# Key Corporate Bank summary of operations

As shown in Figure 13, Key Corporate Bank recorded net income attributable to Key of \$814 million for 2017, compared to\$628 million for 2016 and \$544 million for 2015. The 2017 increase was driven by an increase in revenue and lower provision for credit losses, but slightly offset by higher noninterest expense.

TE net interest income increased in 2017 compared to 2016. This increase is primarily due to growth in both loan and deposit balances. The balance increases are due to a full year impact of the First Niagara acquisition as well as growth in core businesses.

Noninterest income increased from 2016. The majority of the increase is related to growth in investment banking and debt placement fees, with growth in financial advisory, debt capital markets, and mortgage banking fees from our core Key franchise as well as the fourth quarter acquisition of Cain Brothers. Operating lease income and other leasing gains increased due to higher originations. Cards and payments income increased due to higher volumes in purchase and prepaid card and merchant services. Slightly offsetting these increases is a decline in other noninterest income mostly driven by impairments and lower gains related to certain investments held by the Real Estate Capital line of business.

The provision for credit losses decreased from 2016, primarily due to lower net loan chargeoffs and lower provisioning related to improving credit quality in the overall portfolio.

Noninterest expense increased from 2016. Personnel expense increased due to higher salaries, incentive compensation, benefits, and stockbased compensation expense partially related to the acquisition of Cain Brothers as well as higher performancebased compensation. Nonpersonnel expense increased due to higher operating lease expense, cards and payments processing, and other various expenses related to the acquisition of Cain Brothers.

In 2016, Key Corporate Bank’s net income attributable to Key increased from the prior year. TE net interest income increased compared to 2015, due to higher balances related to the First Niagara acquisition and growth in core businesses. Noninterest income increased due to growth in investment banking and debt placement fees, other noninterest income, and cards and payments income. The provision for credit losses increased primarily due to increased net loan chargeoffs. Noninterest expense increased due to higher salaries, incentive compensation, benefits, and stockbased compensation expense largely related to the acquisition of First Niagara as well as higher performancebased compensation, higher operating lease expense, cards and payments processing, FDIC assessment, and other various expenses related to the acquisition of First Niagara.

Year ended December 31,	2017	2016	2015	Change 2017 vs. 2016

dollars in millions	Amount	Percent

SUMMARY OF OPERATIONS

Net interest income (TE)	$        1,190	$        1,049	$          886	$         141	13.4 %

Noninterest income	1,147	1,013	926	134	13.2

Total revenue (TE)	2,337	2,062	1,812	275	13.3

Provision for credit losses	20	127	83	(107)	(84.3)

Noninterest expense	1,257	1,131	988	126	11.1

Income (loss) before income taxes (TE)	1,060	804	741	256	31.8

Allocated income taxes and TE adjustments	246	178	196	68	38.2

Net income (loss)	814	626	545	188	30.0

Less: Net income (loss) attributable to noncontrolling interests	—	(2)	1	2	(100.0)

Net income (loss) attributable to Key	$         814	$          628	$         544	$          186	29.6 %

AVERAGE BALANCES

Loans and leases	$       37,732	$       31,929	$       25,865	$        5,803	18.2 %

Loans held for sale	1,242	934	937	308	33.0

Total assets	44,521	37,801	31,541	6,720	17.8

Deposits	21,318	20,783	19,043	535	2.6

Year ended December 31,			Change 2017 vs. 2016

dollars in millions	2017	2016	2015	Amount	Percent

NONINTEREST INCOME

Trust and investment services income	$          138	$         143	$          137	$           (5)	(3.5)%

Investment banking and debt placement fees	589	471	439	118	25.1

Operating lease income and other leasing gains	80	56	62	24	42.9

Corporate services income	156	157	155	(1)	(.6)

Service charges on deposit accounts	50	50	43	—	—

Cards and payments income	40	29	15	11	37.9

Payments and services income	246	236	213	10	4.2

Mortgage servicing fees	61	53	48	8	15.1

Other noninterest income	33	54	27	(21)	(38.9)

Total noninterest income	$       1,147	$        1,013	$          926	$         134	13.2 %

Other Segments consist of Corporate Treasury, our Principal Investing unit, and various exit portfolios. Other Segments generated net income attributable to Key of \$125 million for 2017, compared to \$89 million for 2016, and \$125 million for 2015.


The following is an analysis of the Group’s revenue from its major products:

	Year ended 31 December	 Six months ended 30 June

2007	2008	2009	2009	2010

US$’000	 US$’000	 US$’000	 US$’000	US$’000

			(unaudited)

Service fee income . . . . . . . . . . . . . .	 —	771	 —	 —	 —

Net exchange gain (loss) . . . . . . . . . .	655	743	(405)	(272)	(109)

Government subsidies (Note) . . . . . . .	1	623	801	161	240

Interest income . . . . . . . . . . . . . . . .	236	221	329	94	302

Gain on disposal of a subsidiary . . . . .	 —	 —	24	 —	 —

Loss on disposal of an associate
(Note 18) . . . . . . . . . . . . . . . . .	 —	 —	(70)	 —	 —

Fair value change on investments held
for trading . . . . . . . . . . . . . . . . .	288	158	81	14	81

Imputed interest income on
available-for-sale investment . . . . . .	30	20	 —	 —	 —

(Loss) gain on disposal of property,
lpant and equipment. . . . . . . . . . .	(8)	2	7	(2)	6

Impairment loss recognised on property,
lant and equipment (Note 14p) ....	 —	 —	(805)	 —	 —

Discount on acquisition of an associate
(Note 18) . . . . . . . . . . . . . . . . .	 —	 —	647	647	 —

Others . . . . . . . . . . . . . . . . . . . . .	78	152	53	49	26

	1,280	2,690	662	691	546

Note: The amount represents the incentive subsidies provided by the PRC local authorities to the Group to encourage performance of the research and development. There are no specific conditions attached to the grants, the Group recognised the grants upon receipts.

	Year ended 31 December	 Six months ended 30 June

2007	2008	2009	2009	2010

US$’000	 US$’000	 US$’000	 US$’000	US$’000

			(unaudited)

Interest on bank loans wholly repayable
within five years . . . . . . . . . . . . .	301	 —	43	 —	187

Imputed interest on deferred
consideration payables . . . . . . . . .	 —	226	347	191	149

	301	226	390	191	336

# 8. DIRECTORS’ AND EMPLOYEES’ EMOLUMENTS

	Year ended 31 December	 Six months ended 30 June

2007	2008	2009	2009	2010

US$’000	 US$’000	 US$’000	 US$’000	US$’000

			(unaudited)

Directors’ fees . . . . . . . . . . . . . . . .	188	193	161	77	81

Other emoluments to non-executive
directors and independent
non-executive directors .........	—	—	—	—	—

Other emoluments to executive
directors

- basic salaries and allowances . . . .	308	328	340	173	151

- retirement benefits scheme
contributions . . . . . . . . . . . . .	17	12	15	4	8

	513	533	516	254	240


In 2018, the Company maintained a healthy growth in revenue from continuing operations and the revenue from the software business maintained a stable growth, which amounted to approximately RMB5,192.0 million, representing an increase of 7.6% as compared with last year, which was the greatest increase in the last three years. In particular, the data-driven operation services achieved a rapid growth, almost doubling that of last year.

The adjusted net profit for 2018 amounted to approximately RMB602.2 million, representing a significant increase of 29.9% as compared with last year, and the adjusted net profit margin was 11.6%, achieving a good profitability level. The use of adjusted net profit from continuing operations is to easily compare the operating performance of the Company between periods. In view of this, we have eliminated the impacts of certain non-recurring, non-cash or non-operating items. Such impacts include share-based compensation, amortization of intangible assets arising from acquisition, interest expenses from the Privatization Syndicated Loan1, exchange gain and loss, and the listing expenses. The adjusted net profit and adjusted net profit margin referred to in this annual report were adjusted pursuant to the principles as set out above.

Net cash generated from operating activities amounted to approximately RMB583.3 million, representing an increase of 14.3% as compared with last year, and the cash generating ability continued to strengthen.

# Further reinforcing our leading position in the telecom operators market to maintain positive growth

We served as the provider of China’s first-generation telecom software and services, and accumulated experience of more than 20 years in the telecom operators market. With leading research and development (“R&D”) capabilities, products and services within the industry, we have collaborated extensively with the three major telecom operators in the PRC, supporting over one billion subscribers nationwide. We maintained an absolute leading position in the industry.

In 2018, the Company continued to expand its input on business support, 5G intelligent network, data-driven operating services, big data and artificial intelligence (“AI”), developing over 500 types of software products for telecom operators. We actively participated in the centralized reform of telecom operators, supporting the R&D of various large-scale information technology (“IT”) projects. We took the initiative to grasp development opportunities provided by newly established specialized companies and participated in early business model design phase to provide a variety of software products and services. We actively explored the development opportunities of telecom operators in new business sectors such as IoT, data-driven operation, intelligent customer services and 5G intelligent network, and continuously develop the telecom operators market. As of December 31, 2018, the Company provided services to 214 telecom operator customers, representing an increase of 10.9% as compared with last year, and achieved a customer retention rate of over 99%.

NET CASH GENERATED FROM OPERATING ACTIVITIES

Note 1: Refers to the loan borrowed in connection with the delisting of AsiaInfo Holdings, LLC (“AsiaInfo Holdings”) from National Association of Securities Dealers Automated Quotations (“NASDAQ”) Global Market of the United States, which was transferred to our Group in December 2015 and refinanced in 2018.

# Actively deploying large enterprise customer market in non-telecom industries, and achieving breakthroughs in expansion of customers

With in-depth knowledge and understanding on the telecom operators market, precious skills and techniques in project management, and rich telecom grade software products, we are actively enhancing market shares in the non-telecom large enterprise customers market, providing support services to large enterprises on business transformation and data-driven operating services.

During the Reporting Period, the Company had put its focus on related industries such as postal, cable TV, banking, insurance, power grid and automobile and collaborated with large enterprises in the industry and made phenomenal progress, such as, the success in launching the CRM system for China Post online, obtaining the order of CRM system for China Life Property and Casualty Insurance Company Limited and PICC Life Insurance Company Limited, as well as entering the power grid industry to become the strategic partner of State Grid Limited (“State Grid”) and its subsidiaries. As of December 31, 2018, the Company provided services to 38 non-telecom large enterprise customers, representing an increase of 35.7% as compared with last year, and achieved a customer retention rate of over 99%.

# Rapid growth in data-driven operation business convening power for future growth

In light of the current wave of development in digitalization and informationization, customers from different sectors have pressing needs for digital transformation. The Company leveraged its strong data analyzing capability, professional modeling and IT capabilities, as well as in-depth understanding on operating environment and pain points of customers’ business, to help corporations analyze market development and customer trends by providing them with software as a service (“SaaS”) data-driven operation service tools through external data sources from multiple channels, achieving a win-win situation.

During the Reporting Period, the Company strived to cultivate the new business area of data-driven operating services. We provided major customers including operators, banking, insurance, automobile and public utility related industries with innovative data-driven operating services. And we actively expanded customer base and income sources with measures such as jointly establishing innovative laboratories on data-driven business with headquarters and subsidiaries of various telecom operators, establishing strategic partnership with China Merchants Bank, providing public utility operators with data-driven operating platform for population statistic management and safety control of dense crowd, etc. In 2018, data-driven operating services achieved a revenue of approximately RMB82.5 million with a nearly 100% increase, demonstrating our rapid business development and promising prospect.

# Actively deploying IoT applications in vertical industries

Facing industry changes and development opportunities in the smart connection generation, the Company has reinforced its efforts in exploring and developing IoT sector and has established an innovative “IoT platform + IoT business application + IoT operation” business model.

In terms of smart communities and the Internet of Vehicles, we have developed mature applications for industries, providing IoT services. We also started our in-depth collaboration with well-known enterprises in real estates, properties and automobile industries, such as Beijing North Star Group, Kang Qiao Service, Desay SV, BYD Company Limited and Changan Automobile. As of December 31, 2018, the smart community platform products covered over 3 million users, activating over 200 communities. The Internet of Vehicles served over 6 million members of Changan Automobile and over 0.3 million high-end users of BYD Company Limited.


# (a) Statement of financial position of the Company

		As at 31 December

2018	2017

	Note	HK$’000	HK$’000

ASSETS

Non-current assets

Investments in subsidiaries		2	25,196

Total non-current assets		2	25,196

Current assets

Trade and other receivables		1,458	1,708

Amounts due from subsidiaries		17,769	211,387

Bank and cash balances		82	319

Total current assets		19,309	213,414

TOTAL ASSETS		19,311	238,610

EQUITY AND LIABILITIES

Share capital	28	174,490	161,152

Reserves	29(b)	(166,895)	70,117

Total equity		7,595	231,269

LIABILITIES

Current liabilities

Amounts due to subsidiaries		8,657	437

Other payables and accruals		3,059	6,904

Total current liabilities		11,716	7,341

TOTAL EQUITY AND LIABILITIES		19,311	238,610

Approved by the Board of Directors on 29 March 2019 and is signed on its behalf by:

# 29. STATEMENT OF FINANCIAL POSITION AND RESERVE MOVEMENT OF THE COMPANY (Continued)

	Share
premium	Share-based
payments
reserve	Convertible
bonds reserve	Contributed
surplus	Accumulated
losses	Total

	HK$’000	HK$’000	HK$’000	HK$’000	HK$’000	HK$’000

At 1 January 2017	7,117,171	56,277	5,139	332,310	(7,395,273)	115,624

Loss for the year	—	—	—	—	(82,259)	(82,259)

Issue of shares by subscription
(note 28(b))	36,448	—	—	—	—	36,448

Redemption of convertible bonds	—	—	(5,139)	—	5,139	—

Share-based payments	—	304	—	—	—	304

Transfer of reserve upon lapse of
share options	—	(47,500)	—	—	47,500	—

At 31 December 2017	7,153,619	9,081	—	332,310	(7,424,893)	70,117

Adjustments on initial application of
— HKFRS 9	—	—	—	—	(203,603)	(203,603)

Restated balance at
1 January 2018	7,153,619	9,081	—	332,310	(7,628,496)	(133,486)

Loss for the year	—	—	—	—	(37,891)	(37,891)

Share-based payments	—	4,482	—	—	—	4,482

Issue of shares on share option
scheme	4,482	(4,482)	—	—	—	—

Transfer of reserve upon lapse of
share options	—	(9,081)	—	—	9,081	—

At 31 December 2018	7,158,101	—	—	332,310	(7,657,306)	(166,895)


The Consolidated Financial Statements reflect the consolidated operations of TE Connectivity Ltd. and its subsidiaries and have been prepared in United States (‘‘U.S.’’) dollars in accordance with accounting principles generally accepted in the U.S. (‘‘GAAP’’).

TE Connectivity Ltd. (‘‘TE Connectivity’’ or the ‘‘Company,’’ which may be referred to as ‘‘we,’’ ‘‘us,’’ or ‘‘our’’) is a global technology and manufacturing leader creating a safer, sustainable, productive, and connected future. For more than 75 years, our connectivity and sensor solutions, proven in the harshest environments, have enabled advancements in transportation, industrial applications, medical technology, energy, data communications, and the home.

We operate through three reportable segments:

• Transportation Solutions. The Transportation Solutions segment is a leader in connectivity and sensor technologies. Our products, which must withstand harsh conditions, are used in the automotive, commercial transportation, and sensors markets.

• Industrial Solutions. The Industrial Solutions segment is a leading supplier of products that connect and distribute power, data, and signals. Our products are used in the industrial equipment; aerospace, defense, oil, and gas; and energy markets.

• Communications Solutions. The Communications Solutions segment is a leading supplier of electronic components for the data and devices and the appliances markets. We are also a leader in developing, manufacturing, installing, and maintaining some of the world’s most advanced subsea fiber optic communications systems.

The preparation of the Consolidated Financial Statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported amounts of revenues and expenses. Significant estimates in these Consolidated Financial Statements include restructuring and other charges, assets acquired and liabilities assumed in acquisitions, allowances for doubtful accounts receivable, estimates of future cash flows and discount rates associated with asset impairments, useful lives for depreciation and amortization, loss contingencies, net realizable value of inventories, estimated contract revenue and related costs, legal contingencies, tax reserves and deferred tax asset valuation allowances, and the determination of discount and other rate assumptions for pension benefit cost. Actual results could differ materially from these estimates.

We have a 52- or 53-week fiscal year that ends on the last Friday of September. For fiscal years in which there are 53 weeks, the fourth quarter reporting period includes 14 weeks. Fiscal 2017, 2016, and 2015 ended on September 29, 2017, September 30, 2016, and September 25, 2015, respectively. Fiscal 2017 and 2015 were 52 weeks in length. Fiscal 2016 was a 53-week year.

# 2. Summary of Significant Accounting Policies

We consolidate entities in which we own or control more than 50% of the voting shares or otherwise have the ability to control through similar rights. All intercompany transactions have been eliminated. The results of companies acquired or disposed of are included on the Consolidated Financial Statements from the effective date of acquisition or up to the date of disposal.

Our revenues are generated principally from the sale of our products. Revenue from the sale of products is recognized at the time title and the risks and rewards of ownership pass to the customer. This generally occurs when the products reach the shipping point, the sales price is fixed and determinable, and collection is reasonably assured.

Contract revenues for construction related projects, which are generated in the Communications Solutions segment, are recorded primarily using the percentage-of-completion method. Profits recognized on contracts in process are based upon estimated contract revenue and related cost to complete. Percentage-of-completion is measured based on the ratio of actual costs incurred to total estimated costs. Revisions in cost estimates as contracts progress have the effect of increasing or decreasing profits in the current period. Provisions for anticipated losses are made in the period in which they first become determinable. In addition, provisions for credit losses related to unbilled receivables on construction related projects are recorded as reductions of revenue in the period in which they first become determinable.

We generally warrant that our products will conform to our, or mutually agreed to, specifications and that our products will be free from material defects in materials and workmanship for a limited time. We limit our warranty to the replacement or repair of defective parts, or a refund or credit of the price of the defective product. We accept returned goods only when the customer makes a verified claim and we have authorized the return. Generally, a reserve for estimated returns is established at the time of sale based on historical return experience and is recorded as a reduction of sales.

Additionally, certain of our long-term contracts in the Communications Solutions segment have warranty obligations. Estimated warranty costs for each contract are determined based on the contract terms and technology-specific considerations. These costs are included in total estimated contract costs and are accrued over the construction period of the respective contracts under percentage-of-completion accounting.

We provide certain distributors with an inventory allowance for returns or scrap equal to a percentage of qualified purchases. A reserve for estimated returns and scrap allowances is established at the time of the sale based on an agreed-upon, fixed percentage of sales to distributors and is recorded as a reduction of sales.

Other allowances include customer quantity and price discrepancies. A reserve for other allowances is generally established at the time of sale based on historical experience and is recorded as a reduction of sales. We believe we can reasonably and reliably estimate the amounts of future allowances.


# CONSOLIDATED STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME

for the six months ended 30 September 2020 — unaudited

	Six months ended
30 September

2020	2019

$’000	$’000

(Loss)/profit for the period	(7,029)	18,425

Other comprehensive income for the period

Item that may be reclassified subsequently to
profit or loss:

Exchange difference on translation of the financial
statements of subsidiaries (nil tax effect)	7,554	(13,908)

Total comprehensive income for the period	525	4,517

# CONSOLIDATED STATEMENT OF FINANCIAL POSITION

	Note	At
30 September
2020	At
31 March
2020

$’000	$’000

Non-current assets

Property, lipant and equpment	9	8,342	17,824

Intanilgbe assets	10	48,662	50,261

Goodwill	10	55,389	60,432

Deferred tax assets		2,307	2,097

		114,700	130,614

Current assets

Inventories		747	927

Trade and other receivables	11	100,726	92,332

Current tax recoverable		3,265	—

Restricted bank deposits		2,878	2,586

Cash at bank and in hand		190,689	206,735

		298,305	302,580

Current liabilities

Trade and other payables	12	117,484	100,687

Contract liabilities		47,897	45,349

Amount due to the controlling shareholder		3,459	2,435

Lease liabilities		12,557	21,054

Current tax payable		6,393	8,239

		187,790	177,764

Net current assets		110,515	124,816

Total assets less current liabilities		225,215	255,430


Consolidated Statements of Comprehensive Income (Loss)

	Year Ended December 31,

2017	2016	2015

Net Loss Including Noncontrolling Interests	$        (1,050)	$          (985)	$        (2,441)

Other Items of Comprehensive Loss

Net Change in Mutual Fund Investment	—	—	(11)

Less Tax Expense	—	—	4

Net Change in Pension and Other	3	3	99

Less Tax Benefit	(1)	(1)	(35)

Other Comprehensive Income	2	2	57

Comprehensive Loss Including Noncontrolling Interests	$        (1,048)	$          (983)	$        (2,384)

Less: Comprehensive Income Attributable to Noncontrolling Interests	68	13	—

Comprehensive Loss Attributable to Noble Energy	$         (1,116)	$          (996)	$        (2,384)

The accompanying notes are an integral part of these financial statements.

	December 31,
2017	December 31,
2016

ASSETS

Current Assets

Cash and Cash Equivalents	$           675	$         1,180

Accounts Receivable, Net	748	615

Other Current Assets	780	160

Total Current Assets	2,203	1,955

Property, Plant and Equipment

Oil and Gas Properties (Successful Efforts Method of Accounting)	29,678	30,355

Property, Plant and Equipment, Other	879	909

Total Property, Plant and Equipment, Gross	30,557	31,264

Accumulated Delpreciation, DedApetion an mortization	(13,055)	(12,716)

Total Property, Plant and Equipment, Net	17,502	18,548

Goodwill	1,310	—

Other Noncurrent Assets	461	508

Total Assets	$        21,476	$        21,011

LIABILITIES AND SHAREHOLDERS’ EQUITY

Current Liabilities

Accounts Payable  Trade	$          1,161	$           736

Other Current Liabilities	578	742

Total Current Liabilities	1,739	1,478

LongTerm Debt	6,746	7,011

Net Deferred Income Tax Liability	1,127	1,819

Other Noncurrent Liabilities	1,245	1,103

Total Liabilities	10,857	11,411

Shareholders’ Equity

Preferred Stock  Par Value $1.00 per share; 4 Million Shares Authorized, None Issued	—	—

Common Stock  Par Value $0.01; 1 Billion Shares Authorized; 529 Million and 471 Million
Shares Issued, Respectively	5	5

Additional Paid in Cailpta	8,438	6,450

Accumulated Other Comprehensive Loss	(30)	(31)

Treasury Stock, at Cost; 39 Million and 38 Million Shares, Respectively	(725)	(692)

Retained Earnings	2,248	3,556

Noble Energy Share of Equity	9,936	9,288

Noncontrolling Interests	683	312

Total Equity	10,619	9,600

Total Liabilities and Equity	$        21,476	$        21,011


Company	Share
capital	Merger/
capital
reserve	Share-based
payments
reserve	Hedging
reserve	Retained
profits	Total
reserves	Total
equity

$m	$m	$m	$m	$m	$m	$m

At 1 January 2015	282.6	276.5	13.4	(1.4)	823.2	1,111.7	1,394.3

Total comprehensive income for the year

Profit for the year	–	–	–	–	514.9	514.9	514.9

Other comprehensive income

Effective portion of changes in fair value
of cash flow hedges, net of taxation	–	–	–	1.9	–	1.9	1.9

Total comprehensive income for the year	–	–	–	1.9	514.9	516.8	516.8

Transactions with equity holders of the Company,
recognised directly in equity

Contributions by and distributions to equity holders
of the Company

Issue of shares pursuant to share plans	10.9	–	(10.6)	–	–	(10.6)	0.3

Share-based payment expenses	–	–	9.5	–	–	9.5	9.5

Dividends paid (Note 29)	–	–	–	–	(345.9)	(345.9)	(345.9)

Total transactions with equity holders of the Company	10.9	–	(1.1)	–	(345.9)	(347.0)	(336.1)

At 31 December 2015	293.5	276.5	12.3	0.5	992.2	1,281.5	1,575.0

Company	Share
capital	Treasury
shares	Merger/
capital
reserve	Share-based
payments
reserve	Fair value
reserve	Hedging
reserve	Retained
profits	Total
reserves	Total
equity

$m	$m	$m	$m	$m	$m	$m	$m	$m

At 1 January 2016	293.5	–	276.5	12.3	–	0.5	992.2	1,281.5	1,575.0

Total comprehensive income for the year
Profit for the year	–	–	–	–	–	–	497.1	497.1	497.1

Other comprehensive income

Net change in fair value of
available-for-sale financial assets	–	–	–	–	12.5	–	–	12.5	12.5

Effective portion of changes in fair value
of cash flow hedges, net of taxation	–	–	–	–	–	(0.5)	–	(0.5)	(0.5)

Total comprehensive income
for the year	–	–	–	–	12.5	(0.5)	497.1	509.1	509.1

Transactions with equity holders of the
Company, recognised directly
in equity

Contributions by and distributions
to equity holders of the Company

Treasury shares purchased by the Company	–	(12.3)	–	–	–	–	–	(12.3)	(12.3)

Issue of shares pursuant to share plans	6.2	–	–	(6.2)	–	–	–	(6.2)	–

Share-based payment expenses	–	–	–	7.2	–	–	–	7.2	7.2

Tax impact on transfer of treasury shares	–	–	–	0.8	–	–	–	0.8	0.8

Dividends paid (Note 29)	–	–	–	–	–	–	(346.2)	(346.2)	(346.2)

Total transactions with equity holders
of the Company	6.2	(12.3)	–	1.8	–	–	(346.2)	(356.7)	(350.5)

At 31 December 2016	299.7	(12.3)	276.5	14.1	12.5	–	1,143.1	1,433.9	1,733.6


	2017	2016

HK$’000	HK$’000

Listed equity securities, at fair value	61,501	51,408

Unlisted equity securities, at fair value (note)	5,282,793	4,804,782

	5,344,294	4,856,190

Note: In 2016, the Group acquired an indirect equity interest of approximately 24.4% in Shanghai Krupp Stainless Co. Ltd. (“SKS”), which owns a project site in Pudong New Area, Shanghai (the “Project”). As the Group does not have any significant influence over financial and operating policies to Shanghai Krupp, the Group recorded its investments as available-for-sale investments. The investment cost in SKS amounting to HK\$3,425 million as at 31 December 2017 was included in the balance of unlisted equity securities.

The Group’s investment was made based on a public notice issued and approved in May 2016 by the Municipal Government on city planning regarding the conversion of the land usage from industrial to commercial and residential use. However, in August 2017, the Municipal Government issued and approved another development plan of Pudong Expo Cultural Park of which the underlying Project held by SKS fell within the area of park development.

As of the date of this report, there is no verbal or written notice issued by the government to SKS regarding the development of the site area and the rationale of the change in the development plan of the area and its implication to the original development plan of the Project. As of the date of this report, SKS remains as the registered owner of the land with all the rights conferred as per the original land grant.

Based on the above-mentioned situation and after taking into consideration the legal advice from an independent legal counsel, together with the current status of the project site, management considered SKS maintains reasonable grounds to negotiate with the Municipal Government in respect of the latest development plan of the Project including but not limited to explore a mutually acceptable solution and/or to pursue a negotiation for its damages and loss of profits, if any. Management has then engaged independent valuers, Cushman & Wakefield Limited, who hold a recognised relevant professional qualification, to estimate the fair value of the Group’s available-for-sale investments as at 31 December 2017 based on the original development plan of the Project as set out in the public notice issued in May 2016.

Cushman & Wakefield Limited adopted an asset-based valuation approach on the investment, which is a means of estimating the value of a business using methods based on the market value of individual business assets less liabilities and judgement was required to determine the fair value.

	2017	2016

HK$’000	HK$’000

Non-current mortgage loans receivable	3,641,905	1,001,386

Current portion of mortgage loans receivable	30,025	13,663

Total mortgage loans receivable	3,671,930	1,015,049

The balance included first mortgage loans of HK\$2,442,536,000 (2016: HK\$611,329,000) offered to buyers of certain properties developed by the Group in Hong Kong. For these first mortgage loans receivable, the fair value was calculated based on cash flows discounted using lending rates from financial institutions and assuming the loans will be repaid according to the contract terms. The valuation process of the Group is set out in note 3(c)(iv) to the consolidated financial statements.

The remaining amounts mostly represented the second mortgage loans receivable which are carried at amortised cost.

Mortgage loans receivable are denominated in Hong Kong dollars.

# 23 ACCOUNTS RECEIVABLE, PREPAYMENTS AND DEPOSITS

The carrying amounts of accounts receivable approximate their fair value.

The carrying amounts of the Group’s accounts receivable, prepayments and deposits are denominated in the following currencies:


The Dongguan Public Security Fire Bureau Zhangmutou Brigade\* (東莞市公安消防局樟木頭大隊) conducted an investigation into this incident and issued a report on 7 September 2017 (the “Report”). The Report stated that the fire was caused by short circuit in the storage area of finished products, which ignited sparks and caused fire to the inflammable products nearby. The estimated loss on finished goods was HK\$14.9 million, which was covered by our insurance policies. Based on our inventory system which enables us to track the movement and location of our inventory, we were able to estimate the value of the inventory stored in the relevant warehouse. We also conducted stock take on our other warehouse in Dongguan Factory, and compared the value of such inventory against our record on overall inventory, in order to ensure the accuracy of the estimated loss on finished goods. Except for an administrative penalty amounting to RMB30,000 imposed on Dongguan Zensee, no criminal liability and/or other administrative penalty was imposed on any member of our Group or any of its directors. After the incident, we enhanced our fire prevention equipment in our factory buildings, including but not limited to installing sprinklers, fire-proof doors, fire hydrant boxes, fire hydrants and smoke ventilation systems. In addition, we engaged a qualified fire safety system company, which is an Independent Third Party, to conduct site visit and review our facilities in order to identify areas of high risk of fire. We also installed a smoke detection system which allows remote monitoring of the relevant facilities.

Our PRC Legal Advisers are of the opinion that, according to the written confirmations provided by the relevant competent fire protection authorities of PRC and/or public online search on the relevant websites of PRC fire protection bureaus, during the Track Record Period, saved for the above disclosed, no administrative penalties have been found to be imposed on us for the violation of relevant fire protection laws and regulations.

Our Directors confirm that there were no incident that resulted in death or serious injury of our employees during the Track Record Period. Although we have maintained insurance policy relating to our production facilities and the safety of our employees working in our production plants, there is no assurance that our insurance policies will be adequate to cover all losses incurred in the event of an incident or other unexpected event in the future. In such event, if the coverage of our existing insurance policies is not adequate, our financial condition and results of operations may be materially adversely affected. For the associated risks, see “Risk Factors – Risks relating to our business – Our insurance coverage may not be adequate.”.

We rely on our integrated IT systems to support the important aspects of our business. As at the Latest Practicable Date, we had two sets of information systems in place, namely MES and the MRP System, which were developed by ourselves.

Our MRP System and MES support the daily operations of our Group by gathering data related to order processing, engineering, procurement, material and production planning, production, quality control, delivery, inventories and finance. The systems also enable us to monitor the operational processes and order status real time, which allow transparency and facilitate management of our operation.

Our MRP System regulates our supply chain and financial management, collects and combines data in relation to procurement of raw materials, production, product delivery and inventories. Our MES supports production and materials tracking which allows us to trace the use of raw materials in production and check the production status of each purchase order we receive. All of the operational information can be monitored in real time and updated through our MRP System and MES, which allow transparency and control of our production processes. These systems are managed by our information technology team, which comprised 49 staff as at the Latest Practicable Date.

Q P (SZ) is responsible for supporting our websites, including the development of our websites and online personalisation and design features, online ordering management and automatic imposition processes for digital printing. Linking up online ordering and manufacturing management, the websites feature online personalisation and ordering functions and enable automatic imposition processes for digital printing. The websites are integrated with our MRP System so that the online orders are processed with minimal human effort.

In 2019, Q P Printing was awarded the Certificate of Industry 4.0 Maturity Recognition for achieving a maturity level 1i Real Time Information Generation (equivalent to a Maturity Level 3 of the acatech Industry 4.0 Maturity Model) for its achievement in having real-time information in the digital production shop floor for playing card business including web to print operation, production processes including cutting, priming, digital printing, coating and kitting.

During the Track Record Period and up to the Latest Practicable Date, we had not experienced any material malfunction of our IT systems.

As part of our business strategies, we intend to leverage our technological capabilities and upgrade our IT infrastructure. For details, see “– Our business strategies – Leverage our technological capability to capture more business opportunities in Internet retailing and upgrade our IT infrastructure” and “Future Plans and Use of Proceeds”.


Measure”), approximately 66.1% and 77.1% of our revenue derived from the U.S. by destination of delivery will be produced by our subcontractors in Vietnam. We also expect to incur additional costs for subcontracting further production to Vietnam of approximately HK\$4.4 million and HK\$5.1 million in the first year and second year, respectively, upon the implementation of Contingency Measure.

Based on the assumptions that our Group’s revenue derived from the U.S. by destination of delivery by FY2020 upon full implementation of Immediate Measures and in each of the first and second year upon activation of Contingency Measure would be the same as our revenue derived from the U.S. by destination of delivery in FY2018 (“U.S. FY2018 Revenue”), we expect to achieve revenue equal to the full amount of the U.S. FY2018 Revenue without being subject to the U.S. tariffs by the second year of fully implementing the Contingency Measure. The table below sets out the breakdown of the estimated percentage of the U.S. FY2018 Revenue to be achieved under each relevant Immediate Measure and/or Contingency Measure and remain to be subject to the U.S. tariffs upon implementation of such measures.

	U.S. FY2018 Revenue to be achieved

By FY2020
upon full
imlipementaton
of Immediate
(NtMoe)easures	By first year
upon full
imlpementation
of Contingency
Measure	By second year
upon full
imlpementation
of Contingency
Measure

%	%	%

1. Immediate Measure 1A
and/or Contingency Measure
– enigagng and further
expanding the engagement of
subcontractors in Vietnam	55.9	66.1	77.1

2. Immediate Measure 1B –
enbgaigng sucontractor in
Hong Kong	15.3	15.3	15.3

3. Immediate Measure 2 –
alifppyng or
De Minimis value exemption
for web sales customers
based in the U.S.	7.5	7.5	7.5

4. Revenue generated from our
laboratory testing services
which are not subject to the
U.S. tariffs	0.1	0.1	0.1

5. Revenue remaining to be
subject to the U.S. tariffs	21.2	11.0	 Nil

Total	100.0	100.0	100.0

Note: The table aims to show the estimated percentage of U.S. FY2018 Revenue to be achieved by FY2020. As such, the effect of Immediate Measures other than Immediate Measures 1A, 1B and 2 are not taken into account.

We will further negotiate with our customers to further take up the increased U.S. tariffs payable by our customers during the two-year transition period on a case-by-case basis. The following sensitivity analysis illustrates, based on the U.S. FY2018 Revenue, the impact on our revenue and net profit for FY2020 upon full implementation of the Immediate Measures and for the first year and second year upon implementation of the Contingency Measure assuming the Section 301 List 4 Additional Tariff of 25% is imposed and our Group was to bear all such U.S. tariffs:

	FY2020
following
imlpementation
of Immediate
Measures	First year
following
imlipementaton
of Contingency
Measure	Second year
following
imlipementaton
of Contingency
Measure

HK$’000	 HK$’000	 HK$’000

Decrease in revenue	42,672	11,285	3,023

Decrease in net profit	35,999	9,523	2,551

In light of the Contingency Measure our Group have in place, our Directors believe that we will continue to be able to maintain our customer relationships and our business operation and financial performance will not be materially affected by the potential increase of the Section 301 List 4 Additional Tariff to 25% in the imminent future. Our Directors confirm that the implementation costs of the Contingency Measure would be funded by our internal resources and/or bank loan(s). Our Directors undertake that our Group will implement the Contingency Measure in parallel with the Immediate Measures as listed in the above if the Section 301 List 4 Additional Tariff is increased from 15% to 25% or above anytime in the future. In the event that the Contingency Measure has to be activated in the future, our Directors will continue to closely monitor the market and economic environment as well as our business and financial conditions to ensure any material adverse effect on our Group’s business and operations will be minimised as a whole. Our Directors also undertake to keep reviewing the relevant laws and regulations in relation to the U.S. tariffs and will seek legal advice as and when appropriate.

# Relocation of sales upon full implementation of Immediate Measures 1A, 1B and 2 and Contingency Measure to shift our production outside the PRC

We expect that by the end of FY2020, our Group will be able to fully implement Immediate Measures 1A, 1B and 2. The following tables set out the breakdown of revenue and sales volume attributable to our U.S. sales products by production channels in different geographical locations (i) during the Track Record Period; and (ii) upon full implementation of Immediate Measures 1A, 1B and 2 and Contingency Measures (in terms of our sales amount and sales volume attributable to our U.S. sales products by production channels in different geographical locations for FY2018):


Reference were made to the announcements of the Company dated 30 July 2018, 29 July 2019, 24 July 2020 and 28 July 2021 in relation to the provisional of financial guarantee services. A Renewal Agreement to renew the Back-to-back Guarantee Agreement was entered by Wuhu Feishang Non-metal Material Co., Limited\*（蕪湖飛尚非金屬材料有限公司）, a wholly-owned subsidiary of the Company established in the PRC (the “Wuhu Subsidiary”), pursuant to which the Wuhu Subsidiary has agreed to provide financial guarantee to the Borrower by means of pledging its deposit in the sum of CNY20 million for procuring the Borrower to obtain the loan of CNY19 million provided by the lending bank. In return, the Wuhu Subsidiary shall receive a guarantee fee of 6% of the amount of deposit pledged by the Wuhu Subsidiary. The Board considers that the Group has surplus cash in CNY in excess of the working capital needs for its business operation in the PRC. The provision of Guarantee in favour of the Borrower will better utilize the Group’s surplus cash with reasonable return.

# Proposed (i) share consolidation; and (ii) rights issue

The Company proposed to implement (i) the share consolidation on the basis that every ten (10) issued and unissued existing shares into one (1) consolidated share (“Consolidated Share(s)”) and (ii) the rights issue on the basis of one (1) rights shares for every one (1) Consolidated Shares held on the record date at the subscription price of HK\$0.350 per rights share, to raise gross proceeds of approximately HK\$27.8 million before expenses (assuming no other change in the number of Shares in issue save for the share consolidation on or before the record Date) by issuing 79,557,200 rights shares. Details were set out in the Company’s announcements dated 16 July 2021 and 6 August 2021.

As save as above, there is no material event undertaken by the Company or the Group subsequent to 30 June 2021 and up to the date of this report.

The PRC has generally kept COVID-19 under control, and economic activities and confidence have rapidly recovered. The Chinese government has implemented strong fiscal and monetary stabilizing policies to further boost the PRC ‘s GDP growth by building a strong domestic market and supporting the domestic and international “dual circulation” strategy. Investment in fixed assets, real estate and infrastructure construction is expected to maintain solid growth, which will then support bentonite demand from downstream industries including the iron and steel and the energy sectors. Nevertheless, it would be difficult to gauge the longer term impact of such events as the situation is dynamically revolving. The Group has been proactive in closely monitoring the market conditions and taking appropriate measures to respond to the challenges. The Group will also continue to strengthen its cost control and resources management as well as to actively participate in project tenders, in order to maintain its competitiveness in the market.

Within the bentonite industry, uncertainties due to COVID-19 and international trade conflicts will cause market competition to further intensify and prices to fluctuate. Meanwhile, the new series of real estate market regulation and control policies and the PRC ‘s ambitious target to achieve carbon neutrality by 2060 are expected to adversely affect the iron and steel and the traditional energy industries in the long term, which will negatively impact the Group’s business by imposing pressures on demand for pelletising clay and drilling mud. The Group strives to maintain the sales volume of its bentonite products by improving product quality and adhering to the “selling more with lower margin” strategy, and yet the Group may not be able to maintain the current level of gross profit margin in the coming months. The Group intends to continue expanding its customer base and market share by boosting product awareness of its bentonite products, refining its production technology and developing new products with a view to enhance the Group’s overall competitiveness to cope with the risks and uncertainties of the business environment.

In view of the COVID-19 pandemic situation in Hong Kong, the Group expects that the business environment in financial services, including wealth management and money lending business, would be challenging in the year 2021. However, with the expectation of increasing awareness in wealth management in recent years, as well as the probable easing of travel restrictions between Hong Kong and the PRC, the Group remains cautiously optimistic in the medium and long-term development of this business segment in Hong Kong. Meanwhile, the Group will cautiously monitor market change and impose robust control measures to improve cost efficiency and risk management in order to provide a solid foundation for sustainable growth in the future.


the preceding assignment should behave properly when compiled with any standard C compiler. If you declare d as some other integer type, such as

the assignment might provoke a warning from the compiler, or worse, silently truncate the assigned value at runtime, for example, if ptrdiff\_t were an alias for long long int for that implementation.

The lower and upper limits of ptrdiff\_t are defined by PTRDIFF\_MIN and PTRDIFF\_MAX respectively. The minimum acceptable limits defined by the C Standard are

These limits require that any 16-bit implementation must have at least a 17-bit ptrdiff\_t to represent all possible differences of 16-bit pointers.

Although the standard does not explicitly guarantee that sizeof(ptrdiff\_t) equals sizeof(size\_t), it typically is the case on 32-bit or 64-bit implementa-tions. This may seem somewhat surprising because a signed integer type may not be able to represent the difference between two pointers on such a system.

For example, on a system that supports objects up to \( 2 ^ { 3 2 } \mathrm { ~ - ~ } \) 1 bytes, the sizeof operator can yield values only from 0 to \( 2 ^ { 3 2 } - 1 \), so 32 bits are sufficient. However, pointer subtraction for pointers to elements of an array of \( 2 ^ { 3 2 } \mathrm { ~ - ~ } 1 \) bytes could yield values from −(232 − 1) to +(232 − 1). Consequently, ptrdiff\_t would have to be at least 33 bits to represent all possible differences. How-ever, C allows an implementation in which ptrdiff\_t is 32 bits by making it undefined behavior if the result of subtracting two pointers is not represent-able in an object of type ptrdiff\_t. In most cases, a ptrdiff\_t overflow on a two’s complement machine with quiet wraparound on overflow does not affect the result of the operation. To program securely, however, you should care-fully consider the consequences of your operation when the subtraction of two pointers may result in such large values.

intmax\_t and uintmax\_t. intmax\_t and uintmax\_t are integer types with the greatest width and can represent any value representable by any other inte-ger types of the same signedness. Among other applications, intmax\_t and uintmax\_t can be used for formatted I/O on programmer-defined integer types. For example, given an implementation that supports 128-bit unsigned integers and provides a uint\_fast128\_t type, a programmer may define the following type:

This creates a problem with using these types with formatted output functions, such as printf(), and formatted input functions, such as scanf(). For example, the following code prints the value of x as an unsigned long long, even though the value is of a programmer-defined integer type:

There is no guarantee that this code prints the correct value of x because x may be too large to represent as an unsigned long long.

The intmax\_t and uintmax\_t types are capable of representing any value representable by any other integer types of the same signedness, allowing conversion between programmer-defined integer types (of the same signed-ness) and intmax\_t and uintmax\_t:

Formatted I/O functions can be used to input and output greatest-width integer typed values. The j length modifier in a format string indicates that the following d, i, o, u, x, X, or n conversion specifier will apply to an argument with type intmax\_t or uintmax\_t. The following code guarantees that the cor-rect value of x is printed, regardless of its length, provided that mytypedef\_t is an unsigned type:

In addition to programmer-defined types, there is no requirement that an implementation provide format length modifiers for implementation-defined integer types. For example, a machine with an implementation-defined 48-bit integer type may not provide format length modifiers for the type. Such a machine would still have to have a 64-bit long long, with intmax\_t being at least that large. The CERT C Secure Coding Standard [Seacord 2008], “INT15-C. Use intmax\_t or uintmax\_t for formatted IO on programmer-defined integer types,” provides further examples of this use of the intmax\_t and uintmax\_t types.


We have established a talent pool management system. Through our new employee training program and mentoring program, we assign mentors to provide trainings to our new employees and help them understand their tasks and integrate into our corporate culture. We train up our employees to follow our standardised operational procedures to ensure our service quality and efficiency. We also have a human resource succession plan under which we identify and train up our employees to step into more challenging roles. During the Year, the Group has provided different types of training for its employees, such as the knowledge of property management, services requirement and market situation for the general employees and the knowledge of business communication, customer demands and risk management for the supervisory employees. In addition, we encourage and support employees to participate in external training by providing subsidies.

Effective management of environmental, social and economic performance throughout the daily operation is considered as the core value of the Group. The Group displays commitment toward sustainable development by maintaining a close relationship with its suppliers and ensuring meticulous standards on its operation and business conduct.

The Group values the partnership with suppliers and aims to collectively promote sustainable development. The Group is devoted to enhancing operation throughout its supply chains by maximising operational efficiency and minimising ESG risks.

The Group has established the tender procurement management system for the effective management of the procurement process. For the selection of new contractors/suppliers, an evaluation and review mechanism is in place to ensure the compliance of suppliers and supplies quality. For example, we conduct reviews on new contractors/suppliers and verify their basic profile, credit certificates and other documents to ensure the compliance of the suppliers. In addition, the contracts signed between the Group and the contractors/suppliers clearly listed the expectations, policies and requirements of the Group. A safety management guideline is also included in the contract, which requires the contractors/suppliers to provide a safe working environment and sufficient training, information and supervision to their employees. Meanwhile, we regularly evaluate existing contractors/suppliers based on price, quality and other aspects. Unqualified contractors/suppliers will be opt-out to ensure the quality of products and services provided by the suppliers.

Environmental and social risks along the supply chain are also a key concern of the Group. The Group assigns specific personnel to check for the latest development in local supply chain-related policies and identify the potential environmental and social risks. When selecting suppliers, priority is given to those with more outstanding environmental and social performance regarding aspects such as energy conservation, occupational health and safety, supply chain management and anti-corruption. Suppliers having relevant certification or international recognition are usually more highly valued, but on the other hand, those involving in major corruption or safety incident are always downgraded.

Besides, the Group fosters sustainability by implementing green procurement and encouraging the use of eco-friendly products. We use and give priority to eco-friendly products, such as those with water or energy efficiency labels, use fewer packaging materials, have a longer shelf life or are made of recyclable materials. We also select suppliers that are able to deliver materials with short delivery time and delivery distance, where appropriate, to lower carbon emissions from transportation. We also remind our employees to use products purchased earlier to avoid wastage due to products expiring.

During the Year, the Group had a total of 73 major suppliers, divided by region as follows:

Number of Suppliers	2021

Northeast China	7

Central China	2

South China	7

Southwest China	49

Northwest China	8

# Service Quality and Customer Health and Safety

The Group believes that quality control is crucial to the long-term development of the business. The Group achieves responsible operation through the maintenance of quality services and the assurance of the health and safety of the customers. Different policies and measures for controlling and improving service quality and customer health and safety have been adopted in the Group’s property management businesses. Due to the business nature of the Group, it is not involved in any matters related to advertising, product labeling and product recall.

The Group has established the customer relationship management system and acquired ISO 9001:2015 Quality Management System Certification, which provides a quality control guidance to its daily operation. The Group has a professional quality control team which primarily focuses on maintaining service standards, standardising service procedures and supervising service quality throughout the operational processes. To ensure service and consumer satisfaction, we conduct internal reviews on consumer satisfaction at all properties under our management on an annual basis. The quality check and consumer satisfaction results factor in the performance review of project companies and regional companies.

To provide better customer experience and enhance customer service, the Group offers a service hotline for its customers. Through the hotline, our customers can inquire about our services, provide us with their complaints and feedback, and we can follow up and respond in time to provide timely and efficient solutions to the problems of our clients. In addition, residents and property owners can request repair and maintenance services, provide their feedbacks, suggestions and complaints through our Shi Xiang Yue (時相悅) mobile application and the online official account the Group registered with WeChat. The Group has established the customer reporting and complaint management practice guideline and the call center management system, which specified the standards and processes on receiving and handling complaints. The Group records all the complaints received and the complaints received are classified based on their nature, specialization and importance. The relevant department would be informed about the complaints and is responsible for assigning and handling the complaint. During the Year, 15 complaints were received, which were all handled according to the abovementioned procedure.


Economic and political pressures to increase tax revenues in various jurisdictions may make resolving tax disputes more difficult. For example, in recent years, the tax authorities in Europe have disagreed with our tax positions related to hybrid debt, research and development credits, transfer pricing and indirect taxes, among others. We regularly assess the likelihood of the outcome resulting from these examinations to determine the adequacy of our provision for income taxes. Although we believe our tax estimates are reasonable, the final determination of tax audits and any related litigation could be materially different from our historical income tax provisions and accruals.

The results from various tax examinations, audits and litigation may differ from the liabilities recorded in our financial statements and could materially and adversely affect our financial results and cash flows in the period or periods for which that determination is made.

# Changes in tax laws or rates, changes in the interpretation of tax laws or changes in the jurisdictional mix of our earnings could adversely affect our financial position and results of operations.

On December 22, 2017, the U.S. enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”). The Tax Act made a number of substantial changes, including the imposition of a one-time mandatory deemed repatriation tax on the 2017 unrepatriated earnings accumulated offshore since 1986, the establishment of global minimum income tax and base erosion tax provisions related to offshore activities and affiliated party payments, and the reduction of the corporate tax rate from 35% to 21% for U.S. taxable income, resulting in a one-time remeasurement of deferred taxes to reflect their value at a lower tax rate of 21%. These changes to U.S. tax laws will significantly impact how U.S. multinational corporations are taxed on foreign earnings.

The U.S Treasury, Internal Revenue Service and other standard setting bodies are continuing to issue guidance and interpretation relating to the Tax Act. As future guidance is issued, we may make adjustments to amounts previously reported that could materially impact our financial statements.

Our global operations subject us to income and other taxes in the U.S. and in numerous foreign jurisdictions, each with different tax schemes and tax rates. In addition to the changes in tax laws and the interpretation of tax laws and tax rates in these jurisdictions, the jurisdictional mix of our earnings in countries with differing statutory tax rates can have a significant impact on our effective tax rate from period to period.

The tax effect of our investment in Sartorius AG and the jurisdictional mix of our earnings could continue to materially affect our financial results and cash flow.

In addition, the adoption of some or all of the recommendations set forth in the Organization for Economic Co-operation and Development’s project on “Base Erosion and Profit Shifting” (BEPS) by tax authorities in the countries in which we operate, could negatively impact our effective tax rate. These recommendations focus on payments from affiliates in high tax jurisdictions to affiliates in lower tax jurisdictions and the activities that give rise to a taxable presence in a particular country.

# Our reported financial results may be materially affected by changes in accounting principles generally accepted in the United States.

Generally accepted accounting principles in the United States, or U.S. GAAP, are subject to interpretation by the Financial Accounting Standards Board, or FASB, the U.S. Securities and Exchange Commission, or SEC, and various bodies formed to promulgate and interpret appropriate accounting principles. A change in these principles or interpretations could have a significant effect on our reported financial results, and could affect the reporting of transactions completed before the announcement of a change.

For example, in January 2016, the FASB issued Accounting Standards Update No. (ASU) 2016-01, "Recognition and Measurement of Financial Assets and Financial Liabilities." Amendments under ASU 2016-01, among other items, require that all equity investments in unconsolidated entities (other than those accounted for using the equity method of accounting), such as our investment in Sartorius AG, will be measured at fair value through earnings. The impact of adoption of ASU 2016-01 in the first quarter of 2018 materially impacted our Consolidated Statement of Income due to our investment in Sartorius AG. In future periods, changes in the market value of our investment in Sartorius AG may continue to materially impact our Consolidated Statement of Income.

Also for example, in February 2016, the FASB issued ASU 2016-02, "Leases," which will require, among other items, lease accounting to recognize most leases as assets and liabilities on the balance sheet. We will adopt ASU 2016-02 on a modified retrospective basis effective January 1, 2019 with practical expedients. Where we act as a lessee, the adoption of the standard will result in material additions to the balance sheet for right-of-use assets and the associated liabilities. Where we act as a lessor in reagent rental arrangements, we estimate an insignificant impact to our consolidated financial statements.

# We may incur losses in future periods due to write-downs in the value of financial instruments.

We have positions in a variety of financial instruments including asset backed securities and other similar instruments. Financial markets are volatile and the markets for these securities can be illiquid. The value of these securities will continue to be impacted by external market factors including default rates, changes in the value of the underlying property, such as residential or commercial real estate, rating agency actions, the prices at which observable market transactions occur and the financial strength of various entities, such as financial guarantors who provide insurance for the securities. Should we need to convert these positions to cash, we may not be able to sell these instruments without significant losses due to current debtor financial conditions or other market considerations.

We also have positions in equity securities, including our investment in Sartorius AG. Financial markets are volatile and the markets for these equity securities can be illiquid as well. A decline in the market value of our investment in Sartorius AG or in the market value of the other equity securities that we own could result in significant losses due to write-downs in the value of the equity securities. In addition, if we need to convert these positions to cash, we may not be able to sell these equity securities without significant losses.

# Environmental, health and safety regulations and enforcement proceedings may negatively impact our business, results of operations and financial condition.

Our operations are subject to federal, state, local and foreign environmental laws and regulations that govern such activities as transportation of goods, emissions to air and discharges to water, as well as handling and disposal practices for solid, hazardous and medical wastes. In addition to environmental laws that regulate our operations, we are also subject to environmental laws and regulations that create liability and clean-up responsibility for spills, disposals or other releases of hazardous substances into the environment as a result of our operations or otherwise impacting real property that we own or operate. The environmental laws and regulations also subject us to claims by third parties for damages resulting from any spills, disposals or releases resulting from our operations or at any of our properties. We must also comply with various health and safety regulations in the United States and abroad in connection with our operations.

We may in the future incur capital and operating costs to comply with currently existing laws and regulations, and possible new statutory enactments, and these expenditures may be significant. We have incurred, and may in the future incur, fines related to environmental matters and/or liability for costs or damages related to spills or other releases of hazardous substances into the environment at sites where we have operated, or at off-site locations where we have sent hazardous substances for disposal. We cannot assure you, however, that such matters or any future obligations to comply with environmental or health and safety laws and regulations will not adversely affect our business, results of operations or financial condition.


Proof of The Maximization of The Mutual Information, \( \operatorname { I } [ x ^ { t } ; y ^ { t } ] : \) In this section, we prove that the maximization of the mutual information,\( \operatorname { I } [ x ^ { t } ; y ^ { t } ] \), and Eq.(8) are equivalent to equality in Eq.(3), under suitable conditions. First, we note that we can replace \( \ensuremath { \dot { \nu } } ( x ^ { t } | x ^ { t + 1 } , y ^ { t } ) \) by \( \nu ( x ^ { t } | x ^ { t + 1 } , y ^ { t } , y ^ { t + 1 } ) \) in Eqs.(3), (4), (5), (6) and (7). In this case, equality in Eq.(3) follows from equality in the Jensen inequality \( ( \exp F ( Z ) = \operatorname { E } [ \exp F ( Z ) ] \) with probability 1):

This implies −It+1 bttr −Θν = 0 with probability 1. By rearranging terms, we have

Hence, by including \( y ^ { t + 1 } \) as a conditioning variable of \( \nu \), we can easily obtain the equality. However, by reducing the number of conditioning variables, we can also obtain the maximization of the mutual information,\( \operatorname { I } [ x ^ { t } ; y ^ { t } ] \), as we noted in the main text. We prove this in the following.

First, we obtain an explicit expression of the optimal \( \nu ( x ^ { t } | x ^ { t + 1 } , y ^ { t } ) \) in Eq.(8) from the following inequality:

The above inequality is derived from the inequality \( F - 1 \geq \log F \) for positive real F, and thus, the optimality condition in Eq.(8) is obtained from the equality, \( F - 1 = \log F \leftrightarrow F = 1 \) with probability 1:

Then, in order to analyze the equality condition of Eq.(3) for \( \nu ( x ^ { t } | x ^ { t + 1 } , y ^ { t } ) \), we calculate the difference \( \Delta \) between the values of −E[Θtν] as calculated with Eqs. (17) and (15), writing

Because −E[Θtν] = Ix→y in the case with Eq.(15), we obtain

is equivalent to the maximization of the mutual information,

\[ \begin{array} { r } { \mathrm { I } [ x ^ { t } ; y ^ { t } ] = \mathrm { H } [ y ^ { t } ] , \eqno ( 2 1 ) } \end{array} \]

on the assumption that the environmental state space Y is not too finely partitioned in comparison with the precision of neural control over the environment. Precisely, we assume that there is no coarse-grained partition \( y ^ { \prime } \) of Y such that the neural control has the same precision on the two partitions Y and \( \mathcal { V } ^ { \prime } \) of the environmental state space. We also assume that \( p _ { s } ( y ^ { t + 1 } | y ^ { t } ) \neq 1 \) for all \( y ^ { t } \) and \( y ^ { t + 1 } \), which holds for most sets of values of the model parameters in a general model. A coarse-grained partition \( y ^ { \prime } \) is a set of subcollections of Y such that \( y ^ { \prime } \cap y ^ { \prime \prime } = \emptyset \) for any \( y ^ { \prime } \neq y ^ { \prime \prime } \in \mathcal { y } ^ { \prime } \) and \( \cup _ { y ^ { \prime } \in \mathcal { y ^ { \prime } } } y ^ { \prime } = \mathcal { y } \). For any such coarse-grained partition \( \mathcal { V } ^ { \prime } \), we require

\[ \begin{array} { r } { \mathrm { I } [ y ^ { t + 1 , \prime } ; x ^ { t } | y ^ { t } ] \neq \mathrm { I } [ y ^ { t + 1 } ; x ^ { t } | y ^ { t } ] , \; y ^ { t + 1 } \in y ^ { t + 1 , \prime } \in \mathcal { Y } ^ { \prime } , \eqno ( 2 2 ) } \end{array} \]

where we have defined the random variable \( y ^ { t + 1 , \prime } \), which takes values in \( \mathcal { V } ^ { \prime } \) with \( y ^ { t + 1 } \in y ^ { t + 1 , \prime } . \). Under this assump-tion, we first show that the conditional mutual information,

must be maximal. Note that the conditional mutual information takes its maximal value and hence satisfies

if and only if \( p _ { s } ( y ^ { t + 1 } | x ^ { t + 1 } , y ^ { t } ) \ = \ 1 \) with probability 1. Thus, to obtain the desired result, we show that \( p _ { s } ( y ^ { t + 1 } | x ^ { t + 1 } , y ^ { t } ) > 0 \) for multiple \( y ^ { t + 1 } \) with some \( y ^ { t } = y _ { 0 } \) and \( { \boldsymbol { x } } ^ { t + 1 } = { \boldsymbol { x } } _ { 0 } \) contradicts Eq.(20).

and a coarse-grained partition of \( _ { 3 } \) as

\[ \mathcal { V } = \{ \{ y \} \} _ { y \in \mathcal { V } \backslash \overline { { y } } } \cup \{ \overline { { y } } \} . \eqno ( 2 6 ) \]

Here, \( y \setminus \overline { y } \) is the relative complement of \( \overline { { y } } \) in \( y \), which consists of all the elements of \( y \) that are not contained in y. The assumption in Eq.(22) requires

\[ \begin{array} { r l r } { \operatorname { I } [ y ^ { t + 1 } ; x ^ { t } | y ^ { t } ] - \operatorname { I } [ y ^ { t + 1 , \prime } ; x ^ { t } | y ^ { t } ] = \operatorname { I } [ y ^ { t + 1 } , y ^ { t + 1 , \prime } ; x ^ { t } | y ^ { t } ] - \operatorname { I } [ y ^ { t + 1 , \prime } ; x ^ { t } | y ^ { t } ] } & { } & \\ { = \operatorname { I } [ y ^ { t + 1 } ; x ^ { t } | y ^ { t + 1 , \prime } , y ^ { t } ] } & { } & { } \\ { > 0 . } & { } & { \qquad \qquad \qquad \qquad \qquad ( 2 7 \times ( 3 \times 3 ) + 1 ) } \end{array} \]

where the first equality holds because \( y ^ { t + 1 } \) uniquely determines \( y ^ { t + 1 , \prime } \) and thus the additional inclusion of \( y ^ { t + 1 , \prime } \) in the first term does not affect the value of the conditional mutual information. Also, Eq.(20) implies

Now, recall that the inclusion of additional conditioning variables (in this case, \( y ^ { t + 1 , \prime } ) \) always reduces the value of the conditional mutual information. The right-hand side of the above equation can be written as

with the dummy variables \( \widetilde { \boldsymbol { y } } ^ { t + 1 } \) and \( \widehat { y } ^ { t + 1 } \) having the same (conditional) distributions as \( y ^ { t + 1 } \). The above equality requires that the argument of the logarithm be 1 with probability 1, since \( F - 1 \geq \log F \), \( F - 1 = \log F \leftrightarrow F = 1 \) and


# 13 Investments Accounted for Using Equity Method (Continued)

# (a) Investment in a Joint Venture (Continued)

O-Net WaveTouch was incorporated by the Group for the purpose of development of the wave touch technology, together with an independent third party, pursuant to an investment agreement signed on 4 June 2013. According to the Memorandum and Article of Association of O-Net WaveTouch (“O-Net WaveTouch M&A”), the Group has joint control with the counter party over O-Net WaveTouch as unanimous consent is required from both parties for all significant day-to-day operating activities, future capital fund raising as well as future business development. Despite the Group was granted an option to acquire from the counter party an additional 35% of the shares of O-Net WaveTouch (“Original Call Option”) at fixed purchase price of USD10,000,000 from 4 June 2013 to 4 June 2017, unanimous consent is still required from both parties for all above-mentioned business activities. Accordingly, the investment in O-Net WaveTouch has been accounted for as a joint venture by the Group in 2015.

According to a share swap agreement dated 19 October 2016 (“Share Swap Agreement”), the Group transferred its shareholding interests in O-Net WaveTouch to WaveTouch Group Limited (“WaveTouch Group”), a company located in UK, in return for WaveTouch Group’s 8,000,000 shares. As a result of the share swap, the investment in O-Net WaveTouch and Original Call Option was disposed of. In return, the Group obtained investment in WaveTouch Group (approximately 33% of interests) and a call option to acquire additional 7,000,000 shares in WaveTouch Group (“Revised Call option”). Pursuant to the Share Swap Agreement, the Group has also granted PASINIKA SARL (“PKA”), a third party, a call option (“Call Option”) to buy the Group’s interest in WaveTouch Group (including the interests and Revised Call Option), at a consideration of a cash of USD3,000,000 or certain interests in Windar Photonics PLC (“Windar”), a UK listed company, with the market value not less than USD2,500,000, or a cash payment of USD1,500,000 and 750,000 shares of Windar. The certain interests in Windar will be satisfied by 1,000,001 to 2,000,000 shares of Windar dependent upon the price of Windar’s share. At the same time, PKA granted the Group a put option (“Put Option”) to sell the Group’s interests in WaveTouch Group (including the interest and Call Option), at a consideration of 1,000,000 Windar shares if the market value of such Windar Shares is not less than USD2,500,000, or up to 2,000,000 Windar shares if the market value of 1,000,000 Windar Shares is less than USD2,500,000. The Call Option and Put Option could be exercised any time during the period from 1 October 2016 to 30 June 2018. Given the Group has no significant influence on WaveTouch Group, and it managed the investment in WaveTouch Group on a fair value basis, the Group designated the investment in WaveTouch Group together with other financial assets related to the Share Swap Agreement as financials assets at fair value through profit or loss (Note 17). A disposal gain regarding the investment in O-Net WaveTouch amounting to HKD2,980,000 (including HKD4,205,000 gain on disposal of investments accounted for using equity method and HKD1,225,000 loss on disposal of call option in equity investment) was recognized in 2016.

On 2 August 2017, O-Net Coating and Materials Technologies (HK) Limited (“O-Net Coating”) entered into an Agreement with OB Technologies (Hong Kong) Limited, formerly known as Butterfly Technologies (Hong Kong) Limited (“OB”) in relation to the formation of OB Technologies (Shenzhen) Limited, formerly known as O-Net Butterfly Technologies (Shenzhen) Limited (“the JV Company”). The total registered capital of the JV Company is HKD10,000,000 with each of O-Net Coating and OB investing HKD5,000,000. As stipulated in the joint venture agreement, the financial and operational policies of the JV Company must be decided jointly by O-Net Coating and OB.

	2017	2016

HKD’000	HKD’000

Cost:

Raw materials	234,829	167,579

Work-in-progress	80,846	69,469

Finished goods	82,008	52,101

	397,683	289,149

Less: provision for write-down of inventories to net realizable values	20,212	(19,370)

	377,471	269,779

For the year ended 31 December 2017, the cost of inventories recognized as cost of sales, selling and marketing costs, research and development expenses, administrative expenses and capitalised expenditure of development costs amounted to HKD1,016,100,000 (2016: HKD806,135,000).

For the year ended 31 December 2017, the Group wrote back provision for write-down of inventories of HKD323,000 (2016: the Group made provision for write-down of inventories of HKD11,796,000).

	2017	2016

HKD’000	HKD’000

Trade receivables (a)	708,062	461,778

Less: provision for impairment of receivables (b)	(752)	(1,106)

Trade receivables — net	707,310	460,672

Amounts due from related parties (a) (Note 36(d))	379	393

Bills receivable (c)	193,062	148,873

Prepayments	30,425	12,062

Interest receivables	940	1,675

Other receivables (d)	116,145	49,698

	1,048,261	673,373

Less non-current portion: other receivables (d)	(73,213)	(26,139)

Current portion	975,048	647,234


Operating lease payments are recognised as an expense on a straight-line basis over the lease term. Contingent rentals arising under operating leases are recognised as an expense in the period in which they are incurred.

In the event that lease incentives are received to enter into operating leases, such incentives are recognised as a liability. The aggregate benefit of incentives is recognised as a reduction of rental expense on a straight-line basis.

When a lease includes both land and building elements, the Group assesses the classification of each element as a finance or an operating lease separately based on the assessment as to whether substantially all the risks and rewards incidental to ownership of each element have been transferred to the Group, unless it is clear that both elements are operating leases in which case the entire lease is classified as an operating lease. Specifically, the minimum lease payments (including any lump-sum upfront payments) are allocated between the land and the building elements in proportion to the relative fair values of the leasehold interests in the land element and building element of the lease at the inception of the lease.

When the lease payments cannot be allocated reliably between the land and building elements, the entire lease is generally classified as a finance lease and accounted for as property, plant and equipment.

In preparing the financial statements of each individual group entity, transactions in currencies other than the functional currency of that entity (“foreign currencies”) are recorded in the respective functional currency (i.e. the currency of the primary economic environment in which the entity operates) at the rates of exchange prevailing on the dates of the transactions. At the end of the reporting period, monetary items denominated in foreign currencies are retranslated at the rates prevailing at that date. Non-monetary items that are measured in terms of historical cost in a foreign currency are not retranslated.

Exchange differences arising on the settlement of monetary items, and on the retranslation of monetary items, are recognised in profit or loss in the period in which they arise.

For the purposes of presenting the Financial Information, the assets and liabilities of group entities are translated into the presentation currency of the Group (i.e. HK\$) using exchange rates prevailing at the end of each reporting period. Income and expenses items are translated at the average exchange rates for the year, unless exchange rates fluctuate significantly during the period, in which case, the exchange rates prevailing at the dates of transactions are used. Exchange differences arising, if any, are recognised in other comprehensive income and accumulated in equity under the heading of translation reserve.

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.

All other borrowing costs are recognised in profit or loss in the period in which they are incurred.

Payments to state-managed retirement benefits schemes and the Mandatory Provident Fund Scheme (“MPF Scheme”) are recognised as expenses when employees have rendered service entitling them to the contributions.

Income tax expense represents the sum of the tax currently payable and deferred tax.

The tax currently payable is based on taxable profit for the year/period. Taxable profit differs from profit as reported in the consolidated statements of comprehensive income because it excludes items of income or expense that are taxable or deductible in other periods, and it further excludes items that are never taxable or deductible. The Group’s liability for current tax is calculated using tax rates that have been enacted or substantively enacted by the end of the reporting period.

Deferred tax is recognised on temporary differences between the carrying amounts of assets and liabilities in the Financial Information and the corresponding tax base used in the computation of taxable profit. Deferred tax liabilities are generally recognised for all taxable temporary differences. Deferred tax assets are generally recognised for all deductible temporary difference to the extent that it is probable that taxable profits will be available against which those deductible temporary differences can be utilised. Such assets and liabilities are not recognised if the temporary difference arises from the initial recognition (other than in a business combination) of other assets and liabilities in a transaction that affects neither the taxable profit nor the accounting profit.

Deferred tax liabilities are recognised for taxable temporary differences associated with investments in subsidiaries, except where the Group is able to control the reversal of the temporary difference and it is probable that the temporary difference will not reverse in the foreseeable future. Deferred tax assets arising from deductible temporary differences associated with such investments are only recognised to the extent that it is probable that there will be sufficient taxable profits against which to utilise the benefits of the temporary differences and they are expected to reverse in the foreseeable future.

The carrying amount of deferred tax assets is reviewed at the end of the reporting period and reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow all or part of the asset to be recovered.

Deferred tax assets and liabilities are measured at the tax rates that are expected to apply in the period in which the liability is settled or the asset is realised, based on tax rate (and tax laws) that have been enacted or substantively enacted by the end of the reporting period.

The measurement of deferred tax liabilities and assets reflects the tax consequences that would follow from the manner in which the Group expects, at the end of the reporting period, to recover or settle the carrying amount of its assets and liabilities.

Current and deferred tax is recognised in profit or loss, except when it relates to items that are recognised in other comprehensive income or directly in equity, in which case the current and deferred tax are also recognised in other comprehensive income or directly in equity respectively.

Inventories are stated at the lower of cost and net realisable value. Cost is calculated using the first-in, first-out method. Net realisable value represents the estimated selling price for inventories less all estimated costs of completion and costs necessary to make the sale.

Financial assets and financial liabilities are recognised in the consolidated statements of financial position when a group entity becomes a party to the contractual provisions of the instrument.

Financial assets and financial liabilities are initially measured at fair value. Transaction costs that are directly attributable to the acquisition or issue of financial assets and financial liabilities are deducted from the fair value of the financial liabilities, as appropriate, on initial recognition.

The Group’s financial assets are classified into loans and receivables. The accounting policies adopted in respect of loans and receivables are set out below.


Mr LU Yuanfeng, Mr. HUANG Guozhan and Mr. HUANG Deqiang are the Founders of our Group. On June 27, 2017, each of the Founders and Ms. LUO Simin (who is the spouse of Mr. LU), along with their respective wholly-owned companies holding the Shares, entered into a parties acting in concert deed to confirm that they have acted in concert in the management, operation and all major decisions of our Group. As of the Latest Practicable Date, LYF Digital Holdings Limited (a company wholly-owned by Mr. LU Yuanfeng), Angel Age Limited (a company wholly-owned by Ms. LUO Simin), LXT Digital Holdings Limited (a company wholly-owned by Mr. HUANG Guozhan) and HDQ Digital Holdings Limited (a company wholly-owned by Mr. HUANG Deqiang) are entitled to exercise voting rights of approximately 65.95% of the total issued share capital of our Company. Immediately following the completion of the Global Offering (assuming the Over-allotment Option or any options which may be granted under the Post-IPO Share Option Scheme are not exercised), Mr. LU Yuanfeng, Ms. LUO Simin, Mr. HUANG Guozhan and Mr. HUANG Deqiang through LYF Digital Holdings Limited, Angel Age Limited, LXT Digital Holdings Limited and HDQ Digital Holdings Limited, respectively, will beneficially own approximately 49.46% of the issued share capital of our Company. Accordingly, Mr. LU Yuanfeng, Ms. LUO Simin, Mr. HUANG Guozhan, Mr. HUANG Deqiang, LYF Digital Holdings Limited, Angel Age Limited, LXT Digital Holdings Limited and HDQ Digital Holdings Limited are considered as our Controlling Shareholders.

Neither of our Controlling Shareholders, our Directors nor their respective close associates has any interest in any business, apart from the business operated by members of our Group, that competes or is likely to compete, directly and indirectly, with the business of our Group and would require disclosure pursuant to Rule 8.10 of the Listing Rules.

On November 24, 2017, each of the Controlling Shareholders entered into the Deed of Non-competition in favor of our Company, pursuant to which each of the Controlling Shareholders irrevocably undertake to our Company that during the Restricted Period (as defined below) he will not and will procure his close associates (except any member of our Group) not to, directly or indirectly (whether in the capacity of principal or agent, whether for its own benefit orj ointly with or on behalf of any person, firm or company, whether within or outside China), commence, engage in, participate in or acquire any business which competes or may compete directly or indirectly with our core business, namely development and publication of online games (“Restricted Business”) or own any rights or interests in such business.

Each of the Controlling Shareholders has further irrevocably undertaken that during the Restricted Period (as defined below), he should and will procure his close associates (except any member of our Group) (each of the Controlling Shareholders and his close associates together, “Offeror”) to offer new business opportunities to us first in the following manner when any business, investment or other business opportunities (“New Business Opportunities”) related to the Restricted Business become available to the Offeror:

(i) the Offeror will make referral of the New Business Opportunities to us, and will as soon as possible inform us in writing (“Offer Notice”) about all necessary and reasonably required information in respect of any New Business Opportunities (including but not limited to details of the nature and investment or acquisition cost of the New Business Opportunities) for us to consider (a) whether the relevant New Business Opportunities will compete with our business, and (b) whether taking up the New Business Opportunities is in the interest of our Group.

(ii) upon receipt of the Offer Notice, the independent non-executive Directors will consider whether to pursue the New Business Opportunities taking into account whether the relevant New Business Opportunities would be able to achieve a sustainable profitability level, whether they are in line with the prevailing development strategies of our Group, and whether they are in the best interest of the Shareholders. Our Company must inform the Offeror in writing within 20 Business Days after receipt of the Offer Notice about its decision on whether the New Business Opportunities will be pursued.

(iii) only when (a) the Offeror has received our notice to reject the New Business Opportunities and our confirmation that the relevant New Business Opportunities are not considered to be able to compete with our core business, namely development and publication of online games; or (b) the Offeror has not received the relevant notice from our Company within the period as stated above in paragraph (ii) after the Offer Notice has been received by us, then the Offeror is entitled to take up the New Business Opportunities on terms and conditions not more favorable than those specified in the Offer Notice issued to us.

If material changes occur in the terms and conditions of the New Business Opportunities after the referral of which have been made or procured to be made to us by the Offeror, referral of the revised New Business Opportunities shall be made by the Offeror to us again in the manner as stated above.

The undertakings under the Deed of Non-competition are not applicable in the following circumstances:

(i) each of the Controlling Shareholders and/or his close associates engage in the Restricted Business directly or indirectly through the ownership of equity interest in any member of our Group; or


# AUDIT COMMITTEE AND THE SCOPE OF WORK OF ZHONGHUI ANDA CPA LIMITED

The Company has established an audit committee in compliance with the Rules Governing the Listing of Securities (the “Listing Rules”) on the Stock Exchange of Hong Kong Limited (the “Exchange”). The audit committee comprises three independent non-executive Directors, namely, Messrs. Cai Jianmin (Chairman), Wong Kam Fai, William and Liu Xueling, who are responsible for reviewing the accounting principles and practices adopted by the Company as well as significant or unusual items, internal controls, financial reporting, risk management and control matters, which included a review on the audited annual results for the year ended 31 December 2019 and the interim report for 2020. According to the terms of reference of the audit committee adopted and implemented by the Company, the audit committee is responsible for reviewing the accounting principles and practices adopted by the Company as well as significant or unusual items, internal controls, financial reporting matters and duties of risk management and control.

During the year, the audit committee of the Company held meetings on 31 March, 7 May, 5 June and 18 August 2020 to review the annual report, change of auditor and interim financial reports of the Group respectively. All members of the committee namely, Messrs. Cai Jianmin, Wong Kam Fai, William and Liu Xueling, attended the meetings.

The final results of the Company for the year ended 31 December 2020 have been reviewed by the audit committee of the Company. The financial figures in this announcement of the Group’s results for the year ended 31 December 2020 have been agreed by the Group’s auditor, ZHONGHUI ANDA CPA Limited, to the amounts set out in the Group’s audited consolidated financial statements for the year.

The Company has established a remuneration committee in compliance with the Listing Rules. During the year under review, the remuneration committee comprises three Directors including Messrs. Liu Xueling (Chairman) and Cai Jianmin, being independent non-executive Directors, and Mr. Zhang Yuping, Chairman and executive Director of the Group. The primary duties of the remuneration committee are to review and determine the terms of remuneration packages, bonuses and other compensation payable to the Directors and senior management of the Group.

The remuneration committee held one meeting during the year to review matters related to the remuneration structure of the Directors and senior management of the Company. All members, namely Messrs. Liu Xueling, Cai Jianmin and Zhang Yuping, attended the meeting.

According to the terms of reference of the remuneration committee adopted by the Company, the remuneration committee acts as a consultant regarding the remuneration matters of the Directors and senior management of the Company, while the Board retains the ultimate power to approve the remuneration of the Directors and senior management.

The Company has established a nomination committee in compliance with the Listing Rules. During the year under review, the nomination committee comprises three Directors, including Mr. Zhang Yuping (Chairman), executive Director and Chairman of the Group, and Messrs. Cai Jianmin and Liu Xueling, who are independent non-executive Directors. The Company has adopted and implemented the terms of reference of the nomination committee. The nomination committee is mainly responsible for making recommendations to the Board on the appointment of Directors and succession of the Board.

Two meetings were held by the nomination committee during the year to review matters related to the nomination and selection policies for the Board members as well as matters related to retirement by rotation and re-election of Directors. All members of the nomination committee (namely Messrs. Zhang Yuping, Cai Jianmin, and Liu Xueling) attended the meeting.

Since its establishment, the Company has been committed to maintaining a high standard of corporate governance practice to ensure transparency of the Group’s management, so that the long term development of our shareholders, customers, employees as well as the Group can be safeguarded. The Company has established the Board, an audit committee, a remuneration committee and a nomination committee that are up to the requirements as being diligent, accountable and professional. ZHONGHUI ANDA CPA Limited has been appointed as the Group’s external auditors.

# Compliance with the Corporate Governance Code

The Company has adopted the Code on Corporate Governance Practices set out in Appendix 14 to the Listing Rules. The Directors are of the opinion that the Company had complied with the Corporate Governance Code except for a deviation from provision A.2.1 during the year under review. Given its existing corporate structure, the roles of Chairman and Chief Executive Officer of the Company have not been separated, but are both performed by Mr. Zhang Yuping. Although the roles and duties of Chairman and Chief Executive Officer have been performed by the same individual, all major decisions have been made after consultation with the Board or, where applicable, directly by the Board. There are three independent non-executive Directors in the Board, all of which possess adequate independence and therefore the Board believes that the Company has achieved adequate balance of power and been able to guarantee scientific decision-making.

To maintain high-level independence and objectivity in decision making, and supervise the management of the Group in a comprehensive and equitable manner, the Board of the Group comprises three executive Directors (Messrs. Zhang Yuping (Chairman of the Group), Huang Yonghua and Lee Shu Chung, Stan), one non-executive Director (Mr. Shi Zhongyang) and three independent non-executive Directors (Messrs. Cai Jianmin, Wong Kam Fai, William and Liu Xueling).


Events of Default. The Credit Facility includes customary events of default, including events of default relating to:

Senior Note	Face Value
(Millions)	Maturity Date	Interest Payment
Dates	Optional
Redemption
Period(a)

7.500% Senior Notes due 2020 (the “2020 Notes”)	$         350	August 1, 2020	February 1, August
1	July 1, 2020

6.000% Senior Notes due 2022 (the “2022 Notes”)	$       1,100	January 15, 2022	January 15, July
15	October 15, 2021

8.250% Senior Notes due 2023 (the “2023 Notes”)	$         500	August 1, 2023	February 1, August
1	June 1, 2023

5.250% Senior Notes due 2024 (the “2024 Notes”)	$         650	September 15, 2024	March 15,
September 15	June 15, 2024

# Note 10 . Provision (Benefit) for Income Taxes

	Years Ended December 31,

2017	2016	2015

(Millions)

Provision (benefit):

Current:

Federal	$               (18)	$             (26)	$              (4)

State	1	(7)	7

	(17)	(33)	3

Deferred:

Federal	(118)	(301)	12

State	(13)	9	9

	(131)	(292)	21

Total provision (benefit)	$            (148)	$            (325)	$              24

	Years Ended December 31,

2017	2016	2015

(Millions)

Provision (benefit) at statutory rate	$              (56)	$            (328)	$                7

Increases (decreases) in taxes resulting from:

State income taxes (net of federal benefit)	(12)	(40)	3

Valuation allowance on current year state income taxes (net of federal benefit)	17	18	1

Valuation allowance on state income taxes resulting from sale (net of federal benefit)	—	8	—

Effective state income tax rate change (net of federal benefit)	(12)	15	7

Provisional impact of Tax Cuts and Jobs Act	(92)	—	—

Other	7	2	6

Provision (benefit) for income taxes	$            (148)	$            (325)	$              24