforcement of such Encumbrances, he/it would cease to be a Controlling Shareholder, provided that the restrictions in this paragraph (i) shall not apply to any Shares which our Controlling Shareholders or any of his/its respective close associates may acquire or become interested in following the Listing Date; (ii) each of our Controlling Shareholders and the Selling Shareholder further undertakes to and covenants with our Company, the Sponsor, the Bookrunner, the Lead Manager, the Underwriter and the Stock Exchange that: (A) in the event that he/it pledges or charges any of his/its direct or indirect interest in the Shares under Rule 13.18(1) of the GEM Listing Rules or pursuant 229

236 UNDERWRITING to any right or waiver granted by the Stock Exchange pursuant to Rule 13.18(4) of the GEM Listing Rules at any time during the relevant periods specified in paragraph (i) above, he/it must inform our Company, the Sponsor, the Bookrunner, the Lead Manager and the Underwriter immediately thereafter, disclosing the details as specified in Rule 17.43(1) to (4) of the GEM Listing Rules; and (B) having pledged or charged any of his/its interests in the Shares under sub-paragraph (A) above, he/it must inform our Company, the Bookrunner, the Lead Manager and the Underwriter immediately in the event that he/it becomes aware that the pledgee or chargee has disposed of or intends to dispose of such interest and of the number of the Shares affected; and (b) our Company undertakes to and covenants with the Sponsor, the Bookrunner, the Lead Manager and the Underwriter, and each of our executive Directors, the Selling Shareholder and Controlling Shareholders jointly and severally undertakes to and covenants with the Sponsor, the Bookrunner, the Lead Manager and the Underwriter to procure that, save with the prior written consent of the Lead Manager, or save pursuant to the Capitalisation Issue, the Placing and the Share Option Scheme, our Company shall not, within the period of six months from the Listing Date: (i) (ii) save as permitted under the GEM Listing Rules (including but not limited to Rule of the GEM Listing Rules) and the applicable laws, allot or issue or agree to allot or issue any Shares or any other securities in our Company (including warrants or other convertible securities (and whether or not of a class already listed)); grant or agree to grant any options, warrants or other rights carrying any rights to subscribe for or otherwise convert into, or exchange for any Shares or any other securities of our Company; (iii) purchase any securities of our Company; or (iv) offer to or agree to do any of the foregoing or announce any intention to do so. Commission and expenses In connection with the Placing, the Underwriter will receive an underwriting commission of 2.5% of the aggregate Placing Price of all the Placing Shares, out of which they will, as the case may be, pay any sub-underwriting commissions and selling concessions. In connection with the Listing, the Sponsor will receive a sponsorship and documentation fee. In connection with the Listing and the Placing, the total expenses are estimated to be approximately HK$17.3 million (including underwriting commission, brokerage, the Stock Exchange trading fee, the SFC transaction levy, the sponsorship and documentation fee, the listing fee, legal and other professional fees, printing cost and other expenses relating to the Placing), which will be borne equally by the Company and the Selling Shareholder. 230

237 UNDERWRITING Our Company, the Selling Shareholder and the executive Directors have agreed to indemnify the Bookrunner, the Lead Manager and the Underwriter for certain losses which they may suffer, including losses incurred arising from their performance of their obligations under the Underwriting Agreement, and any breach by our Company and/or the Selling Shareholder of the Underwriting Agreement. Independence of the Sponsor The Sponsor satisfies the independence criteria applicable to sponsors set forth in Rule 6A.07 of the GEM Listing Rules. Sponsor s, Bookrunner s, Lead Manager s and Underwriter s interests in our Company The Sponsor has been appointed as the compliance adviser of our Company with effect from the Listing Date until despatch of the audited consolidated financial results for the second full financial year after the Listing Date, and our Company will pay to the Sponsor an agreed fee for its provision of services with the scope required under the GEM Listing Rules. Save for their interests and obligations under the Underwriting Agreement, the sponsorship and documentation fee payable to the Sponsor in connection with the Listing, and the fee payable to the Sponsor for its acting as our compliance adviser, none of the Sponsor, the Bookrunner, the Lead Manager and the Underwriter is interested, beneficially or otherwise, in any shares in any member of our Group or has any right (whether legally enforceable or not) or option to subscribe for or to nominate persons to subscribe for any shares in any member of our Group. 231

238 STRUCTURE AND CONDITIONS OF THE PLACING PLACING PRICE The Placing Price, being HK$0.60 per Placing Share, plus a 1% brokerage fee, a 0.005% Stock Exchange trading fee and a % SFC transaction levy make up total price payable on subscription. The Shares will be traded in board lots of 4,000 Shares each. THE PLACING Placing The Placing of 102,800,000 Placing Shares comprising 51,400,000 New Shares and 51,400,000 Sale Shares are conditionally offered by our Company and the Selling Shareholder, respectively, by way of private placements to professional, institutional and/or other investors. The Placing Shares will represent 25% of our Company s enlarged issued share capital immediately after completion of the Capitalisation Issue and the Placing. The Placing is fully underwritten by the Underwriter. Pursuant to the Placing, it is expected that the Underwriter or selling agents nominated by it, on behalf of our Company and the Selling Shareholder, will conditionally place the Placing Shares at the Placing Price (plus 1% brokerage fee, 0.005% Stock Exchange trading fee and % SFC transaction levy) with selected professional, institutional and/or other investors in Hong Kong. Professional and institutional investors generally include brokers, dealers, companies (including fund managers) whose ordinary businesses involve dealing in shares and other securities and/or corporate entities which regularly invest in shares and other securities. Private investors applying for the Placing Shares through banks or other institutions under the Placing may also be allocated the Placing Shares. Basis of Allocation Allocation of the Placing Shares will be based on a number of factors, including the level and timing of demand and whether or not it is expected that the relevant investor is likely to purchase further Shares or hold or sell the Shares after the Listing. Such allocation is intended to result in a distribution of the Placing Shares which would lead to the establishment of a solid professional, and institutional shareholder base for the benefit of our Company and the Shareholders as a whole. In particular, the Placing Shares will be allocated pursuant to Rule 11.23(8) of the GEM Listing Rules, that no more than 50% of the Shares in public hands at the time of the Listing will be owned by the three largest public shareholder. No allocations of the Placing Shares will be permitted to nominee companies unless the name of the ultimate beneficiary is disclosed. There will not be any preferential treatment in the allocation of the Placing Shares to any persons. The Placing is subject to the conditions as stated in the paragraph headed Conditions of the Placing below in this section. 232

239 STRUCTURE AND CONDITIONS OF THE PLACING CONDITIONS OF THE PLACING Acceptance of your applications is conditional upon, among other things: (a) Listing The GEM Listing Committee granting listing of, and permission to deal in, the Shares in issue and to be issued as mentioned herein including any Shares which may fall to be issued pursuant to the Capitalisation Issue and exercise of the options that may be granted under the Share Option Scheme; and (b) Underwriting Agreement The obligations of the Underwriter under the Underwriting Agreement becoming unconditional (including, if relevant, as a result of the waiver of any condition(s) by the Sponsor and the Lead Manager, for itself and on behalf of the Underwriter) and the Underwriting Agreement not being terminated in accordance with its terms or otherwise prior to 8:00 a.m. (Hong Kong time) on the Listing Date). Details of the Underwriting Agreement, their conditions and grounds for termination, are set out in the section headed Underwriting in this prospectus. In each case, on or before the dates and times specified in the Underwriting Agreement (unless and to the extent such conditions are validly waived on or before such dates and times) and in any event not later than the 30th day after the date of this prospectus. If such conditions have not been fulfilled or waived prior to the times and dates specified, the Placing will lapse and the Listing Division will be notified immediately. Notice of the lapse of the Placing will be published by our Company at the website of the Stock Exchange at and our Company s website at on the next Business Day following such lapse. COMMENCEMENT OF DEALINGS IN THE SHARES Dealings in the Shares on the GEM are expected to commence on Friday, 5 December Shares will be traded in board lots of 4,000 Shares each. SHARES WILL BE ELIGIBLE FOR ADMISSION INTO CCASS Application has been made to the Stock Exchange for listing of and permission to deal in the Shares in issue and to be issued as mentioned in this prospectus. If the Stock Exchange grants the listing of and permission to deal in the Shares and our Company complies with the stock admission requirements of HKSCC, the Shares will be accepted as eligible securities by HKSCC for deposit, clearance and settlement in CCASS with effect from the date of commencement of dealings in the Shares on the Stock Exchange or, under contingent situation, any other date HKSCC chooses. Settlement of transactions between participants of the Stock Exchange is required to take place in CCASS on the second Business Day after any trading day. All necessary arrangements have been made for the Shares to be admitted into CCASS. 233

240 STRUCTURE AND CONDITIONS OF THE PLACING All activities under CCASS are subject to the General Rules of CCASS and CCASS Operational Procedures in effect from time to time. Investors should seek the advice of their stockbrokers or other professional adviser for details of those settlement arrangements and how such arrangements will affect their rights and interest. Details of the Placing will be announced in accordance with Rules 10.12(4), and of the GEM Listing Rules. Our Company expects to announce the level of indication of interests in the Placing on or before Thursday, 4 December 2014 on our Company s website at and the website of the Stock Exchange at 234

241 APPENDIX I ACCOUNTANTS REPORT The following is the text of a report received from the Company s reporting accountants, HLB Hodgson Impey Cheng Limited, Certified Public Accountants, Hong Kong, for the purpose of incorporation in this prospectus. It is prepared and addressed to the directors of the Company and to the Sponsor pursuant to the requirements of Auditing Guideline Prospectuses and the Reporting Accountant issued by the Hong Kong Institute of Certified Public Accountants. The Directors KSL Holdings Limited Messis Capital Limited Dear Sirs, 31/F, Gloucester Tower The Landmark 11 Pedder Street Central Hong Kong 28 November 2014 We set out below our report on the financial information (the Financial Information ) regarding KSL Holdings Limited (the Company ) and its subsidiaries (hereinafter collectively referred to as the Group ) for the years ended 31 July 2013 and 2014 (the Track Record Period ), for inclusion in the prospectus of the Company dated 28 November 2014 (the Prospectus ) in connection with the proposed listing of the Company s shares on the Growth Enterprise Market ( GEM ) of The Stock Exchange of Hong Kong Limited (the Stock Exchange ). The Company was incorporated as an exempted company with limited liability in the Cayman Islands under the Companies Law of the Cayman Islands on 17 July Through a corporate reorganisation as more fully explained in the paragraph headed Corporate Reorganisation in Appendix V Statutory and General Information to the Prospectus (the Reorganisation ), the Company became the holding company of the companies now comprising the Group on 19 November As at the date of this report, the Company has the following wholly-owned subsidiaries: Name of subsidiary Legal form, date and place of incorporation/ operations Issued and fully paid up share capital Proportion ownership interest held by the Company Principal activities KSL Enterprises Limited ( KSL Enterprises ) Limited liability company incorporated on 8 July 2014, the British Virgin Islands (the BVI ) US$1 100% (direct) Investment holding I-1

242 APPENDIX I ACCOUNTANTS REPORT Name of subsidiary Legal form, date and place of incorporation/ operations Issued and fully paid up share capital Proportion ownership interest held by the Company Principal activities Victor Li & Associates Limited ( VLA ) Limited liability company incorporated on 30 May 1996, Hong Kong HK$10, % (indirect) Provision of engineering consulting services in Hong Kong KSL Engineering Limited ( KSL Engineering ) Limited liability company incorporated on 27 February 2009, Hong Kong HK$10, % (indirect) Provision of contracting and project management services in Hong Kong Centre For Research & Professional Development Limited ( CRPD ) Limited liability company incorporated on 11 April 2001, Hong Kong HK$ % (indirect) Organising continuing professional development courses, seminars, conferences and publication of technical books Except for VLA which has adopted 31 October as its financial year end date, all companies now comprising the Group have adopted 31 July as their financial year end date. No audited statutory financial statements have been prepared for the Company since its date of incorporation as it was incorporated in a country where there is no statutory audit requirement and the Company has not carried on any business other than those transactions relating to the Reorganisation. No audited statutory financial statements have been prepared for KSL Enterprises since its date of incorporation as it was incorporated in a country where there is no statutory audit requirement. The statutory financial statements of CRPD and KSL Engineering for the year ended 31 July 2014 were audited by us. The statutory financial statements of CRPD and KSL Engineering for the year ended 31 July 2013 which were prepared in accordance with the Small and Medium-sized Entity Financial Reporting Standard ( SME-FRS ) issued by the Hong Kong Institute of Certified Public Accountants ( HKICPA ) were audited by W. S. Li & Co., Certified Public Accountants, Hong Kong. The statutory financial statements of VLA for the years ended 31 October 2012 and 2013 which were prepared in accordance with SME-FRS issued by HKICPA and for the year ended 31 October 2014 which were prepared in accordance with Hong Kong Financial Reporting Standards ( HKFRSs ) issued by HKICPA were audited by W. S. Li & Co., Certified Public Accountants, Hong Kong. I-2

243 APPENDIX I ACCOUNTANTS REPORT For the purpose of this report, the directors of the Company have prepared the combined financial statements of the Group for the Track Record Period (the Underlying Financial Statements ) in accordance with HKFRSs issued by the HKICPA. We have undertaken an independent audit on the Underlying Financial Statements for the Track Record Period in accordance with Hong Kong Standards on Auditing issued by the HKICPA. We have examined the Underlying Financial Statements in accordance with the Auditing Guideline Prospectuses and the Reporting Accountant as recommended by the HKICPA. The Financial Information of the Group for the Track Record Period set out in this report has been prepared from the Underlying Financial Statements on the basis set out in Note 1 of Section II below, and no adjustments to the Underlying Financial Statements are considered necessary in the preparation of this report for inclusion in the Prospectus. The Underlying Financial Statements are the responsibility of the directors of the Company who approved their issue. The directors of the Company are responsible for the contents of the Prospectus in which this report is included. It is our responsibility to compile the Financial Information set out in this report from the Underlying Financial Statements, to form an independent opinion on the Financial Information and to report our opinion to you. In our opinion, on the basis of presentation set out in Note 1 of Section II below, the Financial Information gives, for the purpose of this report, a true and fair view of the state of affairs of the Group as at 31 July 2013 and 2014, and of the combined results and combined cash flows of the Group for the Track Record Period. I-3

244 APPENDIX I ACCOUNTANTS REPORT I FINANCIAL INFORMATION OF THE GROUP The following is the Financial Information of the Group as at 31 July 2013 and 2014 and for each of the years ended 31 July 2013 and 2014, presented on the basis set out in Note 1 of Section II below: Combined statements of profit or loss and other comprehensive income Year ended 31 July 2013 Year ended 31 July 2014 Note HK$ 000 HK$ 000 Revenue 5 45,678 63,413 Cost of sales 6 (17,033) (21,686) Gross profit 28,645 41,727 Other income Administrative and other operating expenses 6 (7,096) (11,805) Operating profit 21,667 30,077 Finance costs 9 (181) (168) Profit before income tax 21,486 29,909 Income tax expense 10 (3,563) (4,951) Profit and total comprehensive income for the year attributable to owners of the Company 17,923 24,958 Basic and diluted earnings per share 11 HK cents 5.0 HK cents 6.9 Details of dividends are disclosed in Note 12 to the Financial Information. I-4

245 APPENDIX I ACCOUNTANTS REPORT Combined statements of financial position As at As at 31 July July 2014 Note HK$ 000 HK$ 000 ASSETS Non-current assets Property, plant and equipment 13 15,922 15,697 Current assets Trade and other receivables 15 7,553 16,488 Amount due from a shareholder 16 10,710 28,313 Cash and cash equivalents 17 5,089 7,724 23,352 52,525 Total assets 39,274 68,222 EQUITY Capital and reserves Combined capital Retained earnings 27,852 52,810 Total equity 27,872 52,830 LIABILITIES Non-current liabilities Borrowings Current liabilities Trade and other payables 20 1,489 2,885 Amounts due to customers for contract work 21 1,779 Borrowings 19 5,996 5,858 Tax payable 2,138 6,478 11,402 15,221 Total liabilities 11,402 15,392 Total equity and liabilities 39,274 68,222 Net current assets 11,950 37,304 Total assets less current liabilities 27,872 53,001 I-5

246 APPENDIX I ACCOUNTANTS REPORT Combined statements of changes in equity Combined capital Retained earnings Total HK$ 000 HK$ 000 HK$ 000 (Note 18) Balance at 1 August ,929 9,949 Profit and total comprehensive income for the year 17,923 17,923 Balance at 31 July ,852 27,872 Balance at 1 August ,852 27,872 Profit and total comprehensive income for the year 24,958 24,958 Balance at 31 July ,810 52,830 I-6

247 APPENDIX I ACCOUNTANTS REPORT Combined statements of cash flows Year ended 31 July 2013 Year ended 31 July 2014 Note HK$ 000 HK$ 000 Cash flows from operating activities Net cash generated from operations 22(a) 10,216 4,979 Tax paid (3,525) (611) Net cash generated from operating activities 6,691 4,368 Cash flows from investing activities Proceeds from disposal of property, plant and equipment Purchases of property, plant and equipment (2,716) (1,326) Net cash used in investing activities (2,586) (1,207) Cash flows from financing activities Repayment of finance lease (60) Repayment of bank borrowing (348) (358) Interest paid on finance lease (2) Interest paid on bank borrowing (179) (168) Net cash used in financing activities (589) (526) Net increase in cash and cash equivalents 3,516 2,635 Cash and cash equivalents at beginning of year 1,573 5,089 Cash and cash equivalents at end of year 17 5,089 7,724 I-7

248 APPENDIX I ACCOUNTANTS REPORT II NOTES TO THE FINANCIAL INFORMATION 1 GENERAL INFORMATION AND BASIS OF PRESENTATION OF THE FINANCIAL INFORMATION The Company was incorporated in the Cayman Islands on 17 July 2014 as an exempted company with limited liability. Its parent and ultimate holding company is Sonic Solutions Limited ( Sonic Solutions ), a company incorporated in the BVI and wholly owned by Dr. Li Kai Shun ( Dr. Li ). The addresses of the registered office and the principal place of business of the Company are set out in the section headed Corporate Information of the Prospectus. The Company is an investment holding company. The Group is principally engaged in the provision of engineering consulting, contracting and project management services in Hong Kong with a focus on geotechnical engineering works. Throughout the Track Record Period, the group entities were under the control of Dr. Li. Through the Reorganisation as more fully explained in the paragraph headed Corporate Reorganisation in Appendix V Statutory and General Information to the Prospectus, the Company became the holding company of the companies now comprising the Group on 19 November Accordingly, for the purpose of the preparation of the Financial Information of the Group, the Company has been considered as the holding company of the companies now comprising the Group throughout the Track Record Period. The Group comprising the Company and its subsidiaries resulting from the Reorganisation is regarded as a continuing entity. The Group was under the control of Dr. Li prior to and after the Reorganisation. The Financial Information has been prepared as if the Company had been the holding company of the Group throughout the Track Record Period in accordance with Accounting Guideline 5 Merger Accounting for Common Control Combinations issued by the HKICPA. The combined statements of profit or loss and other comprehensive income, combined statements of changes in equity and combined statements of cash flows for the Track Record Period, which include the results, changes in equity and cash flows of the companies now comprising the Group, have been prepared as if the current group structure had been in existence throughout the Track Record Period, or since their respective dates of incorporation where this is a shorter period. The combined statements of financial position as at the respective reporting dates have been prepared to present the assets and liabilities of the companies now comprising the Group as if the current group structure had been in existence at those dates. The Financial Information is presented in Hong Kong dollars ( HK$ ), which is the same as the functional currency of the Company. I-8

249 APPENDIX I ACCOUNTANTS REPORT 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The principal accounting policies applied in the preparation of the Financial Information are set out below. These policies have been consistently applied to all the periods presented, unless otherwise stated. (a) Basis of presentation The principal accounting policies applied in the preparation of the Financial Information which are in accordance with the HKFRSs issued by the HKICPA are set out below. The Financial Information set out in this report has been prepared under the historical cost convention, except as otherwise stated in the accounting policies below. The preparation of the Financial Information in accordance with HKFRSs requires the use of certain critical accounting estimates. It also requires management to exercise its judgement in the process of applying the accounting policies of the Company. The areas involving a higher degree of judgement or complexity, or areas where assumptions and estimates are significant to the Financial Information, are disclosed in Note 4 below. Standards, amendments and interpretations to existing standards that are not yet effective and have not been early adopted by the Group The following new or revised standards, amendments and interpretations to existing standards have been published but are not yet effective for the Track Record Period and which the Group has not early adopted: Effective for accounting periods of the Group beginning on or after HKFRS 10, HKFRS 12 and HKAS 27 (2011) Amendment HKAS 32 Amendment HKAS 36 Amendment HKAS 39 Amendment Investment Entities 1 August 2014 Offsetting Financial Assets and Financial Liabilities Recoverable Amount Disclosures for Non-Financial Assets Novation of Derivatives and Continuation of Hedge Accounting 1 August August August 2014 HK(IFRIC) - Int 21 Levies 1 August 2014 HKAS 19 (2011) Amendment Defined Benefit Plans: Employee 1 August 2014 Contributions Annual Improvements Project Annual Improvements Cycle 1 August 2014 I-9

250 APPENDIX I ACCOUNTANTS REPORT Effective for accounting periods of the Group beginning on or after Annual Improvements Project Annual Improvements Cycle Annual Improvements Project Annual Improvements Cycle HKFRS 10 and HKAS 28 (2011) Amendment HKFRS 11 Amendment HKAS 16 and HKAS 38 Amendment HKAS 16 and HKAS 41 Amendment HKAS 27 (2011) Amendment Sale or Contribution of Assets between an Investor and its Associate or Joint Venture Accounting for Acquisitions of Interests in Joint Operations Clarification of Acceptable Methods of Depreciation and Amortisation 1 August August August August August 2016 Agriculture: Bearer Plants 1 August 2016 Equity Method in Separate Financial Statements 1 August 2016 HKFRS 14 Regulatory Deferral Accounts 1 August 2016 HKFRS 15 Revenue from Contracts with 1 August 2017 Customers HKFRS 9 (2014) Financial Instruments 1 August 2018 The Group will adopt these new standards, amendments and interpretations in the period of initial application. It is not expected to have a significant impact on the Group s result of operations and its financial position. (b) Consolidation and combination The combined financial information includes the financial information of the Company and all its subsidiaries made up to respective year end dates during the Track Record Period. Subsidiaries are all entities (including structured entities) over which the Group has control. The Group controls an entity when the Group is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity. Subsidiaries are fully consolidated from the date on which control is transferred to the Group. They are de-consolidated from the date that control ceases. Except for the Reorganisation, the Group uses the acquisition method of accounting to account for business combinations. The consideration transferred for the acquisition of a subsidiary is the fair values of the assets transferred, the liabilities incurred to the former owners of the acquiree and the equity interests issued by the Group. The consideration transferred includes the fair value of any asset I-10

251 APPENDIX I ACCOUNTANTS REPORT or liability resulting from a contingent consideration arrangement. Acquisition-related costs are expensed as incurred. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date. The Group recognises any non-controlling interest in the acquiree on an acquisition-by-acquisition basis either at fair value or at the non-controlling interest s proportionate share of the recognised amount of the acquiree s identifiable net assets. The excess of the consideration transferred, the amount of any non-controlling interest in the acquiree and the acquisition-date fair value of any previous equity interest in the acquiree over the fair value of the identifiable net assets acquired is recorded as goodwill. If the total of consideration transferred, non-controlling interest recognised and previously held interest measured is less than the fair value of the net assets of the subsidiary acquired in the case of a bargain purchase, the difference is recognised directly in the profit or loss. Inter-company transactions, balances and unrealised gains on transactions between group companies are eliminated. Unrealised losses are also eliminated. Accounting policies of subsidiaries have been changed where necessary to ensure consistency with the policies adopted by the Group. (c) Transaction with non-controlling interests The Group treats transactions with non-controlling interests as transactions with equity owners of the Group. For purchases from non-controlling interests, the difference between any consideration paid and the relevant share acquired of the carrying value of net assets of the subsidiary is recorded in equity. Gains or losses on disposals to non-controlling interests are also recorded in equity. When the Group ceases to have control or significant influence, any retained interest in the entity is remeasured to its fair value, with the change in carrying amount recognised in profit or loss. The fair value is the initial carrying amount for the purposes of subsequently accounting for the retained interest as an associate, joint venture or financial asset. In addition, any amounts previously recognised in other comprehensive income in respect of that entity are accounted for as if the Group had directly disposed of the related assets or liabilities. This may mean that amounts previously recognised in other comprehensive income are reclassified to profit or loss. (d) Merger accounting for common control combinations The Financial Information incorporates the financial statements items of the combining entities or businesses in which the common control combination occurs as if they had been combined from the date when the combining entities or businesses first came under the control of the controlling party. The net assets of the combining entities or businesses are consolidated using the existing book values from the controlling parties perspective. No amount is recognised in respect of goodwill or excess of acquirer s interest in the net fair value of acquiree s identifiable assets, liabilities and contingent liabilities over cost at the time of common control combination, to the extent of the continuation of the controlling party s interest. The combined statement of profit or loss and other I-11

252 APPENDIX I ACCOUNTANTS REPORT comprehensive income include the results of each of the combining entities or businesses from the earliest date presented or since the date when the combining entities or businesses first came under the common control, where this is a shorter period, regardless of the date of the common control combination. (e) Segment reporting Operating segments are reported in a manner consistent with the internal reporting reported to the chief operating decision-maker. The chief operating decision-maker, who is responsible for allocating resources and assessing performance of the operating segments, has been identified as the board of directors that makes strategic decisions. (f) Foreign currency translation Functional and presentation currency Items included in the financial statements of each of the Group s entities are measured using the currency of the primary economic environment in which the entity operates (the functional currency ). The Financial Information is presented in HK$, which is the Company s functional and presentation currency. (g) Property, plant and equipment Leasehold land classified as finance lease and all other property, plant and equipment are stated at historical cost less accumulated depreciation and accumulated impairment losses, if any. Historical cost includes expenditure that is directly attributable to the acquisition of the items. Subsequent costs are included in the asset s carrying amount or recognised as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the Group and the cost of the item can be measured reliably. The carrying amount of the replaced part is derecognised. All other repairs and maintenance costs are charged to profit or loss during the financial period in which they are incurred. Leasehold land classified as finance lease commences amortisation from the time when the land interest becomes available for its intended use. Amortisation on leasehold land classified as finance lease and depreciation on other property, plant and equipment is calculated using the straight-line method to allocate their cost to their residual values over their estimated useful lives, as follows: Leasehold properties Over shorter of lease terms and 50 years Leasehold improvements 20% Furniture, fixtures and office equipment 20% Motor vehicles 20% I-12

253 APPENDIX I ACCOUNTANTS REPORT The assets residual values and useful lives are reviewed, and adjusted if appropriate, at the end of each reporting period. An asset s carrying amount is written down immediately to its recoverable amount if the asset s carrying amount is greater than its estimated recoverable amount. Gains and losses on disposals are determined by comparing the proceeds with the carrying amount and are recognised in the combined statement of profit or loss and other comprehensive income. (h) Impairment of non-financial assets Assets that have an indefinite useful life are not subject to amortisation and are tested annually for impairment. Assets that are subject to amortisation or depreciation are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised for the amount by which the asset s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset s fair value less costs of disposal and value in use. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows (cash-generating units). Non-financial assets other than goodwill that suffered an impairment are reviewed for possible reversal of the impairment at each reporting date. (i) Leases Leases in which a significant portion of the risks and rewards of ownership are retained by the lessors are classified as operating leases. Payments made under operating leases (net of any incentives received from the lessors) are charged to the combined statement of profit or loss and other comprehensive income on a straight-line basis over the period of the lease. The Group leases certain property, plant and equipment. Leases of property, plant and equipment where the Group has substantially all the risks and rewards of ownership are classified as finance leases. Finance leases are capitalised at the lease s commencement at the lower of the fair value of the leased property and the present value of the minimum lease payments. Each lease payment is allocated between the liability and finance charges. The corresponding rental obligations, net of finance charges, are included in other long-term payables. The interest element of the finance cost is charged to the combined statement of profit or loss and other comprehensive income over the lease period so as to produce a constant periodic rate of interest on the remaining balance of the liability for each period. The property, plant and equipment acquired under finance leases is depreciated over the shorter of the useful life of the asset and the lease term. I-13

254 APPENDIX I ACCOUNTANTS REPORT (j) Construction contracts in progress Construction work-in-progress is valued at cost incurred plus an appropriate proportion of profits after deducting progress payments and allowances for foreseeable losses. Cost comprises construction material costs, labour and overheads expenses incurred in bringing the work-in-progress to its present condition. The Group presents as an asset the gross amount due from customers for contract work for all contracts in progress for which costs incurred plus recognised profits (less recognised losses) exceed progress billings. Progress billings not yet paid by customers and retention are included within trade and retention receivables. The Group presents as a liability the gross amount due to customers for contract work for all contracts in progress for which progress billings exceed costs incurred plus recognised profits (less recognised losses). (k) Loans and receivables Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They are included in current assets, except for maturities greater than 12 months after the end of the reporting period. These are classified as non-current assets. The Group s loans and receivables comprise trade and other receivables, amount due from a shareholder and cash and cash equivalents in the combined statement of financial position. (l) Impairment of financial assets The Group assesses at the end of each reporting period whether there is objective evidence that a financial asset or group of financial assets is impaired. A financial asset or a group of financial asset is impaired and impairment losses are incurred only if there is objective evidence of impairment as a result of one or more events that occurred after the initial recognition of the asset (a loss event ) and that loss event (or events) has an impact on the estimated future cash flows of the financial asset or group of financial assets that can be reliably estimated. Evidence of impairment may include indications that the debtors or a group of debtors is experiencing significant financial difficulty, default or delinquency in interest or principal payments, the probability that they will enter bankruptcy or other financial reorganisation, and where observable data indicate that there is a measurable decrease in the estimated future cash flows, such as changes in arrears or economic conditions that correlate with defaults. For loans and receivables category, the amount of the loss is measured as the difference between the asset s carrying amount and the present value of estimated future cash flows (excluding future credit losses that have not been incurred) discounted at the financial asset s original effective interest rate. The carrying amount of the asset is reduced and the amount of the loss is recognised in profit or loss. If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognised (such as an improvement in the debtor s credit rating), the reversal of the previously recognised impairment loss is recognised in profit or loss. I-14

255 APPENDIX I ACCOUNTANTS REPORT (m) Trade and other receivables Trade receivables are amounts due from customers for services performed in the ordinary course of business. If collection of trade and other receivables is expected in one year or less (or in the normal operating cycle of the business if longer), they are classified as current assets. If not, they are presented as non-current assets. Trade and other receivables are recognised initially at fair value and subsequently measured at amortised cost using the effective interest method, less provision for impairment. (n) Cash and cash equivalents In the combined statement of cash flow, cash and cash equivalents includes cash in hand, deposits held at call with banks, other short-term highly liquid investments with original maturities of three months or less, and bank overdrafts (if any). (o) Share capital Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of new shares or options are shown in equity as a deduction, net of tax, from the proceeds. (p) Trade and other payables Trade payables are obligations to pay for goods or services that have been acquired in the ordinary course of business from suppliers. Trade and other payables are classified as current liabilities if payment is due within one year or less (or in the normal operating cycle of the business if longer). If not, they are presented as non-current liabilities. Trade and other payables are recognised initially at fair value and subsequently measured at amortised cost using the effective interest method. (q) Borrowings Borrowings are classified as current liabilities unless the Group has an unconditional right to defer settlement of the liability for at least 12 months after the end of the reporting period. Borrowings are recognised initially at fair value, net of transaction costs incurred. Borrowings are subsequently carried at amortised cost; any difference between the proceeds (net of transaction costs) and the redemption value is recognised in profit or loss over the period of the borrowings using the effective interest method. I-15

256 APPENDIX I ACCOUNTANTS REPORT (r) Borrowing costs General and specific borrowing costs directly attributable to the acquisition, construction or production of qualifying assets, which are assets that necessarily take a substantial period of time to get ready for their intended use or sale, are added to the cost of those assets, until such time as the assets are substantially ready for their intended use or sale. Investment income earned on the temporary investment of specific borrowings pending their expenditure on qualifying assets is deducted from the borrowing costs eligible for capitalisation. All other borrowing costs are recognised in profit or loss in the period in which they are incurred. (s) Current and deferred income tax The tax expense for the period comprises current and deferred tax. Tax is recognised in the profit or loss, except to the extent that it relates to items recognised in other comprehensive income or directly in equity. In this case the tax is also recognised in other comprehensive income or directly in equity, respectively. The current income tax charge is calculated on the basis of the tax laws enacted or substantively enacted at the end of each reporting period in the countries where the Group operates and generates taxable income. Management periodically evaluate positions taken in tax returns with respect to situations in which applicable tax regulation is subject to interpretation. It establishes provisions where appropriate on the basis of amounts expected to be paid to the tax authorities. Deferred income tax is recognised, using the liability method, on temporary differences, arising between the tax bases of assets and liabilities and their carrying amounts in the Financial Information. However, the deferred tax liabilities are not recognised if it arises from initial recognition of an asset or liability in a transaction other than a business combination that at the time of the transaction affects neither accounting nor taxable profit or loss. Deferred income tax is determined using tax rates (and laws) that have been enacted or substantively enacted by the end of each reporting period and are expected to apply when the related deferred income tax asset is realised or the deferred taxation liability is settled. Deferred income tax assets are recognised only to the extent that it is probable that future taxable profit will be available against which the temporary differences can be utilised. Deferred income tax assets and liabilities are offset when there is a legally enforceable right to offset current tax assets against current tax liabilities and when the deferred income taxes assets and liabilities relate to income taxes levied by the same taxation authority on either the taxable entity or different taxable entities where there is an intention to settle the balances on a net basis. I-16

257 APPENDIX I ACCOUNTANTS REPORT (t) Employee benefits (i) Employee leave entitlements Employee entitlements to annual leave are recognised when they accrue to employees. A provision is made for the estimated liability for annual leave as a result of services rendered by employees up to the end of each reporting period. Employee entitlements to sick leave and maternity leave are not recognised until the time of leave. (ii) Retirement benefits The Group operates a defined contribution plan and pays contributions to a privately administered pension insurance plan on a mandatory, contractual or voluntary basis. The Group has no further payment obligations once the contributions have been paid. The contributions are recognised as employee benefit expenses when they are due. Prepaid contributions are recognised as an asset to the extent that a cash refund or a reduction in the future payments is available. (iii) Termination benefits Termination benefits are payable when employment is terminated by the Group before the normal retirement date, or whenever an employee accepts voluntary redundancy in exchange for these benefits. The Group recognises termination benefits when it is demonstrably committed to a termination when the entity has a detailed formal plan to terminate the employment of current employees without possibility of withdrawal. In the case of an offer made to encourage voluntary redundancy, the termination benefits are measured based on the number of employees expected to accept the offer. Benefits falling due more than 12 months after the end of each reporting period are discounted to present value. (iv) Bonus plans The Group recognises a liability and an expense for bonuses when the Group has a present legal or constructive obligation as a result of services rendered by employees and a reliable estimate of such obligation can be made. (u) Provisions Provisions are recognised when: the Group has a present legal or constructive obligation as a result of past events; it is probable that an outflow of resources will be required to settle the obligation; and the amounts have been reliably estimated. Provisions are not recognised for future operating losses. I-17

258 APPENDIX I ACCOUNTANTS REPORT Where there are a number of similar obligations, the likelihood that an outflow will be required in settlement is determined by considering the class of obligations as a whole. A provision is recognised even if the likelihood of an outflow with respect to any one item included in the same class of obligations may be small. Provisions are measured at the present value of the expenditures expected to be required to settle the obligation using a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the obligations. The increase in the provision due to passage of time is recognised as interest expense. (v) Contingent liabilities and contingent assets A contingent liability is a possible obligation that arises from past events and whose existence will only be confirmed by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the Group. It can also be a present obligation arising from past events that is not recognised because it is not probable that outflow of economic resource will be required or the amount of obligation cannot be measured reliably. A contingent liability is not recognised but is disclosed in the notes to the Financial Information. When a change in the probability of an outflow occurs so that outflow is probable, it will then be recognised as a provision. A contingent asset is a possible asset that arises from past events and whose existence will be confirmed only by the occurrence or non-occurrence of one or more uncertain events not wholly within the control of the Group. Contingent assets are not recognised but are disclosed in the notes to the Financial Information when an inflow of economic benefits is probable. When inflow is virtually certain, an asset is recognised. (w) Revenue recognition Revenue comprises the fair value of the consideration received or receivables for the sale of services in the ordinary course of the Group s activities. Revenue is shown after eliminating sales within the Group. (a) Contracting income Contract costs are recognised when incurred. When the outcome of a construction contract cannot be estimated reliably, contract revenue is recognised only to the extent of contract costs incurred that are likely to be recoverable. When the outcome of a construction contract can be estimated reliably and it is probable that the contract will be profitable, contract revenue is recognised over the period of the contract. When it is probable that total contract costs will exceed total contract revenue, the expected loss is recognised as an expense immediately. I-18

259 APPENDIX I ACCOUNTANTS REPORT Variations in contract work, claims and incentive payments are included in contract revenue to the extent that they have been agreed with the customer and are capable of being reliably measured. Revenue from contract work is recognised based on the percentage of completion of the contracts, provided that the percentage of contract completion and the gross billing value of contracting work can be measured reliably. The percentage of completion of a contract is established by reference to the construction works certified by the customer. (b) Engineering consulting and project management service income Revenue from provision of engineering consulting and project management services are recognised when the related services rendered to the customer. (c) Interest income Interest income is recognised on a time proportion basis using the effective interest method. (x) Government grants Grants from the government are recognised at their fair value where there is a reasonable assurance that the grant will be received and the Group will comply with all attached conditions. Government grants related to costs are deferred and recognised in the combined statement of profit or loss over the period necessary to match them with the costs that they are intended to compensate. (y) Dividend distribution Dividend distribution to the Company s shareholders is recognised as a liability in the Group s and the Company s financial information in the period in which the dividends are declared by the directors in case of interim dividends or approved by the Company s shareholders in case of final dividends. 3 FINANCIAL RISK MANAGEMENT (a) Financial risk factors The Group s activities exposed it to a variety of financial risks: interest rate risk, credit risk and liquidity risk. The Group s overall risk management programme focuses on the unpredictability of financial markets and seeks to minimise potential adverse effects on the Group s financial performance. I-19

260 APPENDIX I ACCOUNTANTS REPORT (i) Interest rate risk Other than bank balances with variable interest rate, the Group has no other significant interest-bearing assets. Management does not anticipate significant impact to interest-bearing assets resulted from the changes in interest rates, because the interest rates of bank balances are not expected to change significantly. The Group s interest rate risk arises from borrowings. Borrowings issued at variable rates expose the Group to cash flow interest rate risk which is partially offset by cash held at variable rates. The Group has not hedged its cash flow interest rate risks. As at 31 July 2013 and 2014, if the interest rate on all variable-rate borrowings had been 100 basis points higher/lower with all other variables held constant, the Group s profit after income tax for the year would have been decreased/increased by approximately HK$52,000 and HK$49,000 respectively, mainly as a result of higher/lower interest expense on borrowings with floating interest rates. (ii) Credit risk Credit risk arises mainly from trade and other receivables, amount due from a shareholder and cash and cash equivalents. The Group s maximum exposure to credit risk in the event of the counterparties failure to perform their obligations as at the reporting dates in relation to each class of recognised financial assets is the carrying amount of those assets as stated in the combined statement of financial position. The credit risk of bank balances is limited because the counterparties are banks with sound credit ratings assigned by international credit-rating agencies. In respect of trade and other receivables, individual credit evaluations are performed on all customers and counterparties. These evaluations focus on the counterparty s financial position, past history of making payments and take into account information specific to the counterparty as well as pertaining to the economic environment in which the counterparty operates. Monitoring procedures have been implemented to ensure that follow-up action is taken to recover overdue debts. In addition, the Group reviews the recoverable amount of each individual trade and other receivable balance at the end of each reporting period to ensure adequate impairment losses are made for irrecoverable amounts. As at 31 July 2013 and 2014, there were two and three customers which individually contributed over 10% of the Group s trade and other receivables, respectively. The aggregate amounts of trade and other receivables from these customers amounted to 70% and 48% of the Group s total trade and other receivables as at 31 July 2013 and 2014 respectively. I-20

261 APPENDIX I ACCOUNTANTS REPORT (iii) Liquidity risk The Group s policy is to regularly monitor current and expected liquidity requirements and its compliance with debt covenants, to ensure that it maintains sufficient reserves of cash and adequate committed lines of funding from banks and other financial institutions to meet their liquidity requirements in the short and long term. Management believes there is no significant liquidity risk as the Group has sufficient committed facilities to fund their operations. The following table details the remaining contractual maturities at the year end dates during the Track Record Period of the Group s financial liabilities, which are based on contractual undiscounted cash flows (including interest payments computed using contractual rates or, if floating, based on rates current at the year end dates during the Track Record Period) and the earliest date the Group may be required to pay: On demand or within one year Between one and two years Between two and five years Total HK$ 000 HK$ 000 HK$ 000 HK$ 000 At 31 July 2013 Trade and other payables 1,489 1,489 Borrowings (excluding finance lease liabilities) 7,275 7,275 8,764 8,764 At 31 July 2014 Trade and other payables 2,819 2,819 Finance lease liabilities Borrowings (excluding finance lease liabilities) 6,748 6,748 9, ,973 (b) Capital risk management The Group s primary objectives when managing capital are to safeguard the Group s ability to continue as a going concern, so that it can continue to provide returns for shareholders, to support the Group s stability and growth; to earn a margin commensurate with the level of business and market risks in the Group s operation and to maintain an optimal capital structure to reduce the cost of capital. In order to maintain or adjust the capital structure, the Group may adjust the amount of dividends paid to shareholders, return capital to shareholders, issue new shares or sell assets to reduce debt. I-21

262 APPENDIX I ACCOUNTANTS REPORT The Group monitors capital on the basis of the gearing ratio. This ratio is calculated as the total interest-bearing liabilities as at each year end divided by the total equity as at each year end. The gearing ratios during the Track Record Period are as follows: As at 31 July 2013 HK$ 000 As at 31 July 2014 HK$ 000 Total borrowings (Note 19) 5,996 6,029 Total equity 27,872 52,830 Gearing ratio 22% 11% 4 CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS Estimates and judgements used in preparing the Financial Information are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. The resulting accounting estimates will, by definition, seldom equal the related actual results. The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are addressed below. (a) Useful lives and impairment of property, plant and equipment The Group has significant investments in property, plant and equipment. The Group is required to estimate the useful lives of property, plant and equipment in order to ascertain the amount of depreciation charges for each reporting period. Useful lives are estimated at the time of purchase of these assets after considering future technology changes, business developments and the Group s strategies. The Group performs annual reviews to assess the appropriateness of the estimated useful lives. Such review takes into account any unexpected adverse changes in circumstances or events, including decline in projected operating results, negative industry or economic trends and rapid advancement in technology. The Group extends or shortens the useful lives and/or makes impairment provisions according to the results of the review. Impairment of property, plant and equipment is reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Management judgement is required in the area of asset impairment particularly in assessing; (i) whether an event has occurred that may indicate that the related asset value may not be recoverable; (ii) whether the carrying value of an asset can be supported by the recoverable amount, being the higher of fair value less costs of disposal or net present value of future cash flows which are estimated based upon the continued use of the asset in the business; and (iii) the appropriate key assumptions to be applied in preparing cash flow projections including whether these cash flow projections are discounted using an appropriate rate. Changing the assumptions I-22

263 APPENDIX I ACCOUNTANTS REPORT selected by management in assessing impairment, including the discount rates or the growth rate assumptions in the cash flow projections, could affect the net present value used in the impairment test and as a result affect the Group s financial position and results of the operations. (b) Impairment of receivables Management determines the provision for impairment of trade and other receivables. This estimate is based on the credit history of its customers and the current market condition. Management reassesses the provision at each statement of financial position date. Significant judgement is exercised on the assessment of the collectability of receivables from each customer. In making the judgement, management considers a wide range of factors such as results of follow-up procedures, customer payment trends including subsequent payments and customers financial positions. If the financial conditions of the customers of the Group were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. (c) Percentage of completion of construction works The Group recognises its contract revenue according to the percentage of work performed to date of the individual contract of construction works as a percentage of total contract value. Because of the nature of the activity undertaken in construction contracts, the date at which the contract activity is entered into and the date when the activity is completed usually fall into different accounting period. The Group reviews and revises the estimates of contract revenue, contract costs and variation orders prepared for each construction contract as the contract progresses. Management regularly reviews the progress of the contracts and the corresponding costs of the contract revenue. I-23

264 APPENDIX I ACCOUNTANTS REPORT 5 REVENUE AND SEGMENT INFORMATION Revenue and other income recognised during the respective years are as follows: Year ended 31 July 2013 HK$ 000 Year ended 31 July 2014 HK$ 000 Revenue Engineering consulting 31,319 39,122 Contracting 9,748 12,870 Project management 4,071 11,180 Others ,678 63,413 Other income Government grants Others Management has determined the operating segments based on the reports reviewed by the directors of the Company, the chief operating decision-maker, that are used to make strategic decisions. The directors consider the business from a product/service perspective. Principal activities of the segments are as follows: Engineering consulting: Provision of developing cost-effective engineering designs and obtaining necessary approvals in respect of the engineering designs developed by the Group from the relevant Government authorities or their appointed consultants. Contracting: Provision of undertaking foundation and related geotechnical works as a contractor. Project management: Provision of overall planning, management, technical advice and supervision of site works. Others: Organisation of continuing professional development courses, seminars and conferences, provision of related administration services and sales of technical books in Hong Kong. Segment revenue is measured in a manner consistent with that in the combined statements of profit or loss and other comprehensive income. I-24

265 APPENDIX I ACCOUNTANTS REPORT The directors assess the performance of the operating segments based on a measure of segment results. Unallocated corporate expenses, finance costs, income tax expenses and other major items that are isolated and non-recurring in nature are not included in segment results. Segment assets mainly consist of current assets and non-current assets as disclosed in the combined statement of financial position except unallocated property, plant and equipment and amount due from a shareholder. Segment liabilities mainly consist of current liabilities and non-current liabilities as disclosed in the combined statement of financial position except current income tax liabilities and borrowings. Engineering Project consulting Contracting management Others Total HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 Year ended 31 July 2013 Revenue Total revenue 31,319 9,748 4,071 1,041 46,179 Inter-segment revenue (501) (501) External revenue 31,319 9,748 4, ,678 Segment results 17,773 4,592 3,239 (341) 25,263 Unallocated corporate expenses (3,598) Finance costs (179) Profit before income tax 21,486 Income tax expense (3,563) Profit for the year 17,923 Included in segment results are: Depreciation I-25

266 APPENDIX I ACCOUNTANTS REPORT Engineering Project consulting Contracting management Others Total HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 At 31 July 2013 Segment assets 7,081 4,781 1, ,162 Unallocated assets 26,112 Total assets 39,274 Included in segment assets are: Additions to non-current asset Segment liabilities 1,093 2, ,268 Borrowing 5,996 Tax payable 2,138 Total liabilities 11,402 Engineering Project consulting Contracting management Others Total HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 Year ended 31 July 2014 Revenue Total revenue 39,122 12,870 11, ,013 Inter-segment revenue (600) (600) External revenue 39,122 12,870 11, ,413 Segment results 22,734 7,690 8,964 (377) 39,011 Unallocated corporate expenses (8,934) Finance costs (168) Profit before income tax 29,909 Income tax expense (4,951) Profit for the year 24,958 I-26

267 APPENDIX I ACCOUNTANTS REPORT Engineering Project consulting Contracting management Others Total HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 Included in segment results are: Depreciation At 31 July 2014 Segment assets 12,750 4,137 7, ,870 Unallocated assets 43,352 Total assets 68,222 Included in segment assets are: Additions to non-current assets Segment liabilities 1,632 1, ,276 Borrowing 5,638 Tax payable 6,478 Total liabilities 15,392 In determining the Group s geographical segments, revenues and results are attributed to the segments based on the location of the customers, and assets are attributed to the segments based on the location of the assets. The Group s major operations and markets are located in Hong Kong, no geographic segment information is provided. For the years ended 31 July 2013 and 2014, there were 4 and 1 customers which individually contributed over 10% of the Group s revenue, respectively. The aggregate amount of revenue from these customers amounted to 58% and 34% of the Group s total revenue, respectively. I-27

268 APPENDIX I ACCOUNTANTS REPORT 6 EXPENSES BY NATURE Year ended 31 July 2013 HK$ 000 Year ended 31 July 2014 HK$ 000 Cost of sales Consultancy 238 1,489 Depreciation of owned assets (Note 13) Depreciation of leased assets (Note 13) 90 Drafting Motor vehicle expenses Operating lease charges Printing and stationery Secondment fees Staff costs (Note 7) 11,772 14,081 Subcontracting charges 3,185 3,994 Other expenses ,033 21,686 Year ended 31 July 2013 HK$ 000 Year ended 31 July 2014 HK$ 000 Administrative and other operating expenses Auditors remuneration Building management fee Depreciation of owned assets (Note 13) 1,236 1,457 Entertainment Insurance Listing expenses 3,977 Loss on disposal of property, plant and equipment Operating lease rental on premises 131 Staff costs, including directors emoluments (Note 7) 3,402 4,526 Travelling Other expenses ,096 11,805 I-28

269 APPENDIX I ACCOUNTANTS REPORT 7 EMPLOYEE BENEFIT EXPENSES, INCLUDING DIRECTORS EMOLUMENTS Year ended 31 July 2013 HK$ 000 Year ended 31 July 2014 HK$ 000 Salaries and allowances 14,761 18,160 Retirement scheme contributions defined contribution plan ,174 18,607 The Group operates a defined contribution scheme in Hong Kong which complies with the requirements under the Mandatory Provident Fund ( MPF ) Schemes Ordinance. All assets under the scheme are held separately from the Group under independently administered funds. Contributions to the MPF scheme follow the MPF Schemes Ordinance. 8 DIRECTORS EMOLUMENTS (a) Directors emoluments The remuneration of each director for the Track Record Period is set out below: Salaries, Fee allowances and benefits in kind Discretionary bonuses Retirement scheme contributions Total HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 Year ended 31 July 2013 Executive director Dr. Li 1, ,927 Year ended 31 July 2014 Executive director Dr. Li 3, ,160 I-29

270 APPENDIX I ACCOUNTANTS REPORT Dr. Li was appointed as director of the Company on 17 July The executive directors, Mr. Tam Yi Shek, Mr. Chan Kin Pong and Mr. Tsang Siu Wah were appointed as directors of the Company on 16 September The independent non-executive directors, Mr. Ong Chi King, Mr. Ho Ho Ming and Mr. Ko Chi Keung, were appointed as directors of the Company on 19 November During the Track Record Period, the directors including both the independent non-executive directors and executive directors, except for Dr. Li, have not yet been appointed and received nil directors remuneration in the capacity of directors. During the Track Record Period, no emoluments were paid by the Group to the directors as an inducement to join or upon joining the Group or as compensation for loss of office. No director has waived or agreed to waive any emoluments during the Track Record Period. (b) Five highest paid individuals Of the five individuals with the highest emoluments, one of them is director for the Track Record Period whose emoluments are disclosed above. The emoluments in respect of the remaining four individuals for the Track Record Period are as follows: Year ended 31 July 2013 HK$ 000 Year ended 31 July 2014 HK$ 000 Salaries and allowances 3,258 3,724 Discretionary bonuses Retirement scheme contributions ,603 4,302 The emoluments fell within the following bands: Number of individuals Year ended 31 July 2013 Year ended 31 July 2014 Emolument bands (in HK$) Nil-HK$1,000, HK$1,000,001-HK$1,500, During the Track Record Period, no emoluments were paid by the Group to the above highest paid individuals as (i) an inducement to join or upon joining the Group or (ii) as compensation for loss of office as a director or management of any members of the Group. I-30

271 APPENDIX I ACCOUNTANTS REPORT 9 FINANCE COSTS Year ended 31 July 2013 HK$ 000 Year ended 31 July 2014 HK$ 000 Interest on finance leases 2 Interest on bank borrowing not wholly repayable within 5 years INCOME TAX EXPENSE Hong Kong profits tax has been provided at the rate of 16.5% for the Track Record Period on the estimated assessable profit arising in or derived from Hong Kong for the year. Year ended 31 July 2013 HK$ 000 Year ended 31 July 2014 HK$ 000 Hong Kong profits tax Current year 3,563 4,951 Income tax expense 3,563 4,951 No deferred tax assets and liabilities in the Financial Information as the Group did not have material temporary differences arising between tax bases of assets and liabilities and their carrying amounts as at 31 July 2013 and I-31

272 APPENDIX I ACCOUNTANTS REPORT The taxation on the Group s profit before income tax differs from the theoretical amount that would arise using the Hong Kong profits tax rate as follows: Year ended 31 July 2013 HK$ 000 Year ended 31 July 2014 HK$ 000 Profit before income tax 21,486 29,909 Calculated at a tax rate of 16.5% 3,545 4,935 Expenses not deductible for tax purposes 1 1 Temporary differences not recognised Utilisation of previously unrecognised tax losses (15) (9) Tax concession (10) Income tax expense 3,563 4, EARNINGS PER SHARE For the purpose of this report, the calculation of the basic earnings per share attributable to owners of the Company was based on (i) the profit attributable to owners of the Company for the Track Record Period and (ii) the weighted average number of 359,800,000 shares (comprising 51,400,000 shares in issue and 308,400,000 shares to be issued under the capitalisation issue as described in Appendix V Statutory and General Information to the Prospectus) as if these 359,800,000 shares were outstanding throughout the Track Record Period. The diluted earnings per share is equal to the basic earnings per share as there were no dilutive potential ordinary share in issue during the Track Record Period. 12 DIVIDENDS No dividend has been paid or declared by the Company since its incorporation. No dividend has been paid or declared by the respective subsidiaries to its then equity holders during the Track Record Period. The rate of dividend and the number of shares ranking for dividend is not presented as such information is not meaningful having regard to the purpose of this report. Subsequent to the year ended 31 July 2014, in September 2014, interim dividends of HK$22,590,000 were appropriated to the then shareholder of VLA, KSL Engineering and CRPD (which are now the indirect wholly-owned subsidiaries of the Company). I-32

273 APPENDIX I ACCOUNTANTS REPORT 13 PROPERTY, PLANT AND EQUIPMENT Leasehold properties Leasehold improvements Furniture, fixtures and office equipment Motor vehicles Total HK$ 000 HK$ 000 HK$ 000 HK$ 000 HK$ 000 (Note a) (Note b) Cost At 1 August ,420 1,015 1,673 1,066 17,174 Additions 1, ,716 Disposals (420) (226) (646) At 31 July ,420 2,396 2,349 1,079 19,244 Accumulated depreciation At 1 August ,118 Charge for the year (Note 6) ,452 Disposals (157) (91) (248) At 31 July , ,322 Net book value At 31 July ,768 1,619 1, ,922 Cost At 1 August ,420 2,396 2,349 1,079 19,244 Additions 9 1, ,717 Disposals (239) (239) At 31 July ,420 2,405 3,434 1,463 20,722 Accumulated depreciation At 1 August , ,322 Charge for the year (Note 6) ,751 Disposals (48) (48) At 31 July ,025 1,258 1, ,025 Net book value At 31 July ,395 1,147 1, ,697 I-33

274 APPENDIX I ACCOUNTANTS REPORT Notes: (a) As at 31 July 2013 and 2014, leasehold properties with an aggregate net book value of approximately HK$12,768,000 and HK$12,395,000 respectively were pledged as security for bank loan facilities granted to the Group (Note 19). The leasehold properties at their net book values are analysed as follows: As at 31 July 2013 HK$ 000 As at 31 July 2014 HK$ 000 In Hong Kong, held on: Leases of between 10 to 50 years 12,768 12,395 (b) Motor vehicles includes the following amounts where the Group is a lessee under finance leases: As at 31 July 2013 HK$ 000 As at 31 July 2014 HK$ 000 Cost capitalised finance leases 450 Accumulated depreciation (90) Net book value FINANCIAL INSTRUMENTS BY CATEGORY As at 31 July 2013 HK$ 000 As at 31 July 2014 HK$ 000 Financial assets Loans and receivables Trade and other receivables excluding prepayments 7,418 15,915 Amount due from a shareholder 10,710 28,313 Cash and cash equivalents 5,089 7,724 Total 23,217 51,952 Financial liabilities Financial liabilities at amortised cost Trade and other payables excluding non-financial liabilities 1,489 2,819 Borrowings (excluding finance lease liabilities) 5,996 5,638 Finance lease liabilities 391 Total 7,485 8,848 I-34

275 APPENDIX I ACCOUNTANTS REPORT 15 TRADE AND OTHER RECEIVABLES As at 31 July 2013 HK$ 000 As at 31 July 2014 HK$ 000 Trade receivables 7,341 15,430 Other receivables, deposits and prepayments 212 1,058 7,553 16,488 Notes: (a) No credit period was granted to customers. Trade receivables are immediately due when the invoices are issued to customers. Trade receivables are denominated in HK$. (b) The ageing analysis of the trade receivables based on invoice date is as follows: As at 31 July 2013 HK$ 000 As at 31 July 2014 HK$ days 5,484 10, days 1,100 2, days days 497 2,886 7,341 15,430 As at 31 July 2013 and 2014, trade receivables of approximately HK$7,341,000 and HK$15,430,000 as at 31 July 2013 and 2014 were past due but not impaired. These relate to trade receivables from a number of independent customers of whom there is no recent history of default and no provision has therefore been made. (c) The other classes within trade and other receivables do not contain impaired assets. The Group does not hold any collateral as security. 16 AMOUNT DUE FROM A SHAREHOLDER The amount due was unsecured, non-interest bearing and had no fixed terms of repayment. The Group s amount due from a shareholder as of 31 July 2014 has been fully settled in September 2014 by Dr. Li (partly by cash repayment of approximately HK$5,723,000 to the Group and partly by the declaration and payment of interim dividends of HK$22,590,000 to Dr. Li in September 2014). I-35

276 APPENDIX I ACCOUNTANTS REPORT 17 CASH AND CASH EQUIVALENTS As at 31 July 2013 HK$ 000 As at 31 July 2014 HK$ 000 Cash at banks 5,026 7,641 Cash on hand Cash and cash equivalents 5,089 7,724 Notes: (a) All cash and cash equivalents are denominated in HK$. (b) Cash at banks earns interest at floating rates based on daily bank deposit rates. 18 COMBINED CAPITAL As at 31 July 2013 HK$ 000 As at 31 July 2014 HK$ 000 Combined capital For the purpose of the preparation of the combined statement of financial position, the balance of combined capital at 31 July 2013 and 2014 represents the aggregate of the paid up share capital of the subsidiaries comprising the Group prior to the Reorganisation. The Company was incorporated in the Cayman Islands as an exempted company with limited liability under the Companies Law of the Cayman Islands on 17 July 2014 with an initial authorised share capital of HK$380,000 divided into 38,000,000 ordinary shares of HK$0.01 each and one share was issued thereafter. I-36

277 APPENDIX I ACCOUNTANTS REPORT 19 BORROWINGS As at 31 July 2013 HK$ 000 As at 31 July 2014 HK$ 000 Non-current Finance lease liabilities (Note b) 171 Current Bank borrowing (Note a) 5,996 5,638 Finance lease liabilities (Note b) 220 5,996 5,858 Total borrowings 5,996 6,029 Notes: (a) Bank borrowing Bank borrowing mature until 2027 and bear interest at 2.5% above three-month Hong Kong interbank Offered Rate ( HIBOR ) per annum. The bank borrowing is denominated in HK$. The bank borrowing is classified as current liabilities according to the HK Interpretation 5, Presentation of Financial Statements Classification by the Borrower of a Term Loan that Contains a Repayment on Demand Clause issued by the HKICPA. According to the repayment schedule, the bank borrowing is repayable as follows: As at 31 July 2013 HK$ 000 As at 31 July 2014 HK$ 000 Within 1 year Between 1 and 2 years Between 2 and 5 years 1,171 1,204 Over 5 years 4,098 3,686 5,996 5,638 I-37

278 APPENDIX I ACCOUNTANTS REPORT (b) Finance lease liabilities As at 31 July 2013 HK$ 000 As at 31 July 2014 HK$ 000 Gross finance lease liabilities minimum lease payments Within 1 year 232 Later than 1 year and no later than 2 years Future finance charges on finance leases (15) Present value of finance lease liabilities 391 The present value of finance lease liabilities is as follows: As at 31 July 2013 HK$ 000 As at 31 July 2014 HK$ 000 Within 1 year 220 Later than 1 year and no later than 2 years The Group s motor vehicles with an aggregate net book value of nil and approximately HK$360,000 as at 31 July 2013 and 2014 respectively (Note 13) are secured as the rights to the leased assets revert to the lessors in the event of default. The carrying amounts of all finance lease liabilities are denominated in HK$. (c) As at 31 July 2013, the Group had committed banking facilities of approximately HK$5,996,000 which bore interest at 2.88% to 2.89% per annum. As at 31 July 2014, the Group had committed banking facilities of approximately HK$6,029,000 which bore interest at 2.87% to 2.88% per annum. These banking facilities are secured by: (i) The Group s leasehold properties with an aggregate net book value of approximately HK$12,768,000 and HK$12,395,000 as at 31 July 2013 and 2014 respectively (Note 13); and (ii) Personal guarantee given by a director of the Company as at 31 July 2013 and I-38

279 APPENDIX I ACCOUNTANTS REPORT 20 TRADE AND OTHER PAYABLES As at 31 July 2013 HK$ 000 As at 31 July 2014 HK$ 000 Trade payables 275 1,369 Accruals and other payables 1,214 1,516 1,489 2,885 Notes: (a) Payment terms granted by suppliers are 30 days from the invoice date of the relevant purchases. The ageing analysis of trade payables based on the invoice date is as follows: As at 31 July 2013 HK$ 000 As at 31 July 2014 HK$ days 273 1, days ,369 (b) All trade and other payables are denominated in HK$. 21 AMOUNTS DUE TO CUSTOMERS FOR CONTRACT WORK As at 31 July 2013 HK$ 000 As at 31 July 2014 HK$ 000 Contract costs incurred plus recognised profits 7,072 Less: progress billings 8,851 (1,779) I-39

280 APPENDIX I ACCOUNTANTS REPORT 22 NOTES TO COMBINED STATEMENTS OF CASH FLOWS (a) Reconciliation of profit before income tax to net cash generated from operations Year ended 31 July 2013 HK$ 000 Year ended 31 July 2014 HK$ 000 Profit before income tax 21,486 29,909 Adjustments for: Depreciation 1,452 1,751 Loss on disposal of property, plant and equipment Interest expense Operating profit before working capital changes 23,387 31,900 Increase in trade and other receivables (4,556) (8,935) Increase in balance with a shareholder (11,659) (17,603) Increase in trade and other payables 1,265 1,396 Increase/(Decrease) in amounts due to customers for contract work 1,779 (1,779) Net cash generated from operations 10,216 4,979 (b) Material non-cash transactions During the years ended 31 July 2013 and 2014, additions to property, plant and equipment of nil and approximately HK$391,000 were financed by finance lease arrangements respectively. 23 COMMITMENTS (a) Capital commitments Capital commitments outstanding at each statement of financial position date not provided for in the Financial Information were as follows: As at 31 July 2013 HK$ 000 As at 31 July 2014 HK$ 000 Contracted but not provided for: Property, plant and equipment 782 I-40

281 APPENDIX I ACCOUNTANTS REPORT (b) Operating lease commitments Group as lessee At the end of the reporting period, the total future minimum lease payments under non-cancellable operating leases were payable as follows: As at 31 July 2013 HK$ 000 As at 31 July 2014 HK$ 000 Not later than 1 year 1, years 3,209 4,671 The Group is the lessee in respect of office premises and equipment under operating leases. The leases typically run for an initial period of 3 to 5 years, with an option to renew the leases when all terms are renegotiated. 24 RELATED PARTY TRANSACTIONS (a) Save as disclosed in Notes 16 and 19 to the Financial Information, the Group did not have any significant related party transaction with related parties during the Track Record Period. (b) The emoluments of the directors and senior executives (representing the key management personnel) during the Track Record Period are disclosed in Note CONTINGENT LIABILITIES The Group had no significant contingent liabilities at the end of each of the Track Record Period. I-41

282 APPENDIX I ACCOUNTANTS REPORT III DIRECTORS REMUNERATION Save as disclosed in Note 8 to this report, no remuneration has been paid or is payable to the Company s directors by the Company or any of its subsidiaries during the Track Record Period. Under the arrangements presently in force, the aggregate remuneration of the Company s directors for the year ending 31 July 2015 is expected to be approximately HK$5,840,000. IV SUBSEQUENT EVENTS The following significant events took place subsequent to 31 July 2014: (a) In September 2014, interim dividends of HK$22,590,000 were appropriated to the then shareholder of VLA, KSL Engineering and CRPD (which are now the indirect wholly-owned subsidiaries of the Company). All dividends declared had been fully paid in September 2014 and the Group financed the payment of such dividend by offsetting an equivalent amount due from Dr. Li. (b) The Reorganisation as set out in Note 1 of Section II was completed on 19 November (c) The Company adopted a share option scheme on 19 November 2014, a summary of the terms and conditions of which are set out in the paragraph headed Share Option Scheme in Appendix V Statutory and General Information to the Prospectus. (d) On 19 November 2014, the authorised share capital of the Company was increased from HK$380,000 to HK$20,000,000 by the creation of an additional of 1,962,000,000 shares of HK$0.01 each. V SUBSEQUENT FINANCIAL STATEMENTS No audited financial statements of the Group have been prepared in respect of any period subsequent to 31 July Yours faithfully, HLB Hodgson Impey Cheng Limited Certified Public Accountants Jonathan T. S. Lai Practising Certificate Number: P04165 Hong Kong I-42

283 APPENDIX II UNAUDITED PRO FORMA FINANCIAL INFORMATION The information set out in this appendix does not form part of the Accountants Report prepared by HLB Hodgson Impey Cheng Limited, Certified Public Accountants, Hong Kong, as set out in Appendix I to this prospectus, and is included in this prospectus for information only. The following unaudited pro forma financial information prepared in accordance with paragraph 7.31 of the GEM Listing Rules is for illustrative purposes only, and is set out here to provide investors with further information about how the proposed listing might have affected the net tangible assets of our Group as if the Placing had occurred on 31 July Although reasonable care has been exercised in preparing the said information, prospective investors who read the information should bear in mind that these figures are inherently subject to adjustments and may not give a complete picture of our Group s financial results and positions of the financial periods concerns. A. UNAUDITED PRO FORMA ADJUSTED COMBINED NET TANGIBLE ASSETS The unaudited pro forma adjusted combined net tangible assets of the Group has been prepared, on the basis of the notes set forth below, for the purpose of illustrating the effect of the Placing as if it had taken place on 31 July It has been prepared for illustrative purpose only and, because of its hypothetical nature, may not give a true picture of the financial position of the Group after the Placing or at any future dates. Audited combined net tangible assets of the Group attributable to owners of the Company as at 31 July 2014 Add: Estimated net proceeds from the placing of New Shares Unaudited pro forma adjusted net tangible assets Unaudited pro forma adjusted net tangible assets per Share HK$ 000 HK$ 000 HK$ 000 HK$ (Note 1) (Note 2) (Note 3) Based on the Placing Price of HK$0.60 per Share 52,830 26,152 78, Notes: 1. The audited combined net tangible assets of the Group attributable to owners of the Company as at 31 July 2014 is extracted from the accountants report set out in Appendix I to this prospectus. 2. The estimated net proceeds from the placing of New Shares are based on the Placing Price of HK$0.60 per Share, after deduction of relevant estimated underwriting fees and other related fees and expenses to be borne by the Group (excluding approximately HK$4.0 million listing-related expenses which have been accounted for prior to 31 July 2014). 3. The unaudited pro forma adjusted net tangible assets per Share are determined after the adjustments as described in Notes 1 and 2 above and on the basis that 411,200,000 Shares are issued and outstanding as set out in the section headed Share Capital in this prospectus. 4. The unaudited pro forma financial information presented above does not take account of any trading or other transactions subsequent to the date of the financial statements included in the unaudited pro forma financial information (i.e. 31 July 2014). In particular, in September 2014, interim dividends of HK$22,590,000 were appropriated to the then shareholder of VLA, KSL Engineering and CRPD (which are now the indirect wholly-owned subsidiaries of the Company). The unaudited pro forma adjusted net tangible assets had not taken into account of the above transaction. Had the effect of the interim dividends of HK$22,590,000 appropriated in September 2014 been taken into account, the unaudited pro forma adjusted net tangible assets per Share would be HK$0.14 (assuming Placing Price of HK$0.60 per Share) on the basis that 411,200,000 Shares were in issue and that the interim dividends appropriated in September 2014, the Placing and the Capitalisation Issue had been completed on 31 July II-1

284 APPENDIX II UNAUDITED PRO FORMA FINANCIAL INFORMATION B. REPORT ON UNAUDITED PRO FORMA FINANCIAL INFORMATION The following is the text of a report received from the reporting accountants, HLB Hodgson Impey Cheng Limited, Certified Public Accountants, Hong Kong, prepared for the purpose of incorporation in this prospectus. 31/F, Gloucester Tower The Landmark 11 Pedder Street Central Hong Kong 28 November 2014 INDEPENDENT REPORTING ACCOUNTANTS ASSURANCE REPORT ON THE COMPILATION OF UNAUDITED PRO FORMA FINANCIAL INFORMATION TO THE DIRECTORS OF KSL HOLDINGS LIMITED We have completed our assurance engagement to report on the compilation of unaudited pro forma financial information of KSL Holdings Limited (the Company ) and its subsidiaries (hereinafter collectively referred to as the Group ) by the directors for illustrative purposes only. The unaudited pro forma financial information consists of the unaudited pro forma adjusted net tangible assets as at 31 July 2014 (the Unaudited Pro Forma Financial Information ) and related notes as set out in Section A of Appendix II to the prospectus issued by the Company dated 28 November 2014 (the Prospectus ). The applicable criteria on the basis of which the directors have compiled the Unaudited Pro Forma Financial Information are described in Section A of Appendix II to the Prospectus. The Unaudited Pro Forma Financial Information has been compiled by the directors to illustrate the impact of the proposed placing of the shares of the Company on the Group s financial position as at 31 July 2014 as if the proposed placing had taken place at 31 July As part of this process, information about the Group s financial information has been extracted by the directors from the Group s financial information for the year ended 31 July 2014, on which an accountants report has been published. Directors responsibility for the Unaudited Pro Forma Financial Information The directors are responsible for compiling the Unaudited Pro Forma Financial Information in accordance with paragraph 7.31 of the Rules Governing the Listing of Securities on the Growth Enterprise Market of The Stock Exchange of Hong Kong Limited (the GEM Listing Rules ) and with reference to Accounting Guideline 7 Preparation of Pro Forma Financial Information for Inclusion in Investment Circulars ( AG 7 ) issued by the Hong Kong Institute of Certified Public Accountants ( HKICPA ). II-2

285 APPENDIX II UNAUDITED PRO FORMA FINANCIAL INFORMATION Reporting accountants responsibility Our responsibility is to express an opinion, as required by paragraph 7.31(7) of the GEM Listing Rules, on the Unaudited Pro Forma Financial Information and to report our opinion to you. We do not accept any responsibility for any reports previously given by us on any financial information used in the compilation of the Unaudited Pro Forma Financial Information beyond that owed to those to whom those reports were addressed by us at the dates of their issue. We conducted our engagement in accordance with Hong Kong Standard on Assurance Engagements (HKSAE) 3420 Assurance Engagements to Report on the Compilation of Pro Forma Financial Information Included in a Prospectus issued by the HKICPA. This standard requires that the reporting accountants comply with ethical requirements and plan and perform procedures to obtain reasonable assurance about whether the directors have compiled the Unaudited Pro Forma Financial Information in accordance with paragraph 7.31 of the GEM Listing Rules and with reference to AG 7 issued by the HKICPA. For purposes of this engagement, we are not responsible for updating or reissuing any reports or opinions on any historical financial information used in compiling the Unaudited Pro Forma Financial Information, nor have we, in the course of this engagement, performed an audit or review of the financial information used in compiling the Unaudited Pro Forma Financial Information. The purpose of Unaudited Pro Forma Financial Information included in the Prospectus is solely to illustrate the impact of a significant event or transaction on unadjusted financial information of the Group as if the event had occurred or the transaction had been undertaken at an earlier date selected for purposes of the illustration. Accordingly, we do not provide any assurance that the actual outcome of the event or transaction at 31 July 2014 would have been as presented. A reasonable assurance engagement to report on whether the Unaudited Pro Forma Financial Information has been properly compiled on the basis of the applicable criteria involves performing procedures to assess whether the applicable criteria used by the directors in the compilation of the Unaudited Pro Forma Financial Information provide a reasonable basis for presenting the significant effects directly attributable to the event or transaction, and to obtain sufficient appropriate evidence about whether: The related pro forma adjustments give appropriate effect to those criteria; and The Unaudited Pro Forma Financial Information reflects the proper application of those adjustments to the unadjusted financial information. The procedures selected depend on the reporting accountants judgement, having regard to the reporting accountants understanding of the nature of the Group, the event or transaction in respect of which the Unaudited Pro Forma Financial Information has been compiled, and other relevant engagement circumstances. The engagement also involves evaluating the overall presentation of the Unaudited Pro Forma Financial Information. II-3

286 APPENDIX II UNAUDITED PRO FORMA FINANCIAL INFORMATION We believe that the evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Opinion In our opinion: (a) the Unaudited Pro Forma Financial Information has been properly compiled on the basis stated; (b) such basis is consistent with the accounting policies of the Group; and (c) the adjustments are appropriate for the purposes of the Unaudited Pro Forma Financial Information as disclosed pursuant to paragraph 7.31(1) of the GEM Listing Rules. Yours faithfully, HLB Hodgson Impey Cheng Limited Certified Public Accountants Jonathan T. S. Lai Practising Certificate Number: P04165 Hong Kong II-4

287 APPENDIX III PROPERTY VALUATION The following is the text of a letter and valuation certificate, prepared for the purpose of incorporation in this prospectus received from Asset Appraisal Limited, an independent property valuer, in connection with its valuation as at 31 October 2014 of the property interests held by the Group. 28 November 2014 The Board of Directors KSL Holdings Limited Office A and B, 12th Floor Billion Plaza 2 10 Cheung Yue Street Kowloon Hong Kong Dear Sirs, Re: Valuation of Units A, B and C on 7th Floor and Lavatory, Sun Kwong Industrial Building, Nos Tung Chau West Street, Kowloon, Hong Kong. In accordance with the instructions of KSL Holdings Limited (the Company ) to value the property interests (the Property ) held by the Company and its subsidiaries (altogether referred to as the Group ) situated in Hong Kong, we confirm that we have carried out inspections of the property, made relevant enquiries and obtained such further information as we consider necessary for the purpose of providing you with our opinion of the market value of the Property as at 31 October 2014 (the Valuation Date ). BASIS OF VALUATION Our valuation of the Property represents the market value which we would define as intended to mean the estimated amount for which an asset or liability should exchange on the valuation date between a willing buyer and a willing seller in an arm s length transaction after proper marketing and where the parties had each acted knowledgeably, prudently and without compulsion. TITLESHIP We have been obtained land registration details of the Property in the Land Registry. However, we have not verified ownership of the Property and the existence of any encumbrances that would affect its ownership. III-1